The AICPA Survey Lists CPA’s Top Five Concerns, But Did They Ask the Right Question?
And the Survey Said?
In a recent survey, the AICPA polled some 577 CPA firms with the question of “what is your chief business concern?” A compelling question to be sure, and the answers are telling of our current economic situation. However, in our review of the survey and the accompanying analysis by the AICPA, we began to wonder if the survey was asking the wrong question. As evidenced by the survey itself, the issues brought up by the firms are indicative of the times we’re in. But, based on a review of prior surveys, this year’s top concerns probably won’t be the same as next year’s concerns (just take a look at the top concerns in 2009 or 2007). In order to find out what really troubles CPAs, instead of asking what concerns them, we might ask a more specific and telling question. How about this: “As a leader in a CPA firm, what issues keep you up at night?” Likely the answer to this question is far different than simply “What are your biggest concerns as a CPA?” Now, that would be an interesting survey.
I’ll tell you one thing that sometimes keeps me, as a leader of my CPA firm up at night is a worry that we made a mistake on something, or we missed some issue we should have caught. We don’t do attest work; we are state and local tax consultants—that’s all we do.
What Keeps You Up at Night?
I’d be willing to bet it’s not state and local tax—and that’s understandable. But let me tell you why it might need to be especially for your attest clients and what you can do about it.
Don’t get me wrong, all in all, we did find the article very useful, and a near comprehensive list of what we would call the top concerns CPAs have (to view the survey, click here). For example one of the major concerns especially for smaller firms, is dealing with the ever growing and evolving complexity of tax law. And they’re probably referring to changes in the federal tax law. I sympathize with CPA’s on this. We haven’t kept up at all with the federal law in the last 20 years. We focus all our attention on state and local tax and it’s hard enough to keep up with this area. Merely staying on top of these changes is a full time job, let alone spending time using that knowledge in performing client work. To go along with the knowledge of the law, we must be knowledgeable about the various solutions that technology provides. When new and innovative technological solutions present themselves, we can find ourselves out of touch and out of a client when we fail to inform ourselves about new available software solutions.
Another concern that ranked in each category of the survey was the concern to remain competitive with fees and the pricing of services. In addition, firms were concerned with the compressed nature of the tax season that takes place in the weeks and months preceding the April due date for personal income taxes. And while these concerns are relatively constant throughout the years, the most important concern to CPAs in the 2011 survey, at least to firms in the 2-20 professionals’ size range, was bringing in new clients. For firms larger than 20 professionals, new clients ranked as the second major concern, and for sole proprietors, it ranked as the third major concern.
Contrast these outcomes with that of the 2009 survey and the results are interesting. In 2009, the survey recorded a unanimous number one concern across the board—retention of current clients. While client retention remains an important priority in 2011 (it ranked no lower than 3rd in all groups) the change leads us to make some interesting observations. To quote the AICPA release about the survey, “Whereas survival was the top priority in 2009, at the height of the recession, the seeking and signing of new clients has taken on greater importance across the board as firms attempt to find growth opportunities in an uneven economic recovery.”
But, What Else Should CPA’s be Worried About That Wasn’t on the List?
Now, we’re not disputing that growth is an important concern right now, however we mentioned one concern that we feel should be added to the list. And as far as concerns go, this one is big. To put it another way, how many of the concerns previously listed, whether complexity of the law, new technology, pricing of services, the seasonal nature of the business, or even client retention and growth, would you potentially lose sleep over? Probably none. Yet many of us have experienced that awful, restless night after the realization of a material mistake. Now because they don’t happen every day, they don’t always jump to the front of your mind in that quarterly strategy/growth meeting, but they are absolutely a major concern. That gnawing, nagging concern that lingers and hovers over all we do as CPA’s. And when it comes to what gets our heart rate up, or spikes our blood pressure, nothing gets us going quite like this. After all, if we mess up it’s our fanny in the fire.
Specifically the mistakes I’m referring to have to do with attestation work. Attest work is a type of service CPA’s offer—attesting to the veracity and accuracy of financial statements. It is a heavy burden. One major reason why companies hire CPA’s to do attestation work is because they’re required to do so, either by a bank or other creditor or by some other party. Companies don’t usually hire a CPA to do attestation work for their own internal review purposes. It’s because they’ll be using the documents for a third party. CPA’s know this and that’s why CPA’s are extra concerned when it comes to attest clients.
When CPAs do attestation work or audits, the last thing they want to know is that they missed something. What would they be worried they are going to miss? Revenues? Sure. Revenues must not be overstated or “managed” artificially. What CPA’s are usually even more worried about though, is missing or understating some liability—some liability that isn't on the balance sheet, but should be. It's easy to review things already on the balance sheet. The company says, “Yes we've got this inventory, and we have these accounts payable.” CPA’s can confirm those. But what if you miss liabilities that aren't on the balance sheet? And what if those liabilities are material to the financial statements? That’s the big worry.
Case Study -- CPA Firm Misses Multimillion Dollar Liability for Small Attest Company
We knew a CPA firm who had a 30 year client. (Please note: We’ve changed the facts so that neither the firm nor their client is recognizable, and the good news is that the situation was caught and resolved in time. This client was a family-owned distributor business. The CPA firm did audit work for them for 30 years because the company maintained certain loans with the bank where they had to maintain certain covenants or the bank could call in the loan. Everything had been going fine. That is until their client was approached by another company with a buyout offer.
They Didn’t Realize They Had Nexus All Over the Country
While performing their due diligence, the buyout firm issued a nexus questionnaire to the company and discovered they had nexus for sales tax all across the nation based on the activities of independent sales reps. At this point the buyout firm asked, “Don’t you know that independent reps give you nexus and you should have been collecting sales tax all along?”
Nexus Means a State Can Force a Company to Collect Sales Tax
If a company sells something that’s taxable and they have nexus in a state, they need to be licensed to collect the appropriate tax. And they need to actually collect it and remit it. If they don’t collect it from their customers at the time of the transaction, the state will eventually find them and get the money from the seller. When this happens, it’s often too late or too difficult to go back to the customers and the liability shifts to the selling company. Many companies are unaware of this fact. And one thing they’re also shocked to find out is that the state can legally go back to day one and many in fact routinely go back 10 years if they find you.
In this case, the buyout firm went and checked back over the previous three years and found the company’s exposure was around $15 million. For purposes of simplification, let’s estimate that $15 million was roughly half the sales price of the company. There you have roughly half the worth of the company being eaten up by a potential liability of $15 million, and that only goes back three years! And really, with the company not being registered, realistically you could calculate roughly 7-10 years of liability which would have made the whole company insolvent.
CPA Firm Has Palpitations
Now put yourself in the shoes of the CPA firm. You’ve been giving clean opinions all along for the last 30 years. It makes your stomach turn. If that liability is real, you are in a world of hurt because now you know about it, and are duty, ethically and possibly legally bound (think of Enron and Arthur Andersen) to disclose the liability and insist the client put it on the balance sheet which may mean they are in violation of the loan covenants, which may mean the bank has to call their loan. If the bank can’t collect the loan they’re going to come to you. In addition, you have to face the extremely difficult conversation that will inevitably come where your client asks, “Why didn’t you tell us the activities we were performing gave us nexus and we should have been collecting tax?” There is no good answer to that question.
It Ended Well
Thankfully, all’s well that ends well and this situation was resolved satisfactorily because of a series of actions including taking advantage of the SSTP amnesties and strategic voluntary disclosures that we were able to recommend. But, in some respects, the client was lucky that they met some pretty stringent requirements, and lucky is probably the best description for how they dodged this bullet.
So how can you avoid this potential disaster? Well hopefully the solution is obvious. Get informed! Learn more about how the changing environment regarding nexus could be threatening your clients. Learn about the biggest tragedy in sales tax and why nexus is even an issue and what are the typical nexus creating activities. All of these resources are available at no charge.
State and Local Tax Concerns Shouldn’t Keep You Up at Night
Returning to the AICPA survey, firms ranging from the sole proprietor to firms of 20 professionals listed “keeping up with changes and complexity of the tax laws” as one of their top ten concerns. Why is this a top concern? Because it relates to a bigger, underlying concern, the concern that transcends good and bad economies, the one that keeps us up at night—that we could potentially miss something big. No one wants to miss a material item. Thankfully in this case getting informed is just as simple as employing a simple nexus questionnaire, similar to the one given to the manufacturing firm. If you would like a copy of a questionnaire, let us know and we would be happy to make one available. Or for more information about nexus in general, feel free to contact Peisner Johnson & Company at our website, attend one of our complimentary webinars on nexus, or just give us a call at 800-940-9433 ext. 716.
Thursday, July 14, 2011
Friday, January 21, 2011
The "Buy One, Get One Free" Sales Promo Can End Up Costing You... BIG!
by Andrew Johnson, Partner
When A Penny Charged is Worth Two Dollars In The Bush
I don’t think Yogi Berra ever said “a penny charged is worth two dollars in the bush”, but he might have. But I doubt even Yogi’s craziest statements could match the twisted logic used by the Wisconsin DOR in its recent Release.
The Release details the DOR’s position on how sales and use tax applies in various “buy one, get one free” scenarios. To say that it their position is Yogi-like would be to ignore or down-play just how costly it could be for the unwary seller in WI. One thing is certain though, if you are a seller in Wisconsin, you may want to seriously consider charging people for free stuff you give them. A penny charged now could save you many dollars later on.
Where were you on December 14, 2010? Of course you don’t know. Most regular folks were in the middle of the “holidays” during that time period. Going to company parties, shopping for last minute gifts, etc. Most folks were probably not putting their full attention on releases issued by the various taxing jurisdictions. But Peisner Johnson was keeping watch. The Wisconsin Department of Revenue issued a Tax Release on December 14, 2010, that could cost your company a lot of money if you’re not careful.
Do You Use “Buy One, Get One Free” Promotions?
How about buy two get one half off? How about come in for 10 lunches (oil changes, haircuts, palm readings, etc.) and the 11th is free or some such? If you do use these types of promotion, then this article is going to save you big money and headaches at least in Wisconsin.
It’s All About The Invoice
The Wisconsin DOR says: The sales and use tax treatment of buy one, get one free and similar promotions is determined by the invoice or receipt provided by the seller to the customer. If the invoice or receipt provided by the seller to the customer indicates that a second item is provided free to the customer when the customer buys the first item, then the seller is the consumer of the second item and is required to pay Wisconsin sales or use tax on its purchase of this item.
That defies most people’s logic. Wisconsin says that if you sell a shirt for $30 and give another shirt away for free, then you owe the tax on the free one. Then, what if you sell both shirts for $15? In substance, this is the same as selling one for $30 and the other for $0. But in the case where you sell each for $15, you charge tax on the $30 and owe no tax yourself. If you sell one for $30 and give one away free, you collect tax on the $30 and pay tax yourself on the cost of the other. Crazy, eh?
Query: Isn’t this purely form over substance? Answer: Yes. Query: How can states get away with this? Answer: To quote Yogi Berra: “I wish I had an answer to that because I'm tired of answering that question.” Actually, I do have an [admittedly somewhat weak] answer to this question. Sales and use tax is a transaction tax. It usually taxes discrete transactions that stand on their own. The transactions are usually represented by invoices. How the transactions are presented on the face of the invoice is usually critical. So, yes, almost always, sales/use tax is form over substance. The form or presentation controls the taxation. This can be deeply troubling to accountants who are trained to give weight to substance over form. It’s troubling to any logical person for that matter. But to paraphrase Yogi, sales tax is 90% mental and the other half is physical.
So what is Wisconsin trying to do to us? I think this is all about setting companies up to be caught on audit. Note that even if you show on the invoice a charge for both $30 shirts but then show a discount on one of the shirts such that the charge for one of the shirts ends up to be $0, you still owe the tax. So this is form over substance and then substance over form all on the same invoice. But, if you show both shirts on the invoice for $30 each and then give a $30 discount equally applied to both shirts such that the actual selling price is $15 per shirt, then you’re good. This is when you need Yogi Berra to lend his analysis.
Buy One, Get One For A Penny
Don’t despair, it’s not over til it’s over.
When I first read about this release in CCH, I asked myself, why don’t these companies sell the other “free” item for a penny? Since this is all about the form of the transaction, could a company “sell” that other item for a penny and then they wouldn’t owe any use tax on the cost of the item? This would seem to meet the technical requirements. But, would WI come back to a “substance” argument at that point and call it a sham? CCH’s paragraph explanation didn’t address this idea. But, I found it in the actual release in one of the many examples they gave. I will give you all the examples the WI DOR gave in its release, you may find one or two that apply on point to your situation..
What About Other States?
Good question, other states have their own rules as to whether sellers must charge tax on cash discounts given at the time of the transaction (yes, some states do tax those) or cash discounts if the invoice is paid in a certain time (like 2% discount if paid in 10 days), and whether tax is owed on the original sales price before a price reduction for coupons issued by the merchant and/or manufacturer, and how to treat rebates. Every state has their unique rules.
For example, in Texas a similar (but different:) issue arises in connection with the annual tax holidays. Stores like to run sales in connection with sales tax holidays. Shoe stores frequently offer the “buy one pair of shoes, get the next pair at 50% off”. Well, if you find two pairs you like that both sell for $120, then the first pair will cost $120 and the next one will cost $60. So you get two pairs for $180. Depending on how you invoice those shoes is how they are taxed to the consumer. If one pair stays at $120 on the invoice, it will be taxed because the exemption is for articles costing less than $100. If the discount applies to both items and the invoice shows each pair for $90, then neither of them is taxed since they both come under the $100 threshold. Of course, in no case, does the seller owe use tax on either pair if they end up giving one away free. But, that’s Texas, and this article is all about Wisconsin, so we limit our discussion accordingly. Just understand every state has their own peculiarities and of course, we’re here to help you get a handle on the other states too.
Read On -- The Key Is In the Details
Here are the examples given in the Release. Example 13 is the one that confirms that you can charge a penny for the second item and avoid the use tax on that item. One penny is all it takes. How many people will see this and take advantage of this?
Note that this Release addresses a law change that was effective back in October, 2009. Presumably, this treatment applies to sales made back to that date. But you can fix things going forward and hope for the best on audit. I guarantee this is an issue WI auditors will be looking for in their audits of sellers.
Examples:
The following examples illustrate this change. ( Note: In all of the following examples, the retailer's purchases and sales are made on or after October 1, 2009.)
Example 1: Taxable Item Given Away with Required Purchase of Nontaxable Item - Retailer A provides a hat free of charge to any customer that purchases a certain number of gallons of gasoline (i.e., a nontaxable item). The price of the gasoline does not vary depending on whether the hat is included in the transaction. The receipt given by Retailer A to the customer indicates the sales price of the gasoline but does not mention the hat at all. Since Retailer A is giving a hat at no charge to any customer that purchases the required number of gallons of gasoline, Retailer A is the consumer of these hats, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the hats.
Example 2: Taxable Item Given Away with Required Purchase of a Different Taxable Item - Retailer B provides a bicycle free of charge to every customer that purchases a new couch. The price of the couch does not vary depending on whether the bicycle is included in the transaction. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.
Example 3: Retailer Advertises that a Taxable Item is Included with the Purchase of a Different Taxable Item - Same as Example 2, except that Retailer B advertises that the bicycle is included with the purchase of the couch. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.
Example 4: Taxable Item Given Away with Required Purchase of Both Taxable and Nontaxable Items - Retailer C provides a soft drink free of charge to every customer that purchases $20 worth of products. The sales prices of the products in the required purchase do not vary depending on whether the soft drink is included in the transaction and the products that are purchased by the customer may or may not be subject to Wisconsin sales or use tax. The receipt given by Retailer C to the customer indicates that the soft drink is given to the customer for no charge. Since Retailer C is providing a soft drink free of charge to every customer that purchases $20 worth of products, Retailer C is the consumer of the soft drinks it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of these soft drinks.
Example 5: Retailer Advertises “Two for the Price of One;” Second Item Provided Free - Retailer D has a promotion in which it advertises that a customer may buy two candy bars for the price of one. A customer may buy one candy bar for $1.00 and receive a second candy bar at no additional charge. If the customer wants only one candy bar, the customer will still have to pay $1.00. The receipt given by Retailer D to the customer indicates that the second candy bar is given to the customer for no charge. Since Retailer D is providing a candy bar free of charge to every customer that buys a candy bar, Retailer D is the consumer of the candy bars that it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of these candy bars.
Example 6: Retailer Advertises “Two for the Price of One;” Retailer Charges for Second Item - Retailer E has a promotion in which it advertises that a customer may buy two candy bars for the price of one. If a customer buys a candy bar at the regular price of $1.00, the customer may receive a second candy bar free of charge. However, if a customer buys only one candy bar, the price of the candy bar is $0.79. The receipt given by Retailer E to the customer indicates a sales price of $0.79 for the first candy bar and a sales price of $0.21 for the second candy bar. Since a customer must pay an additional amount to receive the second candy bar, the second candy bar is not given away for free. Section 77.52(21), Wis. Stats., does not apply and Retailer D may purchase the candy bars that it provides to its customers in this promotion without tax for resale.
Example 7: Retailer Advertises “Buy One, Get One Free;” Discount Applied to Total Sales Price - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount (i.e., 50% discount) applied against the $60 total sales price for the two shirts. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied against the total $60 amount, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 8: Retailer Advertises “Buy One, Get One Free;” Discount Applied Equally to Both Items - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, a $15 discount (i.e., 50% discount) applied to the sales price of the first shirt and a $15 discount (i.e., 50% discount) applied to the sales price of the second shirt. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied equally against the sales prices of both shirts, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 9: Retailer Advertises “Buy One, Get One Free;” Discount Applied to One Item - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount applied against the sales price of the second shirt. Since the receipt given by Retailer F to the customer reduces the sales price of the second shirt to zero, Retailer F is the consumer of the second shirt, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the second shirt.
Example 10: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied to Total Sales Price - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount (i.e., 50% discount) applied against the $60 total sales price for the two shirts. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied against the total $60 amount, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 11: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied Equally to Both Items - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, a $15 discount (i.e., 50% discount) applied to the sales price of the first shirt and a $15 discount (i.e., 50% discount) applied to the sales price of the second shirt. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied equally against the sales prices of both shirts, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 12: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied to One Item - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount applied against the sales price of the second shirt. Since the receipt given by Retailer F to the customer reduces the sales price of the second shirt to zero, Retailer F is the consumer of the second shirt, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the second shirt.
Example 13: Retailer Advertises “Buy One, Get One for a Penny” - Retailer F has a promotion in which it advertises that a customer may buy one shirt that has a regular price of $30 and receive a second shirt for a penny. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt and a sales price of $0.01 for the second shirt. Since a customer must pay an additional amount to receive the second shirt, the second shirt is not given away for free. Section 77.52(21), Wis. Stats., does not apply and Retailer F may purchase the shirts that it sells to its customers in this promotion without tax for resale.
Example 14: “Buy One, Get One Free;” Retailer Receives Reimbursement from Manufacturer - Battery Manufacturer G offers a promotion to Retailer H in which Retailer H will receive $1.00 for every package of batteries it gives away free in a buy one, get one free promotion. The receipt given by Retailer H to its customer indicates that one of the packages of batteries is given to the customer for no charge. None of the conditions in sec. 77.51(15b)(c)4.a. to c., Wis. Stats., apply to the sale of the batteries by Retailer H to its customer:
Retailer H's customer does not present a coupon, certificate, or other documentation to Retailer H to receive the free package of batteries,
Retailer H's customer does not represent himself or herself to Retailer H as a member of a group or organization that may receive the free package of batteries, and
Retailer H does not provide an invoice to its customer, and its customer does not present a coupon, certificate, or other documentation to Retailer H, that identifies the price reduction or discount as a 3rd-party price reduction or discount.
Retailer H must pay sales or use tax on its purchase of the package of batteries that it gives to its customer, based on its initial purchase price of the package of batteries less the $1.00 reimbursement from Battery Manufacturer G.
Example 15: Restaurant Advertises “Buy One Meal, Get Second Meal Free” - Restaurant I runs a promotion in which a customer may buy one meal and receive a second meal free. No additional charge is made for the second meal, and the price of the first meal does not vary if the second meal is received. The receipt given by Restaurant I to the customer indicates that the second meal is given to the customer for no charge. Restaurant I buys the ingredients for the meals and prepares the meals itself. Since Restaurant I is providing a meal free of charge to customers that buy a meal, Restaurant I is the consumer of the ingredients it uses to prepare the meals it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats. Most of the ingredients Restaurant I purchases to prepare the meals qualify for the exemption for food and food ingredients, and Restaurant I does not owe sales or use tax on its purchases of these items. However, to the extent that Restaurant I buys taxable items, and gives them to customers as a part of the meals it gives away for free, Restaurant I owes sales or use tax on its purchases of those taxable items. Examples of ingredients Restaurant I may buy without tax include meats, vegetables, bread, milk, and fruit. Examples of taxable purchases by Restaurant I include soft drinks, alcoholic beverages, and candy that are given away to customers as a part of the free meals.
Example 16: Restaurant Advertises “Buy One Meal, Get Second Meal Free;” Buys Meals from Caterer - Same as Example 9, except that Restaurant I does not prepare the meals that it gives away for free. Instead, Restaurant I buys these meals from Caterer J. The meals, as Restaurant I purchases them from Caterer J, are “prepared food” because they are heated. Restaurant I owes sales or use tax on its purchases of the meals that it provides to its customers for free.
Example 17: Retailer Advertises Fourth Tire Free with Purchase of Three Other Tires - Retailer K operates an automotive repair facility. Retailer K offers a promotion in which a customer is provided a free tire if the customer purchases three other tires. If the customer does not want the free tire, the price of the other three tires does not change. The receipt given by Retailer K to the customer indicates that the fourth tire is given to the customer for no charge. Retailer K is the consumer of the tires that it provides to customers for free, as provided in sec. 77.51 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such tires.
Example 18: Retailer Offers 11th Oil Change Free - Retailer L operates an automotive oil change shop. After purchasing ten oil changes, Retailer L's customers may receive the 11th oil change free. Retailer L is the consumer of the oil and oil filters that it provides to customers for free, as provided in sec. 77.51 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such oil and oil filters.
Example 19: Dealer Provides Free Loaner Car with Repair Service - Motor Vehicle Dealer M takes a vehicle out of its inventory and provides it free to customers who are having repair services performed on their vehicles. Motor Vehicle Dealer M does not owe use tax on its purchase of the vehicle that it took out of inventory and used as a loaner vehicle, assuming that this is the only use that Motor Vehicle Dealer M makes of the loaner vehicle, other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of its business. The repair service that Motor Vehicle Dealer M is performing on its customers' vehicles is a service that is identified in sec. 77.52(2)(a)10., Wis. Stats. Thus, sec. 77.52(2m)(b), Wis. Stats., allows Motor Vehicle Dealer M to purchase the loaner vehicle without tax for resale, since it is considered to be sold separately from the selling, performing, or furnishing of the repair service.
Note: If Motor Vehicle Dealer M uses the vehicle that it removes from inventory for any other purpose (other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of its business), such as picking up and dropping off customers, running for parts, etc., its purchase price of the vehicle is subject to tax.
Example 20: Retailer Offers Free Taxable Products When Customer Redeems Points; Points Received for Buying Nontaxable Services - Retailer N operates a hair salon. Retailer N's customers may accumulate points by purchasing various services and hair products. Retailer N offers customers free bottles of shampoo and conditioner after accumulating a specified number of points. The receipt given by Retailer N to the customer indicates that the bottles of shampoo and conditioner are given to the customer for no charge. Retailer N is the consumer of the shampoo and conditioner that it provides to customers for free, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such shampoo and conditioner.
When A Penny Charged is Worth Two Dollars In The Bush
I don’t think Yogi Berra ever said “a penny charged is worth two dollars in the bush”, but he might have. But I doubt even Yogi’s craziest statements could match the twisted logic used by the Wisconsin DOR in its recent Release.
The Release details the DOR’s position on how sales and use tax applies in various “buy one, get one free” scenarios. To say that it their position is Yogi-like would be to ignore or down-play just how costly it could be for the unwary seller in WI. One thing is certain though, if you are a seller in Wisconsin, you may want to seriously consider charging people for free stuff you give them. A penny charged now could save you many dollars later on.
Where were you on December 14, 2010? Of course you don’t know. Most regular folks were in the middle of the “holidays” during that time period. Going to company parties, shopping for last minute gifts, etc. Most folks were probably not putting their full attention on releases issued by the various taxing jurisdictions. But Peisner Johnson was keeping watch. The Wisconsin Department of Revenue issued a Tax Release on December 14, 2010, that could cost your company a lot of money if you’re not careful.
Do You Use “Buy One, Get One Free” Promotions?
How about buy two get one half off? How about come in for 10 lunches (oil changes, haircuts, palm readings, etc.) and the 11th is free or some such? If you do use these types of promotion, then this article is going to save you big money and headaches at least in Wisconsin.
It’s All About The Invoice
The Wisconsin DOR says: The sales and use tax treatment of buy one, get one free and similar promotions is determined by the invoice or receipt provided by the seller to the customer. If the invoice or receipt provided by the seller to the customer indicates that a second item is provided free to the customer when the customer buys the first item, then the seller is the consumer of the second item and is required to pay Wisconsin sales or use tax on its purchase of this item.
That defies most people’s logic. Wisconsin says that if you sell a shirt for $30 and give another shirt away for free, then you owe the tax on the free one. Then, what if you sell both shirts for $15? In substance, this is the same as selling one for $30 and the other for $0. But in the case where you sell each for $15, you charge tax on the $30 and owe no tax yourself. If you sell one for $30 and give one away free, you collect tax on the $30 and pay tax yourself on the cost of the other. Crazy, eh?
Query: Isn’t this purely form over substance? Answer: Yes. Query: How can states get away with this? Answer: To quote Yogi Berra: “I wish I had an answer to that because I'm tired of answering that question.” Actually, I do have an [admittedly somewhat weak] answer to this question. Sales and use tax is a transaction tax. It usually taxes discrete transactions that stand on their own. The transactions are usually represented by invoices. How the transactions are presented on the face of the invoice is usually critical. So, yes, almost always, sales/use tax is form over substance. The form or presentation controls the taxation. This can be deeply troubling to accountants who are trained to give weight to substance over form. It’s troubling to any logical person for that matter. But to paraphrase Yogi, sales tax is 90% mental and the other half is physical.
So what is Wisconsin trying to do to us? I think this is all about setting companies up to be caught on audit. Note that even if you show on the invoice a charge for both $30 shirts but then show a discount on one of the shirts such that the charge for one of the shirts ends up to be $0, you still owe the tax. So this is form over substance and then substance over form all on the same invoice. But, if you show both shirts on the invoice for $30 each and then give a $30 discount equally applied to both shirts such that the actual selling price is $15 per shirt, then you’re good. This is when you need Yogi Berra to lend his analysis.
Buy One, Get One For A Penny
Don’t despair, it’s not over til it’s over.
When I first read about this release in CCH, I asked myself, why don’t these companies sell the other “free” item for a penny? Since this is all about the form of the transaction, could a company “sell” that other item for a penny and then they wouldn’t owe any use tax on the cost of the item? This would seem to meet the technical requirements. But, would WI come back to a “substance” argument at that point and call it a sham? CCH’s paragraph explanation didn’t address this idea. But, I found it in the actual release in one of the many examples they gave. I will give you all the examples the WI DOR gave in its release, you may find one or two that apply on point to your situation..
What About Other States?
Good question, other states have their own rules as to whether sellers must charge tax on cash discounts given at the time of the transaction (yes, some states do tax those) or cash discounts if the invoice is paid in a certain time (like 2% discount if paid in 10 days), and whether tax is owed on the original sales price before a price reduction for coupons issued by the merchant and/or manufacturer, and how to treat rebates. Every state has their unique rules.
For example, in Texas a similar (but different:) issue arises in connection with the annual tax holidays. Stores like to run sales in connection with sales tax holidays. Shoe stores frequently offer the “buy one pair of shoes, get the next pair at 50% off”. Well, if you find two pairs you like that both sell for $120, then the first pair will cost $120 and the next one will cost $60. So you get two pairs for $180. Depending on how you invoice those shoes is how they are taxed to the consumer. If one pair stays at $120 on the invoice, it will be taxed because the exemption is for articles costing less than $100. If the discount applies to both items and the invoice shows each pair for $90, then neither of them is taxed since they both come under the $100 threshold. Of course, in no case, does the seller owe use tax on either pair if they end up giving one away free. But, that’s Texas, and this article is all about Wisconsin, so we limit our discussion accordingly. Just understand every state has their own peculiarities and of course, we’re here to help you get a handle on the other states too.
Read On -- The Key Is In the Details
Here are the examples given in the Release. Example 13 is the one that confirms that you can charge a penny for the second item and avoid the use tax on that item. One penny is all it takes. How many people will see this and take advantage of this?
Note that this Release addresses a law change that was effective back in October, 2009. Presumably, this treatment applies to sales made back to that date. But you can fix things going forward and hope for the best on audit. I guarantee this is an issue WI auditors will be looking for in their audits of sellers.
Examples:
The following examples illustrate this change. ( Note: In all of the following examples, the retailer's purchases and sales are made on or after October 1, 2009.)
Example 1: Taxable Item Given Away with Required Purchase of Nontaxable Item - Retailer A provides a hat free of charge to any customer that purchases a certain number of gallons of gasoline (i.e., a nontaxable item). The price of the gasoline does not vary depending on whether the hat is included in the transaction. The receipt given by Retailer A to the customer indicates the sales price of the gasoline but does not mention the hat at all. Since Retailer A is giving a hat at no charge to any customer that purchases the required number of gallons of gasoline, Retailer A is the consumer of these hats, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the hats.
Example 2: Taxable Item Given Away with Required Purchase of a Different Taxable Item - Retailer B provides a bicycle free of charge to every customer that purchases a new couch. The price of the couch does not vary depending on whether the bicycle is included in the transaction. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.
Example 3: Retailer Advertises that a Taxable Item is Included with the Purchase of a Different Taxable Item - Same as Example 2, except that Retailer B advertises that the bicycle is included with the purchase of the couch. The receipt given by Retailer B to the customer indicates that the bicycle is given to the customer for no charge. Since Retailer B is providing a bicycle free of charge to every customer that purchases a couch, Retailer B is the consumer of these bicycles, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the bicycles.
Example 4: Taxable Item Given Away with Required Purchase of Both Taxable and Nontaxable Items - Retailer C provides a soft drink free of charge to every customer that purchases $20 worth of products. The sales prices of the products in the required purchase do not vary depending on whether the soft drink is included in the transaction and the products that are purchased by the customer may or may not be subject to Wisconsin sales or use tax. The receipt given by Retailer C to the customer indicates that the soft drink is given to the customer for no charge. Since Retailer C is providing a soft drink free of charge to every customer that purchases $20 worth of products, Retailer C is the consumer of the soft drinks it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of these soft drinks.
Example 5: Retailer Advertises “Two for the Price of One;” Second Item Provided Free - Retailer D has a promotion in which it advertises that a customer may buy two candy bars for the price of one. A customer may buy one candy bar for $1.00 and receive a second candy bar at no additional charge. If the customer wants only one candy bar, the customer will still have to pay $1.00. The receipt given by Retailer D to the customer indicates that the second candy bar is given to the customer for no charge. Since Retailer D is providing a candy bar free of charge to every customer that buys a candy bar, Retailer D is the consumer of the candy bars that it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of these candy bars.
Example 6: Retailer Advertises “Two for the Price of One;” Retailer Charges for Second Item - Retailer E has a promotion in which it advertises that a customer may buy two candy bars for the price of one. If a customer buys a candy bar at the regular price of $1.00, the customer may receive a second candy bar free of charge. However, if a customer buys only one candy bar, the price of the candy bar is $0.79. The receipt given by Retailer E to the customer indicates a sales price of $0.79 for the first candy bar and a sales price of $0.21 for the second candy bar. Since a customer must pay an additional amount to receive the second candy bar, the second candy bar is not given away for free. Section 77.52(21), Wis. Stats., does not apply and Retailer D may purchase the candy bars that it provides to its customers in this promotion without tax for resale.
Example 7: Retailer Advertises “Buy One, Get One Free;” Discount Applied to Total Sales Price - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount (i.e., 50% discount) applied against the $60 total sales price for the two shirts. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied against the total $60 amount, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 8: Retailer Advertises “Buy One, Get One Free;” Discount Applied Equally to Both Items - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, a $15 discount (i.e., 50% discount) applied to the sales price of the first shirt and a $15 discount (i.e., 50% discount) applied to the sales price of the second shirt. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied equally against the sales prices of both shirts, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 9: Retailer Advertises “Buy One, Get One Free;” Discount Applied to One Item - Retailer F has a promotion in which it advertises that a customer may buy one shirt at the regular price of $30, and receive the second shirt free. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount applied against the sales price of the second shirt. Since the receipt given by Retailer F to the customer reduces the sales price of the second shirt to zero, Retailer F is the consumer of the second shirt, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the second shirt.
Example 10: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied to Total Sales Price - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount (i.e., 50% discount) applied against the $60 total sales price for the two shirts. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied against the total $60 amount, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 11: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied Equally to Both Items - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, a $15 discount (i.e., 50% discount) applied to the sales price of the first shirt and a $15 discount (i.e., 50% discount) applied to the sales price of the second shirt. Since the receipt given by Retailer F to the customer indicates a $30 selling price for each shirt, and the discount does not reduce the sales price of either shirt to zero, but instead is applied equally against the sales prices of both shirts, sec. 77.52(21), Wis. Stats., does not apply and Retailer F may purchase both shirts without tax for resale.
Example 12: Retailer Advertises “Buy Two, Get Half Off;” Discount Applied to One Item - Retailer F has a promotion in which it advertises that a customer may buy two shirts that have a regular price of $30 each, and receive half off the total sales price of the two shirts. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt, a sales price of $30 for the second shirt, and a $30 discount applied against the sales price of the second shirt. Since the receipt given by Retailer F to the customer reduces the sales price of the second shirt to zero, Retailer F is the consumer of the second shirt, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of the second shirt.
Example 13: Retailer Advertises “Buy One, Get One for a Penny” - Retailer F has a promotion in which it advertises that a customer may buy one shirt that has a regular price of $30 and receive a second shirt for a penny. The receipt given by Retailer F to the customer indicates a sales price of $30 for the first shirt and a sales price of $0.01 for the second shirt. Since a customer must pay an additional amount to receive the second shirt, the second shirt is not given away for free. Section 77.52(21), Wis. Stats., does not apply and Retailer F may purchase the shirts that it sells to its customers in this promotion without tax for resale.
Example 14: “Buy One, Get One Free;” Retailer Receives Reimbursement from Manufacturer - Battery Manufacturer G offers a promotion to Retailer H in which Retailer H will receive $1.00 for every package of batteries it gives away free in a buy one, get one free promotion. The receipt given by Retailer H to its customer indicates that one of the packages of batteries is given to the customer for no charge. None of the conditions in sec. 77.51(15b)(c)4.a. to c., Wis. Stats., apply to the sale of the batteries by Retailer H to its customer:
Retailer H's customer does not present a coupon, certificate, or other documentation to Retailer H to receive the free package of batteries,
Retailer H's customer does not represent himself or herself to Retailer H as a member of a group or organization that may receive the free package of batteries, and
Retailer H does not provide an invoice to its customer, and its customer does not present a coupon, certificate, or other documentation to Retailer H, that identifies the price reduction or discount as a 3rd-party price reduction or discount.
Retailer H must pay sales or use tax on its purchase of the package of batteries that it gives to its customer, based on its initial purchase price of the package of batteries less the $1.00 reimbursement from Battery Manufacturer G.
Example 15: Restaurant Advertises “Buy One Meal, Get Second Meal Free” - Restaurant I runs a promotion in which a customer may buy one meal and receive a second meal free. No additional charge is made for the second meal, and the price of the first meal does not vary if the second meal is received. The receipt given by Restaurant I to the customer indicates that the second meal is given to the customer for no charge. Restaurant I buys the ingredients for the meals and prepares the meals itself. Since Restaurant I is providing a meal free of charge to customers that buy a meal, Restaurant I is the consumer of the ingredients it uses to prepare the meals it provides free of charge, as provided in sec. 77.52 (21), Wis. Stats. Most of the ingredients Restaurant I purchases to prepare the meals qualify for the exemption for food and food ingredients, and Restaurant I does not owe sales or use tax on its purchases of these items. However, to the extent that Restaurant I buys taxable items, and gives them to customers as a part of the meals it gives away for free, Restaurant I owes sales or use tax on its purchases of those taxable items. Examples of ingredients Restaurant I may buy without tax include meats, vegetables, bread, milk, and fruit. Examples of taxable purchases by Restaurant I include soft drinks, alcoholic beverages, and candy that are given away to customers as a part of the free meals.
Example 16: Restaurant Advertises “Buy One Meal, Get Second Meal Free;” Buys Meals from Caterer - Same as Example 9, except that Restaurant I does not prepare the meals that it gives away for free. Instead, Restaurant I buys these meals from Caterer J. The meals, as Restaurant I purchases them from Caterer J, are “prepared food” because they are heated. Restaurant I owes sales or use tax on its purchases of the meals that it provides to its customers for free.
Example 17: Retailer Advertises Fourth Tire Free with Purchase of Three Other Tires - Retailer K operates an automotive repair facility. Retailer K offers a promotion in which a customer is provided a free tire if the customer purchases three other tires. If the customer does not want the free tire, the price of the other three tires does not change. The receipt given by Retailer K to the customer indicates that the fourth tire is given to the customer for no charge. Retailer K is the consumer of the tires that it provides to customers for free, as provided in sec. 77.51 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such tires.
Example 18: Retailer Offers 11th Oil Change Free - Retailer L operates an automotive oil change shop. After purchasing ten oil changes, Retailer L's customers may receive the 11th oil change free. Retailer L is the consumer of the oil and oil filters that it provides to customers for free, as provided in sec. 77.51 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such oil and oil filters.
Example 19: Dealer Provides Free Loaner Car with Repair Service - Motor Vehicle Dealer M takes a vehicle out of its inventory and provides it free to customers who are having repair services performed on their vehicles. Motor Vehicle Dealer M does not owe use tax on its purchase of the vehicle that it took out of inventory and used as a loaner vehicle, assuming that this is the only use that Motor Vehicle Dealer M makes of the loaner vehicle, other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of its business. The repair service that Motor Vehicle Dealer M is performing on its customers' vehicles is a service that is identified in sec. 77.52(2)(a)10., Wis. Stats. Thus, sec. 77.52(2m)(b), Wis. Stats., allows Motor Vehicle Dealer M to purchase the loaner vehicle without tax for resale, since it is considered to be sold separately from the selling, performing, or furnishing of the repair service.
Note: If Motor Vehicle Dealer M uses the vehicle that it removes from inventory for any other purpose (other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of its business), such as picking up and dropping off customers, running for parts, etc., its purchase price of the vehicle is subject to tax.
Example 20: Retailer Offers Free Taxable Products When Customer Redeems Points; Points Received for Buying Nontaxable Services - Retailer N operates a hair salon. Retailer N's customers may accumulate points by purchasing various services and hair products. Retailer N offers customers free bottles of shampoo and conditioner after accumulating a specified number of points. The receipt given by Retailer N to the customer indicates that the bottles of shampoo and conditioner are given to the customer for no charge. Retailer N is the consumer of the shampoo and conditioner that it provides to customers for free, as provided in sec. 77.52 (21), Wis. Stats., and is required to pay Wisconsin sales or use tax on its purchases of such shampoo and conditioner.
Friday, October 1, 2010
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.
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.
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