Generally speaking in most states, if you are a contractor doing work for an exempt entity like a school or a church, or if you are the church or school or other exempt entity, you are better off using a separated contract approach. It is generally better to separately state the charges for labor and materials.
Why is that? In many states, the contractor is deemed to be the "consumer" of materials they use in building a structure. So if the contractor enters into one lump-sum agreement say to build a new school for $10M, then the contractor will generally be liable for tax on purchases of steel, lumber, etc. Even though those materials would be exempt from the tax if they had been purchased directly by the school.
Another case with these type of facts has come up in Georgia. This is the headline from CCH: "Contractor's Purchases for Exempt Hospital Authority Were Taxable"
"The Court of Appeals of Georgia has held an Illinois contractor liable for Georgia sales and use taxes on purchases it made for a tax-exempt Georgia hospital authority because the purchases were made in the performance of the contract. The court found that Georgia law does not provide for a "derivative" sales tax exemption based on any agency relationship that the contractor had with the tax-exempt authority."
The contractor argued that it was functioning as the "agent" of the hospital when it bought materials. The contractor lost at every level from the administrative all the way to the appeals court. It appeared the appeals court was sympathetic to the contractor's plight, but said the legislature would have to cure this problem. Let us know if you'd like a copy of this case.
The better solution is usually for the school to enter into separate contracts with the contractor, or it may even be better for the school to buy the materials itself without even using the contractor in the middle.
Tuesday, December 18, 2007
Monday, December 17, 2007
So Exemptions are Called "Loopholes" Now -- Winds of Change Are Blowing In Florida
Get ready Floridians, John McKay has you in his sights. See this article in the Bradenton Herald. And I quote: "The finance committee of Florida's Taxation and Budget Reform Commission has decided unanimously that the Legislature should have to review hundreds of sales-tax exemptions and exclusions, and revamp Florida's sales-tax system.
The measure opens the door for a plan suggested by Bradenton businessman and former state Senate president John McKay earlier this month. His plan calls for property taxes to be slashed by 40 percent, and replaced by about $9 billion worth of repealed sales-tax exemptions and exclusions that have allowed hundreds of materials and services to go untaxed for years."
What's interesting to me is that McKay calls these exemptions passed into law for a reason by the FL legislature "loopholes". That's going too far. Here's the quote in the article from Florida TaxWatch director of tax research Kurt Wenner, "A review of exemptions and services is a good thing. However, the rhetoric about there being $27 billion in loopholes is just wrong. The vast majority of exemptions are there for a reason, and mostly legitimate reasons."
What politicians seem to forget is that state's have legitimate reasons to encourage businesses and individuals to live and work in their state. People and businesses can vote with their feet and politicians can stay there and tax the few remaining companies into oblivion.
The measure opens the door for a plan suggested by Bradenton businessman and former state Senate president John McKay earlier this month. His plan calls for property taxes to be slashed by 40 percent, and replaced by about $9 billion worth of repealed sales-tax exemptions and exclusions that have allowed hundreds of materials and services to go untaxed for years."
What's interesting to me is that McKay calls these exemptions passed into law for a reason by the FL legislature "loopholes". That's going too far. Here's the quote in the article from Florida TaxWatch director of tax research Kurt Wenner, "A review of exemptions and services is a good thing. However, the rhetoric about there being $27 billion in loopholes is just wrong. The vast majority of exemptions are there for a reason, and mostly legitimate reasons."
What politicians seem to forget is that state's have legitimate reasons to encourage businesses and individuals to live and work in their state. People and businesses can vote with their feet and politicians can stay there and tax the few remaining companies into oblivion.
NY Decides to Go After Amazon, But Did Hillary Intervene on This Too?
You know the New York State Department of Taxation and Finance and every other revenue department across the country would like to get their hands on Amazon.com. Well NY came up with an approach to do just that. Apparently it was at the behest of the Honorable Governor Elliott Spitzer.
The Department issued a Memorandum detailing its policies for out-of-state companies selling to customers in New York. A copy of the memo is included below. This was a well-thought out memo with a number of examples. It was obviously targeting companies like Amazon. So how does Amazon have nexus in NY you ask? Well, here comes the novel idea. NY said that Amazon had nexus because of all the agents operating in the state. Did they mean subcontractors or even agreements with Brick and Mortar stores to take returns or advertise for Amazon? No. But Amazon did have a "affiliate" program.
Almost every online seller has these programs whereby on website can post a link to the host website advertising, say a book for sale. If the visitor to the "agent" website clicks on that link to the host website and actually buys the book, then the agent website earns a small commission. NY said this created nexus for Amazon. That is a scary concept right there.
What this means of course is New Yorkers were going to have to pay tax on items purchased from outlets like Amazon. But what it really means in this political environment is it makes Hillary look like all she wants to do is tax people. So my theory is Hillary's people talked to Spitzer's people and said, "hey, are you secretly working for Obama or what?" Whether that actually happened is anyone's guess, but it's certainly not without precedent. Remember the driver's licenses. See this article in the NY Sun for more on this angle. And I quote: "In a second major policy reversal in less than a day, Governor Spitzer is backing down from a plan to require Amazon.com and other online retailers to charge state and local sales taxes on all purchases from New York...The turnabout came just hours after Mr. Spitzer said he was dropping his plan to allow illegal immigrants in New York to obtain driver's licenses."
But the bigger issue for state tax watchers is this new frontier blazing by New York. So they want to take the position that a link on someone else's website, who has no relationship to your company whatever, means they are your agent. This agency relationship gives the state the right to force you to collect their sales tax. Yikes.
Here's the original Memorandum (see the bottom of this post for a copy of the retraction) :
ADMN-RUL, STATE-ARD, ¶405-893, Technical Services Bureau, Taxpayer Services Division, New York Department of Taxation and Finance, NY --TSB-M-07(6)S, Sales and Use (Nov. 09, 2007)Technical Services Bureau, Taxpayer Services Division, New York Department of Taxation and Finance, NY --TSB-M-07(6)SW A Harriman Campus, Albany NY 12227 www.nystax.govNew York State Department of Taxation and FinanceOffice of Tax Policy Analysis Taxpayer Guidance DivisionTSB-M-07(6)SSales TaxNovember 9, 2007Requirement to Register as a Sales Tax Vendor for Out-of-State Companies Soliciting Sales Through Representatives
This memorandum explains the Tax Department's policy regarding the requirement of certain businesses that make taxable sales of tangible personal property or services to register as vendors for New York State sales tax purposes, and to collect New York State and local sales taxes. Specifically, this memorandum explains the application of the sales tax law and regulations to e-commerce retailers who use independent contractors, agents, or other representatives (representatives) within New York State to solicit sales or to make or maintain a market for their products or services.
E-commerce retailers may use persons who act as representatives to solicit sales or to make or maintain a market in return for commissions, referral fees or other types of compensation. The agreement between the e-commerce retailer and its representative usually takes the form of the e-commerce retailer agreeing to pay compensation to the representative for sales that can be directly attributed to the solicitation activities of the representative.
For example, the representative may be a private club that agrees to actively refer its members and to solicit other persons to purchase products from the e-commerce retailer's Web site by providing a specialized link from the club's Web site to the e-commerce retailer's Web site. Alternatively, the club may refer persons directly to the e-commerce retailer's Web site with instructions to enter a code number or other information that will identify to the e-commerce retailer that the club is responsible for the referral. The sales that result from these activities can be tracked and a commission or other compensation is paid to the club based on the amount of resulting sales.
Under the New York State Tax Law and the Sales and Use Tax Regulations, the term vendor includes persons who solicit business within the State through employees, independent contractors, agents or other representatives and, by reason thereof, make sales to persons within the state of tangible personal property or services that are subject to sales tax. Accordingly, if a business located outside New York State solicits sales of taxable tangible personal property or services through employees, salespersons, independent agents, or representatives located in New York State, the business must register as a vendor and obtain a Certificate of Authority for New York State sales tax purposes. (Tax Law Section 1101(b)(8) and Sales and Use Tax Regulation Section 526.10(a)(3)).
As illustrated by the examples below, the physical presence in New York State of a representative of an e-commerce retailer soliciting sales or making or maintaining a market in New York on behalf of the e-commerce retailer, for commissions, referral fees or other compensation, is sufficient to require that retailer to register as a sales tax vendor. (See Tax Law Sections 1101(b)(8), 1131(1), 1134(a), Sales and Use Tax Regulations Section 526.10 and Scripto Inc. v. Carson (362 U.S. 207)). As a registered vendor, the e-commerce retailer must collect New York State and local sales taxes on all of its sales of taxable products and services that are delivered within New York State, and must file the appropriate sales tax returns. However, a person is not considered a vendor merely because the person has advertising disseminated or displayed on the Internet. (See Tax Law Section 12 and TSB-M-97(1.1)S).
A business may apply for a Certificate of Authority by using the New York State Online Permit Assistance and Licensing link at Web site www.nys-permits.org, or by completing Form DTF-17, Application To Register For a Sales Tax Certificate of Authority, and mailing it to the Tax Department to the address specified on the form. (See Tax Law Sections 1131(1) and 1134).Example 1:
XYZ Company (XYZ) is an Internet-based retailer of sporting goods specializing in downhill skiing equipment. XYZ is located in Vermont, where it has its administrative offices and its warehouse, which holds its inventory for sale. XYZ makes sales of its merchandise throughout the United States and has customers in New York State. The merchandise sold by XYZ is delivered by the U.S. Postal Service or by common carrier, such as United Parcel Service or Federal Express.
As part of its marketing plan, XYZ has entered into an agreement with Downhill Ski Club (Ski Club), which is based in Saratoga Springs, New York, whereby Ski Club will maintain links to various skiing equipment listed for sale on XYZ's retail Web site on the Club's own Web site. XYZ will pay a commission to Ski Club based on the amount of sales that XYZ makes that originate from the links on Ski Club's Web site. Ski Club uses the commissions as a fundraising activity to partially offset the expenses for the ski trips it sponsors. To maximize its commissions, Ski Club actively solicits its members and the local community to purchase new skiing equipment through the Ski Club's Web site by clicking on the link to XYZ's retail Web site and making their purchases from XYZ.
XYZ may have similar arrangements with other representatives in New York, but otherwise has no other additional connection with New York State that would cause XYZ to register as a New York State sales tax vendor. Based on its agreement with Ski Club, XYZ is considered to be soliciting business in New York through Ski Club, which is acting as an independent contractor, agent or other representative of XYZ, and making sales of taxable tangible personal property to persons within New York State. Therefore, XYZ must register as a New York sales tax vendor, collect New York State and local sales taxes, and file the required sales tax returns.Example 2:
This example follows the same facts as in Example 1 except that Ski Club does not have its own Web site. Therefore, Ski Club solicits sales of XYZ's merchandise by directing its members and the local community to XYZ's Web site with instructions to enter a specific code number when making their purchase. By entering the code number, Ski Club is identified by XYZ as the organization responsible for referring the purchaser to the Web site, and a commission is paid to Ski Club by XYZ based on the resulting sales.
XYZ is considered to be soliciting business in New York through Ski Club, which is acting as an independent contractor, agent or other representative of XYZ, and making sales of taxable tangible personal property to persons within New York State. Therefore, XYZ must register as a New York sales tax vendor, collect New York State and local sales taxes, and file the required sales tax returns.Example 3:
John Smith is the author of a guide book to kayaking on New York lakes and rivers. The book is listed for sale on an e-commerce retail Web site. Mr. Smith maintains a Web site that contains a variety of information on kayaking and also contains a link to the e-commerce retail Web site through which visitors to his site may purchase his book. For each visitor that follows this link and purchases his book from the e-commerce retail Web site, Mr. Smith is entitled to receive compensation from the e-commerce retailer. Mr. Smith regularly speaks on the subject of kayaking at forums within the State. In the interest of earning commissions from the ecommerce retailer, he actively markets his book at these events by referring attendees to his Web site, where potential purchasers can click on the link to the e-commerce retailer's Web site and purchase his book.
Based on this arrangement, the e-commerce retailer is considered to be soliciting business through Mr. Smith, who is acting as an independent contractor, agent or other representative of the e-commerce retailer, and making sales of taxable tangible personal property to persons within New York State. Therefore, the e-commerce retailer must register as a New York sales tax vendor, collect the New York State and local sales taxes, and file the required sales tax returns.
This memorandum is intended to clarify current policy and does not reflect any change in requirements for vendors doing business in New York State. If an out-of-state business should have been registered based solely on the information contained within this memorandum, but was not registered, the department will not assess any prior sales taxes due or any civil or criminal penalties or interest for the failure to collect and remit any prior sales tax due, if the business registers and begins collecting sales tax by December 7, 2007.
For further information on what tangible personal property and services are subject to tax and how to register for New York State sales tax purposes, see Publication 750, A Guide to Sales Tax in New York State that is available through the department Web site at www.nystax.gov, or by contacting our Sales Tax Information Center at 800-698-2909.
NOTE: A TSB-M is an informational statement of changes and clarification of the law, regulations, or department policies. It is accurate on the date issued. Subsequent changes in the law or regulations, judicial decisions, Tax Appeals Tribunal decisions, or changes in department policies could affect the validity of the information presented in a TSB-M.
And here's the retraction:
Office of Tax Policy Analysis
Taxpayer Guidance Division
TSB-M-07(6.1)S
Sales Tax
November 15, 2007
Notice of Withdrawal of TSB-M-07(6)S
TSB-M-07(6)S, Requirement to Register as a Sales Tax Vendor for Out-of-State
Companies Soliciting Sales Through Representatives, has been withdrawn.
The Department issued a Memorandum detailing its policies for out-of-state companies selling to customers in New York. A copy of the memo is included below. This was a well-thought out memo with a number of examples. It was obviously targeting companies like Amazon. So how does Amazon have nexus in NY you ask? Well, here comes the novel idea. NY said that Amazon had nexus because of all the agents operating in the state. Did they mean subcontractors or even agreements with Brick and Mortar stores to take returns or advertise for Amazon? No. But Amazon did have a "affiliate" program.
Almost every online seller has these programs whereby on website can post a link to the host website advertising, say a book for sale. If the visitor to the "agent" website clicks on that link to the host website and actually buys the book, then the agent website earns a small commission. NY said this created nexus for Amazon. That is a scary concept right there.
What this means of course is New Yorkers were going to have to pay tax on items purchased from outlets like Amazon. But what it really means in this political environment is it makes Hillary look like all she wants to do is tax people. So my theory is Hillary's people talked to Spitzer's people and said, "hey, are you secretly working for Obama or what?" Whether that actually happened is anyone's guess, but it's certainly not without precedent. Remember the driver's licenses. See this article in the NY Sun for more on this angle. And I quote: "In a second major policy reversal in less than a day, Governor Spitzer is backing down from a plan to require Amazon.com and other online retailers to charge state and local sales taxes on all purchases from New York...The turnabout came just hours after Mr. Spitzer said he was dropping his plan to allow illegal immigrants in New York to obtain driver's licenses."
But the bigger issue for state tax watchers is this new frontier blazing by New York. So they want to take the position that a link on someone else's website, who has no relationship to your company whatever, means they are your agent. This agency relationship gives the state the right to force you to collect their sales tax. Yikes.
Here's the original Memorandum (see the bottom of this post for a copy of the retraction) :
ADMN-RUL, STATE-ARD, ¶405-893, Technical Services Bureau, Taxpayer Services Division, New York Department of Taxation and Finance, NY --TSB-M-07(6)S, Sales and Use (Nov. 09, 2007)Technical Services Bureau, Taxpayer Services Division, New York Department of Taxation and Finance, NY --TSB-M-07(6)SW A Harriman Campus, Albany NY 12227 www.nystax.govNew York State Department of Taxation and FinanceOffice of Tax Policy Analysis Taxpayer Guidance DivisionTSB-M-07(6)SSales TaxNovember 9, 2007Requirement to Register as a Sales Tax Vendor for Out-of-State Companies Soliciting Sales Through Representatives
This memorandum explains the Tax Department's policy regarding the requirement of certain businesses that make taxable sales of tangible personal property or services to register as vendors for New York State sales tax purposes, and to collect New York State and local sales taxes. Specifically, this memorandum explains the application of the sales tax law and regulations to e-commerce retailers who use independent contractors, agents, or other representatives (representatives) within New York State to solicit sales or to make or maintain a market for their products or services.
E-commerce retailers may use persons who act as representatives to solicit sales or to make or maintain a market in return for commissions, referral fees or other types of compensation. The agreement between the e-commerce retailer and its representative usually takes the form of the e-commerce retailer agreeing to pay compensation to the representative for sales that can be directly attributed to the solicitation activities of the representative.
For example, the representative may be a private club that agrees to actively refer its members and to solicit other persons to purchase products from the e-commerce retailer's Web site by providing a specialized link from the club's Web site to the e-commerce retailer's Web site. Alternatively, the club may refer persons directly to the e-commerce retailer's Web site with instructions to enter a code number or other information that will identify to the e-commerce retailer that the club is responsible for the referral. The sales that result from these activities can be tracked and a commission or other compensation is paid to the club based on the amount of resulting sales.
Under the New York State Tax Law and the Sales and Use Tax Regulations, the term vendor includes persons who solicit business within the State through employees, independent contractors, agents or other representatives and, by reason thereof, make sales to persons within the state of tangible personal property or services that are subject to sales tax. Accordingly, if a business located outside New York State solicits sales of taxable tangible personal property or services through employees, salespersons, independent agents, or representatives located in New York State, the business must register as a vendor and obtain a Certificate of Authority for New York State sales tax purposes. (Tax Law Section 1101(b)(8) and Sales and Use Tax Regulation Section 526.10(a)(3)).
As illustrated by the examples below, the physical presence in New York State of a representative of an e-commerce retailer soliciting sales or making or maintaining a market in New York on behalf of the e-commerce retailer, for commissions, referral fees or other compensation, is sufficient to require that retailer to register as a sales tax vendor. (See Tax Law Sections 1101(b)(8), 1131(1), 1134(a), Sales and Use Tax Regulations Section 526.10 and Scripto Inc. v. Carson (362 U.S. 207)). As a registered vendor, the e-commerce retailer must collect New York State and local sales taxes on all of its sales of taxable products and services that are delivered within New York State, and must file the appropriate sales tax returns. However, a person is not considered a vendor merely because the person has advertising disseminated or displayed on the Internet. (See Tax Law Section 12 and TSB-M-97(1.1)S).
A business may apply for a Certificate of Authority by using the New York State Online Permit Assistance and Licensing link at Web site www.nys-permits.org, or by completing Form DTF-17, Application To Register For a Sales Tax Certificate of Authority, and mailing it to the Tax Department to the address specified on the form. (See Tax Law Sections 1131(1) and 1134).Example 1:
XYZ Company (XYZ) is an Internet-based retailer of sporting goods specializing in downhill skiing equipment. XYZ is located in Vermont, where it has its administrative offices and its warehouse, which holds its inventory for sale. XYZ makes sales of its merchandise throughout the United States and has customers in New York State. The merchandise sold by XYZ is delivered by the U.S. Postal Service or by common carrier, such as United Parcel Service or Federal Express.
As part of its marketing plan, XYZ has entered into an agreement with Downhill Ski Club (Ski Club), which is based in Saratoga Springs, New York, whereby Ski Club will maintain links to various skiing equipment listed for sale on XYZ's retail Web site on the Club's own Web site. XYZ will pay a commission to Ski Club based on the amount of sales that XYZ makes that originate from the links on Ski Club's Web site. Ski Club uses the commissions as a fundraising activity to partially offset the expenses for the ski trips it sponsors. To maximize its commissions, Ski Club actively solicits its members and the local community to purchase new skiing equipment through the Ski Club's Web site by clicking on the link to XYZ's retail Web site and making their purchases from XYZ.
XYZ may have similar arrangements with other representatives in New York, but otherwise has no other additional connection with New York State that would cause XYZ to register as a New York State sales tax vendor. Based on its agreement with Ski Club, XYZ is considered to be soliciting business in New York through Ski Club, which is acting as an independent contractor, agent or other representative of XYZ, and making sales of taxable tangible personal property to persons within New York State. Therefore, XYZ must register as a New York sales tax vendor, collect New York State and local sales taxes, and file the required sales tax returns.Example 2:
This example follows the same facts as in Example 1 except that Ski Club does not have its own Web site. Therefore, Ski Club solicits sales of XYZ's merchandise by directing its members and the local community to XYZ's Web site with instructions to enter a specific code number when making their purchase. By entering the code number, Ski Club is identified by XYZ as the organization responsible for referring the purchaser to the Web site, and a commission is paid to Ski Club by XYZ based on the resulting sales.
XYZ is considered to be soliciting business in New York through Ski Club, which is acting as an independent contractor, agent or other representative of XYZ, and making sales of taxable tangible personal property to persons within New York State. Therefore, XYZ must register as a New York sales tax vendor, collect New York State and local sales taxes, and file the required sales tax returns.Example 3:
John Smith is the author of a guide book to kayaking on New York lakes and rivers. The book is listed for sale on an e-commerce retail Web site. Mr. Smith maintains a Web site that contains a variety of information on kayaking and also contains a link to the e-commerce retail Web site through which visitors to his site may purchase his book. For each visitor that follows this link and purchases his book from the e-commerce retail Web site, Mr. Smith is entitled to receive compensation from the e-commerce retailer. Mr. Smith regularly speaks on the subject of kayaking at forums within the State. In the interest of earning commissions from the ecommerce retailer, he actively markets his book at these events by referring attendees to his Web site, where potential purchasers can click on the link to the e-commerce retailer's Web site and purchase his book.
Based on this arrangement, the e-commerce retailer is considered to be soliciting business through Mr. Smith, who is acting as an independent contractor, agent or other representative of the e-commerce retailer, and making sales of taxable tangible personal property to persons within New York State. Therefore, the e-commerce retailer must register as a New York sales tax vendor, collect the New York State and local sales taxes, and file the required sales tax returns.
This memorandum is intended to clarify current policy and does not reflect any change in requirements for vendors doing business in New York State. If an out-of-state business should have been registered based solely on the information contained within this memorandum, but was not registered, the department will not assess any prior sales taxes due or any civil or criminal penalties or interest for the failure to collect and remit any prior sales tax due, if the business registers and begins collecting sales tax by December 7, 2007.
For further information on what tangible personal property and services are subject to tax and how to register for New York State sales tax purposes, see Publication 750, A Guide to Sales Tax in New York State that is available through the department Web site at www.nystax.gov, or by contacting our Sales Tax Information Center at 800-698-2909.
NOTE: A TSB-M is an informational statement of changes and clarification of the law, regulations, or department policies. It is accurate on the date issued. Subsequent changes in the law or regulations, judicial decisions, Tax Appeals Tribunal decisions, or changes in department policies could affect the validity of the information presented in a TSB-M.
And here's the retraction:
Office of Tax Policy Analysis
Taxpayer Guidance Division
TSB-M-07(6.1)S
Sales Tax
November 15, 2007
Notice of Withdrawal of TSB-M-07(6)S
TSB-M-07(6)S, Requirement to Register as a Sales Tax Vendor for Out-of-State
Companies Soliciting Sales Through Representatives, has been withdrawn.
Friday, December 14, 2007
Taxable Crane Rental or Nontaxable "Lifting Service"?
Florida has changed its position on the taxability of a crane rental with an operator. They now take the position that providing a crane to a customer on an operated and maintained basis constituted a "lifting service" in which control of the crane was never transferred to the customer, and Florida sales tax did not apply to that service. This ruling revises a Technical Assistance Advisement issued in 1995.
According to the ruling, the operation of a crane is an inherently dangerous activity, and an operator/employee could not shift control or operation to its customer. The customer had no right or authority to even enter the crane cab, and the crane company's operators were solely responsible for the operation and safety of the crane. An indemnity clause in the service contract stating that the equipment and operator were under the lessee's exclusive supervision and control did not change the character of the contract from a service to a lease or transfer control of the crane to the lessee for sales and use tax purposes. Since the crane company was using the cranes to perform a nontaxable service, a use tax would be due from the crane company on its purchase or lease of the cranes. Technical Assistance Advisement, No. 95A-022-R, Florida Department of Revenue, October 25, 2007
According to the ruling, the operation of a crane is an inherently dangerous activity, and an operator/employee could not shift control or operation to its customer. The customer had no right or authority to even enter the crane cab, and the crane company's operators were solely responsible for the operation and safety of the crane. An indemnity clause in the service contract stating that the equipment and operator were under the lessee's exclusive supervision and control did not change the character of the contract from a service to a lease or transfer control of the crane to the lessee for sales and use tax purposes. Since the crane company was using the cranes to perform a nontaxable service, a use tax would be due from the crane company on its purchase or lease of the cranes. Technical Assistance Advisement, No. 95A-022-R, Florida Department of Revenue, October 25, 2007
Friday, November 9, 2007
The Great Pumpkin Tax -- UPDATE -- Refund Opportunity!!
In an earlier post we mused about what the IA DOR must have been thinking when it decided to impose the Pumpkin Tax. Well, the pen is mightier than the sword I guess. The Governor must have read our blog and decided to intervene.
According to CCH, "Governor Chet Culver has directed the Iowa Department of Revenue to suspend the collection of sales tax on pumpkins."
This directive was issued on October 31, though, so the tax savings would have been minimal, but the Governor must have been in a merry mood because he also directed that "Taxpayers who have paid the tax can apply for a refund with the Department."
Now, I think pumkins should be exempt everywhere, but, one must ask, how does the Governor have this type of authority anyway?
According to CCH, "Governor Chet Culver has directed the Iowa Department of Revenue to suspend the collection of sales tax on pumpkins."
This directive was issued on October 31, though, so the tax savings would have been minimal, but the Governor must have been in a merry mood because he also directed that "Taxpayers who have paid the tax can apply for a refund with the Department."
Now, I think pumkins should be exempt everywhere, but, one must ask, how does the Governor have this type of authority anyway?
Amazon.com May Incur the Wrath of the Media
Misunderstanding the tax law and how it works, does not mean a newspaper editor will refrain from bashing a company. Dean Baker wrote an editorial for the Chicago Sun Times on November 4, 2007, entitled "How Amazon got rich on our tax dollars". The title presages the content. Here's a few of the blistering quotes:
Whenever a writer uses the word "loophole", it's never good for the company being attacked.
But isn't this a "win-win" situation? The company benefits and the customer benefits, right? I think so, but what I think doesn't add up to much. What the buying public thinks is a big deal. Will they be influenced by this type of vitriol?
- "The business press has written numerous stories explaining how Jeff Bezos, Amazon's founder and CEO, is a truly brilliant businessman. This may well be true, but the secret of his success is not in the futuristic world of the Internet, rather it's in the old-fashioned world of tax avoidance."
Whenever a writer uses the word "loophole", it's never good for the company being attacked.
- "Thanks to a loophole in the law, Amazon is not required to collect sales tax on its sales. Amazon effectively splits this tax bonanza with its customers, giving them an incentive to keep coming back."
But isn't this a "win-win" situation? The company benefits and the customer benefits, right? I think so, but what I think doesn't add up to much. What the buying public thinks is a big deal. Will they be influenced by this type of vitriol?
- "While Amazon and its customers can both be happy about this situation, this is not a classic win-win story. The sales diverted to Amazon and other Internet retailers came at the expense of old-fashioned brick-and-mortar retailers who haven't mastered the 21st century skill of tax avoidance. These old-timers are losing business and profits because of Amazon's tax subsidy.
State and local governments are also losing tax revenue. This means these governments must either cut back services provided to their residents or they must raise other taxes. Of course, buying goods over the Internet does not reduce the demand for services from state and local governments. So, when politicians promise not to tax the Internet, they are in effect promising to impose higher taxes on items other than Internet purchases."
Do You Have Nexus in IL?
Illinois issued a recent letter ruling with some specific examples of activities that create sales tax nexus in their state. And I quote:
That's the first prong, it's their commenary on the second prong of the test that is interesting.
- "The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set forth the current guidelines for determining what nexus requirements must be met before a person is properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus.
- "The first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill at 1910. "
That's the first prong, it's their commenary on the second prong of the test that is interesting.
- "The second prong of the Supreme Court's nexus test requires that, if due process requirements have been satisfied, the person or entity must have physical presence in the forum state to satisfy the Commerce Clause. A physical presence is not limited to an office or other physical building. Under Illinois law, it also includes the presence of any agent or representative of the seller. The representative need not be a sales representative. Any type of physical presence in the State of Illinois, including the vendor's delivery and installation of his product on a repetitive basis, will trigger Use Tax collection responsibilities. "
Officer Liable for Unpaid Tax Even Though Company Run by Independent Contractor
In a recent administrative hearing in Illinois, an owner of a car dealership who did not actually run the day-to-day operations of the dealership was held liable for taxes not remitted.
This is a tough case. There was this car dealer who wanted to sell his dealership to another company. The other company was going to have to be approved by Chrysler. So while the application was in process, the two parties executed a management agreement. The new company would come in and run the place like they owned it. The management agreement covered the tax issue -- it would be the responsibility of the new company. You'd think you were in good shape from a sales tax standpoint. But not in IL.
But the new operator didn't remit the tax collected. The prior owner claims he had no idea that the tax wasn't sent in. On audit, IL assesses the prior owner saying he was a "responsible officer". IL won the case at the administrative level. The government always seems to get their money, and they get it from the easiest source. (Illinois Department of Revenue, IL --Administrative Hearing Decision No. ST 07-13)
This is a tough case. There was this car dealer who wanted to sell his dealership to another company. The other company was going to have to be approved by Chrysler. So while the application was in process, the two parties executed a management agreement. The new company would come in and run the place like they owned it. The management agreement covered the tax issue -- it would be the responsibility of the new company. You'd think you were in good shape from a sales tax standpoint. But not in IL.
But the new operator didn't remit the tax collected. The prior owner claims he had no idea that the tax wasn't sent in. On audit, IL assesses the prior owner saying he was a "responsible officer". IL won the case at the administrative level. The government always seems to get their money, and they get it from the easiest source. (Illinois Department of Revenue, IL --Administrative Hearing Decision No. ST 07-13)
Media Thinks Manufacturing Gets A "Whopping" Tax Break
An article in the Atlanta Journal and Constitution caught my eye because it was all about how the medical industry is a big "winner" because it will retain some sales tax exemptions. According to the AP writer Shannon McCaffrey, the industries that contributed the PAC got the best deductions. Then there was this throw away line that reveals some bias, maybe, and lack of understanding of double taxation certainly:
"The biggest single exemption in Richardson's plan is on the sale of raw materials to manufacturers worth a whopping $3.2 billion."
Always interesting how things are viewed by the opinion shapers.
"The biggest single exemption in Richardson's plan is on the sale of raw materials to manufacturers worth a whopping $3.2 billion."
Always interesting how things are viewed by the opinion shapers.
What's Going on in Michigan?
On October 2, 2007, the Governor signed a bill imposing a sales tax on 23 new services to be effective December 1, 2007. These services are:
-- business service center services;
-- consulting services;
-- investment advice services;
-- janitorial and landscaping services;
-- warehousing and storage services;
-- packaging and labeling services;
-- document preparation services; and
-- many personal services, such as concierge and psychic services.
Now they're getting cold feet. That's good.
So then on November 1, the Michigan Senate has passed a bill (S.B. 845) to postpone the imposition of the new 6% use tax on services from December 1, 2007, to December 20, 2007.
According to CCH, the goal of this new bill is to provide the Legislature additional time to find an alternative to the new tax.
Then the Michigan Senate has passed S.B. 838, a bill to repeal the imposition of the new 6% use tax on selected services immediately when the tax takes effect on December 1, 2007. S.B. 845, a bill to postpone the imposition of the new tax from December 1, 2007, to December 20, 2007, can only take effect if S.B. 838 is enacted.
Sounds to me like it's back to the drawing board for MI, if the Governor signs this bill.
The Detroit Free Press even editorialized on the new tax law, saying it is "capricious, complicated and potentially burdensome to businesses big and small. It taxes an odd mix of services and exempts others, based, evidently, on legislative perceptions of what sort of spending for services is discretionary as opposed to necessary -- and on who had the loudest lobbyists when the tax plan was being duct-taped together."
Ouch.
They're saying it's "time to bring serious proposals out into public view, with plenty of time for everyone to dissect them, discuss them, and, if needed, present them to voters next August or November."
Let's see how things develop there.
-- business service center services;
-- consulting services;
-- investment advice services;
-- janitorial and landscaping services;
-- warehousing and storage services;
-- packaging and labeling services;
-- document preparation services; and
-- many personal services, such as concierge and psychic services.
Now they're getting cold feet. That's good.
So then on November 1, the Michigan Senate has passed a bill (S.B. 845) to postpone the imposition of the new 6% use tax on services from December 1, 2007, to December 20, 2007.
According to CCH, the goal of this new bill is to provide the Legislature additional time to find an alternative to the new tax.
Then the Michigan Senate has passed S.B. 838, a bill to repeal the imposition of the new 6% use tax on selected services immediately when the tax takes effect on December 1, 2007. S.B. 845, a bill to postpone the imposition of the new tax from December 1, 2007, to December 20, 2007, can only take effect if S.B. 838 is enacted.
Sounds to me like it's back to the drawing board for MI, if the Governor signs this bill.
The Detroit Free Press even editorialized on the new tax law, saying it is "capricious, complicated and potentially burdensome to businesses big and small. It taxes an odd mix of services and exempts others, based, evidently, on legislative perceptions of what sort of spending for services is discretionary as opposed to necessary -- and on who had the loudest lobbyists when the tax plan was being duct-taped together."
Ouch.
They're saying it's "time to bring serious proposals out into public view, with plenty of time for everyone to dissect them, discuss them, and, if needed, present them to voters next August or November."
Let's see how things develop there.
Handing Out Coupons in CA Gives You Nexus There?
You know Barnes & Noble, the big box bookstore operating all across the US. They just won a nice victory against the CA SBE in the CA Superior Court (Barnesandnoble.com LLC v. State Board of Equalization, California Superior Court, San Francisco County, Case No. CGC-06-456465, October 11, 2007). They are not a client of ours, but according to the published court case, here are some relevant facts regarding the corporate structure, during the applicable tax period.
They had a parent company, let's call it BN. BN had a number of subsidiaries. These included subs we'll call Booksellers (owned 100%), BN.com (owned 100%) and BN.com LLC (owned 40% by BN and 40% by another unrelated company and 20% by BN.com. That's a mindful, but it's important. BN.com LLC is the plaintiff in this case, at it is the Internet retailer. Booksellers (the 100% sub of BN) is the company that operates the actual brick and mortar stores. It is not an owner of the plaintiff, but it shares some common owners.
They were careful to set up this Internet reseller so that it would not have sales tax nexus in other states. They had no physical presence in CA for one thing. They were housed in a separate building from other BN entities, the management of the plaintiff was different and distinct. And finally, the plaintiff did not allow its customers to return books or other products.
States have used these factors and others to argue that while a dotcom entity itself may not have a physical presence in their state, they are using their sister companies as agents in the state. That agency relationship is what gives the states the right to force the dotcom to collect sales tax. California was successful in the Borders Online case, but in that situation, the online entity had substantially overlapping boards of directors, and perhaps most importantly, the brick and mortar stores accepted returns and their empoyees actively solicited business for the online entity.
Well the plaintiff in this case did not meet any of the criteria commonly used by the states. But that didn't stop CA from going after them. So what was the plaintiff doing that made CA think they should register and collect tax? Not much. But CA thought it was sufficient.
BN.com LLC, the Internet retailer, put coupons in Bookseller's customers' shopping bags adverstising the existence of the dotcom and offering a discount on online purchases. That's it. They didn't even ask Booksellers to stuff the coupons in the bags -- they hired an independent vendor to do that.
CA argued that on the "basis of the coupons alone" Plaintiff was "retailer engaged in business in the state" with a "substantial nexus in California". They contended that Booksellers acted as Plaintiff's agent.
Does that seem like a reach or what?
The Superior Court said this was not enough of a connection or enough of a relationship to call it an "agency relationship". They specifically said that "the fact that Plaintiff and Booksellers are sister corporations does not support a finding of fact that Booksellers as Plaintiff's agent." They also pointed out -- much to the chagrin of CA, I'm sure, that the "concept of agency requires something significantly more" than passing out coupons. They say this, and this helps: "An essential element is that the agent (or representative) must have the authority bind the principal..."
That's the good news.
The bad news is that CA thought they had a good case here. The bad news is that what this case really says is that you really have to go to great lengths not to have nexus. I think most dotcom affiliates of brick and mortar retailers are concluding that the risk of losing a case like this is not worth the effort of setting the structure up in just the right way to avoid a finding of nexus.
My opinion is that more and more people buy stuff online because its convenient to do so. Being able to return something you don't like, or doesn't work to a brick and mortar makes many people more inclined to shop at a brick and mortar dotcom affiliate, even if they still have to pay tax to do so.
We have a copy of the case available on our website if you'd like it.
They had a parent company, let's call it BN. BN had a number of subsidiaries. These included subs we'll call Booksellers (owned 100%), BN.com (owned 100%) and BN.com LLC (owned 40% by BN and 40% by another unrelated company and 20% by BN.com. That's a mindful, but it's important. BN.com LLC is the plaintiff in this case, at it is the Internet retailer. Booksellers (the 100% sub of BN) is the company that operates the actual brick and mortar stores. It is not an owner of the plaintiff, but it shares some common owners.
They were careful to set up this Internet reseller so that it would not have sales tax nexus in other states. They had no physical presence in CA for one thing. They were housed in a separate building from other BN entities, the management of the plaintiff was different and distinct. And finally, the plaintiff did not allow its customers to return books or other products.
States have used these factors and others to argue that while a dotcom entity itself may not have a physical presence in their state, they are using their sister companies as agents in the state. That agency relationship is what gives the states the right to force the dotcom to collect sales tax. California was successful in the Borders Online case, but in that situation, the online entity had substantially overlapping boards of directors, and perhaps most importantly, the brick and mortar stores accepted returns and their empoyees actively solicited business for the online entity.
Well the plaintiff in this case did not meet any of the criteria commonly used by the states. But that didn't stop CA from going after them. So what was the plaintiff doing that made CA think they should register and collect tax? Not much. But CA thought it was sufficient.
BN.com LLC, the Internet retailer, put coupons in Bookseller's customers' shopping bags adverstising the existence of the dotcom and offering a discount on online purchases. That's it. They didn't even ask Booksellers to stuff the coupons in the bags -- they hired an independent vendor to do that.
CA argued that on the "basis of the coupons alone" Plaintiff was "retailer engaged in business in the state" with a "substantial nexus in California". They contended that Booksellers acted as Plaintiff's agent.
Does that seem like a reach or what?
The Superior Court said this was not enough of a connection or enough of a relationship to call it an "agency relationship". They specifically said that "the fact that Plaintiff and Booksellers are sister corporations does not support a finding of fact that Booksellers as Plaintiff's agent." They also pointed out -- much to the chagrin of CA, I'm sure, that the "concept of agency requires something significantly more" than passing out coupons. They say this, and this helps: "An essential element is that the agent (or representative) must have the authority bind the principal..."
That's the good news.
The bad news is that CA thought they had a good case here. The bad news is that what this case really says is that you really have to go to great lengths not to have nexus. I think most dotcom affiliates of brick and mortar retailers are concluding that the risk of losing a case like this is not worth the effort of setting the structure up in just the right way to avoid a finding of nexus.
My opinion is that more and more people buy stuff online because its convenient to do so. Being able to return something you don't like, or doesn't work to a brick and mortar makes many people more inclined to shop at a brick and mortar dotcom affiliate, even if they still have to pay tax to do so.
We have a copy of the case available on our website if you'd like it.
What's the Rush to Tax? Maryland Trying to Solve Deficit
So Maryland has a projected $1.5B deficit they're trying to deal with. What creative approach do they conceive? Increase taxes. The Governor wants to raise the tax rate to 6% from 5% and tax a raft of new types of businesses. But these things have to be done with input from the taxed businesses. But in politics, you have to strike while the iron is hot. Some legislators, don't like it though.
I like this quote from an impassioned Sen. E.J. Pipkin, R-Upper Shore, as quoted in the Maryland Daily Record who said the proposal was moving too quickly and there should be more time for people to respond to the proposal and for legislators to clarify the intent of the legislation. “What’s the rush this week …? You’ve just included millions of people into a tax bill, and you didn’t get the input of the industry, and you’re saying we didn’t have time.”
Even Maryland Comptroller Peter Franchot is quoted as saying “It’s an example of what happens when you try to implement tax policy at warp speed in a highly charged political environment... adding a tax provision of this magnitude to legislation at the 11th hour — without the courtesy of advance notice, the benefit of meaningful public input or sufficient understanding of its effects — plays into the hands of those who would unfairly question Maryland’s business climate,” Franchot wrote.
It appears that Maryland may end up taxing "computer services". That's always problematic. A number of states have tried that and always find that the big difficulty is determining whether to tax is due and to what extent on services that were performed out-of-state for in-state companies.
I like this quote from an impassioned Sen. E.J. Pipkin, R-Upper Shore, as quoted in the Maryland Daily Record who said the proposal was moving too quickly and there should be more time for people to respond to the proposal and for legislators to clarify the intent of the legislation. “What’s the rush this week …? You’ve just included millions of people into a tax bill, and you didn’t get the input of the industry, and you’re saying we didn’t have time.”
Even Maryland Comptroller Peter Franchot is quoted as saying “It’s an example of what happens when you try to implement tax policy at warp speed in a highly charged political environment... adding a tax provision of this magnitude to legislation at the 11th hour — without the courtesy of advance notice, the benefit of meaningful public input or sufficient understanding of its effects — plays into the hands of those who would unfairly question Maryland’s business climate,” Franchot wrote.
It appears that Maryland may end up taxing "computer services". That's always problematic. A number of states have tried that and always find that the big difficulty is determining whether to tax is due and to what extent on services that were performed out-of-state for in-state companies.
Friday, November 2, 2007
Manufacturers in Missouri Take Note
New Sales Tax Exemption for Manufacturers
Governor Matt Blunt signed the bill June 13, 2007, saying, “Manufacturing is a vital part of our diverse economy, and this will help level the playing field for Missouri manufacturers.” Effective August 28, 2007, Senate Bill 30 exempts from state tax (4.225 percent) and local use tax, but not local sales tax: (note the exemption is for local use tax but not local sales tax)
All of the above may be exempt if they are:
Examples of Activities That Are Not "Manufacturing, Processing, Compounding,
Mining, or Producing a Product:"
A. Preparing a meal in a restaurant.
B. Constructing a road, building, or other fixed structure.
C. Florist activities.
Examples of Activities That Are "Manufacturing, Processing, Compounding,
Mining, or Producing a Product:"
A. Making cabinets and countertops.
B. Making modular homes.
C. Making pre-fabricated steel or concrete products.
D. Preparing framed photographs or pictures.
E. Testing of manufacturing equipment before it is installed.
F. Commercial printing.
G. Producing a wireless or landline based telephone call.
H. Bakeries.
Governor Matt Blunt signed the bill June 13, 2007, saying, “Manufacturing is a vital part of our diverse economy, and this will help level the playing field for Missouri manufacturers.” Effective August 28, 2007, Senate Bill 30 exempts from state tax (4.225 percent) and local use tax, but not local sales tax: (note the exemption is for local use tax but not local sales tax)
- Electrical energy
- gas, whether natural, artificial, or propane
- water
- coal
- energy sources
- chemicals
- machinery equipment
- materials
All of the above may be exempt if they are:
- used or consumed in the manufacturing, processing, compounding, mining, or producing of any product; or
- used or consumed in the processing of recovered materials; or
- used or consumed in research and development related to manufacturing, processing, compounding, mining, or producing any product.
Examples of Activities That Are Not "Manufacturing, Processing, Compounding,
Mining, or Producing a Product:"
A. Preparing a meal in a restaurant.
B. Constructing a road, building, or other fixed structure.
C. Florist activities.
Examples of Activities That Are "Manufacturing, Processing, Compounding,
Mining, or Producing a Product:"
A. Making cabinets and countertops.
B. Making modular homes.
C. Making pre-fabricated steel or concrete products.
D. Preparing framed photographs or pictures.
E. Testing of manufacturing equipment before it is installed.
F. Commercial printing.
G. Producing a wireless or landline based telephone call.
H. Bakeries.
AOL Wins in District Court in Iowa
Iowa seems to be in the sales tax news a lot lately. Their amnesty offer just expired, they issued the landmark ruling thwarting pumkin buyers and now they lose this case to AOL.
This case (America Online, LLC v. Iowa Department of Revenue, Iowa District Court for Polk County, No. CV 6482, September 18, 2007) is interesting because of the arguments AOL used. Basically, it went like this: IA taxes intrastate telecom which is when the call originates and terminates in IA. AOL subscribers are given a local IA telephone number to dial to hook up to the Internet. IA argued that was intrastate telecom. Seems like a pretty decent argument.
AOL succeeded in arguing that while the users called a local number, they were actually calling into servers in VA that authenticated them and got them hooked up. There would be no Internet access without the VA servers.
The District Court agreed with them. No word if Iowa is going to appeal it. We can get you a copy of the case if you'd like it.
This case (America Online, LLC v. Iowa Department of Revenue, Iowa District Court for Polk County, No. CV 6482, September 18, 2007) is interesting because of the arguments AOL used. Basically, it went like this: IA taxes intrastate telecom which is when the call originates and terminates in IA. AOL subscribers are given a local IA telephone number to dial to hook up to the Internet. IA argued that was intrastate telecom. Seems like a pretty decent argument.
AOL succeeded in arguing that while the users called a local number, they were actually calling into servers in VA that authenticated them and got them hooked up. There would be no Internet access without the VA servers.
The District Court agreed with them. No word if Iowa is going to appeal it. We can get you a copy of the case if you'd like it.
Thursday, November 1, 2007
The Long Arm of the Cigarette Tax Law in Montana
This Montana cigarette tax case (Vanderbyl v. Department of Revenue, Montana State Tax Appeal Board, No. MT-2007-66, October 15, 2007) is an interesting case because you don't often see a state go after individual purchasers who buy taxable stuff over the Internet. I'm sure that in the not-too-distant future, they will start to do so, because they can mine a lot of information from the Internet itself. There'll be no need to have the SSTP probably. They'll be collecting more tax than ever. Just my humble prediction.
In this case, Tobacco taxes were held to be due on cigarettes purchased from an out-of-state distributor and shipped to taxpayers residing in Montana. The taxpayers argued that the distributor used deceptive business practices by not providing information regarding the taxpayers' responsibility to pay state tobacco taxes. They also claimed that a portion of the cigarettes were purchased by friends and family to save on shipping. However, the taxpayers were ultimately responsible for paying the tax, regardless of whether the distributor used deceptive business practices. Also, the taxpayers failed to provide any information related to purchases made by friends and family, so the taxpayers were deemed the ultimate consumers of the cigarettes. (summary by CCH)
In this case, Tobacco taxes were held to be due on cigarettes purchased from an out-of-state distributor and shipped to taxpayers residing in Montana. The taxpayers argued that the distributor used deceptive business practices by not providing information regarding the taxpayers' responsibility to pay state tobacco taxes. They also claimed that a portion of the cigarettes were purchased by friends and family to save on shipping. However, the taxpayers were ultimately responsible for paying the tax, regardless of whether the distributor used deceptive business practices. Also, the taxpayers failed to provide any information related to purchases made by friends and family, so the taxpayers were deemed the ultimate consumers of the cigarettes. (summary by CCH)
Internet Access Ban In Effect 7 More Years -- What About VOIP?
A couple of items caught my eye in this bill that was signed to extend the moratorium on taxing Internet access. One has to do with sales taxes and the other with state income taxes.
Here's one provision that impacts sales taxes:
"Internet access" does not include voice, audio or video programming, or other products and services using Internet protocol for which there is a charge, regardless of whether the charge is bundled with charges for "Internet access."
In other words, it looks like video downloading services,VOIP, etc. would not be federally defined as "Internet Access". So it would then be open season by the states on these services.
We have a copy of the actual law, we can .pdf to you if you would like it. Just ask.
Here's one provision that impacts sales taxes:
"Internet access" does not include voice, audio or video programming, or other products and services using Internet protocol for which there is a charge, regardless of whether the charge is bundled with charges for "Internet access."
In other words, it looks like video downloading services,VOIP, etc. would not be federally defined as "Internet Access". So it would then be open season by the states on these services.
We have a copy of the actual law, we can .pdf to you if you would like it. Just ask.
Caveat Pumpkin Vendors -- IA Knows What You Did Last Halloween
File this in your "someone in Iowa has too much time on their hands" folder. According to the Iowa Tax e-News, issued by the IA DOR, as quoted in the CCH's State Tax Review, of October 12, 2007, only certain kinds of pumpkins can be purchased tax exempt in IA.
This type of thing is always great news for grocery stores. Get this: Pumpkins are only exempt if: (1) the buyer completes a sales tax exemption certificate stating they will be using the pumkin as food. Oh, my, so stores will have to maintain copies of these certificates too.
But wait! There's more. The store can't just take the certificate and go on, they have to verify that the particular pumpkin purchased is a specific variety that would normally be used for pumpkin pies.
There is one safe-harbor though. If the pumpkins are purchased with food stamps they are exempt.
This type of thing is always great news for grocery stores. Get this: Pumpkins are only exempt if: (1) the buyer completes a sales tax exemption certificate stating they will be using the pumkin as food. Oh, my, so stores will have to maintain copies of these certificates too.
But wait! There's more. The store can't just take the certificate and go on, they have to verify that the particular pumpkin purchased is a specific variety that would normally be used for pumpkin pies.
There is one safe-harbor though. If the pumpkins are purchased with food stamps they are exempt.
Monday, October 29, 2007
You Have to be Careful About Tax Reduction Strategies
When the media reports on strategies companies use and have used over the years to minimize their tax burden, their lack of tax expertise and hunger for scandal makes them predisposed to report it like a heinous crime. Look at this article. When you are a prominent retailer, the media can make something look like a scandal and if the result is a backlash by the consumer, the tax savings can be dwarfed by decreases in sales.
No Industry Wants Sales Tax to Apply to Their Services
The investment advice community does not want its services to be taxed in MI. That's certainly predictable. But this article highlights the industry's novel reasoning in why it shouldn't be taxed.
"In a letter to Michigan State Senator Nancy Cassis and Steve Bieda, Chairman of the Michigan House Tax Policy Committee, the Washington-based ICI said that imposing the tax would harm Michigan residents by discouraging them "from seeking financial advice to ensure their retirement security."
"In a letter to Michigan State Senator Nancy Cassis and Steve Bieda, Chairman of the Michigan House Tax Policy Committee, the Washington-based ICI said that imposing the tax would harm Michigan residents by discouraging them "from seeking financial advice to ensure their retirement security."
Halt the obscene sales tax giveways
This is not my headline; it's the headline in a California newspaper and it shows the degree of dislike people have for certain tax incentives. Getting cities to rebate some of the sales tax collected by retailers continues to be controversial. As more of the general public hears about these types of incentives, the more controversial it will become. At some point, you can probably expect a backlash from consumers and the tax rebates will be insignificant compared to the loss of business. This editorial is evidence of the bad feelings this type of incentive creates.
Maryland's Tax Burden Close to the Worst
According to a speech given by Curtis Dubay who is a staff economist at the Tax Foundation (in Maryland), Maryland's tax burden as compared to the rest of the region, is worsening.
"Maryland's Tax Burden
Marylanders currently pay 10.8 percent of their income in state and local taxes. This is right near the national average of 11.0 percent and ranks Maryland 23rd overall nationally.
If Governor O'Malley's plan had been in effect for 2007, however, Marylanders would have paid 11.5 percent of their income in state and local taxes, ranking 11th highest nationally.
Maryland would have jumped over West Virginia and competed with New Jersey for the highest-taxed state in the region. In fact, Maryland would only be a few hundredths of a percentage point behind New Jersey, meaning it would be knocking on the door of the top ten."
"Maryland's Tax Burden
Marylanders currently pay 10.8 percent of their income in state and local taxes. This is right near the national average of 11.0 percent and ranks Maryland 23rd overall nationally.
If Governor O'Malley's plan had been in effect for 2007, however, Marylanders would have paid 11.5 percent of their income in state and local taxes, ranking 11th highest nationally.
Maryland would have jumped over West Virginia and competed with New Jersey for the highest-taxed state in the region. In fact, Maryland would only be a few hundredths of a percentage point behind New Jersey, meaning it would be knocking on the door of the top ten."
Chrysler Looking at a $46M Tax Credit
Times are tough in Detroit. According to this article in the Detroit News, the state of Michigan and the city of Detroit are teaming up to keep a Chrysler plant open in that city. The state is offering a tax credit valued at more than $6 million over seven years. The city of Detroit is also considering a12-year abatement worth an estimated $40.2 million.
Ohio is Trying to Enact a Sales Tax Holiday
It seems like every state is jumping on the bandwagon to help the "hard-working" folks and "the children". Ohio is considering getting in on it. In my experience, anytime a politician mentions "hard workers" and "the children", you better grab your wallet. These sales tax holidays mean some headaches for retailer tax departments.
Texans Trying to Make Sales Tax Deduction Permanent
Texas has no personal income tax, so it makes sense that Texans should be able to deduct sales tax on the federal income tax return. At least that makes sense to Texans. Senators Cornyn and Hutchison are working on that. Click here to view the article on this. They don't want "hard-working Texans" to pay too much federal tax. Well, maybe there needs to be some consideration of repealing the federal income tax for Texans (at least for the hard working ones).
Wednesday, October 17, 2007
Double Taxation On Drop Ships
So You Don’t Drop-Ship Items To Your Customers? You Still May Be A Victim Of Double Taxation.
In our last newsletter we discussed the sales tax implications for manufacturers and/or distributors who drop ship items to customers. We also offered a state-by-state chart showing how each state handles tax on drop-shipped items. This week we’re going to explore the other side of the issue.
Almost All Companies Purchase Drop-Shipped Items
It’s more common for companies to purchase items and have it delivered rather than going going to retail locations. Many of these purchases are drop-shipped items. For example, your company may buy supplies from the catalog of a local supplier. But in fact, that supplier might be just a catalog company and the product is drop-shipped to you, their customer. They might never even touch the product.
States Commonly Collect Tax Twice On Drop-Shipped Items
As we discussed last time, some states require the distributor to pay tax on the transaction at the time the product is drop-shipped, however, most companies accrue tax on these items to satisfy their use tax obligation. If you haven’t picked up on it already, when the distributor pays tax on a shipment and the user pays tax on the same order, then the state is collecting the tax twice.Double taxation is not legal in any state.
Here’s An Example:
In California, if a manufacturer is registered in the state but a distributor is not, the manufacturer is required to collect sales tax on the sale to the distributor. In fact, they collect tax on the sale after an additional 10% markup.
Let's say Your Company purchases computer equipment from Distributor located in Washington. Distributor arranges for Manufacturer to ship the product on their behalf to you. Manufacturer is registered in every state. Distributor is not registered in California. Manufacturer is required to collect the California tax after adding an additional 10% markup to the price charged from Distributor. Distributor does not show the tax to you. Your Company is registered in California and accrues tax on the purchase to satisfy your use tax obligation. Your Company and Distributor both paid tax on the sale to California. Double taxation is alive and well!State Laws Vary Widely On Drop-ShipsLike anything else in state and local tax, these laws vary from state to state. The scenario above is not the same in every state. A thorough review of state laws will help in determining the possibility of credits available.
Review For Credits Or Refunds
A quick review by a state and local tax firm like Peisner Johnson & Company is the most effective way of conducting this type of review. We often conduct these type of reviews on a performance basis. Please contact us if you would like more information, or to be contacted regarding our FREE Refund Review.
Click here if you would like a copy of our Drop Ship Chart.
In our last newsletter we discussed the sales tax implications for manufacturers and/or distributors who drop ship items to customers. We also offered a state-by-state chart showing how each state handles tax on drop-shipped items. This week we’re going to explore the other side of the issue.
Almost All Companies Purchase Drop-Shipped Items
It’s more common for companies to purchase items and have it delivered rather than going going to retail locations. Many of these purchases are drop-shipped items. For example, your company may buy supplies from the catalog of a local supplier. But in fact, that supplier might be just a catalog company and the product is drop-shipped to you, their customer. They might never even touch the product.
States Commonly Collect Tax Twice On Drop-Shipped Items
As we discussed last time, some states require the distributor to pay tax on the transaction at the time the product is drop-shipped, however, most companies accrue tax on these items to satisfy their use tax obligation. If you haven’t picked up on it already, when the distributor pays tax on a shipment and the user pays tax on the same order, then the state is collecting the tax twice.Double taxation is not legal in any state.
Here’s An Example:
In California, if a manufacturer is registered in the state but a distributor is not, the manufacturer is required to collect sales tax on the sale to the distributor. In fact, they collect tax on the sale after an additional 10% markup.
Let's say Your Company purchases computer equipment from Distributor located in Washington. Distributor arranges for Manufacturer to ship the product on their behalf to you. Manufacturer is registered in every state. Distributor is not registered in California. Manufacturer is required to collect the California tax after adding an additional 10% markup to the price charged from Distributor. Distributor does not show the tax to you. Your Company is registered in California and accrues tax on the purchase to satisfy your use tax obligation. Your Company and Distributor both paid tax on the sale to California. Double taxation is alive and well!State Laws Vary Widely On Drop-ShipsLike anything else in state and local tax, these laws vary from state to state. The scenario above is not the same in every state. A thorough review of state laws will help in determining the possibility of credits available.
Review For Credits Or Refunds
A quick review by a state and local tax firm like Peisner Johnson & Company is the most effective way of conducting this type of review. We often conduct these type of reviews on a performance basis. Please contact us if you would like more information, or to be contacted regarding our FREE Refund Review.
Click here if you would like a copy of our Drop Ship Chart.
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