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:

• 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.

The seller must next determine if the total applicable tax rate being imposed for the place of business from which the item is being shipped is less than 8.25 percent, which represents the 6.25 percent state tax plus up to a maximum of 2 percent local tax that can be collected. If the combined local sales tax collected is less than 8.25 percent, the seller needs to look to the point of delivery to determine if any local use tax has to be collected. Sellers are required to collect the additional local use tax if they are engaged in business in the applicable local jurisdictions.
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.

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.

Read what happened to one of his truck drivers who was merely passing through the state.

"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.

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."

How Many Auditors Are Out There?

Here's a rundown of the top 10 states in terms of auditors employed:

1. 730 -- California

No surprise here and probably none of our clients are suprised either. CA is very active with our clients. But usually CA, by any measure you come up with, is pretty much double the size of any other state.

2. 468 -- Texas

Texas 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 York

New 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 -- Florida

States like FL and TX with no personal income tax, rely very heavily on the sales tax.

5.  279 -- Illinois

I 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 -- WA

7.   236 -- MN

8.   200 -- MI

9.   178 -- TN

10. 175 -- NC

Besides 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,

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. "

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?

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.

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.