If You Call It Sales Tax, You Must Remit

There was a recent case in WA that illustrates an important concept in sales tax. That is, once you have nexus in a state, they can force you to be their agent tax collector. As their agent, you collect taxes in trust, and bear the burden of those taxes until they are remitted. In this case, the retailer sold nontaxable services and claimed they meant to charge "handling fees". Instead, they labeld the charges as "taxes". Washington audited them and set up the sales as taxable. I say "claimed" because of the following as reported by CCH.

 

"Under an objective interpretation of the invoice, it was determined that the taxpayer was collecting sales taxes in the name of the state and, therefore, these amounts were held in trust and had to be remitted. The word "tax" was written below the subtotal for services, and this amount used the same rate as the sales tax. Any amount charged and collected as a tax must be remitted to the state."

 

It seems far-fetched indeed to say, under these circumstances, that this was a "handling" charge.

 

There is relief for the customers who actually paid this tax. The taxpayer's customers have the ability to claim a refund of the incorrectly collected sales taxes remitted by the taxpayer. Fortunately, for this retailer, the DOR did not charge the fraud penalty.

 

We have a copy of this case and can send it to you if you would like.

 

Spend $800,000 and Get $40Million Back From New York

New York has some interesting programs to be sure. I found this fascinating article in the Albany Business Journal Online that tells of the "Brownfield Program" that awards tax credits to companies that clean up and develop hazardous sites. Sounds like a worthwhile endeavor. It has been proven true that when the government tries to encourage behavior with tax credits, behaviors definitely are encouraged. The problem is that the behavior they hoped to increase, isn't always the one that increases. This article points out one extreme (I assume) example of this. And I quote:

 

"The brownfield program, created in 2003, awards tax credits for companies to clean and develop hazardous sites... For example, the report cites work on a former BASF site in Rensselaer, where Empire Generating Co. has spent about $800,000 cleaning up 34 acres. The report says the developers are scheduled to receive $40.1 million in state tax credits.

"Because tax breaks are based on redevelopment value, rather than cleanup cost, sites with the least contamination and the highest redeveloped value get cleaned up," the report said, "and contaminated sites that would most benefit from redevelopment are left dirty and undeveloped."

Not surpisingly, Governor Spitzer is aghast. "This program has proven to be unsustainable," Spitzer is quoted as saying in the article. "In many cases, millions of dollars in development tax credits are provided to projects with minimal remediation expenses, counter to the intent of this program."

Spend $800,000 and get back $40Million. Wow. 

Class Action Suit Possible Avoidance Tactic

CCH reported on a case involving a mobile phone company has asked the U.S. Supreme Court whether a class action may proceed alleging that the company violated California law by charging sales tax on the full retail value of discounted wireless telephones. The action was filed by a consumer who purchased a phone from the company and entered into a written agreement to resolve disputes through individual arbitration. Despite the arbitration agreement, the consumer subsequently filed a suit in state court on behalf of herself and all similarly situated California consumers. The action was removed to federal court. The federal district court refused the company's motion to compel arbitration and the U.S. Court of Appeals for the Ninth Circuit affirmed. The appellate court held that precedent compelled a finding that the arbitration agreement was unconscionable under California law and that state law is not preempted by the Federal Arbitration Act (FAA), 9 U.S.C. §§1-16.

 

It would be a good thing, IMHO, if having consumers sign agreements to resove disputes through arbitration, will prevent this class-action lawsuit abuse. Unfortunately, it appears that the arbitration clause will fail because CA says it's unconscionable. For our client's sake, I hope the Supreme's take this case and compel the abitration. This will be interesting to watch.

You May Qualify for R&D Exemption in MA

CCH alerted us to a revised exemption in MA, that you may qualify to recieve -- check it out. Certain types of corporations can purchase TPP used directly and exclusively for research and development. Before you give up on this as a possible benefit for your company read on. 

 

The new regulation issued by the MA DOR, 830 CMR 64H.6.4, provides a more detailed explanation of the requirements for an entity to qualify for the exemption. The exemption applies to a research and development corporation or a statutorily defined manufacturing corporation.

 

Corporation requirements

To qualify as a research and development corporation, an entity must meet the following four requirements:

(1) it must be either a domestic or foreign corporation;

(2) it must be engaged in research and development in the Commonwealth;

(3) its principal activity in Massachusetts must be research and development; and

(4) it must meet either a receipts test or an expenditures test.

 

So what constitutes "research and development"?

The definition of "research and development" has been amended to include a statement indicating that research and development are complete when the product, process, technique, formula, invention, or software can be readily reproduced for sale or commercial use.

 

What about this "Principal Activity" wording?

 

"Principal activity" means the predominant activity of a corporation in Massachusetts relative to its other activities in Massachusetts. The determination of a corporation's principal activity is based on the facts and circumstances surrounding the corporation's operations. An entity having a majority of its Massachusetts-based employees engaged in research and development will be presumed to meet this requirement.

 

Note that the test is whether the MA activity is predominantly R&D relative to other activities in MA, not relative to other activities everywhere. This is a big key.

 

What is the "Receipts Test"?

To qualify under the receipts test, more than two-thirds of a corporation's Massachusetts receipts must be derived from research and development during the taxable year. For the computation, the numerator is the gross receipts from research and development performed in Massachusetts and the denominator is the gross receipts from all activities in Massachusetts.

What is the "Expenditures Test"?

To qualify under the expenditures test, more than two-thirds of a corporation's Massachusetts expenditures must be allocable to its research and development activities during the taxable year. For this computation, the numerator is the corporation's total Massachusetts expenditures that are allocable to research and development activities and the denominator is the corporation's total Massachusetts expenditures. However, neither the numerator nor denominator includes the corporation's manufacturing expenses or administrative expenditures.

Annual determination

The determination of whether an entity qualifies as an eligible research and development corporation or manufacturing corporation must be made on an annual basis for the applicable taxable year. A corporation that was not in existence in the previous year may utilize current information and reasonable projections of its business activity for its first year. In calculating an entity's receipts or expenditures, a taxpayer must use the same taxable year and method of accounting used for federal income tax purposes.

 

 

For a corporation qualifying as a research and development corporation by virtue of meeting the expenditures test, the sales tax exemptions apply only to purchases made after Nov. 25, 2003.

IL Passes Exemption for Manufacturers

CCH reported this morning that IL has passed a budget bill that contained a temporary exemption for certain equipment. Here's the report from CCH:

 

"Production-related property

"For purposes of the manufacturing and assembly exemption from retailers' occupation (sales) and use tax, the term "production-related tangible personal property" means all tangible personal property that is used or consumed by the purchaser in a manufacturing facility in which a manufacturing process takes place.

"The term includes tangible personal property that is purchased for incorporation into real estate within a manufacturing facility and tangible personal property that is used or consumed in activities such as research and development, preproduction material handling, receiving, quality control, inventory control, storage, staging, and packaging for shipping and transportation purposes.

"Production-related tangible personal property" does not include (1) tangible personal property that is used, within or without a manufacturing facility, in sales, purchasing, accounting, fiscal management, marketing, personnel recruitment or selection, or landscaping, or (2) tangible personal property that is required to be titled or registered with a department, agency, or unit of federal, state, or local government.

"The manufacturing and assembling machinery and equipment exemption includes production-related tangible personal property that is purchased on or after July 1, 2007, and on or before June 30, 2008."

Back to School Tax Holiday in Tennessee -- in March?

Tennessee is having a "special", "one-time only" sales tax holiday in March. Tennessee's special, one-time sales tax holiday will run from Friday, March 21, 2008, at 12:01 a.m., through Sunday, March 23, 2008, at 11:59 p.m. During the tax holiday, the following items are exempt from sales and use tax: (1) clothing with a price of $100 or less per item; (2) school and art supplies with a price of $100 or less per item; and (3) computers with a price of $1,500 or less.

 

Big Note: None of these items are exempt if for use in a trade or business.

 

Click here for link to TN website