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.

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.

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.

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

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.

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.

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."