This is a question that we get all the time. We get the questions from
sellers of software and buyers of software alike. The taxability of
software maintenance turns sometimes on whether it is mandatory or
optional. The taxability also depends often on exactly what is
included in the "maintenance".
Often having a "maintenance agreement"
means you get software updates; sometimes it just means someone will
be helping you deal with issues that come up from time to time. We've
pulled together a taxability matrix thanks to CCH that shows the
taxability of maintenance agreements in the top 5 states. When you
look at the chart we've provided take note of the comments. It may
indicate a "maintenance agreement" is taxable, but the note may say if
it's just telephone support, it's exempt.
Keep in mind that this chart addresses the general situation. Your
specific facts and circumstances may indicate a different answer. If
you would like to discuss your specific situation, or if you need this
chart in additional states, just give us a call.
Friday, November 21, 2008
Friday, October 17, 2008
Big Chains Double Taxing Customers?
George Gombossy of the Hartford Courant has been writing a few articles that are probably scaring some large retailers. This is a potentially large exposure for these companies. What's the exposure? Class-action lawsuits. Apparently some large chain retailers are taxing exchanged items twice in Connecticut.
Here's how it happens: Customer goes to Home Depot (let's say Joe Biden since he goes there so often) and buys some beige tile grout and pays $13 plus tax in cash. Joe gets home and prepares to regrout the bathroom floor when he realizes he should have bought the white grout. He hops on his bicycle and heads back to the Depot and tries to exchange it. Of course he doesn't have the receipt so they give him a Home Depot store card with the $13 credited to the card. They do not give him a credit for the tax he paid. He picks up the white grout ($13 price) and goes to the register and presents his store card. They tell him he'll have to pay tax since he didn't have the receipt. So they end up charging him tax twice. Yikes!
Here's how it happens: Customer goes to Home Depot (let's say Joe Biden since he goes there so often) and buys some beige tile grout and pays $13 plus tax in cash. Joe gets home and prepares to regrout the bathroom floor when he realizes he should have bought the white grout. He hops on his bicycle and heads back to the Depot and tries to exchange it. Of course he doesn't have the receipt so they give him a Home Depot store card with the $13 credited to the card. They do not give him a credit for the tax he paid. He picks up the white grout ($13 price) and goes to the register and presents his store card. They tell him he'll have to pay tax since he didn't have the receipt. So they end up charging him tax twice. Yikes!
This is the exact situation retailers are trying to avoid. They didn't keep the money, they remitted it to the state. They can only get it back from the state if they refund it to their customer. But since the customers paid in cash, then who do they give the refunds to? Their best hope is that they made a record of the person requesting these exchanges and then to look for credits without tax. Then they need to refund all those customers. What a pain. But the much larger pain would be a class action lawsuit. According to this article, this is a common practice in CT. http://blogs.courant.com/george_gombossy/2008/10/chain-stores-illegally-chargin.html
Monday, September 29, 2008
You Buy A Company You Buy Their Sales Tax Problems
Let's say your company wants to acquire another company. What are the sales tax issues? We recently performed some due diligence for a client of ours who was negotiating to buy a competitor. In this particular case, the acquisition was an asset purchase. Only certain assets were purchased, not all or substantially all of the assets just certain assets. The issues to consider will vary of course depending on the nature of the transaction and the facts present in the situation, but this case will at least be instructive as far as the given facts.
Here are some of the issues they considered.
1. First, does the purchase of the assets transaction itself incur any sales/use tax cost? You should review the applicable state and local tax laws in those states in which the Seller's assets are located to determine if the purchase of assets by the acquiring company would result in any taxes due on the actual purchase transaction. Obviously, you need to know where the assets are located in order to make this determination.
1a. Along those same lines -- you may want to include in the negotiation which party will bear any sales/use tax due on the asset sale is to be borne by the seller.
1b. How will the purchase price be allocated to the assets being purchased?
2. Is the sale reportable in the various states? Every state has their own rules, of course on whether a sale/purchase of assets is reportable in their jurisdiction. This is a matter that should be researched. In this scenario, a large portion of the assets were located in Washington, DC.
2a. Is the sale of assets taxable in DC?
It appears to be taxable but is not entirely clear. We read the law on casual sales and found to be somewhat contradictory. See what you think:
"Casual and isolated sales" means unplanned and nonrecurring sales made by an individual or organization to dispose of certain items of tangible personal property originally acquired for the person's or organization's own use or consumption. ( Reg. Sec. 402.1)
This is exactly what was occurring in our situation, so it would seem that there would be no tax due. But there is another provision that raises a concern. The law exempts certain types of transactions including "casual and isolated sales". Here is the law:
47-2005(7)(A) Casual and isolated sales by a vendor who is not regularly engaged in the business of making sales at retail;
The Distributor in our case was regularly engaged in making sales at retail, but not sales of its business assets purchased and consumed for its own use. The assets being sold were all acquired over many years and tax was paid to DC when the assets were purchased originally.
We advised our client that a written letter ruling from the Mayor's office was desirable in this situation.
3. What About Successor Liability?
Does the Seller have sales/use tax liabilities as a result of their business practices that could transfer to the buyer as the acquiring company.
You should review the laws in the states where the acquired company is registered to ascertain whether a company purchasing all or substantially all the assets of another entity would be held responsible for the prior owner's tax liabilities (referred to as "successor liability.") Obviously you want to avoid assuming any prior sales or use tax liabilities that could be owed by the Seller.
To be conservative, you can assume successor liability is an issue in most states even though it may not be specifically addressed in the statutes and regulations. Since successor liability is a concern, an acquiring company should always review the Seller's sales and purchases to estimate the amount of sales/use tax liabilities that may become your responsibility as a result of purchasing a new company.
Here's what we reviewed:
> Copies of sales/use tax returns for the last 3 years.
> A list of states the company is registered in, along with the dates of registration for sales/use tax purposes.
>Report of sales where no tax was charged by Customer and by State.
>Actual sale or exemption certificates that were obtained by the Seller from its customers.
>Details of Seller's sales/use tax payable account(s) to see if taxes collected were in fact paid to the taxing jurisdictions.
>Any sales tax audits for the last 5 years.
Our motto is: The Best Surprise is No Surprise.
A thorough review of a company being purchased is the best way to minimize surprises.
Here are some of the issues they considered.
1. First, does the purchase of the assets transaction itself incur any sales/use tax cost? You should review the applicable state and local tax laws in those states in which the Seller's assets are located to determine if the purchase of assets by the acquiring company would result in any taxes due on the actual purchase transaction. Obviously, you need to know where the assets are located in order to make this determination.
1a. Along those same lines -- you may want to include in the negotiation which party will bear any sales/use tax due on the asset sale is to be borne by the seller.
1b. How will the purchase price be allocated to the assets being purchased?
2. Is the sale reportable in the various states? Every state has their own rules, of course on whether a sale/purchase of assets is reportable in their jurisdiction. This is a matter that should be researched. In this scenario, a large portion of the assets were located in Washington, DC.
2a. Is the sale of assets taxable in DC?
It appears to be taxable but is not entirely clear. We read the law on casual sales and found to be somewhat contradictory. See what you think:
"Casual and isolated sales" means unplanned and nonrecurring sales made by an individual or organization to dispose of certain items of tangible personal property originally acquired for the person's or organization's own use or consumption. ( Reg. Sec. 402.1)
This is exactly what was occurring in our situation, so it would seem that there would be no tax due. But there is another provision that raises a concern. The law exempts certain types of transactions including "casual and isolated sales". Here is the law:
47-2005(7)(A) Casual and isolated sales by a vendor who is not regularly engaged in the business of making sales at retail;
The Distributor in our case was regularly engaged in making sales at retail, but not sales of its business assets purchased and consumed for its own use. The assets being sold were all acquired over many years and tax was paid to DC when the assets were purchased originally.
We advised our client that a written letter ruling from the Mayor's office was desirable in this situation.
3. What About Successor Liability?
Does the Seller have sales/use tax liabilities as a result of their business practices that could transfer to the buyer as the acquiring company.
You should review the laws in the states where the acquired company is registered to ascertain whether a company purchasing all or substantially all the assets of another entity would be held responsible for the prior owner's tax liabilities (referred to as "successor liability.") Obviously you want to avoid assuming any prior sales or use tax liabilities that could be owed by the Seller.
To be conservative, you can assume successor liability is an issue in most states even though it may not be specifically addressed in the statutes and regulations. Since successor liability is a concern, an acquiring company should always review the Seller's sales and purchases to estimate the amount of sales/use tax liabilities that may become your responsibility as a result of purchasing a new company.
Here's what we reviewed:
> Copies of sales/use tax returns for the last 3 years.
> A list of states the company is registered in, along with the dates of registration for sales/use tax purposes.
>Report of sales where no tax was charged by Customer and by State.
>Actual sale or exemption certificates that were obtained by the Seller from its customers.
>Details of Seller's sales/use tax payable account(s) to see if taxes collected were in fact paid to the taxing jurisdictions.
>Any sales tax audits for the last 5 years.
Our motto is: The Best Surprise is No Surprise.
A thorough review of a company being purchased is the best way to minimize surprises.
A New Way States Are Using to Find You
So you use 3rd party contractors to perform work on your behalf in another state. Does that mean you have sales tax nexus in that state? The answer to that is "yes, probably".
We have many clients in this situation. They will usually concede that they should get registered in these states, but they want to make a benefits vs. cost analysis. Sometimes they ask us to assess the risk of being found by a taxing jurisdiction, when their only contact with a state is through nonrelated 3rd parties.
Obviously, it's difficult to put a percentage on the amount of risk they have in that situation. But we can tell them the experience of others in a similar situation.
Here are some of the more common ways states can find companies doing business in their state. And rest assured of this, states are most anxious to find companies, especially out of state (read nonvoting) companies with nexus in their state.
One of the ways, perhaps the most common method states use to find nonregistered companies who should get registered is through audits of other companies. In other words, let's say you use a 3rd party contractor to do maintenance services for a customer in a state where you have no employees or property and in which you are not registered. You don't charge tax. Your customer is audited and naturally the state reviews purchases of maintenance services. Maintenance almost by definition involves people working on site at your customer. When the auditor finds your invoice with no tax on it, she will usually check to see if your company is registered in the state. Then, it's an easy audit lead and the auditor gets a pat on the back.
Another method states use works in the situation where you have employees in a state but are not registered in that state. To find you, they simply do a comparison of payroll tax returns and sales tax returns. Companies almost always register to pay payroll tax as soon as they have employees in a state. They register for payroll tax purposes, but not for sales tax purposes. The tax return comparison approach easily finds companies with nexus by having employees in the state.
There are other methods that states use, like posting agents at truck stops on freeways in their states taking note of trucks that come into the state representing companies who are not registered.
But I want to highlight the recent experience of one of our clients as proof of another popular method states are using to find companies using 3rd party contractors. Think about how you pay these contractors and the filings you are required to make with the IRS by January 31st of each year. That's right 1099's.
States have sharing agreements with the IRS and can get 1099 data for contractors/businesses in their states. This information includes the name of the payor, of course. So what the state does is get a list of payors who made payments to contractors in their state. Then they compare that list of payors to a list of registered companies. The resulting list is a list of companies who use 3rd party contractors in the state.
So, the state has numerous means at its disposal to find companies in their state. If your exposure is relatively high, you should consider how best to limit your exposure, including using the voluntary disclosure process.
We have many clients in this situation. They will usually concede that they should get registered in these states, but they want to make a benefits vs. cost analysis. Sometimes they ask us to assess the risk of being found by a taxing jurisdiction, when their only contact with a state is through nonrelated 3rd parties.
Obviously, it's difficult to put a percentage on the amount of risk they have in that situation. But we can tell them the experience of others in a similar situation.
Here are some of the more common ways states can find companies doing business in their state. And rest assured of this, states are most anxious to find companies, especially out of state (read nonvoting) companies with nexus in their state.
One of the ways, perhaps the most common method states use to find nonregistered companies who should get registered is through audits of other companies. In other words, let's say you use a 3rd party contractor to do maintenance services for a customer in a state where you have no employees or property and in which you are not registered. You don't charge tax. Your customer is audited and naturally the state reviews purchases of maintenance services. Maintenance almost by definition involves people working on site at your customer. When the auditor finds your invoice with no tax on it, she will usually check to see if your company is registered in the state. Then, it's an easy audit lead and the auditor gets a pat on the back.
Another method states use works in the situation where you have employees in a state but are not registered in that state. To find you, they simply do a comparison of payroll tax returns and sales tax returns. Companies almost always register to pay payroll tax as soon as they have employees in a state. They register for payroll tax purposes, but not for sales tax purposes. The tax return comparison approach easily finds companies with nexus by having employees in the state.
There are other methods that states use, like posting agents at truck stops on freeways in their states taking note of trucks that come into the state representing companies who are not registered.
But I want to highlight the recent experience of one of our clients as proof of another popular method states are using to find companies using 3rd party contractors. Think about how you pay these contractors and the filings you are required to make with the IRS by January 31st of each year. That's right 1099's.
States have sharing agreements with the IRS and can get 1099 data for contractors/businesses in their states. This information includes the name of the payor, of course. So what the state does is get a list of payors who made payments to contractors in their state. Then they compare that list of payors to a list of registered companies. The resulting list is a list of companies who use 3rd party contractors in the state.
So, the state has numerous means at its disposal to find companies in their state. If your exposure is relatively high, you should consider how best to limit your exposure, including using the voluntary disclosure process.
Friday, July 11, 2008
Alabama Is The Lowest Taxing State -- So Why the Long Face?
This editorial in the Birmingham News surprised me at its melancoly tone. Sort of self-loathing attitude about their own state. I would have seen the "low-tax" attribute as a big positive to bring in business. Instead, this paper wants AL to tax everyone more. Check out the gloominess:
Alabama's state and local tax burden per person is the lowest in the country, again
Thursday, July 10, 2008
THE ISSUE: Alabama's state and local tax burden per person is the lowest in the country, again. Some things never change, not for a decade, or even nine decades.
For at least the past decade, Alabama has ranked dead last in the nation in state and local tax collections per person. State, county and city governments collected $2,782 in taxes per person in fiscal 2006, according to the Census Bureau's most recent report on state and local taxes and state population estimates. That's $918 less than the $3,700 national median, with half the states below and half above the latter figure.
If Alabama taxed at the median rate, there would be an extra $4.2 billion for state and local services. If Alabama taxed at the rate of No. 49 Mississippi (unofficial Magnolia state motto: "Thank God for Alabama"), our state and local governments would have $184 million more to spend.
But "no new taxes" has played well in Alabama forever, or at least for more than nine decades, as the 1918 Russell Sage Foundation report makes clear. That report said Alabama didn't raise enough money to meet citizens' needs, nor did it raise that money fairly.
In 1918, the answer was tax reform.
"This suggestion will be met by the statement that the citizens of Alabama are firmly opposed to any increase of taxation and that to vote for such legislation would be political suicide to members of the Legislature," the report said.
In 2008, the answer still is tax reform.
State and local governments still need more money to provide services to their citizens, from police protection, to roads, to schools, to prisons. As Jim Williams, head of the Public Affairs Research Council of Alabama, notes: "We're trying to do the same thing with about 70 percent of the money, and that's a hard thing to do."
It is a hard thing, too, to convince Alabamians of the need to raise taxes. With great reason: Despite the nation's lightest state and local tax burden, it doesn't feel that way to many people. That's because, as the Sage report noted, state government didn't raise tax dollars fairly then, and it doesn't now.
Poorer citizens pay a far larger share of their incomes in state and local taxes than the wealthiest Alabamians do. Families in the lowest 20 percent income levels (less than $16,000 a year) pay more than 11 percent of their incomes in state and local taxes, while those in the top 1 percent ($316,000 a year and more) pay only 4.3 percent, the Institute on Taxation and Economic Policy reported earlier this year.
Why is everything so out of whack? Blame sales taxes that are among the highest in the nation and hit the poor the hardest, as well as exemptions and loopholes that prevent much of the state's wealth from being taxed. Alabama excludes about half the sales tax, 52 percent of personal income and 88 percent of property value from its tax base, a Governing magazine study on state tax systems noted.
That is a recipe for a tax system that burns the poor and middle class as it caters to the wealthy. It is no wonder so many people in Alabama don't want higher taxes; they're already paying more than their fair share even though the state ranks 50th in state and local taxes per person.
Only by righting the imbalances in the tax system will the Legislature ever be able to make the case for raising taxes, as well. Yet when we last left lawmakers during this year's session, they had blown a chance to bring some fairness to the tax system by removing the state sales tax from groceries and raising the threshold at which families start paying income tax.
Nine decades ago, the answer was tax reform. But the Legislature has been much more interested in carving out special-interest tax exemptions than in bringing fairness to the tax system. Suffice it to say, lawmakers have ignored Sage advice.
Thursday, July 10, 2008
NY May Get the Boot from the SSTP
The SSTP has a committee that evaluates whether a state remains in compliance with the SSTP agreement. So what happens if one or more states fall out of compliance? And it's easy to imagine that states will adopt various provisions from time to time that will move it in and out of compliance with the SSTP. What a mess this creates. Apparently NJ is the first state to cross that line. The CRIC (Compliane Review and Interpretations Committee) was all over it according to a report we read in CCH. Apparently, New Jersey is not in substantial compliance with the Agreement because of its failure to enact certain telecommunication provisions.
So what happens to a state that goes AWOL?
The Board imposes sanctions. If New Jersey does not come into compliance by January 1, 2009, on that date it will lose its right to vote on amendments to and interpretations of the Agreement and determinations of whether a petitioning state is in compliance.
I don't know how much of a sanction that is. But that only gives them 6 months from now to get these "certain telecommunication provisions" enacted. The bigger sanction happens one year from now.
If NJ still is not in compliance on July 1, 2009, sellers will be relieved on that date of the obligation to collect sales and use taxes on sales into New Jersey, if they are collecting on a voluntary basis solely because of their registration under the Agreement.
This sanction could hurt. So if you are one of the companies collecting in NJ just because of the SSTP registration, you may be off the hook a year from now, we'll see.
I wouldn't think the NJ legislators will react kindly to the admonishment given them by the SSTP Governing Board President (who is Joan Wagnon of the Kansas Secretary of Revenue). Who said this is "an opportunity for the New Jersey Legislature to rise to the occasion" and get those telecom provisions enacted.
But maybe this will scare them: NJ May Get Expelled!
The Board says if the state's noncompliance continues after January 1, 2010, the Board will consider additional sanctions, which could include expulsion.
Yikes.
Wednesday, May 28, 2008
Don't Remit Tax - You Could Go To Jail?
This headline from the Associated Press was a bit startling.
The charges were brought in Snohomish County Superior Court.
Charging papers say the 59-year-old Sperry reported about $5.5 million in sales to the Washington Department of Licensing, but less than one quarter of that to the Washington Department of Revenue.
Sperry is accused of pocketing the sales tax paid to him by customers of yachts he sold. He also is accused of underreporting the 10 percent commissions he made on those sales.
Felony theft of sales tax is punishable by up to 10 years in prison and a $20,000 fine.
WA yacht broker charged with felony theft of sales tax
Ronald J. Sperry is accused of failing to remit nearly $359,000 in sales tax he collected from late 2004 through 2007 on sales of yachts through Everett Yacht Sales and Hanan Yachts.The charges were brought in Snohomish County Superior Court.
Charging papers say the 59-year-old Sperry reported about $5.5 million in sales to the Washington Department of Licensing, but less than one quarter of that to the Washington Department of Revenue.
Sperry is accused of pocketing the sales tax paid to him by customers of yachts he sold. He also is accused of underreporting the 10 percent commissions he made on those sales.
Felony theft of sales tax is punishable by up to 10 years in prison and a $20,000 fine.
Monday, April 28, 2008
Whiplash In Ohio As They Switch Back To Origin Based
On April 25, the Ohio Department of Taxation issued a press release about a recent bill signed by the Governor switching back to sourcing sales at the origin instead of destination. You may recall that Ohio swiched to destination sourcing back in 2006 in an effort to become a full member of the Streamlined Sales Tax Project (SSTP).
The SSTP is a multi-state effort to simplify and standardize sales tax rules across state lines. For years, the multistate group required states to move to destination sourcing in order to become full members. Ohio got on board and passed their law to change to destination sourcing. This caused a big problem for delivery sellers like furniture and appliance stores. Suddenly all of them had to put in systems to charge tax based on the tax rate of the delivery.
Now, last summer, in response to concerns from small businesses (according to the press release), the Ohio General Assembly put the shift to destination sourcing of delivery sales on hold. Later, in December, the Governing Board of the Streamlined Sales Tax Project decided to allow "origin states" to become a full member of the organization starting in 2010 as long as at least four other "origin states" are also ready to become full members. So now, Ohio has moved back into the origin camp.
The SSTP is a multi-state effort to simplify and standardize sales tax rules across state lines. For years, the multistate group required states to move to destination sourcing in order to become full members. Ohio got on board and passed their law to change to destination sourcing. This caused a big problem for delivery sellers like furniture and appliance stores. Suddenly all of them had to put in systems to charge tax based on the tax rate of the delivery.
Now, last summer, in response to concerns from small businesses (according to the press release), the Ohio General Assembly put the shift to destination sourcing of delivery sales on hold. Later, in December, the Governing Board of the Streamlined Sales Tax Project decided to allow "origin states" to become a full member of the organization starting in 2010 as long as at least four other "origin states" are also ready to become full members. So now, Ohio has moved back into the origin camp.
Saturday, April 26, 2008
Refund Opportunity in Missouri for Electricity Resold
Hotels in Missouri can purchase electricity for resale to the extent it is used for paying guests and not in common areas. So how do you calculate that amount? You can use the Department's suggested form, but it's complicated and time consuming. Or you can just use the relative square feet for guest rooms and common areas. That was the method used by one Taxpayer and it was finally ok'd by the Commisioner in MO. See Kansas City Power & Light Co. v. Director of Revenue, Missouri Administrative Hearing Commission, No. 06-1589 RS, March 12, 2008.
Contact us at www.PeisnerJohnson.com for help in securing these refunds. We can usually do it for less than it will cost you to do it yourself.
Friday, April 25, 2008
Refund Opportunity in Missouri for Electricity Resold
Hotels in Missouri can purchase electricity for resale to the extent it is used for paying guests and not in common areas. So how do you calculate that amount? You can use the Department's suggested form, but it's complicated and time consuming. Or you can just use the relative square feet for guest rooms and common areas. That was the method used by one Taxpayer and it was finally ok'd by the Commisioner in MO. See Kansas City Power & Light Co. v. Director of Revenue, Missouri Administrative Hearing Commission, No. 06-1589 RS, March 12, 2008.
Contact us at www.PeisnerJohnson.com for help in securing these refunds. We can usually do it for less than it will cost you to do it yourself.
Air is TPP in Ohio
Last week I had a piece about how a number of states are beginning to define electricity as tangible personal property. Of course, electricity does meet the definition, since it can be felt, measured, etc. However, many states specifically say that utilities are providing a service, not selling TPP. What about air?
Clearly it can also be felt, measured, etc. But do states consider it TPP? Well, that question doesn't come up very often, because who sells air? Below is a copy of a recent letter ruling issued by the state of Ohio to a business who will be providing compressed air to its customers.
Clearly it can also be felt, measured, etc. But do states consider it TPP? Well, that question doesn't come up very often, because who sells air? Below is a copy of a recent letter ruling issued by the state of Ohio to a business who will be providing compressed air to its customers.
Opinion of the Tax Commissioner
Date Issued: February 20, 2008
Opinion No: 08-0002 Tax: Sales
FACTS
We sell and distribute industrial air compressors and related parts, supplies and services * * *.
We are introducing a new venture called "XXXX", the supply of compressed air to our customer's place of business. We anticipate the majority of these consumers to be manufacturers, who typically utilize compressed air to operate tools and production line equipment required for manufacturing of products for resale. Upon implementation of a ten year contract, we will install and maintain the equipment at our customer's location; retaining full ownership and control of the compressor, spare parts, and accessories. Our customer will be invoiced a standard monthly fee for the delivery of the compressed air based upon an anticipated range of consumption. If the maximum contractual volume is exceeded, there will be a supplementary charge, calculated by a predetermined method.
QUESTION FOR WHICH OPINION IS REQUESTED
Taxpayer requests an Opinion of the Tax Commissioner on how sales tax should be handled on the monthly fee, as well as the overage charges; whether the compressed air supply should be treated as tangible personal property or a service, and under what conditions it would be a taxable or an exempt transaction.
DISCUSSION
Pursuant to R.C. 5739.02, the Ohio sales tax applies to all retail sales in this state. R.C. 5739.01(B) defines "sale" for Ohio sales tax purposes to include any transfer of title, possession, or a right to use tangible personal property in this state or the provision of a designated taxable service in this state for a consideration. There is a presumption that all sales made in the state are subject to the tax until the contrary is established, R.C. 5739.02(C). 2
R.C. 5739.01(YY) defines "Tangible personal property" as:
* * * personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses. For purposes of this chapter and Chapter 5741. of the Revised Code, "tangible personal property" includes motor vehicles, electricity, water, gas, steam, and prewritten computer software.
Because compressed air can be weighed, measured and felt it falls within the definition of "tangible personal property" and is therefore a product that is sold by the Taxpayer to its customers. Accordingly, Ohio sales tax should be charged on the sale of the compressed air unless an exception to the tax applies. Tax should be charged regardless of whether the amount being invoiced is the standard charge or an overage charge for the purchase of additional air.
You indicate that you anticipate that your customers of the compressed air will be primarily manufacturers. R.C. 5739.02(B)(42)(g) provides an exemption for items, as described in R.C. 5739.011, primarily used in a manufacturing operation to produce tangible personal property for sale. R.C. 5739.011(B)(8) provides that "coke, gas, water, steam and similar substances used in the manufacturing operation" qualify for exemption. Therefore it is likely that you will have manufacturing customers that claim an exemption from sales tax on their purchase of the compressed air. Note that there is no status exemption for manufacturers; instead it is the use of the product being purchased that determines whether the purchased product is exempt from tax.
For any sale where a customer claims an exemption from sales tax, whether it be on the basis of the manufacturing exemption or some other exemption, you should obtain a fully completed exemption certificate as provided for in R.C. 5739.03(B)(1)(a). A vendor that obtains a fully completed exemption certificate from a customer is, in the absence of fraud or collusion, relieved of the liability for collecting tax on the sales covered by the certificate, R.C. 5739.03(B)(1)(b).
OPINION
Based upon the forgoing, it is the Opinion of the Tax Commissioner that the compressed air sold by Taxpayer is the sale of tangible personal property. Sales tax is to be charged and collected from customers on the sales of such tangible personal property unless and exemption is applicable and the Taxpayer has obtained a certificate of exemption as provided for in R.C. 5739.03(B)(1)(b).
This Opinion is limited to the legal issue addressed in this Opinion. This Opinion only applies to the taxpayer and it may not be transferred or assigned. In addition, the tax consequences stated in this Opinion may be subject to change for any of the reasons stated in R.C. 5703.53(C). It is the duty of the taxpayer to be aware of such changes. See R.C. 5703(E).
Richard A. Levin
Tax Commissioner Friday, April 11, 2008
ITunes (and Other Downloaded Software) May Soon be Taxable in CA
California is facing a huge budget deficit. That means they are going to cut spending and balance the budget right? Of course not. They are seeking more revenue. One thing that makes California different from most states is that they do not define software as tangible personal property.
A compact disk is tangible personal property. Software you buy on a tangible medium like a CD is taxable in CA. If you just download software and get no tangible media along with it, then the purchase is not taxable. Most people don't buy lots of software routinely, so you would not expect the general population to protest much if corporations have to pay tax on software downloaded electronically. But there is something that the general citizenry does buy and download a lot and that they will care about. That is a song from ITunes. Yes, that's also "software" and it's electronically downloaded. If CA passes a bill recently proposed, then Itunes would cost $1.08 instead of $.99. This could generate quite a backlash. Check out this article in the Mercury News.
A compact disk is tangible personal property. Software you buy on a tangible medium like a CD is taxable in CA. If you just download software and get no tangible media along with it, then the purchase is not taxable. Most people don't buy lots of software routinely, so you would not expect the general population to protest much if corporations have to pay tax on software downloaded electronically. But there is something that the general citizenry does buy and download a lot and that they will care about. That is a song from ITunes. Yes, that's also "software" and it's electronically downloaded. If CA passes a bill recently proposed, then Itunes would cost $1.08 instead of $.99. This could generate quite a backlash. Check out this article in the Mercury News.
Marland Computer Services Sales Tax REPEALED
There was quite firestorm of protest ignited when Maryland passed the computer services sales tax bill during a special session convened in 2007. It was set to go into efrect on July 1, 2008. However, before it could take effect, it has now been repealed. Under the legislation enacted in 2007 that is now repealed, "computer service" included:
-- computer facilities management and operation;
-- custom computer programming;
-- computer system planning and design that integrate computer hardware, software and communication technologies;
-- computer disaster recovery;
-- data processing, storage and recovery; and
-- hardware or software installation, maintenance and repair.
In addition, sales and use tax is inapplicable to the sale of custom computer software services that relate to procedures and programs that:
-- are otherwise taxable, as specified;
-- are to be used by a specific person;
-- are created for that person or contain standard or proprietary routines that incorporate significant creative input to customize the procedures and programs for that person; and
-- do not constitute a program, procedure or documentation that is mass produced and sold to the general public or persons associated in a trade, profession or industry.
MN Tax Court Finds Company President Personally Liable
The MN Tax Court confirmed once again, something we all should know. Corporate officers can be held personally liable for unpaid taxes. Sometimes, these cases reach an individual who really seems blameless for the situation, but in this case, it's hard to argue with the decision of the court. In this case, as reported by CCH, the individual had the ability to sign checks, and he could hire and fire employees. He had joint control of the corporation's financial affairs with other officers, and he had an entrepreneurial stake in the corporation. Thus, the court found that the individual had the authority and responsibility necessary to hold him personally liable for the corporation's unpaid tax.
I thought Findings of Fact nos. 3 and 4 showed that the state had a pretty strong case:
3. Appellant was involved in the day-to-day operations of the business and was a signatory on the business bank accounts. He had access to Mojito's accounts through paper checks, through on-line electronic access, or through communication with the bank. During the tax periods at issue, he had control or supervision jointly with others over the finances of Mojito, including the payment of taxes.
4. Mojito began having problems with unpaid sales taxes sometime in 2004. Although Appellant was on personal leave from September, 2004 through February, 2005, his partners copied him on email messages so he continued to be informed of Mojito's sales tax liability during that time. From March through October of 2005, he was involved in Mojito's operations and kept up to date on its sales tax status. As early as March 2005, he was advised of the risk that Mojito would be posted by the State for unpaid taxes so it could no longer purchase liquor. Again in April 2005, Appellant was notified that although Mojito's sales tax return had been filed, the amount owed ($13,778) had not been paid. By June 2005, Appellant was working with and proposing compromises to Mojito's creditors and negotiating with the restaurant's landlord to assist Mojito in paying down its outstanding sales tax liability to the state.
(Paddock v. Commissioner of Revenue, Minnesota Tax Court, No. 7856-R, March 31, 2008)
Changing a Light Bulb Taxable in FL, But Not Changing the Fixture
The Florida Department of Revenue issued a Technical Assistance Advisement, No. 08A-006, on March 5, 2008 discussing the tax treatment of cleaning nonresidential properties. The specific question was whether store lighting retrofits performed by a contractor in Florida stores are subject to sales tax.
There is always a question in FL (and certain other states) on real property services. In FL, sales tax is imposed on charges for all nonresidential cleaning services included in SIC Industry Group Number 734. You might have considered changing a light bulb to be taxable because a rule provides that lighting maintenance services (bulb replacement and cleaning) are an example of nonresidential cleaning services. Another rule provides the general rule of taxability of real property contracts and it states that contractors are the ultimate consumer of the materials and supplies used to perform real property contracts and must pay tax on their cost of those materials and supplies. As such, charges made by a contractor maintaining and washing existing lighting are taxable. Note the word "existing". If you change lightbulbs in existing fixtures in FL, then that service is taxable. The replacement of lighting fixtures, however, referred to as "retrofitting," constitutes a real property improvement and, as such, is not included within SIC Industry Group Number 734, nonresidential cleaning services.
There is always a question in FL (and certain other states) on real property services. In FL, sales tax is imposed on charges for all nonresidential cleaning services included in SIC Industry Group Number 734. You might have considered changing a light bulb to be taxable because a rule provides that lighting maintenance services (bulb replacement and cleaning) are an example of nonresidential cleaning services. Another rule provides the general rule of taxability of real property contracts and it states that contractors are the ultimate consumer of the materials and supplies used to perform real property contracts and must pay tax on their cost of those materials and supplies. As such, charges made by a contractor maintaining and washing existing lighting are taxable. Note the word "existing". If you change lightbulbs in existing fixtures in FL, then that service is taxable. The replacement of lighting fixtures, however, referred to as "retrofitting," constitutes a real property improvement and, as such, is not included within SIC Industry Group Number 734, nonresidential cleaning services.
So, changing a light bulb is taxable, but replacing a fixture and "retrofitting" the lighting is not. It's like we always say, "Sales tax is not brain surgery -- it's worse."
Friday, March 28, 2008
What Local Taxes Do You Charge in Texas?
What local tax to charge in Texas can be very tricky. And Texas, recently changed the statute on the MTA tax making it potentially more complex. The Comptroller of Public Accounts recently issued a letter with some explanation that is helpful. Here it is:
1. Look at the place of business from which the item is being mailed, shipped or delivered. Is there a:
For example, if the sales tax rate at the seller's place of business is 7.25 percent-6.25 percent state tax and 1.00 percent local sales tax-the seller can possibly collect up to an additional 1.00 percent of local use tax for other types of local taxing jurisdictions other than the type of local sales tax collected. This means that if, for example, the local sales tax a seller is responsible for collecting is city tax, then the seller is not required to collect any additional city use tax even if the destination city has a city tax rate at or below 1.00 percent. In this situation, the additional 1.00 percent of use tax that could be due would be county, SPD or transit authority local use taxes.
Remember: sellers should collect local use taxes in the order indicated below and cannot collect more than 8.25 percent in total sales and use taxes.
2. Look at the location where the item is being mailed, shipped or delivered. Is there a:
- City Rate? If yes, collect the city sales tax on all taxable sales in Texas.
- County Rate? If the seller is located in a taxing county, then collect the county sales tax on all taxable Texas sales.
- Special Purpose District (SPD)? If the seller is located in a special purpose district, then the seller must also collect the SPD sales tax on all taxable Texas sales.
- Transit Authority? If yes, the seller must collect the transit authority tax on all taxable sales in Texas.
For example, if the sales tax rate at the seller's place of business is 7.25 percent-6.25 percent state tax and 1.00 percent local sales tax-the seller can possibly collect up to an additional 1.00 percent of local use tax for other types of local taxing jurisdictions other than the type of local sales tax collected. This means that if, for example, the local sales tax a seller is responsible for collecting is city tax, then the seller is not required to collect any additional city use tax even if the destination city has a city tax rate at or below 1.00 percent. In this situation, the additional 1.00 percent of use tax that could be due would be county, SPD or transit authority local use taxes.
Remember: sellers should collect local use taxes in the order indicated below and cannot collect more than 8.25 percent in total sales and use taxes.
2. Look at the location where the item is being mailed, shipped or delivered. Is there a:
- City Rate? If there is a city tax rate, collect city use tax if no city tax rate exists at the place of business from where the item was shipped and collection of the city use tax will not exceed the 2 percent cap.
- County Rate? If there is a county tax rate, collect county use tax if no county tax rate exists at the place of business from where the item was shipped and collection of the county use tax will not exceed the 2 percent cap.
- SPD Rate? If there is a SPD tax rate, collect SPD use tax if no SPD tax rate exists at the place of business from where the item was shipped and collection of the SPD use tax will not exceed the cap. If use tax can be collected for multiple SPDs at the full rate of each without exceeding the 2 percent cap, do so.
- Transit Rate? If there is a transit tax rate, collect transit use tax if no transit tax rate exists at the place of business from where the item was shipped and collection of the transit use tax will not exceed the 2 percent cap. If use tax can be collected for multiple transits, at the full rate of each without exceeding the cap, do so.
Tuesday, March 25, 2008
You May Never Want to Do Business in NJ After Reading This
This article by Jason Method of the Gannett News Service may convince you never to do business in NJ. He tells the story of South Carolina businessman J. Barry Godwin whose company builds and delivers Stingray power boats.
"A New Jersey tax collector threatened to impound Godwin's company truck, which was stopped at the state border as it was moving $120,000 worth of Stingray power boats to another state, unless the company wired $46,200 in business taxes to New Jersey immediately. The state claimed that Stingray owed the back taxes because, although it had no stores in the state, it sold boats here.
Godwin said he had no choice but to wire the money to the state Treasury that afternoon. "I was treated like a criminal," Godwin said. "When you cross the New Jersey state line, it's another world."
New Jersey officials say their tax enforcement is fair.
"We do this in order to obtain compliance from out-of-state companies conducting business in New Jersey so that they pay the appropriate taxes and do not receive an unfair competitive advantage over New Jersey businesses by avoiding these taxes," Treasury spokesman Tom Vincz said in an e-mail.
Vincz could not say how much money is collected under this legal principle, called "economic nexus." The state collected $2.7 billion in all corporate taxes last year.
But some out-of-state business owners say New Jersey has become so aggressive that the tax bills have crossed over to the absurd.
Godwin, of Stingray Boats in Hartsville, S.C., said in an interview that he thinks New Jersey has gone too far. Godwin said the company was unaware that it had any issue with New Jersey before the revenue agent stopped its truck at a weigh station in Carney's Point near the Delaware border. Godwin also was surprised because the truck loaded with six powerboats worth $20,000 each was only headed through New Jersey, to make a delivery in Massachusetts.
The revenue agent, Godwin said, asked the truck driver whether the company delivered boats to any dealers in New Jersey. The driver radioed the company headquarters and found out that Garden State Yacht Sales in Point Pleasant Beach sold the company's boats. The agent ordered the driver out of the truck and called Godwin. She wanted to know the company's revenue from its New Jersey sales for the past seven years.
The agent and company officials calculated the tax bill over the telephone.
"She told me, 'Your load of boats is not leaving here until you pay fines and back taxes,'" Godwin said. "'If we don't get the money by 1 p.m., I'm going to impound your truck and boats, and you'll have to find a place for your driver to go.'" Godwin said he pleaded for more time. "I asked, 'Can you let my truck go and we work this out?' She said, 'No, you have to pay the money,'" Godwin said.
The company had no choice but to wire the money to the state. The company since has decided it would be too expensive to pursue an appeal, he said. "
Stingray was not the only company to be stung by revenue agents. We'll tell you about those in another post. But this one is enough to see how aggressive some states are becoming in asserting nexus on out-of-state companies.
TN Agrees Telecom Sold to ISP Not Taxable
The Tennessee Department of Revenue issued a Letter Ruling on February 8, 2008 stating that TN could not charge tax on telecommunications sold to an Internet service provider since Federal Law prohibited such taxation. (See TN --Letter Ruling No. 08-08.) If you would like a copy of the full ruling, we can get it for you. Here is their analysis:
"The purchase of telecommunications services by the Taxpayer is not subject to the Tennessee sales and use tax because of the federal Internet Tax Freedom Act, 47 U.S.C. § 151 which prohibits the imposition of a state sales tax upon the retail sale of telecommunications services to providers of Internet access for use in providing Internet access. The Internet Tax Freedom Act is federal legislation that preempts any Tennessee laws relating to the taxation of Internet access or telecommunications services purchased by Internet access providers."
Schwarzenegger Sorry That Services Not Taxed in CA
Listen to (I mean read) what CA Governor, Schwarzenegger said last week at a town hall meeting in the Northern California city of Pleasant Hill:
"The way we are taxing. I mean, we are missing a lot out there," the governor said. "There's whole new economies that are developing, service-oriented economies. Manufacturing is going down."
So taxing services is on the horizon out there in CA. I would agree with the writer of this article in the Sacramento Bee, that the most likely first target will be telecommunications and cable television. I really have to shake my head though when an elected official thinks any item not taxed is a big dissapointment.
Monday, March 10, 2008
Nebraska Getting Tough
Nebraska has 73 auditors out there trying to find companies who owe tax. This recent article in the Omaha World-Herald describes how the Nebraska Department of Revenue has added about $12.5Million to state coffers in the last 3 years and it all started with an amnesty program. The amnesty program funded the hiring of more auditors and a computer programmer. Let the data mining begin.
The article describes how the Department used various business records to find likely audit candidates. Let the company beware! Here comes Nebraska! "Data mining involves searching and comparing large quantities of information to find patterns and relationships. For the Revenue Department, it has meant looking through lists and databases to find clues that a person or a company might owe taxes.
Dearmont said the operation uses the Revenue Department's taxpayer databases, as well as information from the Internal Revenue Service and the State Department of Labor. It also uses data purchased from InfoUSA, an Omaha marketing and sales-leads company.
Enforcement employees found the three companies that owed around $1 million by looking at categories of businesses that typically would be paying sales and use taxes to the state, Dearmont said.
Sales taxes are collected from customers and are then turned over to the state. Retail businesses — auto parts stores, restaurants and discount stores, for example — commonly collect sales taxes. Businesses involved in personal services, such as law firms, typically don't.
Use taxes are supposed to be paid on goods or services bought for use in Nebraska from a state that doesn't charge sales tax.
Dearmont said he could not name the three companies — or their type of business — because of state confidentiality laws.
In those cases and others, Revenue Department employees started with a list of all companies engaged in a specific type of business that might be expected to owe sales or use taxes — all rental companies or all landscaping companies, for example.
Then they compared the list with a list of companies operating in Nebraska. Finally, they checked the Nebraska companies against state sales tax records to see if companies had taken out sales tax permits and had paid sales or use taxes.
When a company operating in the state was found not to have paid sales or use taxes, a revenue agent gave the company a call to find out more about its situation.
The three companies paid the taxes voluntarily. No court action was needed to collect the money, Dearmont said.
The Revenue Department is asking for $500,000 this year to buy the equipment and software needed to tap additional databases. The request is included in the Appropriations Committee's budget recommendation.
Whether clues come from data mining, tips from the public or other means, Revenue Department staffers follow up with traditional audits, tax questionnaires and letters to find out whether a taxpayer actually owes money."
Dearmont said the operation uses the Revenue Department's taxpayer databases, as well as information from the Internal Revenue Service and the State Department of Labor. It also uses data purchased from InfoUSA, an Omaha marketing and sales-leads company.
Enforcement employees found the three companies that owed around $1 million by looking at categories of businesses that typically would be paying sales and use taxes to the state, Dearmont said.
Sales taxes are collected from customers and are then turned over to the state. Retail businesses — auto parts stores, restaurants and discount stores, for example — commonly collect sales taxes. Businesses involved in personal services, such as law firms, typically don't.
Use taxes are supposed to be paid on goods or services bought for use in Nebraska from a state that doesn't charge sales tax.
Dearmont said he could not name the three companies — or their type of business — because of state confidentiality laws.
In those cases and others, Revenue Department employees started with a list of all companies engaged in a specific type of business that might be expected to owe sales or use taxes — all rental companies or all landscaping companies, for example.
Then they compared the list with a list of companies operating in Nebraska. Finally, they checked the Nebraska companies against state sales tax records to see if companies had taken out sales tax permits and had paid sales or use taxes.
When a company operating in the state was found not to have paid sales or use taxes, a revenue agent gave the company a call to find out more about its situation.
The three companies paid the taxes voluntarily. No court action was needed to collect the money, Dearmont said.
The Revenue Department is asking for $500,000 this year to buy the equipment and software needed to tap additional databases. The request is included in the Appropriations Committee's budget recommendation.
Whether clues come from data mining, tips from the public or other means, Revenue Department staffers follow up with traditional audits, tax questionnaires and letters to find out whether a taxpayer actually owes money."
How Many Auditors Are Out There?
Here's a rundown of the top 10 states in terms of auditors employed:
1. 730 -- California2. 468 -- TexasTexas came in 2nd, in terms of numbers of auditors out there, and it barely beat out number 3. Texas has had larger numbers of auditors in the past -- as many as 600. Diferent Comptrollers have come in and cut numbers to save costs.3. 467 -- New YorkNew York is traditionally viewed as one of the more difficult states to deal with and when you see how many auditors they have, you're probably not surprised.4. 390 -- FloridaStates like FL and TX with no personal income tax, rely very heavily on the sales tax.5. 279 -- IllinoisI bet if I had just asked you name the 5 "Big" states for sales tax audits these would have been the first 5 you would have named. Here is the rest of the top ten.6. 218 -- WA7. 236 -- MN8. 200 -- MI9. 178 -- TN10. 175 -- NCBesides the sttes with no statewide sales tax such as AL, DE, MT, NH and OR the following states have less than 20 sales tax auditors.North Dakota and Wyoming
We got an interesting chart from one of the sources we subscribe to. It's the Sales and Use Tax Monitor published by Strafford Publications. You can subscribe also at www.straffordpub.com if you're interested. But anyway,
Friday, March 7, 2008
States Share Information on Use Tax Evaders
There was this interesting article in Forbes magazine about the number of states that include a line on their individual state income tax form for people to voluntarily enter how much use tax they owe on their own purchases. The article discussed the various methods used to encourage voluntary compliance. In the end, though, even the most effective approach (which was to provide lookup tables for taxpayers) resulted in only 3% of taxpayers reporting any use tax. That's not very good. Now to quote from the article:
"So meanwhile, the states have begun to enforce their use-tax laws against consumers, particularly high-income purchasers of big-ticket items.
"Virginia, for example, routinely sends use-tax bills to residents who buy furniture in North Carolina and have it shipped home, Smith notes. How does Virginia know? North Carolina audits the furniture sellers and gets a list of tax-free sales to Virginia residents, which it shares with Virginia tax authorities. Such interstate tax sharing agreements are now common. "
"Virginia, for example, routinely sends use-tax bills to residents who buy furniture in North Carolina and have it shipped home, Smith notes. How does Virginia know? North Carolina audits the furniture sellers and gets a list of tax-free sales to Virginia residents, which it shares with Virginia tax authorities. Such interstate tax sharing agreements are now common. "
Clients will frequently ask us how the states could possibly find them. This is a good example of how they do it.
Electricity Held to be Tangible Personal Property in CA
This recent CA appeals court case about coal purchased by a producer of electricity caught my eye. (Searles Valley Minerals Operations, Inc. v. State Board of Equalization, California Court of Appeal, Fourth Appellate District, No. D049905, February 26, 2008). The court held that coal doesn't become part of the final product and therefore cannot be purchased for resale in CA. That could have been expected. The interesting part to me was that they first went through an analysis of whether electricity is even "tangible personal property" for purposes of CA sales/use tax.
As reported by CCH: "The term "tangible personal property" is defined in the sales and use tax laws as personal property that may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses. The evidence at trial established that electricity can be measured and felt and is perceptible to the senses. As such, electricity constitutes tangible personal property. Based on the unambiguous language of the applicable statute and the evidence presented, the court concluded that electricity is tangible personal property for purposes of the sales and use tax law." This is important because it might lead to other refunds being sought in CA, for example, plain old telephone service (POTS) is essentially an electric signal. Telephone companies spend a lot of money on electricity needed to generate telecommunications. So maybe telecommunications is tangible personal property and since the electricity purchased becomes a part of the ultimate item sold, maybe it's exempt in CA now? Or maybe, telecommunications is taxable as the sale of TPP in CA now?
As reported by CCH: "The term "tangible personal property" is defined in the sales and use tax laws as personal property that may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses. The evidence at trial established that electricity can be measured and felt and is perceptible to the senses. As such, electricity constitutes tangible personal property. Based on the unambiguous language of the applicable statute and the evidence presented, the court concluded that electricity is tangible personal property for purposes of the sales and use tax law." This is important because it might lead to other refunds being sought in CA, for example, plain old telephone service (POTS) is essentially an electric signal. Telephone companies spend a lot of money on electricity needed to generate telecommunications. So maybe telecommunications is tangible personal property and since the electricity purchased becomes a part of the ultimate item sold, maybe it's exempt in CA now? Or maybe, telecommunications is taxable as the sale of TPP in CA now?
Certain Conveyor Equipment Exempt in NY
Here's an interesting Advisory Opinion hot off the presses out of NY that actually favors the taxpayer. Did you know that conveyors can be exempt in NY if they are used directly and predominantly in production activities? It's the truth, read on for some of the specific facts and some language from the Opinion.
If you'd like a full copy, let us know and we'll get it to you. Just keep in mind that in New York, an Advisory Opinion is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts.
If you'd like a full copy, let us know and we'll get it to you. Just keep in mind that in New York, an Advisory Opinion is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts.
The Issue
The issue raised by Petitioner is whether the conveyor used to move product outside of Petitioner's plant qualifies for the production exemption under section 1115(a)(12) of the Tax Law for equipment used directly and predominantly in the production process.
Opinion
Petitioner is in the business of producing various grades of concrete aggregate products. Petitioner uses aggregate conveyors to move products to conical stockpiles outside of the production plant.
Petitioner states that when the aggregate products are moved from within the plant to be stockpiled outside the plant, the products begin a dewatering process that continues until after the products are dropped in the stockpiles. The products cannot be loaded for delivery directly from the plant and are not ready for sale or delivery as they leave the plant on the conveyor system. In order to be ready for sale, the product must have a moisture content in a range below 5%. The process of drying a product or removing water from a product is considered to be a production activity. (See Matter of Albert H. Mast, St Tax Comm, September 3, 1982, TSB-H-82(97)S; Matter of National Fuel Distribution Corporation et. al., Dec Tax App Trib, March 14, 1991, DTA Nos. 801047 and 801048.) While Petitioner does not appear to "package" its products, based on the facts in this Opinion, the aggregate is not a finished product at the time it is placed on the conveyor and moved outside to the stockpile. Petitioner's conveyor system is used to transport the aggregate from the plant to the outside stockpile, during which time the drying process continues. Thus, the conveyor system is used directly and predominantly in production activities and qualifies for exemption from sales and use tax pursuant to section 1115(a)(12) of the Tax Law.
Friday, February 22, 2008
If You Call It Sales Tax, You Must Remit
There was a recent case in WA that illustrates an important concept in sales tax. That is, once you have nexus in a state, they can force you to be their agent tax collector. As their agent, you collect taxes in trust, and bear the burden of those taxes until they are remitted.
In this case, the retailer sold nontaxable services and claimed they meant to charge "handling fees". Instead, they labeld the charges as "taxes". Washington audited them and set up the sales as taxable. I say "claimed" because of the following as reported by CCH.
"Under an objective interpretation of the invoice, it was determined that the taxpayer was collecting sales taxes in the name of the state and, therefore, these amounts were held in trust and had to be remitted. The word "tax" was written below the subtotal for services, and this amount used the same rate as the sales tax. Any amount charged and collected as a tax must be remitted to the state."
It seems far-fetched indeed to say, under these circumstances, that this was a "handling" charge.
There is relief for the customers who actually paid this tax. The taxpayer's customers have the ability to claim a refund of the incorrectly collected sales taxes remitted by the taxpayer. Fortunately, for this retailer, the DOR did not charge the fraud penalty.
We have a copy of this case and can send it to you if you would like.
Spend $800,000 and Get $40Million Back From New York
New York has some interesting programs to be sure. I found this fascinating article in the Albany Business Journal Online that tells of the "Brownfield Program" that awards tax credits to companies that clean up and develop hazardous sites. Sounds like a worthwhile endeavor. It has been proven true that when the government tries to encourage behavior with tax credits, behaviors definitely are encouraged. The problem is that the behavior they hoped to increase, isn't always the one that increases.
This article points out one extreme (I assume) example of this. And I quote:
This article points out one extreme (I assume) example of this. And I quote:
"The brownfield program, created in 2003, awards tax credits for companies to clean and develop hazardous sites... For example, the report cites work on a former BASF site in Rensselaer, where Empire Generating Co. has spent about $800,000 cleaning up 34 acres. The report says the developers are scheduled to receive $40.1 million in state tax credits.
"Because tax breaks are based on redevelopment value, rather than cleanup cost, sites with the least contamination and the highest redeveloped value get cleaned up," the report said, "and contaminated sites that would most benefit from redevelopment are left dirty and undeveloped."
Not surpisingly, Governor Spitzer is aghast. "This program has proven to be unsustainable," Spitzer is quoted as saying in the article. "In many cases, millions of dollars in development tax credits are provided to projects with minimal remediation expenses, counter to the intent of this program."
Spend $800,000 and get back $40Million. Wow.
Not surpisingly, Governor Spitzer is aghast. "This program has proven to be unsustainable," Spitzer is quoted as saying in the article. "In many cases, millions of dollars in development tax credits are provided to projects with minimal remediation expenses, counter to the intent of this program."
Spend $800,000 and get back $40Million. Wow.
Monday, February 11, 2008
Class Action Suit Possible Avoidance Tactic
CCH reported on a case involving a mobile phone company has asked the U.S. Supreme Court whether a class action may proceed alleging that the company violated California law by charging sales tax on the full retail value of discounted wireless telephones.
The action was filed by a consumer who purchased a phone from the company and entered into a written agreement to resolve disputes through individual arbitration. Despite the arbitration agreement, the consumer subsequently filed a suit in state court on behalf of herself and all similarly situated California consumers. The action was removed to federal court. The federal district court refused the company's motion to compel arbitration and the U.S. Court of Appeals for the Ninth Circuit affirmed. The appellate court held that precedent compelled a finding that the arbitration agreement was unconscionable under California law and that state law is not preempted by the Federal Arbitration Act (FAA), 9 U.S.C. §§1-16.
The action was filed by a consumer who purchased a phone from the company and entered into a written agreement to resolve disputes through individual arbitration. Despite the arbitration agreement, the consumer subsequently filed a suit in state court on behalf of herself and all similarly situated California consumers. The action was removed to federal court. The federal district court refused the company's motion to compel arbitration and the U.S. Court of Appeals for the Ninth Circuit affirmed. The appellate court held that precedent compelled a finding that the arbitration agreement was unconscionable under California law and that state law is not preempted by the Federal Arbitration Act (FAA), 9 U.S.C. §§1-16.
It would be a good thing, IMHO, if having consumers sign agreements to resove disputes through arbitration, will prevent this class-action lawsuit abuse. Unfortunately, it appears that the arbitration clause will fail because CA says it's unconscionable. For our client's sake, I hope the Supreme's take this case and compel the abitration. This will be interesting to watch.
You May Qualify for R&D Exemption in MA
CCH alerted us to a revised exemption in MA, that you may qualify to recieve -- check it out. Certain types of corporations can purchase TPP used directly and exclusively for research and development. Before you give up on this as a possible benefit for your company read on.
The new regulation issued by the MA DOR, 830 CMR 64H.6.4, provides a more detailed explanation of the requirements for an entity to qualify for the exemption. The exemption applies to a research and development corporation or a statutorily defined manufacturing corporation.
Corporation requirements
To qualify as a research and development corporation, an entity must meet the following four requirements:
What is the "Receipts Test"?
To qualify under the receipts test, more than two-thirds of a corporation's Massachusetts receipts must be derived from research and development during the taxable year. For the computation, the numerator is the gross receipts from research and development performed in Massachusetts and the denominator is the gross receipts from all activities in Massachusetts.
What is the "Expenditures Test"?
To qualify under the expenditures test, more than two-thirds of a corporation's Massachusetts expenditures must be allocable to its research and development activities during the taxable year. For this computation, the numerator is the corporation's total Massachusetts expenditures that are allocable to research and development activities and the denominator is the corporation's total Massachusetts expenditures. However, neither the numerator nor denominator includes the corporation's manufacturing expenses or administrative expenditures.
Annual determination
The determination of whether an entity qualifies as an eligible research and development corporation or manufacturing corporation must be made on an annual basis for the applicable taxable year. A corporation that was not in existence in the previous year may utilize current information and reasonable projections of its business activity for its first year. In calculating an entity's receipts or expenditures, a taxpayer must use the same taxable year and method of accounting used for federal income tax purposes.
To qualify as a research and development corporation, an entity must meet the following four requirements:
(1) it must be either a domestic or foreign corporation;
(2) it must be engaged in research and development in the Commonwealth;
(3) its principal activity in Massachusetts must be research and development; and
(4) it must meet either a receipts test or an expenditures test.
So what constitutes "research and development"?
The definition of "research and development" has been amended to include a statement indicating that research and development are complete when the product, process, technique, formula, invention, or software can be readily reproduced for sale or commercial use.
What about this "Principal Activity" wording?
"Principal activity" means the predominant activity of a corporation in Massachusetts relative to its other activities in Massachusetts. The determination of a corporation's principal activity is based on the facts and circumstances surrounding the corporation's operations. An entity having a majority of its Massachusetts-based employees engaged in research and development will be presumed to meet this requirement.
Note that the test is whether the MA activity is predominantly R&D relative to other activities in MA, not relative to other activities everywhere. This is a big key.
What is the "Receipts Test"?
To qualify under the receipts test, more than two-thirds of a corporation's Massachusetts receipts must be derived from research and development during the taxable year. For the computation, the numerator is the gross receipts from research and development performed in Massachusetts and the denominator is the gross receipts from all activities in Massachusetts.
What is the "Expenditures Test"?
To qualify under the expenditures test, more than two-thirds of a corporation's Massachusetts expenditures must be allocable to its research and development activities during the taxable year. For this computation, the numerator is the corporation's total Massachusetts expenditures that are allocable to research and development activities and the denominator is the corporation's total Massachusetts expenditures. However, neither the numerator nor denominator includes the corporation's manufacturing expenses or administrative expenditures.
Annual determination
The determination of whether an entity qualifies as an eligible research and development corporation or manufacturing corporation must be made on an annual basis for the applicable taxable year. A corporation that was not in existence in the previous year may utilize current information and reasonable projections of its business activity for its first year. In calculating an entity's receipts or expenditures, a taxpayer must use the same taxable year and method of accounting used for federal income tax purposes.
For a corporation qualifying as a research and development corporation by virtue of meeting the expenditures test, the sales tax exemptions apply only to purchases made after Nov. 25, 2003.
IL Passes Exemption for Manufacturers
CCH reported this morning that IL has passed a budget bill that contained a temporary exemption for certain equipment. Here's the report from CCH:
"Production-related property
"For purposes of the manufacturing and assembly exemption from retailers' occupation (sales) and use tax, the term "production-related tangible personal property" means all tangible personal property that is used or consumed by the purchaser in a manufacturing facility in which a manufacturing process takes place.
"The term includes tangible personal property that is purchased for incorporation into real estate within a manufacturing facility and tangible personal property that is used or consumed in activities such as research and development, preproduction material handling, receiving, quality control, inventory control, storage, staging, and packaging for shipping and transportation purposes.
"Production-related tangible personal property" does not include (1) tangible personal property that is used, within or without a manufacturing facility, in sales, purchasing, accounting, fiscal management, marketing, personnel recruitment or selection, or landscaping, or (2) tangible personal property that is required to be titled or registered with a department, agency, or unit of federal, state, or local government."For purposes of the manufacturing and assembly exemption from retailers' occupation (sales) and use tax, the term "production-related tangible personal property" means all tangible personal property that is used or consumed by the purchaser in a manufacturing facility in which a manufacturing process takes place.
"The term includes tangible personal property that is purchased for incorporation into real estate within a manufacturing facility and tangible personal property that is used or consumed in activities such as research and development, preproduction material handling, receiving, quality control, inventory control, storage, staging, and packaging for shipping and transportation purposes.
"The manufacturing and assembling machinery and equipment exemption includes production-related tangible personal property that is purchased on or after July 1, 2007, and on or before June 30, 2008."
Back to School Tax Holiday in Tennessee -- in March?
Tennessee is having a "special", "one-time only" sales tax holiday in March. Tennessee's special, one-time sales tax holiday will run from Friday, March 21, 2008, at 12:01 a.m., through Sunday, March 23, 2008, at 11:59 p.m. During the tax holiday, the following items are exempt from sales and use tax: (1) clothing with a price of $100 or less per item; (2) school and art supplies with a price of $100 or less per item; and (3) computers with a price of $1,500 or less.
Big Note: None of these items are exempt if for use in a trade or business.
Tuesday, January 29, 2008
Buy Vehicles Tax Free with Montana LLC
I want to say from the outset that I have not investigated this story independently. I do not claim that this practice will work in any state. But there was an article recently in a Framingham, MA newspaper about people using a Montana LLC to purchase RV's sans the sales tax. The practice is to set up an LLC in Montana, and that company will buy the vehicle. Montana will allow you to register your vehicle in their state. But, according to this article, Montana will not share any information about the owner of the LLC that would allow a given state to track them down.
The problem is this: this methodology relies on Montana's secrecy and on MA not being able to find you. The newspaper contacted Ann Dufresne, the director of communications for the Massachusetts Registry of Motor Vehicles for a comment on this. Ann warned drivers would face stiff penalties for trying to avoid the state's sales and excise taxes and other fees.
A person who drives a car in Massachusetts for more than 30 days is required to register and insure it here and pay the sales tax, she said. Residents who don't register their vehicles here could face more than $6,000 in fines and potentially have their license suspended, according to state law.
A person who drives a car in Massachusetts for more than 30 days is required to register and insure it here and pay the sales tax, she said. Residents who don't register their vehicles here could face more than $6,000 in fines and potentially have their license suspended, according to state law.
Big News! You Can Be an Origin-based State and Still Be in the SSTP
Sounds like the SSTP is in danger to me.
Is this the beginning of the end of the SSTP?
The Streamlined Sales Tax (SST) Governing Board has amended the SST Agreement to allow states to become full members even while continuing to source sales on an origin basis. As reported in CCH, the Board and its predecessor organizations rejected repeated attempts in the past to change the Agreement to allow origin sourcing, most recently at its meeting in Kansas City, Kansas. However, the Board relented when confronted with the impending loss of at least two associate member states, uncertain prospects for adding further states, pressure from local governments, and a divided business community.
The chief cornerstone of the SSTP, regardless of how it's spun now, was uniformity amongst the several states. O one of the main impediments to uniformity/simplicity was always the question of origin vs. destination sourcing. Some states do it one way, some another. "Why can't we all just pick one way?" was the theme early on. Well, now faced with losing these associate states and never being able to coax certain origin states to come over to the destination-based approach, the Board blinked.
So what else will they cave on to get more states to participate? You get the feeling that we're in the same boat we were always in just rowing in circles.
Did You Collect (or Pay) That Michigan Sales Tax On Services for 10 Days?
If you collected it or paid it, then you may be in the refund business.
Effective December 1, 2007, a 6% Michigan use tax was enacted on certain taxable services. That new tax was vastly unpopular and was repealed but not until December 10, 2007. What to do for the interim? Here's the answer (from CCH): A person that provided any service subject to the tax and collected the tax beginning December 1, 2007, before the legislation that repealed the service tax was signed into law, must return the amount of the tax to the person that received the service or remit the tax to the Department of Treasury, and the person that received the service may apply for a refund of the tax. A person that fails to remit any tax collected from a person that received a service is subject to penalties unless the collected tax was returned to the person that received the service.
Thursday, January 24, 2008
The ERA Begs Congress Not to Pass SSTP Legislation
Information Week had the story on a different retailers association that had the opposite opinion from the National Retail Federation. The Electronic Retailers Association issued a statement on Thursday squaring off over legislation that would require Internet merchants, mail-order houses, and other "remote sellers" to collect sales tax across state lines."
The debate is based around U.S. Representative William Delahunt's, D-Mass., bill (H.R.3396) that would allow states that have implemented the Streamlined Sales and Use Tax Agreement (SSUTA) to require out-of-state sellers to collect sales tax on merchandise sold their residents.
The ERA opposes the bill, saying it would stifle e-commerce and burden electronic retailers with costs and compliance problems.
"In a very short amount of time, the Internet has become an unprecedented marketplace where the playing field is level for retailers both large and small," Barbara Tulipane, ERA President and CEO, said. "The Streamlined Sales Tax Project and its provisions would create a cost-prohibitive barrier for smaller retailers who are the lifeblood of our economy."
ERA said it will actually discriminate against online sellers.
"Making electronic retailers responsible for computing, collecting, and remitting tax for thousands of taxing jurisdictions with different rates and coverage is unfair and will significantly harm the growth of e-commerce," the group said in a statement released this week. The group pointed out that the agreement allows states with multiple tax rates to adopt new an additional rate, which the ERA said could force electronic retailers to administer 15,000 tax rates. The ERA also said that direct marketers would have to pay for taxes customers fail to pay, while traditional retailers are not held responsible. Finally, it said that online retailers don't enjoy tax incentives available to in-state businesses. Those requirements would put online sellers at a competitive disadvantage, ERA said.
The ERA said more time is necessary to develop consensus among the affected parties for a "rational, practical and simple system for assessing and collecting taxes" from Internet sales.
Another State with a Surplus
Here's the headline and story from the Missouri newspaper the Columbia Tribune:
State tax income higher than expected
State tax income higher than expected
Published Thursday, December 6, 2007
JEFFERSON CITY (AP) - Missouri's tax revenue is coming in ahead of what was budgeted.
The state Office of Administration says November's net general revenue was up more than 6 percent compared to November 2006. Missouri's annual budget takes effect in July. Through the first five months of its fiscal year, net general revenue was up about 4.5 percent compared to last year. The state budget was built on an assumption that revenue would grow by 3.8 percent this year.
The larger-than-projected increase is largely because of income taxes. Individual income tax revenue was up more than 7.5 percent during the first five months of the budget year. Sales tax collections were up barely 1 percent over last year.
National Retail Federation Begs for SSTP Passage
It's hard to blame them really. If the big retailers are charging tax, but their competitors are not, that is a competitive disadvantage. Here's the compelling argument from J.C. Penney's Vice President and Associate General Counsel-Tax Wayne Zakrzewski. "We are here to ask you to level the playing field between sellers that collect sales tax and those who cannot be required to collect the tax because they do business in the community on a virtual rather than physical basis."
"Many of our competitors do not collect, which gives them a competitive advantage. This is not because they are innovative or provide incremental value to the consumer, but because the states do not have the ability to require collection of a tax that is due from the consumer." "We believe there are compelling reasons why Congress should act now to level the playing field," Zakrzewski, whose multi-state company collects sales tax on in-store, catalog and Internet purchases alike, said. "Passage of H.R. 3396 into law would be the appropriate next step to a modern, fair and responsive sales tax system across all participating states and sellers." Never heard of the NRF?
The National Retail Federation is the world's largest retail trade association, with membership that comprises all retail formats and channels of distribution including department, specialty, discount, catalog, Internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry's key trading partners of retail goods and services. NRF represents an industry with more than 1.6 million U.S. retail establishments, more than 24 million employees - about one in five American workers - and 2006 sales of $4.7 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations. www.nrf.com
"Many of our competitors do not collect, which gives them a competitive advantage. This is not because they are innovative or provide incremental value to the consumer, but because the states do not have the ability to require collection of a tax that is due from the consumer." "We believe there are compelling reasons why Congress should act now to level the playing field," Zakrzewski, whose multi-state company collects sales tax on in-store, catalog and Internet purchases alike, said. "Passage of H.R. 3396 into law would be the appropriate next step to a modern, fair and responsive sales tax system across all participating states and sellers." Never heard of the NRF?
The National Retail Federation is the world's largest retail trade association, with membership that comprises all retail formats and channels of distribution including department, specialty, discount, catalog, Internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry's key trading partners of retail goods and services. NRF represents an industry with more than 1.6 million U.S. retail establishments, more than 24 million employees - about one in five American workers - and 2006 sales of $4.7 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations. www.nrf.com
Expanding Manufacturing Facility? Beware the Contractor Trap
We frequently get involved in transactions where a client is expanding the manufacturing plant. Many times they hire a contractor to do the work. The contractor ends up buying all the materials (including certain equipment that would likely be considered manufacturing equipment) and installing it or incorporating into the structure they're building. This is NOT good.
Why is this a problem? In most states a contractor (especially one working under a lump-sum agreement) is considered to be a service provider not a seller of TPP. As such, the materials the contractor purchases are deemed to be "used" by the contractor in the course of the construction service. A contractor in most states is not a manufacturer and not conducting a manufacturing activity. Therefore, they consumed some equipment that would be exempt if purchased by the manufacturer but not if purchased by a contractor.
This is an area where it is crucial to be careful. And don't think this doesn't come up very often. Here's a recent case in point: Decision No. 19969, Idaho State Tax Commission, July 30, 2007 in which it was held that since the equipment was purchased by a contractor, the production exemption was not available.
If You Use an "Agent" in Another State, You Might Have Nexus
Here's another example of a situation where non-related people acting as your "agent" can give you nexus with another state.
This was an administrative decision recently issued in Alabama. It involves an out-of-state company that rented graduation caps and gowns to students in Alabama.
This rental company used non-related individuals working on commission to measure the students for the caps and gowns. These "agents" also provided the students (or the schools) with the taxpayer's order forms. They collected the completed order forms and submitted them to the rental company. Although there was no written agency agreement between the rental company and the people doing the measurements, the facts established that the in-state representatives were de facto or implied agents of the taxpayer. The judge ruled that the in-state representatives were clearly acting on behalf of the taxpayer when performing those duties. The in-state representatives were also compensated for their activities or services on behalf of the taxpayer in the form of a commission. Ultimately, the in-state representatives were acting as agents of the taxpayer, and their actions on behalf of the taxpayer in Alabama allowed the taxpayer to establish and maintain its business of renting caps and gowns in Alabama. Thus, the taxpayer had nexus with Alabama.
This rental company used non-related individuals working on commission to measure the students for the caps and gowns. These "agents" also provided the students (or the schools) with the taxpayer's order forms. They collected the completed order forms and submitted them to the rental company. Although there was no written agency agreement between the rental company and the people doing the measurements, the facts established that the in-state representatives were de facto or implied agents of the taxpayer. The judge ruled that the in-state representatives were clearly acting on behalf of the taxpayer when performing those duties. The in-state representatives were also compensated for their activities or services on behalf of the taxpayer in the form of a commission. Ultimately, the in-state representatives were acting as agents of the taxpayer, and their actions on behalf of the taxpayer in Alabama allowed the taxpayer to establish and maintain its business of renting caps and gowns in Alabama. Thus, the taxpayer had nexus with Alabama.
But wait there's more: Even if the in-state company's representatives were not deemed to be de facto or implied agents of the taxpayer, the taxpayer still had nexus with Alabama because it owned caps and gowns that were being rented in Alabama, and it derived substantial income from the presence of the caps and gowns in Alabama. The physical presence of the taxpayer's income-producing property in Alabama established substantial nexus. Thus, the taxpayer was doing business in and was subject to Alabama's taxing jurisdiction.
Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. S. 05-751, November 20, 2007. Let us know if you'd like a copy of this case and we'll get it to you.
Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. S. 05-751, November 20, 2007. Let us know if you'd like a copy of this case and we'll get it to you.
Durable Medical Equipment and Prosthetic Devices Exempt in GA
We were alerted by CCH that a Georgia regulation (Reg. 560-12-2-.30) addressing the sales and use tax treatment of sales of drugs and medical equipment has been amended to provide additional guidance regarding prosthetic devices, durable medical equipment, and insulin.
"Durable medical equipment" is intended to withstand repeated use, is primarily and customarily used for a medical purpose, is generally not useful absent illness or injury, and is appropriate to use in the home. The regulation gives examples of durable medical equipment. The sale or use of durable medical equipment is exempt from sales and use tax if paid for directly with funds of the United States or the State of Georgia pursuant to Medicare or Medicaid programs.
A "prosthetic device" is defined as a prescription replacement, corrective, or supportive device meant to artificially replace a missing portion of the body, correct or prevent a physical deformity or malfunction, or support a weak or deformed portion of the body. The sale or use of prosthetic devices is exempt from sales and use tax. The regulation gives examples of these devices.
Certain People Can Purchase Goods in Washington Tax Free
Did You Know?
Residents of certain states, U.S. Territories, and Canadian provinces that have a state or provincial sales tax rate of less than 3% are eligible to purchase goods in Washington without paying sales tax if they will take and use the goods outside the state. BUT, sellers are not required to make these exempt sales, and no refund is available if the seller chooses to collect sales tax. According to CCH, this exemption is commonly used by residents of Oregon, Montana, and the province of Alberta, Canada.
Friday, January 11, 2008
Big Changes In Arkansas Sales Tax
Effective January 1, 2008, big changes have happened in Arkansas. The changes include how local city and county sales taxes are to be administered in the following circumstances:
• Delivery of Merchandise to Customers --Beginning January 1, 2008, if your business makes a retail sale of property and delivers the tangible property through common carrier, your truck, mail, or by any other shipping or delivery method to your customer, you will charge the state, county, and city taxes based on where the purchaser takes receipt or delivery.
• Taxable Services Performed in Arkansas -- Beginning January 1, 2008, state and local sales and use tax for taxable services will be collected based on where the customer receives the service. If the service is not received by the purchaser at the seller’s business location, the local taxes due are based on where the purchaser takes receipt of the service provided. In most cases, the customer will take receipt of the taxable services where it is performed; however, this may not apply in all circumstances.
• Rental or Lease of Tangible Personal Property --A lease or rental that requires periodic payments is subject to sales tax as follows:
1. The first periodic payment is subject to state and local taxes based on where the lessee receives the property.
2. For periodic payments made after the first payment, the state, city, and county taxes are based on the "primary property location" of the tangible personal property for each period covered by the payment.
The primary property location is the address for the property provided by the lessee to the lessor in the ordinary course of business. The primary property location is not changed by intermittent use at different locations. If the property is moved to a new location and the lessor has been notified of the new location, the lessor will tax subsequent payments based on
the new location. If the lessor does not receive notice of a change in location, sales tax will continue to apply based on the address the lessee gave the lessor for the primary property location.
• Rental or Lease of Motor Vehicles, Trailers, Semi-Trailers or Aircraft -- If your business leases or rents motor vehicles, trailers, semi-trailers, or aircraft that requires recurring periodic payments, you will collect the state, county, and city taxes due based on the primary property location. The primary property location is the address provided by the lessee in the ordinary course of business. The primary property location does not change by intermittent use at different locations. For a lease or rental that does not require recurring periodic payments, the local taxes are based on where the leased equipment is received by the purchaser.
• Taxable Services Purchased from Out of State Vendors for Use in the State of Arkansas -- If you purchase services from outside the State that are subject to tax in Arkansas and first use the service within the State of Arkansas, then Arkansas state and local use tax is due based on where you take receipt of the services. Credit will be given for taxes legally imposed and paid in the state where the taxable service was performed.
• Elimination of City and County Local Tax Caps -- Beginning January 1, 2008, local tax caps on single transactions will no longer apply when retailers collect city and county sales and use taxes. Since the caps no longer apply, retailers will collect the full amount of state, city, and county taxes on all transactions. Your customer may be eligible to apply to DFA for a refund of the local tax for qualified business purchases made on or after January 1, 2008.
The local tax cap will continue to apply to the first $2500 per item on the sale of motor vehicles, aircraft, watercraft, modular homes, manufactured homes, or mobile homes. Sellers should continue to apply the cap on the sales of those items only.
• Rebates or Refunds of Local Tax Paid to the Seller – Business Purchasers Only
Qualifying businesses may be eligible for a rebate or refund of the additional local tax paid on qualifying business purchases on purchase invoices that exceed $2500.00. A qualifying business purchase means a purchase of tangible personal property or a taxable service for which a business may claim a business expense deduction or depreciation deduction for federal income tax purposes. The purchase will be eligible even though the business purchaser may not be
required to file an income tax return. In addition, governmental agencies (including schools and colleges or universities) and non-profit organizations (including churches) may apply for rebates/refunds of additional local taxes paid.
For purposes of calculating the rebate or refund amount, a uniform single transaction definition has been adopted effective January 1, 2008: "Single transaction shall mean any sale of tangible personal property or taxable service reflected on a single invoice, receipt, or statement for which an aggregate sales or use tax amount has been reported or remitted to the state for a single local taxing jurisdiction." Note: Refunds or rebates will no longer be issued by the city or county for purchases made on or after January 1, 2008. There is a six month time limit on requesting a rebate which begins on the date of the purchase or from the date of payment of the tax to the seller, whichever is later.
• Bad Debt Write Offs --Beginning January 1, 2008, bad debts may be deducted on the Excise Tax report for the tax period during which the bad debt is written-off as uncollectible on your books and eligible to be deducted for federal income tax purposes. The bad debt deduction is eligible for sales on which the tax has previously been reported and paid to DFA. The bad debt must have resulted from a sale that has occurred within the last three years. The deduction is available for taxpayers even though the business may not be required to file an income tax return. Some examples are governmental agencies (including schools and colleges or universities) and non-profit organizations (including churches). Bad debts include, but are not limited to, worthless checks, worthless credit card payments, and uncollectible credit accounts. Bad debts do not include financing charges or interest, uncollectible amounts on property that remain in the possession of the taxpayer or vendor until the full purchase price is paid, expenses incurred in attempting to collect any debt, debts sold or assigned to third parties for collection, or repossessed property.
• Delivery of Merchandise to Customers --Beginning January 1, 2008, if your business makes a retail sale of property and delivers the tangible property through common carrier, your truck, mail, or by any other shipping or delivery method to your customer, you will charge the state, county, and city taxes based on where the purchaser takes receipt or delivery.
• Taxable Services Performed in Arkansas -- Beginning January 1, 2008, state and local sales and use tax for taxable services will be collected based on where the customer receives the service. If the service is not received by the purchaser at the seller’s business location, the local taxes due are based on where the purchaser takes receipt of the service provided. In most cases, the customer will take receipt of the taxable services where it is performed; however, this may not apply in all circumstances.
• Rental or Lease of Tangible Personal Property --A lease or rental that requires periodic payments is subject to sales tax as follows:
1. The first periodic payment is subject to state and local taxes based on where the lessee receives the property.
2. For periodic payments made after the first payment, the state, city, and county taxes are based on the "primary property location" of the tangible personal property for each period covered by the payment.
The primary property location is the address for the property provided by the lessee to the lessor in the ordinary course of business. The primary property location is not changed by intermittent use at different locations. If the property is moved to a new location and the lessor has been notified of the new location, the lessor will tax subsequent payments based on
the new location. If the lessor does not receive notice of a change in location, sales tax will continue to apply based on the address the lessee gave the lessor for the primary property location.
• Rental or Lease of Motor Vehicles, Trailers, Semi-Trailers or Aircraft -- If your business leases or rents motor vehicles, trailers, semi-trailers, or aircraft that requires recurring periodic payments, you will collect the state, county, and city taxes due based on the primary property location. The primary property location is the address provided by the lessee in the ordinary course of business. The primary property location does not change by intermittent use at different locations. For a lease or rental that does not require recurring periodic payments, the local taxes are based on where the leased equipment is received by the purchaser.
• Taxable Services Purchased from Out of State Vendors for Use in the State of Arkansas -- If you purchase services from outside the State that are subject to tax in Arkansas and first use the service within the State of Arkansas, then Arkansas state and local use tax is due based on where you take receipt of the services. Credit will be given for taxes legally imposed and paid in the state where the taxable service was performed.
• Elimination of City and County Local Tax Caps -- Beginning January 1, 2008, local tax caps on single transactions will no longer apply when retailers collect city and county sales and use taxes. Since the caps no longer apply, retailers will collect the full amount of state, city, and county taxes on all transactions. Your customer may be eligible to apply to DFA for a refund of the local tax for qualified business purchases made on or after January 1, 2008.
The local tax cap will continue to apply to the first $2500 per item on the sale of motor vehicles, aircraft, watercraft, modular homes, manufactured homes, or mobile homes. Sellers should continue to apply the cap on the sales of those items only.
• Rebates or Refunds of Local Tax Paid to the Seller – Business Purchasers Only
Qualifying businesses may be eligible for a rebate or refund of the additional local tax paid on qualifying business purchases on purchase invoices that exceed $2500.00. A qualifying business purchase means a purchase of tangible personal property or a taxable service for which a business may claim a business expense deduction or depreciation deduction for federal income tax purposes. The purchase will be eligible even though the business purchaser may not be
required to file an income tax return. In addition, governmental agencies (including schools and colleges or universities) and non-profit organizations (including churches) may apply for rebates/refunds of additional local taxes paid.
For purposes of calculating the rebate or refund amount, a uniform single transaction definition has been adopted effective January 1, 2008: "Single transaction shall mean any sale of tangible personal property or taxable service reflected on a single invoice, receipt, or statement for which an aggregate sales or use tax amount has been reported or remitted to the state for a single local taxing jurisdiction." Note: Refunds or rebates will no longer be issued by the city or county for purchases made on or after January 1, 2008. There is a six month time limit on requesting a rebate which begins on the date of the purchase or from the date of payment of the tax to the seller, whichever is later.
• Bad Debt Write Offs --Beginning January 1, 2008, bad debts may be deducted on the Excise Tax report for the tax period during which the bad debt is written-off as uncollectible on your books and eligible to be deducted for federal income tax purposes. The bad debt deduction is eligible for sales on which the tax has previously been reported and paid to DFA. The bad debt must have resulted from a sale that has occurred within the last three years. The deduction is available for taxpayers even though the business may not be required to file an income tax return. Some examples are governmental agencies (including schools and colleges or universities) and non-profit organizations (including churches). Bad debts include, but are not limited to, worthless checks, worthless credit card payments, and uncollectible credit accounts. Bad debts do not include financing charges or interest, uncollectible amounts on property that remain in the possession of the taxpayer or vendor until the full purchase price is paid, expenses incurred in attempting to collect any debt, debts sold or assigned to third parties for collection, or repossessed property.
Michigan Services Tax Was in Effect For a Few Hours -- What Do You Do If You Collected It?
The MI Services tax was in effect for a few hours on 12/1/2007. The repealing law allows the businesses that collected the tax to either refund to the customer or pay to the state. For taxpayers that did not collect the tax the legislators have agreed to pass legislation to hold them harmless.
Tax "Paperwork Snafu" Results in Bad Pubilicity
Just about the last thing a tax department wants is something they are responsible for to result in bad publicity for their publicly-held company. Here's an example of something that my guess is not the tax department's mistake, but was a major crisis to deal with for a well-known company.
Tax Department Pays $38,569 for a 12 Pack of Toilet Paper
You've seen the headline that goes something like this: "Federal Government Pays $735 for a Hammer". Well, here's a case where a retailer probably had to spend many thousands dealing with a customer who filed what she called a "message lawsuit". The question you have to ask yourself is "what's the message?"
You try to get the tax rates right on the right items taking into account crazy tax laws all over the nation, and you get it wrong a 12-pack of toilet paper and you get sued over that? Give me a break. We must have bigger problems to fight than this.
Check out this article in the Pittsburgh Tribune-Review.
And I quote: "A Murrayville homemaker has won another legal battle against a retail giant.
Mary Bach, 63, sued Kmart after its store on Mall Boulevard in Monroeville charged her 7 percent sales tax on two 12-pack rolls of Angel Soft toilet paper -- a non-taxable item, according to the state Department of Revenue. On Thursday, Monroeville District Judge Herbst ruled in Bach's favor, finding Kmart twice levied the tax improperly. She gets $100, plus court costs.
Company spokeswoman Kim Freely said the tax was charged in error that the problem has been fixed. The Tribune-Review bought the same toilet paper yesterday tax-free.
"Bach, a self-proclaimed consumer advocate, has successfully sued other retailers including Wal-Mart and Radio Shack for incorrectly taxing items. Bach calls them "message lawsuits."
"I want to be in a position to educate consumers," Bach said. "The only thing retailers understand is a message lawsuit."
What's the message?
You try to get the tax rates right on the right items taking into account crazy tax laws all over the nation, and you get it wrong a 12-pack of toilet paper and you get sued over that? Give me a break. We must have bigger problems to fight than this.
Check out this article in the Pittsburgh Tribune-Review.
And I quote: "A Murrayville homemaker has won another legal battle against a retail giant.
Mary Bach, 63, sued Kmart after its store on Mall Boulevard in Monroeville charged her 7 percent sales tax on two 12-pack rolls of Angel Soft toilet paper -- a non-taxable item, according to the state Department of Revenue. On Thursday, Monroeville District Judge Herbst ruled in Bach's favor, finding Kmart twice levied the tax improperly. She gets $100, plus court costs.
Company spokeswoman Kim Freely said the tax was charged in error that the problem has been fixed. The Tribune-Review bought the same toilet paper yesterday tax-free.
"Bach, a self-proclaimed consumer advocate, has successfully sued other retailers including Wal-Mart and Radio Shack for incorrectly taxing items. Bach calls them "message lawsuits."
"I want to be in a position to educate consumers," Bach said. "The only thing retailers understand is a message lawsuit."
What's the message?
Do People Shop Online to Avoid the Tax -- Looks Like the Answer is No
According to this article in Forbes magazine, 17 out of the top 20 Internet retailers are brick and mortar operations that collect tax. Also, it is estimated that consumers paid sales tax on half of their online purchases this Christmas.
So maybe avoiding sales taxes isn't the main lure of shopping online. Even though you wouldn't be surprised people would try to avoid the tax which now averages more than 8.5% in the taxing states.
This estimate that half the sales taxes owed by consumers on the purchases of goods online are being collected anyway was made by William Fox, director of the Center for Business and Economic Research at the University of Tennessee. He bases that estimate on surveys of Web sites he and his students have conducted over the last two years.
"I was surprised to find it was so high. And if anything, it's growing," says Fox.
Only three of the 20 largest online merchants in 2006 were pure online operations, according to Internet Retailer's annual rankings. Staples (nasdaq: SPLS - news - people ), Office Depot (nyse: ODP - news - people ), Sears Holdings (nasdaq: SHLD - news - people ), Best Buy (nyse: BBY - news - people ), J.C. Penney (nyse: JCP - news - people ), Wal-Mart Stores (nyse: WMT - news - people ), Circuit City (nyse: CC - news - people ) and Target (nyse: TGT - news - people ) all made the top 20. All collect sales tax. Limited Brand's (nyse: LTD - news - people ) Victoria's Secret, which collects taxes, sold more online last year than did Overstock.com (nasdaq: OSTK - news - people ), which only applies tax to shipments bound for Utah.
As the article in Forbes states, even non-traditional retailers have started moving into the tax line, too. Dell (nasdaq: DELL - news - people ) began collecting sales tax nationwide last year, prompting some grumbling online by surprised shoppers. CDW (nasdaq: CDWC - news - people ) began collecting in 2005.
Retailers are finding that customers like being able to return a defective DVD player purchased online to a local store.
We've blogged before about it being pretty well-settled that if you are a retailer that allows people to return items to a brick and mortar location, you have nexus -- even if the online retailer and the brick/mortar one are in separate legal entities.
So maybe avoiding sales taxes isn't the main lure of shopping online. Even though you wouldn't be surprised people would try to avoid the tax which now averages more than 8.5% in the taxing states.
This estimate that half the sales taxes owed by consumers on the purchases of goods online are being collected anyway was made by William Fox, director of the Center for Business and Economic Research at the University of Tennessee. He bases that estimate on surveys of Web sites he and his students have conducted over the last two years.
"I was surprised to find it was so high. And if anything, it's growing," says Fox.
Only three of the 20 largest online merchants in 2006 were pure online operations, according to Internet Retailer's annual rankings. Staples (nasdaq: SPLS - news - people ), Office Depot (nyse: ODP - news - people ), Sears Holdings (nasdaq: SHLD - news - people ), Best Buy (nyse: BBY - news - people ), J.C. Penney (nyse: JCP - news - people ), Wal-Mart Stores (nyse: WMT - news - people ), Circuit City (nyse: CC - news - people ) and Target (nyse: TGT - news - people ) all made the top 20. All collect sales tax. Limited Brand's (nyse: LTD - news - people ) Victoria's Secret, which collects taxes, sold more online last year than did Overstock.com (nasdaq: OSTK - news - people ), which only applies tax to shipments bound for Utah.
As the article in Forbes states, even non-traditional retailers have started moving into the tax line, too. Dell (nasdaq: DELL - news - people ) began collecting sales tax nationwide last year, prompting some grumbling online by surprised shoppers. CDW (nasdaq: CDWC - news - people ) began collecting in 2005.
Retailers are finding that customers like being able to return a defective DVD player purchased online to a local store.
We've blogged before about it being pretty well-settled that if you are a retailer that allows people to return items to a brick and mortar location, you have nexus -- even if the online retailer and the brick/mortar one are in separate legal entities.
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