Missouri Policy on Software Load and Leave is Ruled Out Is Software Even Taxable in Missouri Now?

Special Bonus Content: Who Else Exempts Load and Leave?

The Missouri Administrative Hearing Commission (AHC) recently held that the sale of canned computer software to a customer through a “load and leave” delivery method was not subject to Missouri use tax because the software was not tangible personal property. This decision overrides a Missouri DOR policy that software transferred by the load and leave method is taxable. (FileNet Corp. v. Director of Revenue, Administrative Hearing Commission (Missouri), No. 07-0146 RS, August 20, 2010.)

For a full copy of the lengthy decision, please contact us at www.PeisnerJohnson.com.

What is “Load and Leave”?

The load and leave method refers to a situation in which the vendor of the software typically brings the software to the customer location on some medium that is the property of the software vendor. Let’s say it’s on a usb flash drive. The vendor owns the the flash drive and never transfers that flash drive to the customer. The vendor transfers the software from the flash drive to the customer’s computer installing the software for the customer. The vendor removes the flash drive and leaves the customer location. No tangible media is ever transferred to the customer. This is a basic description of a typical load and leave transaction.

Missouri’s Old Policy

Until this Decision was reached, Missouri’s policy had been that computer software load and leave transactions were subject to sales and use tax. (See Tax Policy Notice TPN16, Missouri Department of Revenue, January 9, 2004; Letter Ruling LR1724.) Now, this policy is no longer valid.

The basis of the ruling in this case has potentially far-reaching effects. The AHC considered prior Missouri court precedents as well as conclusions reached in other states in recent cases but ultimately said it had to rely on the strict wording of the Missouri statutes in reaching their decision. In construing the statute, they made the point that taxation statutes must be construed in favor of the taxpayer. This is in noted contrast to the usual point made in many cases where taxpayers are contending they qualify for an exemption. In those cases, the administrative officers or judges, almost always will point out that since exemptions are the “antithesis of fair and equal taxation” they must be strictly construed against the taxpayer. In this case, the taxpayer’s main contention was that the tax did not apply to this transaction not because of an exemption, but because the statute did not explicitly tax it. Therefore, the statute must be construed in favor of the taxpayer. Fortunately for this taxpayer, the AHC agreed with them.

The taxpayer also made other alternative arguments, but the AHC did not address them with conclusions of law but they did make findings of fact relative to the arguments,

Important Findings of Fact

Something tangible is capable of being perceived, especially by the sense of touch. It is a fact that software takes up space on a computer’s hard drive. However, the evidence in the record showed that a person cannot see or touch software. A person can only see the media on which the software is stored, such as a computer, a CD or a hard drive. If one had an oscilloscope, one could see the positive and negative charges moving across a chip, but the 1s and 0s could not actually be seen. Under the load and leave method, the taxpayer's programs were transferred from the taxpayer's portable USB hard drive onto the customer's computer system. There was no use of any physical medium, such as tapes or disks, to transmit the computer programs to the end-user, and there was no sale of tangible personal property. Also, the taxpayer did not leave the portable USB hard drive or any other tangible storage media or other tangible personal property with the customer.

Software is Not Tangible Property in Missouri

Based on the record in this case, the AHC held that the taxpayer's software was intangible. The statute taxes only the sale of tangible personal property. Since software is intangible, no tax is due in Missouri. Missouri’s old policy (before they changed in in January 2004) was that software delivered electronically where no tangible personal property was included (including when delivered by load and leave) was not taxable. They changed their policy effective back in January 2004. After that date, all load and leave transactions were taxable. Electronic delivery with no tangible medium being transferred were not taxable. It was always odd that MO would make the distinction that while electronic downloads are not taxable, if the vendor downloads the software to their customer’s computer in person leaving behind no TPP, that it would now be taxable. But, thanks to this decision, there is no longer such a distinction.

But this decision seems to throw the whole question out in the open. Is software even taxable at all regardless of how it is delivered? Is the means of delivery completely superfluous and is it all about the true object of the transaction? That certainly seems to be the overriding message to this reader. Consider this: the AHC stated that while it was true that precedents from the Missouri Supreme Court have applied to sales of software, the prior cases did not squarely address the issue of whether software is tangible personal property. In fact, tellingly, the AHC compared the sale of software on a disk to the sale of a share of stock. The sale of stock is not taxed because it is intangible in nature. Yes, it is represented on some fancy parchment stock paper, but the value of the paper is inconsequential to the value of the ownership interest it represents. It could certainly be argued using the reasoning in this case that in Missouri all software is intangible by nature and whether it is transferred electronically, by load and leave, or by tangible medium does not matter.

This issue bears very close watching.

Where Else is Load and Leave Not Taxable?

We thought our readers might be interested to see how some other states tax software delivered by the load and leave method. Here is some good research from CCH on the issue.

NORTH CAROLINA

Prior to January 1, 2010, computer software delivered electronically or delivered by load and leave was exempt.

But wait ... there’s more: according to the North Carolina Department of Revenue, effective January 1, 2010, the sale at retail and the use, storage, or consumption of computer software that meets any of the following descriptions is exempt: (1) software designed to run on an enterprise server operating system; (2) software sold to a person who operates a data center and is used within the data center; and (3) software sold to a person who provides cable service, telecommunications service, or video programming and is used to provide ancillary service, cable service, Internet access service, telecommunications service, or video programming. In addition, and also effective January 1, 2010, computer software or digital property that becomes a component part of other computer software or digital property that is offered for sale or a service that is offered for sale is exempt. Custom computer software and the portion of pre-written computer software that is modified or enhanced, provided the modification or enhancement is designed and developed to the specifications of a specific purchaser and the charges for the modification or enhancement are separately stated, continue to be exempt. Pre-written computer software or licenses purchased by consumers for personal use are subject to tax. ( Important Notice: Computer Software, North Carolina Department of Revenue, February 2010)

ARKANSAS

Software that is delivered electronically or by "load and leave" is not taxable. For tax purposes, rentals and leases of computer hardware and software are considered sales. ( Sec. 26-52-304; Sec. 26-53-109, A.C.A.; Reg. GR-25)

GEORGIA

Pre-written or modified computer software transferred to the retail purchaser by means of load and leave is not subject to sales and use tax. The transaction is not deemed to be the sale of tangible personal property when the retailer installs the computer software and the computer software does not remain permanently in the purchaser’s possession in a tangible medium after the computer software has been installed. ( Reg. Sec. 560-12-2-.111(6)(a) )

RHODE ISLAND

Pre-written software is exempt if delivered electronically or by load and leave. ( RI Gen Laws Sec. 44-18-30(61) ; Reg. SU 09-25 )

NEW JERSEY

Pre-written software delivered electronically is generally taxable as tangible personal property. (N.J.S.A. 54:32B-2(g) ; Reg. 18:24-25.5 ) (Technical Bulletin TB-51R, March 13, 2007) Nevertheless, there is one exception to the taxability of pre-written software delivered electronically. Sales of pre-written software delivered electronically are exempt if the software is to be used directly and exclusively in the conduct of the purchaser's business, trade, or occupation. (N.J.S.A., Sec. 54:32B-8.56(15) ; Reg. 18:24-25.5 ) (Technical Bulletin TB-51R, March 13, 2007)

This exception does not apply, however, if the software is being delivered by a "load-and-leave" method. The transaction is not deemed to be the sale of tangible personal property delivered electronically, and therefore is not exempt, even if the software is to be used directly and exclusively in the conduct of the purchaser's business, trade, or occupation. (Technical Bulletin TB-51R, March 13, 2007)

But make sure there is no tangible property delivered or left behind! If the purchaser of software initially delivered electronically also receives tangible storage media containing the software, then the transaction is not deemed to be a sale of software delivered electronically and is not exempt, even when the software is to be used directly and exclusively in the purchaser's business. (Technical Bulletin TB-51R, March 13, 2007)

CALIFORNIA

California taxes the sale of "canned" computer software, which is software designed and manufactured for general retail sale and not under the specifications or demands of any individual client. ( Sec. 6010.9, Rev. & Tax. Code ) Tax applies whether title to the storage media on which the program is recorded, coded, or punched passes to the customer, or the program is recorded, coded, or punched on storage media furnished by the customer. Tax applies to the entire charge made to the customer, including any license or royalty fees. However, tax does not apply to license fees or royalties paid for the right to reproduce or copy a federally copyrighted program, even if a tangible copy of the program is transferred concurrently with the granting of the right. ( Reg. 1502(f)(1), 18 CCR )

In addition, tax does not apply to sales of canned software that are transmitted electronically from the seller's place of business to or through the purchaser's computer as long as the purchaser does not obtain possession of any tangible personal property in the transaction. Sales of canned software also are not taxable if the software is installed by the seller on the customer's computer. They do not specifically say “Load and Leave” here but we can certainly infer it. However, the load and leave method is taxable if the seller transfers title to or possession of storage media in the transaction or the installation of the program is a part of the sale of the computer. ( Reg. 1502(f)(1)(D), 18 CCR)

FLORIDA (Load and Leave is Taxable Here)

So far, every state we’ve listed here exempts software sold and delivered by means of the Load and Leave method. Florida is not one of those states. But since they have recently published a TAA that addresses this issue on point, we include them in this discussion.

In Florida, software delivered electronically is not considered an exchange of tangible personal property and is not subject to tax. In addition, the charge for furnishing information by way of electronic images appearing on a subscriber's video display screen is neither a sale of tangible personal property nor a sale of a taxable information service. ( Rule 12A-1.062(4), F.A.C, CCH Survey on the Sales and Use Taxation of E-Commerce, Florida Department of Revenue, October 3, 2000)

According to TAA 10A-010 issued 2/16/10, the sale of canned or pre-packaged software delivered to a customer in tangible form, including but not limited to, on a disk or via the load and leave method, is a sale of tangible personal property subject to sales tax. Charges for services, including installation and travel charges, that are part of the sale of tangible canned or pre-packaged software are a part of the sales price and subject to sales tax.

Amazon.com & You - Internet Sales and the Long Arm of the Tax Man

by Michael J. Fleming

We all have heard or read about the plights of the states in the recent economy. Revenues from all sources are down and states are desperate to increase them. Virtually all states are becoming more aggressive in their collection efforts and many are looking at creative new statutes or ways to reinterpret those already on the books. One prime example of these efforts is the Internet. Most of the news about the Internet currently revolves around Amazon, with some statutes actually being dubbed the “Amazon Laws”. However make no mistake about it; it’s not just Amazon the states are thinking about. If you are selling or buying on the Internet the states have their eyes on you also.

The reasons so many states are looking at Internet sales are because of their explosive growth and the fact that sales or use taxes often go uncollected on these transactions. Experts estimate that the uncollected taxes for these transactions will total $18 billion dollars this year and predict that by 2012 the number will grow to $23 billion. The cumulative amounts for the period of 2009-2012 could reach $55 billion dollars. It’s no wonder the states have their eyes on the Internet; capturing these uncollected taxes would go a long way to closing their budget gaps.

In their pursuit of this Internet treasure the states are taking a number of different approaches. The states easiest to follow are those that have passed new statutes. There are currently 3 of these states that have passed “Amazon Laws”; NY, NC and RI. One of the major components of all three of these statues is what is called “Click-Through Nexus”. This nexus occurs when the seller enters into an agreement with an in-state resident, where the resident is compensated for referring customers directly or indirectly to the seller. One form of this is an affiliate program where a potential customer clicks on a resident’s link and is redirected to the seller’s website. The laws are currently being challenged in court and many tax professionals have taken a wait-and-see approach.

While the professionals may be waiting, the states are not. According to BNA’s 2010 Survey of State Tax Departments, 14 additional states believe that their existing statutes allow them to pursue taxes through this “click-through nexus”. The approach of these states is much more stealthy and without the information contained in the BNA survey, many would be hearing about this the first time through an audit. The states referenced in the BNA survey are: Arizona, the District of Columbia, Florida, Iowa, Maryland, Missouri, Nevada, New Mexico, North Dakota, Pennsylvania, South Dakota, Tennessee, Texas, and Washington.

In addition to “Click-Through Nexus” many of the states are looking at (or have already passed in the case of Colorado & Oklahoma) “Sales & Use Tax Notice and Reporting Requirements” for transactions where sales taxes are not collected. Quite simply states are requiring sellers without nexus to inform purchasers that tax is due on individual transactions as well as provide year end summaries with instructions on how the taxes should be paid. There are also requirements for reporting these sales to the state and provisions for penalties for non-compliant sellers.

If the new statutes were not enough, states are aggressively searching for companies that have “old-fashioned nexus”. This nexus is caused by the usual myriad of ever-evolving activities whose importance in creating nexus can vary from state to state. Most of these activities are not directly related to the Internet and are conducted by other parts of your company, but could impact the sales tax aspect of your Internet business anyway. These activities are too many to list entirely but here is a quick list of 10 potential nexus-creating activities:

1. Owning or leasing property in a state.
2. Owning or leasing equipment in a state.
3. Travel into a state to perform sales.
4. Travel into a state to perform services such as installations, training, repair, etc.
5. Travel to trade shows in a state.
6. Having payroll in a state.
7. Having agents or contractors in a state.
8. Licensing intangibles to others in a state.
9. Delivery into a state in a company owned truck.
10. Doing business with a bank in a state.

Let’s not forget those issues that are not nexus related. Issues like changing taxability (software especially), delivery methods (downloads vs hard copy) and of course drop-shipping issues. Are you responsible for the taxes on a sale someone else makes? You could be. If your purchaser is not registered in a state and you have nexus in that state you may be liable.

If you are beginning to wonder if you need to take another look at how you are approaching these issues pat yourself on the back. All too often we speak to very smart people at companies of all sizes and types, who work at all levels of the organization that we believe are much too complacent. They assume that if their system has worked up to this point why change it? Some of them are right. They stay on top of the ever-changing environment and update their policies continuously. Others find out the hard way (usually in a Sales/Use Tax Audit), that just because it worked in the past doesn’t mean it’s going to work now.
Andy Johnson, a founding partner at Peisner Johnson & Company, believes that, “The greatest tragedy when it comes to sales tax is neglecting to collect sales tax on a taxable item at the point of sale, only to have it come out of your pocket later.” Because unlike an income tax which comes out of your pocket no matter when you realize it, sales tax that would have been paid willingly (if not grudgingly) by your customer at the time of the sale, ends up coming out of your pocket 3 to 5 years later. And, don’t forget to add the penalty and interest insult to the injury. Can you afford not to be compliant?

Ok you’ve started to wonder, now what do you do. Here are some suggested actions:

1. Educate yourself - Start with charts and matrices, attend webinars, contact the states.
2. Ask questions – Of your staff, your accountants, everyone. You can never ask enough questions.
3. Evaluate - Don’t assume your accountants or staff are up-to-date. They usually are multi-tasking.
4. Consult an expert – There are some excellent service providers that focus on issues like these.
5. Train your people – Knowledge is power. Empowered employees can help prevent problems.

There are a few good firms that can help you educate yourself or provide additional support as needed. Peisner Johnson & Company offers many free services designed to make your life easier. One of those free services is that we will provide you with a chart or matrix on just about any topic you would like. We also offer a free service called quick questions. If you have questions that we can answer without the need for research we will do so free of charge.

There are currently so many issues effecting Internet sales it is hard to cover them all or in great detail in a single article like this. It is our intention to alert you to as many of these issues as we could. If you have any questions or would like additional information please let us know. We can be reached at 800-940-9433 or by email at taxquestions@peisnerjohnson.com. Peisner Johnson and Company, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax issues.

States Are Targeting You?

Which States Have Set Up Nexus Teams?

We subscribe to some of the best resources available today when it comes to state and local tax research. Chances are, whatever question you could possibly have, we can find the answer. Today, we thought it would be interesting to highlight the issue of Nexus and which states have set up teams with the express purpose of finding companies who have nexus in their state.

Nexus Teams Targeting You?

If you operate in multiple states, then you need to be ever vigilant in these difficult economic times because it appears states are being much more aggressive in looking for companies making sales in their state hoping that they can force them to collect sales taxes for the states. To do so, they must first determine that you have Nexus in their state.

So what is NEXUS? nex-us n. pl nexus or nex-us-es - a means of connection; a link or tie.
Your business has nexus if you have established a connection with the state in question. Clearly, physical presence in a state, in the form of a store or office, establishes nexus. If you have a physical presence in a state, take notice: You now have the responsibility to collect taxes for the sales you have in that state if what you sell is taxable.
Unfortunately, the laws do allow states to force you to collect tax for them and to penalize you for not doing so if you have nexus. The courts have long agreed that the government is well within its constitutional authority to impose this duty on sellers with a physical presence in their state. Likewise, a state can also force you to pay tax on the taxable purchases you make in their state.
With these laws in their favor and in their fiscal desperation, states are working harder than ever to find more tax collectors. I thought it would be interesting to note which states admit to having a special team that is specially set up for this very purpose.

First of all, let's look at the top 5 states: CA, TX, FL, OH, NY and IL. As it turns out, only Texas and NY have "Nexus Teams". According to my research 25 other states also have "Nexus Teams".

We Have a Chart for That -- You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. This particular matrix addresses this question of whether the state has a designated "Nexus Team". We offer this basic research to you at no charge for up to 10 states. If you like to receive one of these charts, please email us here and just request it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult a professional.

What's the Best Way to Get Answers to Your State Tax Questions?

CALL THE STATE? -- This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it's not that people at the state don't know what they're talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you're protected in the event of a future audit.

But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a "form over substance" type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don't get me wrong, I'm not saying there's some sort of trick or code language that you must conform to or else, I'm just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.

Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.

GOOGLE IT? -- With so much information available on the Internet these days, you can Google your question and chances are, you'll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?

GET A RULING? -- What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point -- it's just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you're going to get in the ruling. It's not always possible to do, but you don't want bad precedent, if you can help it.

ASK THE AUTHORITY? -- Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking a professional? You probably have, but hesitated, considering the cost. Well, this is what we do -- We Solve State Tax Problems.

And, we don't always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.

Sometimes we just flat know the answer to a question you have. We always tell our clients: "If you have a question, just call us or email us. If we can answer you off the top of our heads, we're not going to charge you. If we need to do some research, we'll tell you before we do the work and seek your approval before we do it." You can expect no surprise invoices from us.

So What Questions Do You Have?

Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, "it depends!" And that may sound like a cop out, but it really does depend. The answer depends on which state we're talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.

CAUTION ON CHARTS --A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it's still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state's own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We're here to help, give us a call.

Certain Illinois Taxpayers May Lose Millions of Dollars on July 1, 2010

Illinois Taxpayers May Lose Millions of Dollars on July 1, 2010

The State of Illinois Manufacturer's Purchase Credit ("MPC") is unique among state incentives. Many Illinois taxpayers might qualify for this credit. If they do qualify, they must file the appropriate forms by June 30, 2010, or the money is lost forever.

What is the MPC Credit?

The MPC is earned when a manufacturer or graphic artist purchases manufacturing or graphic arts machinery and that equipment qualifies for the existing sales/use tax exemptions. The credit is equal to half of 6.25% state sales tax that would have been owed if the purchase was not otherwise exempt.

The MPC Credit may be used to pay state sales tax or use tax on future purchases of qualifying production-related tangible personal property. All unused MPC earned expires the last day of the second calendar year following the year in which the original tax exempt purchase was made. MPC may not be transferred to another party.

What Must You Do?

File a Illinois ST-16 Annual Report of MPC earned with the Illinois Department of Revenue by June 30,2010 for all qualified purchases made in 2009. In addition, the Illinois ST-17 Annual Report of MPC used should also be filed.

We Can Help

Facing a time crunch? Not sure if you qualify or which purchases you make meet the tests? We can help you. We will review the prior year's capital purchases and Accounts Payable files to identify qualifying purchases. We will then prepare the ST-16 Report of MPC earned along with a ST-17 Report of MPC used on your behalf.

PJCo will also review the credit earned to ensure maximum usage of the credit. By reviewing your AP files we can identify transactions where MPC can be applied. If we discover tax was paid to a vendor or State we will prepare a refund to recover the taxes paid.

How Soon Can You Actually Get This Money in Your Pocket?

It's one thing to qualify for a credit and file all the right forms -- it's quite another to actually get the cash in your hands. The state of Illinois doesn't just send you a check. The credit has to be applied against other taxes owed. If it isn't applied to some other tax in a timely fashion, it's lost and all that work was wasted. This is where our experience and services become valuable in assisting your company in using the credit before they expire. We know exactly where to look to apply the credit on future or past purchases. Eligible purchases of the credit can be applied to many areas to include production related tangible personal property that is:

* Incorporated into real estate within a manufacturing or graphic arts facility.

* Used or consumed in activities such as pre-production, material handling, receiving, quality control, inventory control, storage and staging, and packaging for shipping purposes.

* Used or consumed Tangible Personal Property for Research and Development.

What Should You Do Now?

Contact us today to arrange a review of all purchases made in 2009. Remember there is no extension available to file for this credit and the return must be filed by June 30, 2010. There is still time for us to marshal our resources and complete this critical filing on your behalf.

by Brad Dent

Sounds Crazy, But a Managed Sales Tax Audit May Be The Best Way To Go

We subscribe to some of the best resources available today when it comes to state and local tax research. Chances are, whatever question you could possibly have, we can find the answer. Today, we want to address some basic questions surrounding managed audits.

Managed audits are somewhat unknown except perhaps in the fairly small state tax consultant community. But they ought to be more well known, because they can lead to some great benefits in many states. We recently completed a managed audit for a major cable television provider and saved them in excess of $1Million so we know from experience how beneficial they can be.

But what is a managed audit, first of all?

A managed audit generally refers to a process whereby you the taxpayer conduct your own audit subject to agreed-upon procedures with and pursuant to a review by the taxing jurisdiction. It may sound crazy for a company to audit themselves, but there can be substantial benefits in time and money saved. You pull your own invoices, schedule purchases/sales where tax is due and then turn those schedules into the auditor. They review the schedules and process the audit. You can typically protest questionable items.

Managed audits are probably most appropriate in a situation where you know at the outset that you will have a large liability and you want to save the assessed penalty (and in some states the interest also). A managed audit can save you vast amounts of time because you yourselves who are familiar with your company and record storage. If you want to participate in a managed audits, usually you have to request one before an actual audit begins or very soon thereafter. We wish more people knew about this option.

You have to be careful in putting together a managed audit agreement. Here are factors to consider:Audit Period;Sampling Methodology;Policy on Missing Invoices; and Deadlines.

TAX MATRIX
We have some tax matrices already put together based on survey questions made to the states each year. We offer this basic research to you at no charge for up to 10 states. If you like to receive one of these charts, please email us here and just request it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult a professional.

Top 4 questions:

• Does Your State Provide a Managed Audit Program or Similar Program? What is the Program Called?
• Are There Any Limitations on the Taxpayers' Participation in Such a Program?
• Is Interest Waived for Participation in the Program, or Does a Special Reduced Rate of Interest Apply?
• Is Penalty Waived for Taxpayers Participating in the Program?

What's the Best Way to Get Answers to Your State Tax Questions?

CALL THE STATE?
This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it's not that people at the state don't know what they're talking about. In fact, if you get a hold of the right people with experience in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you're protected in the event of a future audit.

But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a "form over substance" type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don't get me wrong, I'm not saying there's some sort of trick or code language that you must conform to or else, I'm just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.

Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.

GOOGLE IT?
With so much information available on the Internet these days, you can Google your question and chances are, you'll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?

GET A RULING?
What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point -- it's just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you're going to get in the ruling. It's not always possible to do, but you don't want bad precedent, if you can help it.

ASK THE AUTHORITY?
Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered consulting a professional? You probably have, but hesitated, considering the cost. Well, this is what we do -- We Solve State Tax Problems.

And, we don't always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.

Sometimes we just flat know the answer to a question you have. We always tell our clients: "If you have a question, just call us or email us. If we can answer you off the top of our heads, we're not going to charge you. If we need to do some research, we'll tell you before we do the work and seek your approval before we do it." You can expect no surprise invoices from us.

So What Questions Do You Have?

Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, "it depends!" And that may sound like a cop out, but it really does depend. The answer depends on which state we're talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.

CAUTION ON CHARTS
A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it's still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state's own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We're here to help, give us a call.

Vice President NOT PERSONALLY Liable for Sales Tax

You don't see a headline like this very often. Usually, the headline you see is where a Director or Corporate Officer is on the hook for unpaid taxes. In this case (Mitchell, New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No. 822072, February 25, 2010), the director and vice president of a telecommunications company that was later acquired by another company was not personally liable for collecting and remitting New York sales and use tax on behalf of the company.

The ALJ did not find that this particular V.P. was a "responsible person" for sales tax collection and as a result they could not impose the liability no her. This was the decision of the ALJ despite the taxpayer's positions as vice president and director of the company. Good for her -- I'm sure she breathed a huge sigh of relief. To be a "responsible person", you have to have "sufficient authority or control over the company's affairs". The ALJ found she did not have enough control.

How did she manage to escape the long arm of the law?

In this case, the taxpayer did not attend board meetings, nor did she have management responsibilities, nor did she sign the company's tax returns. She also was not authorized to sign any checks on behalf of the company. Therefore, the notice of determination against the taxpayer was canceled.

So, the lesson here is that it is possible to escape liability on sales tax but you better not have any control whatever on the process. If you do have authority to sign checks and tax returns and you're an officer of a corporation in NY, and your company has a liability it does not pay, you could be at risk.

Big Changes in Washington -- Resale Certificate No Longer Valid. "Reseller's Permit" Now Required

Businesses Must Have a "Reseller's Permit" if They Hope to Buy Items for Resale.

Effective Jan. 1, 2010, only businesses with a Department of Revenue-issued Reseller Permit can purchase items for resale without paying sales tax.


The Old System in Washington

Before this change, any business or individual can obtain a resale certificate from the Department's website, present that certificate at the point of sale, and avoid paying retail sales tax on the value of the goods purchased. Apparently, this very loose system has been costly for the State. According to the news release announcing the change, all kinds of abuses have been happening.

"Examples of misuse of the self-issued resale certificates include a dentist buying a big screen TV for office or home use, a nonprofit corporation purchasing office equipment for its own use, and a janitorial firm buying cleaning supplies used in its business. Sales tax is due on all of these purchases because the materials aren’t being resold."

This change is the result of legislation passed in September of 2009 and effective January, 2010. The legislature is trying to curb these abuses. The switch from the current resale certificate program is projected to recover up to $100 million annually in state and local sales tax revenue that is now lost when businesses buy items for their own use but don’t pay sales tax when due.

You May Have to Register for this New Permit
Or, you may be one of those businesses that automatically qualifies for the permit and will have it sent to you with no further action necessary on your part. The Department estimates that 30 percent of registered businesses in this state qualify for and will receive the new reseller permit.

Businesses that do not report retail or wholesale sales generally will not be eligible for permits.
According to the news release, more than 155,000 businesses were mailed permits automatically back in October, 2009. Another 330,000 were advised that they would not be sent a permit but could apply for one if they could demonstrate a legitimate business need.

Contractors Targeted
It's obvious that the Department feels like contractors are the biggest abusers of the old resale certificate system. As a result, they are making it difficult for contractors to obtain these new Reseller Permits. They certainly don't get any automatic permits although they may have been notified that they might qualify for permits depending on the nature of their work and to apply if they want one. Even if contractors get a Reseller Permit, it's only valid for 12 months. They have to reapply every other year. Other types of businesses generally only have to reapply every 4 years.
According to Department estimates, about 326,000 registered non-reporters, who don’t file tax returns and don’t collect sales tax, will not qualify for permits.

What Now?

After Dec. 31, 2009, businesses that do not have a reseller permit will need to pay sales tax on products they purchase to resell, but can claim a deduction for sales tax paid at source on their state excise tax returns or seek a refund if you do resell them.

More Information Available

Follow this link to the State's website for much more information on this new permit. And of course, if you have any questions on this matter, do feel free to call and discuss it with us.

The Empires Strike Back -- Plus Big Changes in California and Colorado

The Empires Strike Back -- Big Developments in Colorado and California

Amazon.com has long been a target of the state government empire. In fact, the Empire State started it all. We've mentioned before that New York has been on the forefront of the nexus wars. They were the first to float the idea that Amazon, by virtue of their "affiliate" relationships in NY has nexus in NY.

Nevermind that the term affiliate as it relates to Internet relationships is not nearly the relationship contemplated in the more traditional usage of that term. The dictionary.com definition of the term "affiliate" as used in commerce is "a business concern owned or controlled in whole or in part by another concern". In common Internet usage, to be an "affiliate" of a website is no such thing. I can be "affiliated" with Amazon.com by merely signing up to be one. I agree not to do certain things that would harm Amazon, but I certainly am not owned nor controlled by them nor do I represent them, and certainly I do not have any authority to bind them to an agreement with another party. Just because I'm called an affiliate, doesn't, in and of itself, mean that now Amazon.com has nexus wherever I live. But that's what New York is saying. And how all this turns out is something we have been observing with some interest.

Taxation Without Representation

When one state seems to be having some success in either targeting certain types of taxpayers or certain industries or employing certain techniques or novel approaches to taxation, other states jump on the bandwagon. We see this happening in this case also. In fact, in the publications we subscribe to, it's not at all uncommon to actually see headlines like "X State Legislature Passes 'So-Called Amazon Provision' Into Law". This trend of states getting ever more aggressive is on the upswing.

Virginia is the just the latest example of this. A bill just passed the VA Senate that provides a presumption of nexus exists in a situation where a seller enters into an agreement with a VA resident in which the resident "refers potential customers" to the seller "by a link on an Internet site".

What states really like is taxation without representation. It's almost impossible, and probably political suicide, in the current environment to suggest raising taxes. But revenue shortfalls and corresponding budget deficits abound. To cut spending might seem to be the logical choice, but that's also politically difficult. Who wants to be accused of trying to "balance the budget on the backs of the poor"? So what is there to do? Certainly, a state can send out more auditors and train them to be more aggressive. That is definitely happening, but even that comes at a cost. If you harass your own taxpayers too much, they begin to want to vote in some different people.

What if you could tax people who can't vote you out? This is exactly what is at the root of all this. Get money from companies who can't vote you out of office. They're not citizens with a vote. Plus the states can pursue them with a certain righteous indignation. It's not that they're looking for revenues only, they'll say, but really it's all about "leveling the playing field" for local citizens and businesses. The playing field is not level, if the Amazon's of the world have a built-in advantage of not having to charge sales tax.

Tear Down This Wall!

If it were up to the States, they would exempt their own citizens from paying any tax and impose their entire budgetary requirements on non-citizens. If you want to business in our state and "exploit" our resources and services, then you're going to have to pay! But fortunately for the prosperity of our nation in general and particularly for companies trying to do business in more than one state, there is this clause (Article I, Section 8, Clause 3) in the Constitution that reserves the right to the US Congress to "Regulate Commerce ... among the several States..." This is commonly referred to as the "Interstate Commerce Clause" and is widely interpreted to mean that states can't burden interstate commerce with discriminatory taxation.

Suffice it to say that there is a continuing tension between "leveling the playing field" on the one hand and "taxation without representation" on the other. Man has stepped foot on the Moon and the Wall has come down in Berlin, and so maybe this issue will be resolved, but peace may come to middle east first.

The bottom line is that faced with revenue shortfalls and the resultant budget deficits, state revenue departments and state legislatures are scrambling. They are now and will continue to push the envelope on asserting that non-citizens have nexus in their state. Once they win the nexus battle, then they can force companies to collect and pay their taxes.

Here's a Few Other Recent Developments in California and Colorado

COLORADO: An interesting bill has passed the Colorado House and the CO Senate (with significant amendments to be resolved). The amended Senate version would create nexus for a retailer who is part of a controlled corporate group with a component member who has a retail presence in Colorado. This is not all that revolutionary. Affiliate nexus (as that term is more commonly understood in the state taxation parlance and not in the NY definition) is not a new approach. But here is the interesting part. Any retailer who has nexus as a result of being part of a such a controlled group, would now have (if this bill is signed into law) some new notification and filing responsibilities. First, the seller would have to notify their customers that sales tax is due on those purchases. What if they don't? They would be subject to a $5 penalty for EACH failure. That's big. Second, the seller who does not collect tax, but has nexus through this attribution approach, would also have to send a separate mailing (by first class mail) to each of its customers in CO a schedule showing the detailed purchases they made. This mailing would have to be done by January 31 of the year following. That's huge.

But wait, there's more!

Third, and here's where this is really big, this retailer would also be required to file an annual statement (by March 1 of each year) summarizing the total CO purchases made by each purchaser. Failure to do so, carries a $10 penalty for each purchaser left off the filing. Of course, it's easy to see the CO tax collectors using this information to dash off a tax bill to all the people on that list. This bill will be watched carefully.

CALIFORNIA: California has passed a new use tax registration requirement. It is for all business that: (1) have $100,000 or more in gross sales; (2) not already registered with the SBE (State Board of Equalization -- CA DOR for sales taxes); (3) made purchasers from non-CA sellers who did not collect CA tax; and (4) used, consumed, gave away, or stored the purchased items in CA. If this applies to you, you would be required to file a report by April 15th each year. Oh, and one more thing -- CA is a tough place to do business. Even federally exempt 501(c)(3) entities with over $100K in receipts have to register. If this applies to you, when you get registered, it you'll also be required to file for 2007, 2008, and 2009 also. And yes, penalty and interest will apply. But you may request relief from the penalty. See this link for more details. Yikes. If you have concerns here, let us help. We can help you minimize the damage this could cause your business.

HST Headed For BC & ONT, Canada

Tax Grab or Good For Business?
by Linda Lujan

There's a firestorm of controversy brewing to the north. Big tax changes are coming for British Columbia and Ontario, this summer, and citizens in those provinces are not happy. We'll get into the details in a bit, but first let's talk about the controversy.


According to this article, a stunning 90% of citizens are against this change saying it's a tax grab. But this article and this article say it's really revenue neutral, but points out that more things will be taxable now than before.

In our view, it appears that the new system will help businesses, because it avoids the cascading effect of the provincial sales taxes which tax inputs depending on how many times products change hands. It's revenue neutral in the sense that the overall tax rate stays the same. It's not revenue neutral in the sense that while it helps business by not taxing their inputs it makes things taxable for consumers that weren't taxable before. Have a look at the linked articles for more details.

Now here's the details:

If you are registered in either one of the provinces, be prepared for the changes that will take affect on July 1, 2010. Both British Columbia and Ontario will be changing over to an Harmonized Sales Tax (HST). At which point, the Canada Revenue Agency (CRA) will administer the HST in both Ontario and British Columbia.

Ontario released information Notice No. 3 on October 14, 2009 that gives the general transitional rules for changing over to HST starting July 1, 2010. Click this link to read Ontario’s HST Notice No. 3. HST Notice No 3. British Columbia has also released a Tax Information Notice; HST Notice #1 dated October 14, 2009, which explains the general transitional rules as well. Click this link to read British Columbia’s HST Notice #1 BC HST Notice #1.

The Canada Revenue Agency released a GST/HST Notice No. 247 in October 2009, which provides questions and answers concerning the change taking affect in both provinces. This notice does a great job in describing how the change will affect tangible personal property such as sales, leases, licenses, returns and exchanges, as well as direct sellers. It explains services such as freight and passenger transportation as well as intangible personal property. This notice goes into the changes as it applies to accounting and claiming Input Tax Credits. Here is a link to the GST/HST notice for your convenience. Click this link to connect to the notice: GST/HST Notice.

Rates:

In Ontario and B.C., the 5% goods and services tax (GST) will continue to apply according to the usual rules, either as GST or, where the HST would apply, as the federal part of the HST. The new HST rate in Ontario will be 13%, consisting of the 5% federal and an 8% Ontario. In British Columbia, the HST rate will be 12%, consisting of the 5% federal part and a 7% British Columbia.

Sales of Tangible Personal Property:

In general, the HST would apply to any sale that has become due, or is paid before coming due, prior to May 1, 2010 for a sale of tangible personal property that is delivered and ownership transferred to the recipient on or after July 1, 2010.

The HST would not apply to a sale of tangible personal property if the property is delivered or ownership is transferred prior to the July 1, 2010 change date no matter when the amount becomes due or is paid prior to becoming due.

That's Just The Beginning, It's a Jungle Out There.
It's not good tax code unless a forest acre of trees is used to print it. You can bravely hack through the dense pages yourself, but it's more efficient to talk to someone who's already explored the landscape and can give you map. There no cost to talk to us on the phone regarding your situation ("get a map"). We know the pitfalls and speak the language.

Peisner Johnson & Company, LLP
"The Tax Guides"