Sales Tax in the News

Don’t Shoot the Messenger; They Might Just Save Your Business

2012-01-24T16:06:00.000-06:00

Last year we released a short video highlighting a situation we refer to as “the biggest tragedy in sales tax.” Essentially a business which has a tax obligation, or “nexus”, to a state fails to collect sales tax from customers at the time of purchase and is audited. The state assesses the business for the tax, plus heavy penalty and interest charges. What once would have been willingly collected from paying customers now comes directly out of the company’s pocket. And sadly, the penalty and interest charges from these audits can balloon even relatively small assessments into business crippling amounts. Such was the case in the state of Washington just recently.

You Can’t Hide it under the Mattress

Up until late 2009, Mattress World, a seven store mattress retailer based out of Portland, Oregon operated without complaint. Though business hadn’t been booming in recent years, owner Sherri Hiner was “anticipat[ing] opening new stores.” That’s when the WA Department of Revenue appeared. Asserting that Mattress World qualified as a WA business, the DOR audited and assessed the company to the tune of $2 Million in unpaid sales taxes, penalties and interest dating back to 2002. And now after two years of struggling to stay ahead of the payments to the state, and increasing legal and other expenses, Mattress World has decided to close its doors.

It’s hard to blame Hiner for the disaster. Sales tax nexus is not a well understood concept. Outside the small contingent of professionals who deal with sales taxes each day, most of the public, including many very savvy business professionals, don’t understand how it works. In Hiner’s case, she did have a number of things on her side. Mattress World did not operate any stores in WA, and as Hiner explained, they “used third-party delivery services to transport bed sets north of the border during the period covered by the audit.” But as WA DOR representative Mike Gowrylow explained, “Because Mattress World delivers products [to WA], it must still pay sales and other applicable taxes.”

Can They Do That?

Let’s take a step back and figure out why Mattress World found itself in this position. The term nexus has been floating around the sales tax world since the US Supreme Court first used it in 1968, and has been the primary argument by which states make decisions on which businesses they tax and do not tax. The arguments surrounding nexus center around essentially two clauses of the Constitution—the Due Process Clause, and the Commerce Clause. The Supreme Court’s rulings about nexus mainly follow the Commerce (or Interstate Commerce) Clause of the Constitution. They have stressed the real power to regulate commerce lies with Congress. However absent congressional action, the Court has upheld the idea that there should be no barriers, or at least very few to interstate commerce.

This means that in order for a state to be justified in levying a tax on a business, it must first show that the tax does not create a barrier to interstate commerce. This requirement provides that some minimum connection must exist between the business and the state that seeks to tax it. And current sales tax nexus law dictates there must be some kind of significant physical presence, whether it be a brick and mortar store, an employee, third party agent or affiliate, etc.

Now back to our story. In this case, it is not clear where or how WA found nexus with Mattress World. Since we don’t have all the details it would at best be speculation to guess. What we can say is that with as complex as nexus law has become, and with states asserting nexus more aggressively than ever, it doesn’t surprise us too much that Mattress World found itself in such hot water. At our last count, WA state employed over 200 full-time sales tax auditors, whose express purpose was to find and audit companies in these situations.

You Can Avoid This

Probably the most unfortunate circumstance in this situation is that the entire problem was preventable. As we mentioned before, we feel the biggest tragedy in sales tax is a situation where a company fails to collect tax or obtain an exemption or resale certificate (no matter the reason) at the time of purchase. We always caution our clients and really anyone who will listen, to be proactive, or conservative in the collection of sales taxes. Whether or not they follow our counsel is another story. But if you sell something taxable, and you aren’t sure if you have nexus, you will almost always be better off simply collecting the tax, so you can avoid the painful, and sometimes business sinking assessments down the road.

In A Stunning About-Face: Amazon Says It Will Start Collecting Sales Tax Everywhere -- For Their Affiliates. Why This is Such a Big Deal.

2011-11-18T16:34:00.002-06:00

Many Internet-only retailers do not collect sales tax on their sales except in a few states where they have a physical presence or nexus. Amazon.com may be the largest of them all and certainly must be the most well-known, but by no means are they the only ones. There are many online sellers large and small who do not collect sales tax everywhere they ship product. Internet sellers have generally followed Amazon’s lead and taken the position that since they don’t have physical presence, they don’t have “substantial nexus” and therefore states can’t force them to be tax collectors. States have struck back with a variety of so-called “amazon laws” attempting to assert that these online sellers do in fact have at least a type of physical presence through so-called “click-through affiliates” and other agents in the state.

Online-only sellers usually collect tax in just a few states. This contrasts sharply with traditional retailers that have “brick-and-mortar” stores. These traditional retailers who also make substantial sales online (see walmart.com, bestbuy.com, etc.), almost universally collect taxes on their online sales. And with an estimated $170 billion dollars in online retail sales in 2010 according to the National Retail Federation, It’s become a huge issue. It’s a big deal for states starving for revenues and for small/local as well as large/international companies who may or may not be collecting tax on online sales.

Not collecting tax has made Amazon a target of state revenue departments and their traditional retail competitors. State revenue departments face a tremendous pressure to stem the tide of falling tax revenue. Brick-and-mortar competitors large and small are also bringing the heat to the politicians. These self-styled “main-street” businesses who do collect tax but face what they feel is the unfairly subsidized competition from online sellers want their legislators to level the playing field. Keep in mind that the prominent online retailers like amazon.com and overstock.com are only the tip of the iceberg. There are many more businesses who sell online but don’t collect taxes in most states. Amazon gets all the attention, but any change in the nexus laws hits all the smaller retailers as well. In fact, it hits them much harder in terms of cost of compliance. Compliance costs are pretty much fixed or not very variable, so the cost of compliance is relatively small for a large online seller and relatively large, even bordering on prohibitive for a smaller online retailer.

What Are The Online Sellers Best Arguments?

If you’ve been following the issue of nexus for online-only retailers, you know that
they make two primary arguments. First, they argue that complying with the sales tax law in all these jurisdictions is just too complicated and administratively burdensome. The other argument is that they don’t receive any governmental services in states where they have no physical presence. Both arguments have been persuasive in the courts. That first argument is in jeopardy and Amazon may be accelerating its demise.

In the past, courts have held that the sheer complexity of complying with the myriad sales tax rates and rules in so many jurisdictions is by itself an unconstitutional impediment to interstate commerce.

National Bellas Hess and Quill

Let’s back up before we move forward. The argument of complexity and administrative burden was a key in two US Supreme Court cases – in National Bellas Hess, and Quill Corporation. First, in 1967 the Supremes ruled in favor of National Bellas Hess and against the Illinois Department of Revenue. Essentially the court explained that Bellas Hess, a mail-order retailer, who had no physical presence in Illinois, could not be made to collect sales taxes there because such a requirement would create an unfair burden on the company. In the court’s words:

The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s inter-state business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose a fair share of the cost of the local government.

Jumping forward to 1992, a situation very similar to Bellas Hess emerged in Quill Corporation v North Dakota. In this case as well as in Bellas Hess, the court upheld that a company must have a physical presence in a state before a tax collection responsibility could be imposed. The court also explained that final authority over the regulation of interstate commerce rested with Congress. In their words, “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.”

Amazon and every other online seller has relied largely on these two cases in justifying not being required to collect sales taxes. Their reliance has been well-placed. These are U.S. Supreme Court cases and since Congress has failed to act in establishing federal laws on sales tax nexus, these cases represent the law of the land. Complying with the sales tax laws in every jurisdiction has been extremely burdensome. Amazon has continued to make that argument even just recently. Consumer Reports quoted Amazon CEO Jeff Bezos as saying, “Our point of view is that we should simplify the sales tax system, and we’ve been insisting on this for 10 years…sales tax is very complicated.” So powerful has been that argument that states have gone to extreme measures to remove it as an issue. In fact, defeat this argument has been a primary reason why many states have banded together and formed the Streamlined Sales Tax Project.

Primary Argument May Be Losing Steam

Amazon has effectively led the charge for all online sellers so far in taking the heat. Their steadfast refusal to collect tax has emboldened many an online seller to do likewise. But now times are a-changing and Amazon appears to be changing direction in dramatic fashion.

Amazon just recently announced their new plan to help their affiliates cope with the complexity of collecting sales tax. Beginning February 1, 2012, Amazon’s new tax collection service will go online and the company will offer to collect and remit their affiliates’ sales taxes for them, all for a mere 2.9% additional fee. In one sense, this is no big deal. It’s typical of Amazon just to continually innovate and improve. They have seen that their affiliates were having difficulties coping with sales tax collection and set about to figure out a way to help them. In fact, Amazon has been doing this already for some time. They’ve actually been collecting tax for certain affiliates in every state for years. So this “new” plan is maybe nothing really new except they are just seeking to make tax collection a profit center.

But in another sense, this announcement of the new service in and of itself just blows the whole cover off the argument that complying with the sales tax is just too complex or administratively burdensome. It’s quite a departure from the Amazon of the past or even the Amazon of just a few months ago that went so far as to ax its California affiliates program and initiate a referendum on the state law requiring online retailers to collect sales tax. The announcement of the tax collecting plan was not missed by their brick-and-mortar competitors nor by state revenue officers.

Jason Brewer, a spokesman for the Retail Industry Leaders Association said, “It’s hypocrisy of the highest order. Now they’re trying to profit from collecting sales tax everywhere else, while still digging in their heels from collecting for their own company (as quoted in the LA Times in an article entitled “Amazon offers to serve as a tax collector - for a price”). In the same article, George Runner, a member of California’s State Board of Equalization, the agency that administers sales tax said simply, “This is what smart business people do. They are going to use whatever model they can to expand their business opportunities. They’re very slick at it.”

What Does All This Mean?

The decision reached in Bellas Hess, and then again reinforced by Quill, provides if a retailer is to be taxed, there must be an established physical connection to the taxing jurisdiction. Only Congress has a right to change that standard. Since Amazon had been such an ardent supporter of these decisions, the recent decision to begin collecting taxes effectively erodes their argument that the system is too complex, and too much of a burden. They have now basically said that not only is the system not too complicated, but it’s simple enough that we’ll do it for all our affiliates and make a profit doing it.

Take away one of the two primary arguments online-only sellers had working in their favor and we can imagine the pendulum swinging in the states’ direction. Online-only sellers will face some costs trying to comply with relaxed nexus standards.

How Difficult/Costly Is Sales Tax Compliance?

Improvements in communications technology and software solutions give taxpayers many options to help them become compliant with state tax law. There are some excellent and surprisingly cost-effective solutions available. In our 20 years of consulting with companies in sales and use tax matters, we have worked with just about every service providers in the sales/use tax automation space and we’re very encouraged at how they can help our clients. We help companies by giving them our honest feedback on solutions we’ve seen.

Pendulum Swinging?

We see this as a big deal. Amazon has been a leader in many respects and certainly in the sales tax world for online-only sellers. They may still be leading the charge, but the direction of the charge appears to have changed dramatically and it may be to the detriment of many smaller online sellers. If smaller online sellers suddenly have to start charging tax everywhere, the cost to them will be significant. Online sellers had some good arguments, and one of their best was that it was excessively burdensome and costly to comply. Amazon is saying it’s not difficult at all to charge and collect sales tax and that may be true, at least for the larger companies like Amazon. But it hurts the prospects for smaller online sellers. Could this be the catalyst for Congress to finally act? The pendulum appears to be swinging in the states’ favor, but only time will tell.

This May Be Ohio’s Most Generous Use Tax Amnesty Plan Ever

2011-09-26T17:26:00.001-05:00

Back in April, we wrote about Ohio Department of Taxation’s (ODT) use tax collection program.

They called their program the Use Tax Education Program. When the government uses the word “education” in a tax collection program title, you better hold on to your wallet! Their interest is not so much in education as it is in income repatriation.

But then almost as soon as the ODT announced their education program it was suspended because the legislature had the temerity to pass their own amnesty bill. The amnesty program would be effective October 1, 2011 so the ODT had to scramble to figure out the details.

The ODT has now announced the details (well some of them) via their website. Keep in mind that what the Legislature giveth, the regulator taketh (or at least attempteth to take) away, so it’s important to review the details of this program. But it does look to be relatively generous.

Keep this in mind too: This amnesty is for use tax on purchases. And it does actually waive some use tax on purchases made before January 1, 2009 that would otherwise be due. But what about sales tax on sales you make? There’s another program for that. Ohio also participates as an associate member of the SSTP and as such is obliged to offer an even MORE generous amnesty program that could waive all the tax you should have collected in OH if you qualify. More on that below after we discuss this new use tax amnesty program.

The following is from the the ODT website with PJCo commentary as noted.

ST 2011-01 - CONSUMER'S USE TAX AMNESTY PROGRAM - ISSUED SEPTEMBER 2011
The consumer's use tax amnesty provisions of H.B. 153 (see uncodified section 757.42) provide an excellent opportunity for taxpayers to satisfy their past consumer's use tax liability. The amnesty program begins October 1, 2011 and ends May 1, 2013.

PJCo: This is an unusually good opportunity as amnesties go (see our article “Are You For or Against Amnesty?”. Because if OH were to find you first, they go back 7 years and assess not only the tax but penalty and interest
.
WHAT CONSUMER'S USE TAX PERIODS SHOULD BE INCLUDED IN MY AMNESTY APPLICATION?
Consumer's use tax due on purchases made on or after January 1, 2009 should be included in your amnesty application. However, if you have been issued an assessment for consumer's use tax due for any period, you are not eligible for amnesty. You can apply for consumer's use tax amnesty only once during the program.

PJCo: Eligibility is key here. You don’t want to apply for amnesty and then realize you’re not eligible. The ODT says you may still be eligible for the VDA program but it is unclear if you would be eligible if you applied for amnesty and then learned you weren’t eligible.

WHAT IF I DON'T QUALIFY FOR CONSUMER'S USE TAX AMNESTY?
Taxpayers who do not qualify for consumer's use tax amnesty may still qualify for ODT's Voluntary Disclosure Program. For more information on voluntary disclosure, please visit ODT's Web site at http://tax.ohio.gov/channels/other/voluntary_disclosure.stm. However, if you qualify for consumer's use tax amnesty, you are not eligible for voluntary disclosure for consumer's use tax.

PJCo: This does not clear things up entirely.

WHAT ARE THE ADVANTAGES OF AMNESTY?
The Tax Commissioner will waive all unasessed use tax liability due for any periods prior to January 1, 2009. Consumer's use tax paid under amnesty is not subject to interest or civil or criminal penalties. However, if you are registered for Ohio use tax as of June 1, 2011, you will be required to pay interest on any under-reported or unreported consumer's use tax.

PJCo: They will waive all “unasessed” use tax liability for periods before 2009. That makes this amnesty pretty generous relatively speaking. Most amnesty programs do not offer to waive tax, just penalty and/or interest.

AM I REQUIRED TO PAY TAX FOR PAST PERIODS?
Yes. You must make a nonrefundable payment of all consumer's use tax due on purchases made on or after January 1, 2009 through the last day of the month preceding the month in which you request amnesty. You will also be required to register for consumer's use tax and may be required to file returns on an ongoing basis. Even if you are not required to file use tax returns on a regular basis, you still must report and pay consumer's use tax on your annual personal income tax return (e.g., Schedule C filers), Form IT1040, or via a Use Tax Voluntary Payment Form VP-Use. Both forms are available on ODT's Web site.

IS THE INFORMATION I SUBMIT UNDER AMNESTY SUBJECT TO REVIEW?
The Tax Commissioner reserves the right to review the documentation provided under amnesty and any other records that support the amnesty submission in order to confirm that the amount of the amnesty payment accurately reflects your consumer's use tax liability.

WHAT HAPPENS IF I APPLY FOR AMNESTY BUT DON'T QUALIFY?
If you apply for amnesty but ODT determines that you don't qualify because of a prior consumer's use tax assessment or prior consumer's use tax amnesty submission, ODT will issue an assessment for the balance of your consumer's use tax liability, plus interest. Any payment submitted with your application will be applied to your consumer's use tax liability. A payment plan is not available to consumers who do not qualify for amnesty.

PJCo: Moral to the story: don’t apply if you’re not eligible.

IS THERE A PAYMENT PLAN AVAILABLE?
A no-interest payment plan is available to businesses that were not registered for consumer's use tax as of June 1, 2011. In order to qualify for a payment plan, the amount of consumer's use tax due under amnesty must exceed $1,000. The length of the payment plan will be determined by the total consumer's use tax liability and the payment period cannot exceed 7 years (84 months). Further, a minimum payment of $1,000 per month is required. If you request a payment plan:

1. At least one corporate officer, LLC member, general partner or other guarantor (“Guarantor”) must agree to the terms of the payment plan on behalf of the business and agree to accept personal liability for the entire debt; and

2. One additional Guarantor must agree to accept personal liability for the entire debt.

Guarantors signing the payment plan agreement must provide his or her social security number on the payment plan agreement. Further, the business must waive the statute of limitations for assessment of the consumer's use tax due under the payment plan. The first month's payment must be remitted at the time you submit your amnesty application.

PJCo: These payment plan terms are pretty reasonable EXCEPT for those 2 onerous conditions. An officer and someone else must agree to accept personal liability?? How many companies are going to be opting for the payment plan?

This plan helps you if you have use tax liabilities. The SSTP Amnesty plan could help you if you have sales tax liability.

OH SALES TAX AMNESTY VIA THE SSTP
OH is an associate member of the Streamlined Sales Tax Project (SSTP) and as such must offer full amnesty for all past due sales taxes, penalties and interest for any company that wishes to register through the SSTP. The amnesty period must be offered until 1 year after the state becomes a full member of the SSTP. It is important to note that the amnesty is for uncollected taxes only and does not include taxes collected but not remitted. Registering through the SSTP has some significant drawbacks and there is enough significant risk that you should only proceed with extreme caution or with someone familiar with the process. One of the biggest drawbacks is that you must register with all the members of the SSTP. There are currently 21 full members and 3 associate members. So, potentially, you would reap some benefits in OH, but you’d be immediately registered in these other states where there is no amnesty offered. On the plus side though is that the other 2 associate members are also offering full amnesties. Those states are TN and UT. Also, GA is a new full member of the SSTP so they must also offer full amnesty for the first 12 months after they became a full member (which was August 1, 2011). Therefore, if your liability is great enough in any one of these 4 states it may make sense to take advantage of this opportunity. Some of our clients have literally saved millions with this approach. All of this must be handled very carefully, or the tax impact could be very detrimental. There are many factors to address, but the bottom line is there are ways to minimize the damage and take advantage of the opportunities. For more information on this amnesty or the SSTP you may read the article, “Are You For or Against Amnesty?” or you may contact Mike Fleming at 800-940-9433 ext. 720.

Nexus: It’s all about Physical Presence. Or is it?

2011-07-29T14:00:00.002-05:00

By Michael J. Fleming

Nexus, it’s a fairly simple five letter word that the Miriam—Webster dictionary defines as a connection or link. At first glance the word doesn’t appear very scary, mystical or confusing, but when used in the context of taxes it is often one of the most misunderstood, misinterpreted and underestimated issues; making it a very common cause of tax problems. Why does this seemingly non-threatening word generate such heartburn in multi-state businesses?? Start with the US Constitution, add a couple federal laws and Supreme Court cases, multiply that by the laws passed in the each of the fifty states, then apply that to different categories of taxes, factor in states hungry for revenue and top it off with an ever evolving economy and you have your answer. Nexus is not static; states are constantly pushing the nexus envelope trying to increase their tax base. So even if you are a nexus expert (a Nexpert?), nexus is a topic that requires continuous monitoring and updating of knowledge. The following discussion is intended to provide a glimpse into some of the basics of nexus and the role of physical presence.

To start off our discussion we should enhance our simple nexus definition to one that best fits our state tax context. A generic definition I like to use is; the minimum connection or link necessary, that allows a state to tax you or force you to collect taxes on it’s behalf. This minimum link can vary from state to state as well as from tax to tax. Perhaps the best way to delve into nexus is by examining it within the context of the three different major types of state taxes and some of the primary legal influences affecting nexus for those taxes. These taxes are; sales & use tax (SUT), corporate income tax (CIT) and the third group which is neither SUT nor CIT, but closer to a mix of the two. For a lack of a better term we’ll call the third group, “Neither/Nor Taxes” (NNT). The third group consists of taxes like the Washington Business & Occupation Tax (B & O), the Ohio Commercial Activities Tax (CAT), the Michigan Business Tax (MBT) and the Texas Franchise Tax, among others.

Sales and Use Tax (SUT)

To understand the evolution of nexus for sales and use tax it is important to start with the U.S. Constitution; more specifically the Due Process and Commerce Clauses. The Due Process Clause states that no state shall deprive any one of life, liberty, or property, without due process of law and the Commerce clause states that congress shall have the right to regulate commerce among the several states. What this has evolved to mean is that before a state can subject you to its laws you must have a link or nexus with that state. The Supreme Court has held that when it comes to the Due Process Clause, there must be a “minimal connection” (nexus) before a state can tax you. However when it comes to the commerce clause, the Supremes have declared that there must be a “substantial connection” (nexus). Since it is fairly easy to create the minimal connection required by the Due Process Clause, we will concentrate on the Commerce Clause and its substantial nexus.

It has been just over 70 years since the Supreme Court, in Nelson v. Sears Roebuck and Wisconsin v. J.C. Penney, defined the concept of “Substantial Nexus”. Since that time it has been widely accepted that substantial nexus requires more than the slightest physical presence. What has not been as clear is exactly what constitutes physical presence and exactly at what point does one cross the line from “slightest” to “more than the slightest” physical presence to create substantial nexus. Although the Supreme Court has decided a number of cases over the last 50 years providing some guidance, since it can only rule on the facts in the instant case, no definitive, all inclusive answer can come from them. They have (properly) deferred the matter to Congress instead. So until Congress decides to exercise its powers under the Commerce Clause, nexus will continue to be a complex grey area where states will continue to push the envelope. In the meantime we will have to rely on what little guidance the Supreme Court has provided. And don’t hold out too much hope that even if Congress does act that all of a sudden things will immediately clarify.

One of the earliest cases to expand the scope of physical presence is the 1960 case, Scripto, Inc. v. Carson. In this case it was decided that independent sales representatives, even if they are not exclusive to a company, create substantial nexus. The Court stated that it was not important what these representatives were called but rather what they did for the company. This is the first time we see the phrase “establishing and maintaining a marketplace for the company”. The Court visited this issue again in the 1967 case Tyler Pipe Industries, Inc. v. Washington Dept. of Revenue. The Court held that even one part time employee or independent agent can create Nexus. It went on to add that the critical test was to see if the activities performed on behalf of a taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market. Following this line of reasoning you can see how installation, maintenance, warranty services, etc., are just as important to establishing and maintaining a market as sales, and therefore can also create nexus even if performed by third parties.

Perhaps the most important or at least the latest (1992) of the important Supreme Court Cases is Quill Corp v. North Dakota. In Quill the State argued that three diskettes were enough of a physical presence to create nexus for Quill’s catalog business. The Court decided for Quill, stating that a taxpayer must have a more than the slightest physical presence in a state in order to require the collection of sales or use tax. The Court’s reasoning was partially based on the fact that, due to the immense number of sales tax jurisdictions, imposing an obligation to collect sales tax would create a burden that could be said to effectively restrict interstate commerce.

This brings us to where we are today. We know that third parties performing activities that help establish and maintain a market can create nexus. We also know that it takes more than the slightest physical presence to create nexus. It’s safe to assume that offices, warehouses and employees all exceed the slightest physical presence. But where is the line drawn? In Quill three diskettes was not sufficient; but could it be four, five or six? Since the Court decided not to quantify we will remain in this complex grey area reacting to the pushing of the envelope by states until Congress decides to act.

10 Nexus Creating Activities for Sales & Use Tax

Ownership of real property (stores, warehouses, offices, etc.).
Ownership of personal property (machinery, equipment, etc.).
Leasing of real property (stores, warehouses, offices, etc.).
Leasing of personal property (machinery, equipment, etc.).
Maintaining of an inventory, whether consigned, stored or carried by sales representatives.
Travel of employees into a state to conduct sales, training, deliveries, installations, repairs etc.
Use of independent sales or manufacture’s reps even if they are not exclusive.
Use of sub-contractors for repairs, maintenance, installations, etc.
Allowing employees to telecommute or use a home office.
Advertising in local media or phone directories.

Corporate Income Tax (CIT)

When it comes to corporate income tax the role of physical presence has become somewhat less paramount. In some instances the state’s authority has been limited and in others increased. Sometimes these results are by design and sometimes they are the result of the law of unintended consequences. Let’s take a look at two of the biggest influences.

In February 1959, the U.S. Supreme Court decided Northwestern Cement v. Minnesota. In its opinion The Court affirmed a state's power to tax income generated from interstate activities. They went on to say that such a tax is valid if it does not discriminate against interstate commerce and is properly apportioned to activities within the state that create nexus. Congress began to worry that unclear nexus guidelines as well as complex compliance issues, could cause some companies, particularly smaller ones, to limit their interstate activities. Congress moved quickly to pass legislation, Public Law 86-272, seven months after the Supreme Court decided the Northwestern Cement case. The major thrust of PL 86-272 is that a state is prohibited from imposing a net income tax if a company's only activities in a state are the solicitation of orders for sales of tangible personal property which are sent outside the state for approval or rejection and are filled from outside the state. The Senate noted that the legislation was not a permanent solution and was intended to be a temporary fix while further studies were made of the problem. Yet here we are fifty-two years later with no further action and an environment even more confusing than back then. Nowadays, companies sell services and intangibles sometimes even combined with tangible personal property. This law is now one of the factors confusing the nexus situation even more. The protection of PL 86-272 applies to independent agents as well as employees. However when relying on these protections it is important to remember the narrow confines of the activities covered.

Another influence on CIT comes from the unintended consequences of the Quill decision. In Quill, the Court expressly talks of physical presence in the context of SUT. Many states have taken the position that the courts narrow language in Quill referencing SUT means that the requirement for physical presence is superfluous when referencing other taxes. This opened the door for a concept called “Economic Nexus.” This concept basically defined is that states have jurisdictional authority to tax any company that takes advantage of the state’s markets without regard to physical presence and can be measured in ways such as receipts generated from the state or numbers of customers within the state. To date there have been many lower court and state supreme court cases affirming the concept of economic nexus with the U.S. Supreme Court refusing to take sides. The result is a confusing mix of nexus rules with some states requiring physical presence and others not.

Neither/Nor Taxes (NNT)

As mentioned earlier these taxes are neither SUT nor CIT, but closer to a mix of the two. The Neither/Nor group consists of taxes like the Washington Business & Occupation Tax (B & O), the Ohio Commercial Activities Tax (CAT), the Michigan Business Tax (MBT) and the Texas Franchise Tax. Since neither/nor taxes are not income taxes they are not afforded the protections of PL 86-272. Conversely since they are not SUT, they are in the states’ minds, not subject to the physical presence requirements of Quill. Of the four taxes mentioned above, only TX does not have an economic nexus provision.

Conclusion

Physical presence has and does play a role in nexus. How big that role is depends on the type of tax and the state in question. What qualifies as physical presence also varies widely as states continue pushing the envelope looking to increase their tax base. It’s a situation that promises to get more confusing as time goes by. The ultimate solution probably rests with congress and their ability to regulate interstate commerce. However, since they have been reviewing the situation for 52 years, a congressional solution does not seem to be on the near-term horizon. . For now we are on our own.

Here is a list of survival tips that may help.

Top Ten Nexus Survival Tips

Do not underestimate nexus – Not knowing about nexus can have a devastating effect on you and your company. If a state determines you have nexus there is generally not a statute of limitations on how far back they can audit you. In theory they can go back to the date you started to do business in the state, although in reality they usually stay in the 7-10 year range. But 7 to 10 years is still a long time, obviously. Then, not only can you can end up paying back taxes but they tack on penalty and interest as well. The dollars can start to add up quickly, especially if the states share information. In some extreme cases criminal penalties may also apply.
Educate yourself - Learn about nexus and see how it applies to your company’s operations. Stay abreast of nexus changes as well as changes in your business. There are a number of resources that are available but free webinars are a good place to start. There are also a handful of firms that can help.
Do not assume you are OK – Just because you have not been contacted by a state yet doesn’t mean you are OK. You may be OK or it may mean that the state just hasn’t found you yet. Some common ways states find you are through audits of your vendors or customers, disgruntled employees reporting you or your competitors turning you in. There are many other way but these are three of the big ones.
Do not assume that your current CPA’s fully understand nexus – CPAs are usually very good at what they do. The problem is that many of them don’t focus on state and local taxes and some of those that do only focus on a handful of states. You may be surprised to learn that their knowledge of multi-state nexus issues is no better than yours. Question your CPA about how much of this type of work do they do? How do they stay on top of the evolving issues in each of the states? You may have a great nexus resource in your CPA -- then again you may not.
Do not assume that your employees are keeping you compliant – Ask your employees how they stay abreast of nexus changes. Do they monitor operations and see how changes in the way you do business impacts nexus? How do they educate themselves? Who do they go to for answers or clarifications? Are you giving them the tools that they need? If you have doubts consider doing a nexus consultation and analysis; it can be done internally or by a third party.
Do not assume that your competitors are approaching nexus correctly – This is a perfect example of something my father told me over and over, “Just because everyone else is doing it doesn’t make it right.” How true this is. Maybe your competitor has it right, but maybe not. Maybe they just haven’t been discovered yet. This may become a case of the blind leading the blind. How do you know that your competitors are not following you? Where are your competitors getting their information? Perhaps the best question to ask is if the state finds you will your competitor pay the money you owe. I would say no, therefore educate yourself.
Do not stick your head in the sand – If you have nexus do not wait for the state to find you. The longer you wait the greater your liabilities grow as there is no statute of limitations. The second reason is that there is a program called a Voluntary Disclosure Agreement (VDA) that states offer to entice you to come forward. The VDA program usually limits the period a state will look back to 3-4 years as well as waiving penalties and/or all or part of the interest. The drawback is that if the state finds you before you come forward, then you are usually not eligible to participate in the program.
Do not answer a nexus questionnaire without fully understanding your exposure – When a state becomes aware of you they will usually send out a questionnaire about your activities in the state. Before you answer the questionnaire you should not only understand what your exposure is but what options are available. Once you return that questionnaire, your options may be limited.
Do not just get registered if you find out you have nexus – This may seem counter intuitive, but remember that there is no statute of limitations if you have not filed the monthly returns. Once you come forward and get registered, you’ve lost the one small advantage and leverage you had. The state now knows who you are and the state can go back and audit you for all the past periods. You will definitely want to look at a VDA or amnesty program.
Do not panic – If you think you might have nexus or have been contacted by a state do not panic. There are programs you can take advantage of and a handful of firms that can help. You are not alone and are not unique. You can rest assured that many before you have had the same problems and have been helped. Just remember not to ignore this issue. Not only does it not go away, it gets worse with time.

I have mentioned throughout the article that there are a handful of firms that may be able to help. I am partial to one in particular, my employer, Peisner Johnson & Company. Peisner Johnson, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax issues. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we concentrate exclusively on state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services or would like to learn how we may be able to help, you may contact Russell Gordon at 800-940-9433 ext. 716.

As a Leader of a CPA Firm, What Keeps You Up at Night?

2011-07-14T08:39:00.001-05:00

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.

The "Buy One, Get One Free" Sales Promo Can End Up Costing You... BIG!

2011-01-21T17:01:00.002-06:00

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.

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

2010-10-01T10:54:00.007-05:00

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

2010-08-23T10:52:00.003-05:00

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:

Owning or leasing property in a state.
Owning or leasing equipment in a state.
Travel into a state to perform sales.
Travel into a state to perform services such as installations, training, repair, etc.
Travel to trade shows in a state.
Having payroll in a state.
Having agents or contractors in a state.
Licensing intangibles to others in a state.
Delivery into a state in a company owned truck.
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:

Educate yourself - Start with charts and matrices, attend webinars, contact the states.
Ask questions – Of your staff, your accountants, everyone. You can never ask enough questions.
Evaluate - Don’t assume your accountants or staff are up-to-date. They usually are multi-tasking.
Consult an expert – There are some excellent service providers that focus on issues like these.
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?

2010-06-25T16:39:00.005-05:00

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

2010-04-14T14:15:00.004-05:00

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

2010-03-16T14:35:00.004-05:00

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

2010-03-12T15:38:00.003-06:00

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

2010-03-05T15:40:00.006-06:00

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

2010-02-19T14:48:00.002-06:00

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

2010-01-08T08:57:00.004-06:00

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"

It's Beginning to Look Like Budget Deficits Galore

2009-12-11T15:33:00.009-06:00

Here's a spattering of recent headlines portending trouble ahead.

WA is Facing $2.8Billion Deficit

Washington's two-year budget is about $34Billion. So the deficit is nearly 10% of the total budget. I guess that's better than the $5 to $6Billion that they were projecting back at this time a year ago.

Washington's budget mess: Close prisons or raise taxes?

Should we let out all the prisoners or raise taxes? What kind of choice is that? I think they'll just audit more people.

PA Governor warns of more layoffs as Pa. revenues lag

Pennsylvania is threatening to lay off a bunch of government workers. No one is in favor of layoffs, so get ready for more taxes in PA and more audits.

GA revenues plummet again in November

TX sales tax revenue plunge continues

Alabama schools spend savings to stay open

Our battered MN state budget: What's the cure?

MS Governor Makes More Cuts, Says More to Come

Arizona struggles with budget crisis

Cash for Clunkers and Sales Tax

2009-08-28T15:33:00.010-05:00

The federal cash for clunkers program has been in the news nonstop lately. Everyone’s thinking about what they have in their driveway and if it would qualify for this program.
But not me. I’m thinking about the sales tax implications involved.

There’s a few basic questions that come to mind. First, what is the tax treatment of the actual cash-for-clunker transaction in the various states. Will states tax just the net amount of the sale, or do they clunk the purchaser by making him/her pay tax on the entire purchase price? And, second, now that we’re thinking about trade-ins, how are non-motor vehicle trade-ins treated in the various states? And there’s one more question: How do the dealers themselves treat the cash they get from the federal government (assuming they actually get it, of course!)?

Taxability of Vehicle Trade-ins

When you mention trade-ins, most people think about motor vehicles. So let’s answer that question first. Most people would probably argue that if you bought a vehicle 3 years ago and paid tax on it when you got it, you should get “credit” for that when you go to trade the vehicle in—it’s only fair!
Of course that theory doesn’t really hold too much water in the transactional tax world of sales/use tax. Sales taxes are due when transactions occur. If you buy a piece of equipment for your use, then tax is due on that transaction. If you sell it 2 years later, then tax is due again on that transaction. A trade-in is essentially a sale of the item being traded in. But even so, most states still allow an exclusion from the taxable sales price for the amount of a vehicle trade-in. Sales tax purists may cringe, but most voters buy cars over and over. Politicians would be hearing from upset constituents nonstop if they didn’t allow a trade-in tax offset. As it turns out, when it comes to motor vehicles, most states tax only the net amount of the sale.

Clunker States—These States Tax Vehicle Trade-ins

Alabama, California, D.C., Maryland, Michigan, New Jersey, North Carolina and Oklahoma,

Other Trade-ins

Now what about the larger issue? How do the various states treat trade-ins in general. It’s not nearly so common as motor vehicle trade-ins but, we do see from time to time, companies will buy some item and get credit for some other item they traded in. Most states allow a tax reduction when a trade-in is made. We have a chart for that and we would be happy to share that with you.

Car Dealers

Finally, what about the dealers? The sell a car for $30,000 less a $4,500 clunker rebate. In these states that do not allow a trade-in tax reduction, do they collect tax on the $30,000 or on the lesser amount? At least one of those states has weighed in the matter and that’s California. The California SBE has issued Special Notice L-230, in which they say that these rebates will be considered as sales to the federal government and therefore not taxable in CA. So, good news for dealers in CA.
TAX CHART: Click on this link to request the Trade-In Tax Chart.

Shipping Charges Taxable?

2009-07-17T09:51:00.007-05:00

Freight charges always seem to be a thorn in the side of tax professionals. They're usually too small to worry about on an individual transaction basis, but they can loom large in sample audits where just a few errors in a sample can translate to huge assessments when extrapolated to a population.

Separately Stated

The sales/use tax treatment of shipping charges varies all over the board with lots of little conditions. Almost half of the states do not tax shipping charges depending on certain factors. One major factor is whether the shipping charge is separately stated. In fact, according to our research, in AZ, ID, MD, UT and VA, as long as the charge is separately stated, it is not included in the taxable sale amount and that's the only condition.

Other Conditions

There are additional states that do not tax shipping charges and require the charges to be separately stated, but also have other conditions. Included in that list are: AL, CA, DC, FL, IA, LA, ME, MA, MI, MO, NV, WI. BUT, keep in mind that even in those states, there are other (IMPORTANT, EVEN CRITICAL) conditions that apply. You'll want to see our chart for the details. For example, in Alabama, shipping charges are not taxable if (1) charges are separately stated and paid by the purchaser, and (2) delivery is by common carrier or the U.S. Postal Service. And in AL, transportation charges are not "separate and identifiable" if included with other charges and billed as "shipping and handling" or "postage and handling." In WI, the shipping charges are not taxed, if (1) charges are separately stated and (2) delivery occurs after the sale. Charges are excluded when billed by a third party transportation company, if buyer contracts with the third party company for transportation of the property.

Usually Needs Research

As you can see, it can be a little tricky. In some states, shipping charges are just flat taxable regardless of how they are stated, who paid for them, whether they occur before or after the sale, etc. In other states, just separately state them, and the shipping charges are not taxable. In most states, there are certain conditions that apply and they can be convoluted. Research is usually necessary. Feel free to email us to view a chart (posted by permission from and with credit to CCH) which is current as of 7/16/2009. Please remember that these charts are general in nature. Your situation may very likely involve some particular facts and circumstances that would yield a different result. This chart is a good starting point, but should not be your only research source.

Sales Tax Rate Changes Announced For: AL, IL, KS & NY

2009-07-16T10:28:00.009-05:00

Monday, July 13, 2009 - NEW YORK CITY

New York City --Multiple Taxes: Senate Passes Combined Reporting, Sales Tax Rate Increase Bills

The New York Senate has passed A.B. 8615, A.B. 8866, and A.B. 8867, which contain a variety of New York City sales tax, corporation tax, and unincorporated business tax provisions that are part of a revenue package that was passed by the Assembly on June 16, 2009.

If signed, A.B. 8866 would do the following:

-- increase the New York City sales tax rate from 4% to 4.5%;

-- repeal the exemption for purchases of clothing items priced at $110 or more; and

-- apply the full New York City sales tax to electric and natural gas customers purchasing energy from non-utility companies.

Under A.B. 8615, a credit reducing the unincorporated business tax would apply if the annual tax amount is less than $5,400. The credit would completely offset unincorporated business tax amounts of $3,400 or less.

Among other changes, A.B. 8867 would phase in a single sales factor and generally require related corporations with substantial intercorporate transactions to file a combined report, regardless of the transfer price for such intercorporate transactions.

The text of the bills is available at http://assembly.state.ny.us/leg/?bn=a8615 for A.B. 8615, http://assembly.state.ny.us/leg/?bn=a8866 for A.B. 8866, and http://assembly.state.ny.us/leg/?bn=a8867 for A.B. 8867.

A.B. 8615, A.B. 8866, and A.B. 8867, as passed by the New York Senate on July 9, 2009

Tuesday, July 14, 2009 - ALABAMA

Alabama --Sales and Use Tax: New Local Tax Levy and Rate Changes Announced

The Alabama Department of Revenue has announced the following new local sales and use tax levy and rate changes.

The city of Adamsville began levying a local sales and use tax in its police jurisdiction, effective July 1, 2009. The rates for general items, admissions to places of amusement and entertainment, and retail sales of food for human consumption sold through vending machines are 3.5%. The rates for machines, machinery, and equipment used in planting, cultivating, and harvesting farm products, and machines used in manufacturing tangible personal property are 1.5%. The rate on the net difference paid for all automotive vehicles, truck trailers, semi-trailers, and house trailers is 1%.

The town of Hackleburg increased its general sales and use tax rate, rates on admissions to places of amusement and entertainment, and retail sales of food for human consumption sold through vending machines from 1% to 2%, effective July 1, 2009. The rates on machines, machinery, and equipment used in planting, cultivating, and harvesting farm products; machines used in manufacturing tangible personal property; and the net difference paid for all automotive vehicles, truck trailers, semi-trailers, and house trailers remains at 0.50%.

The city of Hamilton increased its lodgings tax rate from 2% to 7%, effective June 1, 2009.

Notices of these changes were first posted by the department on July 13, 2009, and can be found on the department's Web site at http://www.ador.state.al.us/salestax/ratechanges.htm.

Local Tax Notices, Alabama Department of Revenue, July 13, 2009

Wednesday, July 15, 2009 - ILLINOIS & KANSAS

Illinois --Sales and Use Tax: Rate on Candy, Hygiene Products, and Certain Drinks Increased

Beginning September 1, 2009, candy, grooming and hygiene products, and certain soft drinks will no longer be eligible for the 1% reduced state rate allowed for qualifying food, medicines, and drugs and instead will be subject to the full 6.25% state rate for purposes of Illinois retailers' occupation (sales) tax, service occupation tax, use tax, and service use tax.

The rate increases were imposed by H.B. 255 as part of a $31 billion public works program to renovate roads, bridges, and schools. S.B. 349 changed the effective date of the rate increases from August 1, 2009, to September 1, 2009. The bills also increase motor vehicle license fees and alcoholic beverage tax rates and impose a new video gaming tax.

Candy

"Food for human consumption that is to be consumed off the premises where it is sold" (which qualifies for the reduced rate) will not include candy, effective September 1, 2009. A new provision defines "candy" as a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces. However, "candy" does not include any preparation that contains flour or requires refrigeration.

In addition, candy sold through a vending machine is not considered food for human consumption that is to be consumed off the premises where it is sold, effective July 1, 2009.

Soft Drinks

Beginning September 1, 2009, "soft drinks" (which are ineligible for the reduced rate) will be defined as non-alcoholic beverages that contain natural or artificial sweeteners. However, "soft drinks" will not include beverages that contain milk or milk products, soy, rice or similar milk substitutes, or greater than 50% of vegetable or fruit juice by volume.

Prior to September 1, 2009, "soft drinks" are defined as any complete, finished, ready-to-use, non-alcoholic drink, whether carbonated or not, including soda water, cola, fruit juice, vegetable juice, carbonated water, and all other preparations commonly known as soft drinks that are contained in any closed or sealed bottle, can, carton, or container, regardless of size. However, "soft drinks" do not include coffee, tea, non-carbonated water, infant formula, milk or milk products as defined in the Grade A Pasteurized Milk and Milk Products Act, or drinks containing 50% or more natural fruit or vegetable juice.

Grooming and Hygiene Products

"Nonprescription medicines and drugs" (which qualify for the reduced rate) will not include grooming and hygiene products, effective September 1, 2009. The term "grooming and hygiene products" includes soaps and cleaning solutions, shampoo, toothpaste, mouthwash, antiperspirants, and sun tan lotions and screens, unless those products are available by prescription only, regardless of whether the products meet the definition of "over-the-counter-drugs."

The term "over-the-counter-drug" means a drug for human use that contains a label that identifies the product as a drug as required by 21 C.F.R. §201.66. The over-the-counter-drug label includes (1) a "Drug Facts" panel or (2) a statement of active ingredient(s) with a list of those ingredients contained in the compound, substance, or preparation.

P.A. 96-34 (H.B. 255) and P.A. 96-38 (S.B. 349) , Laws 2009, effective as noted

Kansas --Sales and Use Tax: Local Rate Changes Announced

The following local sales and use tax rate changes take effect throughout Kansas on October 1, 2009.

City Rate Changes

La Cygne increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.
Le Roy increases its rate 1%, increasing its total tax rate from 5.3% to 6.3%.
Manhattan (Pottawatomie County) increases its rate 0.25%, increasing its total tax rate from 7.3% to 7.55%.
Manhattan (Riley County) increases its rate 0.25%, increasing its total tax rate from 7.3% to 7.55%.
McPherson increases its rate 0.5%, increasing its total tax rate from 6.8% to 7.3%.
Meade increases its rate 0.5%, increasing its total tax rate from 6.8% to 7.3%.
Neodesha increases its rate 1%, increasing its total tax rate from 7.3% to 8.3%.
Neosho Rapids increases its rate 1%, increasing its total tax rate from 6.8% to 7.8%.
Sterling increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.
Topeka increases its rate 0.5%, increasing its total tax rate from 7.45% to 7.95%.
Washington increases its rate 1%, increasing its total tax rate from 6.3% to 7.3%.-- Willard (Shawnee County) increases its rate 0.75%, increasing its total tax rate from 6.45% to 7.2%.
Willard (Wabaunsee County) increases its rate 0.75%, increasing its total tax rate from 6.8% to 7.55%.
Wilmore increases its rate 1%, increasing its total tax rate from 5.3% to 6.3%.

County Rate Changes

Finney County increases its rate 0.25% from 0.90% to 1.15%, increasing its total tax rate from 6.2% to 6.45%. As a result, the total tax rates for the following cities within Finney County increase as follows:

From 7.2% to 7.45%: Garden City.
From 6.7% to 6.95%: Holcomb.

Graham County increases its rate 1% from 0.25% to 1.25%, increasing its total tax rate from 5.55% to 6.55%. As a result, the total tax rates for the following cities within Graham County increase as follows:

From 5.55% to 6.55%: Bogue.
From 6.55% to 7.55%: Hill City and Morland.

Sheridan County increases its rate 1% from 1% to 2%, increasing its total tax rate from 6.3% to 7.3%. As a result, the total tax rates for the following cities within Sheridan County increase from 6.3% to 7.3%: Hoxie and Selden.

Special Taxing Jurisdictions

The total tax rates for the following transportation development districts (TDDs) increase 0.5% from 7.55% to 8.05%:

Manhattan Marketplace TDD
Manhattan (Riley County) TDD
Manhattan (Pottawatomie County) TDD

The city of Kansas City creates the following three transportation developments districts with the following rates:

Plaza at the Speedway #1 TDD will impose a 0.6% transportation district sales tax within the district, and the district's total tax rate will be 8.15%.
Plaza at the Speedway #2 TDD will impose a 0.4% transportation district sales tax within the district, and the district's total tax rate will be 8.55%.
Plaza at the Speedway #3 TDD will impose a 0.6% transportation district sales tax within the district, and the district's total tax rate will be 8.15%.

The Kansas City Waterpark Village STAR Bond Project begins. The tax rate in the Waterpark Village (also known as the Schlitterbahn Waterpark) will be 7.55%.

The city of Lansing creates the Lansing Town Center TDD. A 1% transportation district sales tax will be levied in the district, and the district's total tax rate will be 8.3%.

The city of Lawrence creates the Oread TDD. A 1% transportation district sales tax will be levied in the district, and the district's total tax rate will be 8.85%.

The city of Merriam ceases imposing the 1% transportation district sales tax in the Merriam Pointe Transportation District. As a result, the total tax rate in the district will decrease from 8.775% to 7.775% and the jurisdiction code changes from MERTD to MERJO.

The city of Overland Park deactivates the Corbin Park TDD. The district will resume October 1, 2010. For the one year of deactivation, the jurisdiction code changes temporarily from OVET3 to OVEJO.

State and Local Sales/Use Tax Rate Changes, Kansas Department of Revenue, July 13, 2009

Thursday, July 16, 2009 - ALABAMA

Alabama --Sales and Use Tax: Town of Livingston Imposed Local Rental Tax

The Alabama Department of Revenue has announced that the town of Livingston levied a local rental tax on the lease or rental of tangible personal property and linens at the rate of 3%, and a tax on automotive vehicle rentals at the rate of 1%, effective December 1, 2008. Notice of the new rental tax was first announced by the department on July 15, 2009.

Local Tax Notice, Alabama Department of Revenue, July 15, 2009

Friday, July 17, 2009 - NO CHANGES

New York City --Sales and Use Tax: Rate Increase, Repeal of Certain Exemptions Enacted

Legislation has been enacted that increases the New York City sales tax rate from 4% to 4.5%, effective August 1, 2009. It also increases the tax rate on credit rating and reporting services, and on beauty, barbering, and certain other personal services from 4% to 4.5%, and provides that the taxes on these services can only be imposed through November 30, 2011, unless they are renewed. Previously, these taxes could only be imposed through December 31, 2011.

In addition, the legislation repeals the New York City sales tax exemption for purchases of clothing items priced at $110 or more (the exemption for clothing and footwear costing under $110 is maintained) and applies the full New York City sales tax to the transmission and distribution of electric and natural gas service, even when the electricity or natural gas service is purchased separately from the transmission and distribution service.

Ch. 200 (A.B. 8866), Laws 2009, effective August 1, 2009

Sales Tax Rate Changes Announced For: AZ, DE, IN, OK & WA

2009-07-10T12:47:00.005-05:00

Monday July 6, 2009 - SEE BELOW

Arizona --Sales and Use Tax: Local Tax Rate Changes Announced

The Arizona Department of Revenue has announced that effective July 3, 2009, Marana will increase the rate of taxation for the transient lodging add tax to 6% (previously, 3%). Additionally, effective August 1, 2009, Thatcher will increase the rate of taxation for the food tax to 2% (previously, 1.5%).

Effective June 1, 2009, Wickenburg increased its transaction privilege tax for all classifications to 2.2% (previously, 1.7%). The April 2009 edition of Transaction Privilege Tax Changes and News issued by the Arizona Department of Revenue stated that all classifications were subject to the new rate. The Department's latest announcement makes a correction stating that the increased rate is for all classifications except the rental occupancy tax.

Transaction Privilege Tax Changes and News, Arizona Department of Revenue, June 2009

Indiana --Sales and Use Tax: Gasoline Prepayment Rate Decreased

The Indiana prepaid sales tax rate for gasoline will be 8.9 cents per gallon for the period of July 1, 2009, through December 31, 2009. The first payment at the new rate is due July 27, 2009. The notice can be viewed on the department's Web site at http://www.in.gov/dor/4059.htm.

Notification to Gasoline Distributors, Indiana Department of Revenue, June 30, 2009

Oklahoma --Sales and Use Tax: Local Rate Changes Announced

The following local sales and use tax rate changes take effect in Oklahoma on October 1, 2009:

-- The city of Muskogee increases its sales and use tax rate from 3.5% to 4%.

-- The city of Talequah increases its sales and use tax rate from 2% to 2.5%.

-- Ellis County imposes a new use tax at a rate of 2%.

-- Washington County increases its sales tax rate from 0.5% to 1%.

-- Washita County increases its sales and use tax rate from 1.25% to 1.875%.

Rates and Codes for Sales, Use, and Lodging Tax, Oklahoma Tax Commission, July 1, 2009

Tuesday, July 7, 2009 - NO RATE CHANGES ANNOUNCED

Wednesday, July 8, 2009 - NO RATE CHANGES ANNOUNCED

Thursday, July 9, 2009 - SEE BELOW

Delaware --Sales and Use Tax: Correction: Rate Change Enacted

Effective for taxable years beginning after December 31, 2009, the Delaware gross receipts tax rate applicable to manufacturers is 0.1944%. The rate increase sunsets effective for taxable periods beginning after December 31, 2013. A previous story incorrectly stated the new rate.

H.B. 289, Laws 2009

Washington --Sales and Use, Business and Occupation Taxes: Decreased Solar Energy System Rate, Semiconductor Incentives Explained

The Washington Department of Revenue has released a notice explaining the change to the business and occupation (B&O) tax rate for manufacturers of solar energy system components and the sales and use tax exemption for gases and chemicals used in making semiconductor materials. Beginning October 1, 2009, the B&O tax rate is decreased from 0.2904% to 0.275% for manufacturing of solar energy systems using photovoltaic modules, and on manufacturing of solar grade silicon, silicon solar wafers, silicon solar cells, thin film solar devices, or compound semiconductor solar wafers used exclusively in components of solar energy systems. The lower rate also applies to wholesale sales of such solar energy systems and components. The lower rate expires June 30, 2014.

Effective July 1, 2009, the sales and use tax exemptions for sales of gasses and chemicals used in semiconductor materials include gasses and chemicals used to produce silicon solar wafers, silicon solar cells, thin film solar devices, and compound semiconductor solar wafers. These exemptions expire December 1, 2018.

Special Notice, Washington Department of Revenue, July 2, 2009

Friday, July 10, 2009 - NO RATE CHANGES ANNOUNCED

Finally Some Good News for Manufacturers

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These days, when it comes to sales/use taxes, good news is hard to come by. So many states are increasing taxes and rolling back exemptions and stepping up audit enforcement. A quick perusal of the headlines provides all the proof. New York, North Carolina, California and others are taking the position that merely having otherwise unrelated people sign up as affiliates in those states means that Amazon.com (and other similarly situated companies) have nexus in those states. That's what you call aggressive.

Meanwhile, New Jersey, Illinois, California and many other states are increasing taxes and letting exemptions expire.

News is pretty bad no matter where you look. And if we polled our subscribers on which state would be the worst for bad news, then Louisiana would surely rank high up on that list. But Louisiana, has come out with some great news for manufacturers.

Louisiana had been phasing in an exemption for certain manufacturing machinery and equipment. The exemption was to have been fully phased in by July 1, 2010. The good news is that by virtue of Act 12 of the 2nd Extraordinary Legislative Session of 2008, the last segment of the phase-in made the exclusion fully effective on July 1, 2009. The exclusions are from the state sales, use, lease, and rental tax for machinery and equipment used by eligible manufacturers in plant facilities predominantly and directly in the actual manufacturing for agricultural purposes or in the actual manufacturing of tangible personal property that is for sale to another.

The LA Department of Revenue has published an Information Bulletin (No. 09-016) with some answers to questions that might arise.

Is this Exemption Good in the Parishes as well?

The legislation authorizes political subdivisions of the state to provide these exclusions from local sales, use, lease, and rental taxes but does not require that they do so. If you have a specific parish question, ask us and we'll do the research for you.

What is Manufacturing "Machinery and Equipment"?

"Machinery and equipment" is defined by R.S. 47:301(3)(i)(ii)(aa) as tangible personal property or other property that is eligible for depreciation for federal income tax purposes and that is used as an integral part in the manufacturing of tangible personal property for sale. "Machinery and equipment" also includes tangible personal property or other property that is eligible for depreciation for federal income tax purposes and that is used as an integral part of the production, processing, and storing of food and fiber or of timber.

Specific examples of tangible personal property that this statute categorizes as eligible "machinery and equipment" are computers and software that are an integral part of the machinery and equipment used directly in the manufacturing process; machinery and equipment necessary to control pollution at a plant facility where pollution is produced by the manufacturing operation; machinery or equipment used to test or measure raw materials, the property undergoing manufacturing, or the finished product, when such test or measurement is a necessary part of the manufacturing process; machinery and equipment used by an industrial manufacturing plant to generate electric power for self consumption or cogeneration; and machinery and equipment used to produce news publications whether the news publications are ultimately sold at retail, for resale, or distributed at no cost.

Buildings (usually) Don't Count -- Categorized by the statute act as ineligible for the manufacturing "machinery and equipment" exclusions are a building and its structural components, unless the building or structural component is so closely related to the machinery and equipment that it houses or supports that the building or structural component can be expected to be replaced when the machinery and equipment are replaced; heating, ventilation, and air-conditioning systems, unless their installation is necessary to meet the requirements of the manufacturing process, even though the system may provide incidental comfort to employees or serve, to an insubstantial degree, non-production activities; tangible personal property used to transport raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete; and tangible personal property used to store raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete.

What is a "Manufacturer"?

Here's one of the sticking points. To take advantage of this exemption, your company must be a "manufacturer". The term "manufacturer" is defined in the statute as a person whose principal activity is manufacturing, and who is assigned by the Louisiana Workforce Commission a North American Industry Classification System (NAICS) code within the agricultural, forestry, fishing, and hunting Sector 11; the manufacturing Sectors 31-33; the information sector 511110, all as they existed in 2002, or under industry code 423930 as a recyclable material merchant wholesaler who is engaged in manufacturing activities, which must include shredding facilities. R.S. 47:301(16)(o) additionally defines the term manufacturer to include a person regulated by the Louisiana Public Service Commission or the Council of the City of New Orleans who is assigned a NAICS code 22111. This 22111 NAICS code applies to electric power generation businesses.

Persons whose principal activity is manufacturing, but who are not required to register with the Louisiana Workforce Commission for purposes of unemployment insurance, can apply to the Louisiana Department of Revenue to be classified as a "manufacturers" under NAICS sectors 11, 31-33, or 511110 for purposes of this sales tax exclusion. The department will determine from income tax data whether applicant would have been so classified had the applicant been required to register with the Louisiana Workforce Commission.

What is a "Plant Facility" and What is Meant by "Predominantly and Directly" in the Actual "Manufacturing Process"?

The term "plant facility" is defined as "a facility, at one or more locations, in which manufacturing referred to in sectors 11 and 31-33 of the North American Industry Classification System of 2002, of a product of tangible personal property takes place." "Used directly" means used in the actual process of manufacturing or manufacturing for agricultural purposes.

"Manufacturing for agricultural purposes," means the production, processing, and storing of food and fiber and the production, processing, and storing of timber.

"Manufacturing", the statute provides, means putting raw materials through a series of steps that brings about a change in their composition or physical nature in order to make a new and different item of tangible personal property that will be sold to another. The statute provides that manufacturing begins at the point at which raw materials reach the first machine or piece of equipment involved in changing the form of the material and ends at the point at which manufacturing has altered the material to its completed form. Placing materials into containers, packages, or wrapping in which they are sold to the ultimate consumer is part of this manufacturing process.

For purposes of the sales tax exclusions, manufacturing does not include repackaging or redistributing; the cooking or preparing of food products by a retailer in the regular course of retail trade; the storage of tangible personal property; the delivery of tangible personal property to or from the plant; the delivery of tangible personal property to or from storage within the plant; and actions such as sorting, packing, or shrink wrapping the final material for ease or transporting and shipping.

What About Other States?

We put together a chart using our resources with CCH to show you the current status of the manufacturing exemptions in some of the top states. That chart is reproduced below. If you'd like more detail about those states, or in other states, just let us know and we can help you with that.

The MA Amnesty Expires June 30, 2009

2009-05-27T15:37:00.003-05:00

Massachusetts has enacted an amnesty program also. It's good for periods before January 2007. It only waives the penalty, but no interest. It expires June 30, 2009.

Here's the details from CCH:

Massachusetts Governor Deval Patrick has signed legislation authorizing a two-month tax amnesty program, during which penalties for failure to timely file or pay Massachusetts taxes will be waived if the taxpayer files all outstanding returns and pays, or at the Commissioner's discretion provides security for, all tax and interest due. The amnesty period will begin on a date to be determined by the Department of Revenue and will end no later than June 30, 2009. The amnesty program will not apply to any tax liability for a period that commenced on or after January 1, 2007. Also excluded are penalties that the Commissioner does not have the sole authority to waive, including penalties applicable to fuel taxes administered under the International Fuel Tax Agreement and local option portions of taxes collected for the benefit of cities, towns, or state governmental authorities. Any taxpayer who has been the subject of a tax-related criminal investigation or prosecution is not eligible for amnesty. Taxpayers who have delayed payment due to a pending abatement application or appeal must waive the right to delay payment, and pay all assessed tax and interest, in order to participate in the amnesty program. Payment of tax and interest will not affect the taxpayer's appeal rights.

WI is Hoping to Be Part of the SSTP -- Amnesty may be Available

2009-05-27T15:31:00.003-05:00

Since WI has conformed its laws to the SSTP, then it should be admitted as a full member of the Agreement. Once that happens, then amnesty will be available for a one year period. The SSTP amnesty is pretty great because companies are not only forgiven penalty and interest but the tax also. However, the downside is significant. You also have to register with all SSTP states and those in the Agreement for over a year offer no amnesty at all.

Here's the details according to CCH: Wisconsin Gov. Jim Doyle has signed a budget repair and economic stimulus bill that enacts provisions conforming Wisconsin sales and use tax laws to the Streamlined Sales and Use Tax (SST) Agreement.

SST Conformity

Wisconsin sales and use tax laws are conformed to the SST Agreement, effective October 1, 2009. With the enactment of this legislation, the state may petition to become a full member of the Agreement. The state must be found in compliance with the Agreement by the SST Governing Board before it can become a full member of the Agreement.

Amnesty: A seller is not liable for uncollected and unpaid state and local sales and use taxes, penalties, and interest on previous sales made to Wisconsin purchasers if the seller registers with the Department of Revenue to collect and remit taxes on such sales in accordance with the SST Agreement. In order to receive amnesty, the seller must:

-- register within one year of the effective date of the state's participation in the Agreement; and

-- collect and remit state and local taxes on sales to purchasers in Wisconsin for at least three consecutive years after the date the seller registers.

Amnesty is not available to sellers that were already registered with the Department during the year immediately preceding the effective date of Wisconsin's participation in the Agreement; sellers that are being audited by the Department; or sellers that have committed or been involved in fraud or an intentional misrepresentation of a material fact.

MD has an Amnesty Program With Catches

2009-05-27T15:25:00.003-05:00

If you have fewer than 500 employees and you didn't take advantage of Maryland's last amnesty offer back in 2001, then you might want to participate in this program.

It doesn't start til September 1, 2009 but everything must be done by October 30, 2009. Here's the details from CCH:

Maryland Gov. Martin O'Malley has signed legislation that provides an amnesty period from September 1 through October 30, 2009, for taxpayers who failed to file a return or pay personal income, corporate income, withholding, sales and use, or admissions and amusement taxes. The comptroller will waive civil penalties (except previously assessed fraud penalties) and half the interest due if a taxpayer files all delinquent returns and pays all tax and half the interest due, or enters into an agreement with the comptroller, during the amnesty period. Amnesty is not available to taxpayers who have more than 500 U.S. employees, who participated in the 2001 Maryland amnesty program, or who were eligible for the 2004 Delaware holding company settlement period. Taxpayers cannot be charged with a criminal tax offense arising out of any return filed or tax paid during the amnesty period, but amnesty does not apply to criminal charges that are already pending or under investigation.

CT Has an Amnesty Program -- Also Expiring in June, 09

2009-05-27T15:16:00.003-05:00

Connecticut has also enacted an amnesty program that expires June 25, 2009.

Here's the details from CCH:

The Commissioner of Revenue Services is required to establish a tax amnesty program for persons who owe any tax for any affected taxable period to be conducted from May 1, 2009 to June 25, 2009, inclusive. "Tax" is defined as any tax imposed by any Connecticut law and required to be paid to the Connecticut Department of Revenue Services, as specified. "Affected taxable period" is defined as any taxable period ending on or before November 30, 2008, for which: (1) a tax return was required by law to be filed with the Commissioner and for which no return has been previously filed or made by the Commissioner on behalf of an affected person; or (2) a tax return was previously filed but not examined by the Department and on which the tax was underreported.

In addition, upon the filing of an amnesty application by the affected person during the tax amnesty period, and payment by that person of all taxes and interest due for affected tax periods, amnesty shall be granted and the Commissioner will waive any civil penalties that may be applicable and will not seek criminal prosecution. In the case of taxes due for an affected taxable period that is paid in full on or before June 25, 2009, interest is computed at the rate of 0.75% per month or fraction thereof from the date such taxes were originally due to the date of payment or June 25, 2009, whichever is earlier.

Any person who wilfully delivers or discloses to the Commissioner or the Commissioner's authorized agent any application, list, return, account, statement, or other document, known by that person to be fraudulent or false in any material matter, shall be ineligible for the tax amnesty program, and may, in addition to any other penalty provided by law, be fined not more than $5,000 or imprisoned not more than five years nor less than one year or both.

Amnesty in NJ Has a Catch -- It Also Expires in June

2009-05-27T15:10:00.003-05:00

NJ has an amnesty program in place that also expires soon -- June 15, 2009 to be exact. This from CCH:

Legislation has been enacted that requires the Director of the New Jersey Division of Taxation to establish a 45-day state tax amnesty period, to end no later than June 15, 2009.

The amnesty applies only to state tax liabilities for tax returns due on and after January 1, 2002 (the day following termination of the most recent amnesty period), and before February 1, 2009. During the amnesty period, a taxpayer who has failed to pay a state tax can pay the tax and one-half of the balance of interest that is due as of May 1, 2009, without the imposition of the remaining one-half of the balance of interest that is due as of that date, recovery fees, and civil or criminal penalties arising out of the tax obligation. The amnesty is not be available to a taxpayer who, at the time of payment, is under criminal investigation or charge for any state tax matter.

Now Here's the Catch -- If You Don't Take Advantage of This Amnesty, You'll Owe an Additional 5% Penalty Later!

If a taxpayer eligible for the amnesty fails during the amnesty period to pay taxes owed, that taxpayer will be subject to a 5% penalty that may not be waived or abated. The 5% penalty will be in addition to all other penalties, interest, or collection costs otherwise authorized by law.

Amnesty About to Expire in AZ on June 1, 2009

2009-05-27T14:52:00.003-05:00

Believe it or not, amnesty offers don't come around all that often. From time to time we like to highlight the current states who are offering some type of amnesty program.

Arizona has a program that is just about to expire. You'll have to hurry to take advantage of it. But if you're under audit in AZ you might want to do something quick. Here's the details from CCH, and I quote:

"The Arizona Department of Revenue will conduct a tax amnesty program from May 1, 2009, through June 1, 2009, that covers personal income taxes, corporate income taxes, transaction privilege (sales ) taxes, tobacco taxes, and liquor taxes. The amnesty provides an opportunity for those who live, work, or do business in Arizona to pay any back taxes owed to the state without penalty or criminal prosecution. Additionally, a reduced interest rate will apply for those who qualify.

For taxes filed on an annual basis, amnesty is available for years beginning on or after January 1, 2002, and ending before January 1, 2008. Taxpayers who file taxes on a monthly or quarterly basis are eligible for tax periods beginning on or after January 1, 2003, and ending before January 1, 2008.

Amnesty tax returns must be submitted with the Amnesty Application form, and be filed or postmarked and paid in full by June 1, 2009, in order to qualify for the program. Amnesty program forms and applications are available on the Department's Web site under the Forms & Calculator section.

Tax amnesty is available to:

-- those who failed to file a tax return;

-- taxpayers who failed to report all income or all tax, interest and penalties that were due;

-- taxpayers who claimed incorrect credits or deductions;

-- taxpayers who misrepresented or omitted any tax due;

-- nonresidents or part-time residents who receive income that may be taxable in Arizona;

-- out-of-state and multi-state businesses; and

-- taxpayers who are under audit (not finalized).

Persons who are a party to any criminal proceeding with respect to any tax imposed by any law of Arizona and required to be collected by the Department that is pending on May 1, 2009, for failure to file, failure to pay, or fraud may not participate in the amnesty program. Additionally, persons under criminal investigation may not participate in the program. Tax amnesty does not apply to 2008 Arizona income tax due April 15, 2009."

Sales Tax Rate Changes in: HA, IL & NY

2009-05-14T16:31:00.008-05:00

May 11, 2009: NO RATE CHANGES ANNOUNCED
May 12, 2009: SEE BELOW

Hawaii --Sales and Use Tax: Transient Accommodations Tax Rate Increased

The Hawaii transient accommodations tax rate will increase from 7.25% to 8.25% from July 1, 2009, through June 30, 2010, and will increase again from 8.25% to 9.25% from July 1, 2010, through June 30, 2015. Beginning July 1, 2015, the transient accommodations tax rate is scheduled to decrease to the current 7.25% rate. The tax rate increase was vetoed by Hawaii Gov. Linda Lingle, but the Legislature overrode her veto.

S.B. 1111, Laws 2009, effective as noted

Illinois --Sales and Use, Utilities Taxes: Chicago Wireless Retailers Must Collect Full 7% Rate as of June 1

Wireless telecommunications retailers currently paying a reduced Chicago simplified telecommunications tax rate of 6.5% must begin to collect and remit the full 7% rate beginning June 1, 2009. Pursuant to a 2005 class action settlement, a reduced 6.5% tax rate was to remain in effect until $30 million in savings for customers were realized. Because the agreed savings have been realized, the reduced rate will end. Retailers were notified of this rate change in an earlier release.

Simplified Telecommunications Tax Ruling 1A, Chicago Department of Revenue, May 5, 2009

New York --Sales and Use Tax: Notice Issued on Quarterly Cents-Per-Gallon Rate Adjustments

The New York Department of Taxation and Finance has issued a notice regarding the adjustment of the state and local cents-per-gallon rates of New York sales and use taxes on certain motor fuel and diesel fuel (together, "qualified fuel").

The commissioner of taxation and finance is required to establish an average price (not including sales tax or fuel excise tax) on motor fuel and diesel fuel during each quarter. Counties and cities that have elected a cents-per-gallon method of tax must multiply the average price by the local sales tax rate. If the result of this computation is less than the locality's effective cents-per-gallon rate, localities must drop their cents-per-gallon rate to the lower rate, rounded to the nearest cent. Adjustments to a cents-per-gallon rate due to a change in the average price must be published by the commissioner and will take effect on the first day of the next succeeding sales tax quarter.

The average price is also multiplied by the state percentage sales tax rate and the Metropolitan Commuter Transportation District (MCTD) percentage tax rate. If the result of this computation is a lower state or MCTD cents-per-gallon rate, the state or MCTD cents-per-gallon rate is also adjusted to the lower rate. The new rates would also take effect on the first day of the next succeeding sales tax quarter.

The commissioner has established the required average price applicable to the sales tax quarter beginning June 1, 2009. As a result, no local cents-per-gallon tax rate on qualified fuel is being adjusted effective June 1, 2009. Similarly, no adjustment is being made to the state cents-per-gallon rate effective June 1, 2009. However, the MCTD cents-per-gallon rate on qualified fuel will decrease from 0.75 cents to 0.7 cents effective June 1, 2009.

Important Notice N-09-10, New York Department of Taxation and Finance, May 2009

May 13, 2009: NO RATE CHANGES ANNOUNCED
May 14, 2009: SEE BELOW

New York --Sales and Use Tax: Publication Listing Local Rates on Qualified Fuel Revised

The New York Department of Taxation and Finance has revised a publication listing the local sales and use tax rates on qualified motor fuel, diesel motor fuel, and B20 biodiesel, effective June 1, 2009. The publication also lists the localities that have elected the cents-per-gallon method of computing local sales tax on qualified fuel, and the applicable local cents-per-gallon rates. It also lists those localities that continue to use the percentage rate method of computing sales tax on qualified fuel, and the applicable percentage rates.

The revised publication reflects that the state sales tax rate within the Metropolitan Commuter Transportation District (MCTD) will decrease from 8.75 cents to 8.7 cents, effective June 1, 2009.

Publication 718-F, New York Department of Taxation and Finance, May 2009

May 15, 2009: NO RATE CHANGES ANNOUNCED

Legal Disclaimer: This publication is designed to distribute general tax information. Applicable laws and regulations may vary by state and your specific facts or circumstances. Due to the ever-changing nature of laws and regulations, there may be omissions, delays or inaccuracies in the information contained in this newsletter. Therefore, the information herein is not to be considered tax advice nor a substitute for consulting with professionals who are familiar with your particular factual situation. No client, advisory, fiduciary or professional relationship is implied or established. Please contact a Peisner Johnson consultant to discuss the impact of this information on your particular situation. © 2008 Sales tax rate source: Used by permission from CCH INC Tax Research Network Subscription Service & RIA CHECKPOINT News Headlines Subscription Service. All Rights Reserved.

How Many Sales Tax Auditors Are Out There?

2009-01-27T11:20:00.001-06:00

Software Maintenance Contracts Taxable? It Depends.

2008-11-21T14:43:00.002-06:00

This is a question that we get all the time. We get the questions from
sellers of software and buyers of software alike. The taxability of
software maintenance turns sometimes on whether it is mandatory or
optional. The taxability also depends often on exactly what is
included in the "maintenance".

Often having a "maintenance agreement"
means you get software updates; sometimes it just means someone will
be helping you deal with issues that come up from time to time. We've
pulled together a taxability matrix thanks to CCH that shows the
taxability of maintenance agreements in the top 5 states. When you
look at the chart we've provided take note of the comments. It may
indicate a "maintenance agreement" is taxable, but the note may say if
it's just telephone support, it's exempt.
Keep in mind that this chart addresses the general situation. Your
specific facts and circumstances may indicate a different answer. If
you would like to discuss your specific situation, or if you need this
chart in additional states, just give us a call.

Big Chains Double Taxing Customers?

2008-10-17T14:50:00.002-05:00

George Gombossy of the Hartford Courant has been writing a few articles that are probably scaring some large retailers. This is a potentially large exposure for these companies. What's the exposure? Class-action lawsuits. Apparently some large chain retailers are taxing exchanged items twice in Connecticut.

Here's how it happens: Customer goes to Home Depot (let's say Joe Biden since he goes there so often) and buys some beige tile grout and pays $13 plus tax in cash. Joe gets home and prepares to regrout the bathroom floor when he realizes he should have bought the white grout. He hops on his bicycle and heads back to the Depot and tries to exchange it. Of course he doesn't have the receipt so they give him a Home Depot store card with the $13 credited to the card. They do not give him a credit for the tax he paid. He picks up the white grout ($13 price) and goes to the register and presents his store card. They tell him he'll have to pay tax since he didn't have the receipt. So they end up charging him tax twice. Yikes!

This is the exact situation retailers are trying to avoid. They didn't keep the money, they remitted it to the state. They can only get it back from the state if they refund it to their customer. But since the customers paid in cash, then who do they give the refunds to? Their best hope is that they made a record of the person requesting these exchanges and then to look for credits without tax. Then they need to refund all those customers. What a pain. But the much larger pain would be a class action lawsuit. According to this article, this is a common practice in CT. http://blogs.courant.com/george_gombossy/2008/10/chain-stores-illegally-chargin.html

You Buy A Company You Buy Their Sales Tax Problems

2008-09-29T16:49:00.003-05:00

Let's say your company wants to acquire another company. What are the sales tax issues? We recently performed some due diligence for a client of ours who was negotiating to buy a competitor. In this particular case, the acquisition was an asset purchase. Only certain assets were purchased, not all or substantially all of the assets just certain assets. The issues to consider will vary of course depending on the nature of the transaction and the facts present in the situation, but this case will at least be instructive as far as the given facts.

Here are some of the issues they considered.

1. First, does the purchase of the assets transaction itself incur any sales/use tax cost? You should review the applicable state and local tax laws in those states in which the Seller's assets are located to determine if the purchase of assets by the acquiring company would result in any taxes due on the actual purchase transaction. Obviously, you need to know where the assets are located in order to make this determination.

1a. Along those same lines -- you may want to include in the negotiation which party will bear any sales/use tax due on the asset sale is to be borne by the seller.

1b. How will the purchase price be allocated to the assets being purchased?

2. Is the sale reportable in the various states? Every state has their own rules, of course on whether a sale/purchase of assets is reportable in their jurisdiction. This is a matter that should be researched. In this scenario, a large portion of the assets were located in Washington, DC.

2a. Is the sale of assets taxable in DC?

It appears to be taxable but is not entirely clear. We read the law on casual sales and found to be somewhat contradictory. See what you think:

"Casual and isolated sales" means unplanned and nonrecurring sales made by an individual or organization to dispose of certain items of tangible personal property originally acquired for the person's or organization's own use or consumption. ( Reg. Sec. 402.1)

This is exactly what was occurring in our situation, so it would seem that there would be no tax due. But there is another provision that raises a concern. The law exempts certain types of transactions including "casual and isolated sales". Here is the law:

47-2005(7)(A) Casual and isolated sales by a vendor who is not regularly engaged in the business of making sales at retail;

The Distributor in our case was regularly engaged in making sales at retail, but not sales of its business assets purchased and consumed for its own use. The assets being sold were all acquired over many years and tax was paid to DC when the assets were purchased originally.

We advised our client that a written letter ruling from the Mayor's office was desirable in this situation.

3. What About Successor Liability?

Does the Seller have sales/use tax liabilities as a result of their business practices that could transfer to the buyer as the acquiring company.

You should review the laws in the states where the acquired company is registered to ascertain whether a company purchasing all or substantially all the assets of another entity would be held responsible for the prior owner's tax liabilities (referred to as "successor liability.") Obviously you want to avoid assuming any prior sales or use tax liabilities that could be owed by the Seller.

To be conservative, you can assume successor liability is an issue in most states even though it may not be specifically addressed in the statutes and regulations. Since successor liability is a concern, an acquiring company should always review the Seller's sales and purchases to estimate the amount of sales/use tax liabilities that may become your responsibility as a result of purchasing a new company.

Here's what we reviewed:

> Copies of sales/use tax returns for the last 3 years.

> A list of states the company is registered in, along with the dates of registration for sales/use tax purposes.

>Report of sales where no tax was charged by Customer and by State.

>Actual sale or exemption certificates that were obtained by the Seller from its customers.

>Details of Seller's sales/use tax payable account(s) to see if taxes collected were in fact paid to the taxing jurisdictions.

>Any sales tax audits for the last 5 years.

Our motto is: The Best Surprise is No Surprise.

A thorough review of a company being purchased is the best way to minimize surprises.

A New Way States Are Using to Find You

2008-09-29T15:57:00.005-05:00

So you use 3rd party contractors to perform work on your behalf in another state. Does that mean you have sales tax nexus in that state? The answer to that is "yes, probably".

We have many clients in this situation. They will usually concede that they should get registered in these states, but they want to make a benefits vs. cost analysis. Sometimes they ask us to assess the risk of being found by a taxing jurisdiction, when their only contact with a state is through nonrelated 3rd parties.

Obviously, it's difficult to put a percentage on the amount of risk they have in that situation. But we can tell them the experience of others in a similar situation.

Here are some of the more common ways states can find companies doing business in their state. And rest assured of this, states are most anxious to find companies, especially out of state (read nonvoting) companies with nexus in their state.

One of the ways, perhaps the most common method states use to find nonregistered companies who should get registered is through audits of other companies. In other words, let's say you use a 3rd party contractor to do maintenance services for a customer in a state where you have no employees or property and in which you are not registered. You don't charge tax. Your customer is audited and naturally the state reviews purchases of maintenance services. Maintenance almost by definition involves people working on site at your customer. When the auditor finds your invoice with no tax on it, she will usually check to see if your company is registered in the state. Then, it's an easy audit lead and the auditor gets a pat on the back.

Another method states use works in the situation where you have employees in a state but are not registered in that state. To find you, they simply do a comparison of payroll tax returns and sales tax returns. Companies almost always register to pay payroll tax as soon as they have employees in a state. They register for payroll tax purposes, but not for sales tax purposes. The tax return comparison approach easily finds companies with nexus by having employees in the state.

There are other methods that states use, like posting agents at truck stops on freeways in their states taking note of trucks that come into the state representing companies who are not registered.

But I want to highlight the recent experience of one of our clients as proof of another popular method states are using to find companies using 3rd party contractors. Think about how you pay these contractors and the filings you are required to make with the IRS by January 31st of each year. That's right 1099's.

States have sharing agreements with the IRS and can get 1099 data for contractors/businesses in their states. This information includes the name of the payor, of course. So what the state does is get a list of payors who made payments to contractors in their state. Then they compare that list of payors to a list of registered companies. The resulting list is a list of companies who use 3rd party contractors in the state.

So, the state has numerous means at its disposal to find companies in their state. If your exposure is relatively high, you should consider how best to limit your exposure, including using the voluntary disclosure process.

Alabama Is The Lowest Taxing State -- So Why the Long Face?

2008-07-11T14:42:00.002-05:00

This editorial in the Birmingham News surprised me at its melancoly tone. Sort of self-loathing attitude about their own state. I would have seen the "low-tax" attribute as a big positive to bring in business. Instead, this paper wants AL to tax everyone more. Check out the gloominess:

Alabama's state and local tax burden per person is the lowest in the country, again

Thursday, July 10, 2008

THE ISSUE: Alabama's state and local tax burden per person is the lowest in the country, again.
Some things never change, not for a decade, or even nine decades.
For at least the past decade, Alabama has ranked dead last in the nation in state and local tax collections per person. State, county and city governments collected $2,782 in taxes per person in fiscal 2006, according to the Census Bureau's most recent report on state and local taxes and state population estimates. That's $918 less than the $3,700 national median, with half the states below and half above the latter figure.

If Alabama taxed at the median rate, there would be an extra $4.2 billion for state and local services. If Alabama taxed at the rate of No. 49 Mississippi (unofficial Magnolia state motto: "Thank God for Alabama"), our state and local governments would have $184 million more to spend.
But "no new taxes" has played well in Alabama forever, or at least for more than nine decades, as the 1918 Russell Sage Foundation report makes clear. That report said Alabama didn't raise enough money to meet citizens' needs, nor did it raise that money fairly.
In 1918, the answer was tax reform.
"This suggestion will be met by the statement that the citizens of Alabama are firmly opposed to any increase of taxation and that to vote for such legislation would be political suicide to members of the Legislature," the report said.
In 2008, the answer still is tax reform.
State and local governments still need more money to provide services to their citizens, from police protection, to roads, to schools, to prisons. As Jim Williams, head of the Public Affairs Research Council of Alabama, notes: "We're trying to do the same thing with about 70 percent of the money, and that's a hard thing to do."
It is a hard thing, too, to convince Alabamians of the need to raise taxes. With great reason: Despite the nation's lightest state and local tax burden, it doesn't feel that way to many people. That's because, as the Sage report noted, state government didn't raise tax dollars fairly then, and it doesn't now.
Poorer citizens pay a far larger share of their incomes in state and local taxes than the wealthiest Alabamians do. Families in the lowest 20 percent income levels (less than $16,000 a year) pay more than 11 percent of their incomes in state and local taxes, while those in the top 1 percent ($316,000 a year and more) pay only 4.3 percent, the Institute on Taxation and Economic Policy reported earlier this year.
Why is everything so out of whack? Blame sales taxes that are among the highest in the nation and hit the poor the hardest, as well as exemptions and loopholes that prevent much of the state's wealth from being taxed. Alabama excludes about half the sales tax, 52 percent of personal income and 88 percent of property value from its tax base, a Governing magazine study on state tax systems noted.
That is a recipe for a tax system that burns the poor and middle class as it caters to the wealthy. It is no wonder so many people in Alabama don't want higher taxes; they're already paying more than their fair share even though the state ranks 50th in state and local taxes per person.
Only by righting the imbalances in the tax system will the Legislature ever be able to make the case for raising taxes, as well. Yet when we last left lawmakers during this year's session, they had blown a chance to bring some fairness to the tax system by removing the state sales tax from groceries and raising the threshold at which families start paying income tax.
Nine decades ago, the answer was tax reform. But the Legislature has been much more interested in carving out special-interest tax exemptions than in bringing fairness to the tax system. Suffice it to say, lawmakers have ignored Sage advice.

NY May Get the Boot from the SSTP

2008-07-10T16:39:00.001-05:00

The SSTP has a committee that evaluates whether a state remains in compliance with the SSTP agreement. So what happens if one or more states fall out of compliance? And it's easy to imagine that states will adopt various provisions from time to time that will move it in and out of compliance with the SSTP. What a mess this creates. Apparently NJ is the first state to cross that line. The CRIC (Compliane Review and Interpretations Committee) was all over it according to a report we read in CCH. Apparently, New Jersey is not in substantial compliance with the Agreement because of its failure to enact certain telecommunication provisions.

So what happens to a state that goes AWOL?

The Board imposes sanctions.

If New Jersey does not come into compliance by January 1, 2009, on that date it will lose its right to vote on amendments to and interpretations of the Agreement and determinations of whether a petitioning state is in compliance.

I don't know how much of a sanction that is. But that only gives them 6 months from now to get these "certain telecommunication provisions" enacted. The bigger sanction happens one year from now.

If NJ still is not in compliance on July 1, 2009, sellers will be relieved on that date of the obligation to collect sales and use taxes on sales into New Jersey, if they are collecting on a voluntary basis solely because of their registration under the Agreement.

This sanction could hurt. So if you are one of the companies collecting in NJ just because of the SSTP registration, you may be off the hook a year from now, we'll see.

I wouldn't think the NJ legislators will react kindly to the admonishment given them by the SSTP Governing Board President (who is Joan Wagnon of the Kansas Secretary of Revenue). Who said this is "an opportunity for the New Jersey Legislature to rise to the occasion" and get those telecom provisions enacted.

But maybe this will scare them: NJ May Get Expelled!

The Board says if the state's noncompliance continues after January 1, 2010, the Board will consider additional sanctions, which could include expulsion.

Yikes.

Don't Remit Tax - You Could Go To Jail?

2008-05-28T16:32:00.002-05:00

This headline from the Associated Press was a bit startling.

WA yacht broker charged with felony theft of sales tax

Most people think about penalty and interest being the big problem when it comes to not remiitting tax collected. But this yacht broker in Everett, Washington is thinking that penalty and interest would be by far preferable to the going to jail part.

Here's the article:

EVERETT, Wash. -- An Everett yacht broker has been charged with felony theft of sales tax and filing false state tax returns.

Ronald J. Sperry is accused of failing to remit nearly $359,000 in sales tax he collected from late 2004 through 2007 on sales of yachts through Everett Yacht Sales and Hanan Yachts.
The charges were brought in Snohomish County Superior Court.
Charging papers say the 59-year-old Sperry reported about $5.5 million in sales to the Washington Department of Licensing, but less than one quarter of that to the Washington Department of Revenue.
Sperry is accused of pocketing the sales tax paid to him by customers of yachts he sold. He also is accused of underreporting the 10 percent commissions he made on those sales.
Felony theft of sales tax is punishable by up to 10 years in prison and a $20,000 fine.

Whiplash In Ohio As They Switch Back To Origin Based

2008-04-28T16:07:00.002-05:00

On April 25, the Ohio Department of Taxation issued a press release about a recent bill signed by the Governor switching back to sourcing sales at the origin instead of destination. You may recall that Ohio swiched to destination sourcing back in 2006 in an effort to become a full member of the Streamlined Sales Tax Project (SSTP).

The SSTP is a multi-state effort to simplify and standardize sales tax rules across state lines. For years, the multistate group required states to move to destination sourcing in order to become full members. Ohio got on board and passed their law to change to destination sourcing. This caused a big problem for delivery sellers like furniture and appliance stores. Suddenly all of them had to put in systems to charge tax based on the tax rate of the delivery.
Now, last summer, in response to concerns from small businesses (according to the press release), the Ohio General Assembly put the shift to destination sourcing of delivery sales on hold. Later, in December, the Governing Board of the Streamlined Sales Tax Project decided to allow "origin states" to become a full member of the organization starting in 2010 as long as at least four other "origin states" are also ready to become full members. So now, Ohio has moved back into the origin camp.

Refund Opportunity in Missouri for Electricity Resold

2008-04-26T15:47:00.001-05:00

Hotels in Missouri can purchase electricity for resale to the extent it is used for paying guests and not in common areas. So how do you calculate that amount? You can use the Department's suggested form, but it's complicated and time consuming. Or you can just use the relative square feet for guest rooms and common areas. That was the method used by one Taxpayer and it was finally ok'd by the Commisioner in MO. See Kansas City Power & Light Co. v. Director of Revenue, Missouri Administrative Hearing Commission, No. 06-1589 RS, March 12, 2008.

Contact us at www.PeisnerJohnson.com for help in securing these refunds. We can usually do it for less than it will cost you to do it yourself.

Refund Opportunity in Missouri for Electricity Resold

2008-04-25T15:41:00.001-05:00

Contact us at www.PeisnerJohnson.com for help in securing these refunds. We can usually do it for less than it will cost you to do it yourself.

Air is TPP in Ohio

2008-04-25T15:17:00.002-05:00

Last week I had a piece about how a number of states are beginning to define electricity as tangible personal property. Of course, electricity does meet the definition, since it can be felt, measured, etc. However, many states specifically say that utilities are providing a service, not selling TPP. What about air?

Clearly it can also be felt, measured, etc. But do states consider it TPP? Well, that question doesn't come up very often, because who sells air? Below is a copy of a recent letter ruling issued by the state of Ohio to a business who will be providing compressed air to its customers.

Opinion of the Tax Commissioner

Date Issued: February 20, 2008

Opinion No: 08-0002 Tax: Sales

FACTS

We sell and distribute industrial air compressors and related parts, supplies and services * * *.

We are introducing a new venture called "XXXX", the supply of compressed air to our customer's place of business. We anticipate the majority of these consumers to be manufacturers, who typically utilize compressed air to operate tools and production line equipment required for manufacturing of products for resale. Upon implementation of a ten year contract, we will install and maintain the equipment at our customer's location; retaining full ownership and control of the compressor, spare parts, and accessories. Our customer will be invoiced a standard monthly fee for the delivery of the compressed air based upon an anticipated range of consumption. If the maximum contractual volume is exceeded, there will be a supplementary charge, calculated by a predetermined method.

QUESTION FOR WHICH OPINION IS REQUESTED

Taxpayer requests an Opinion of the Tax Commissioner on how sales tax should be handled on the monthly fee, as well as the overage charges; whether the compressed air supply should be treated as tangible personal property or a service, and under what conditions it would be a taxable or an exempt transaction.

DISCUSSION

Pursuant to R.C. 5739.02, the Ohio sales tax applies to all retail sales in this state. R.C. 5739.01(B) defines "sale" for Ohio sales tax purposes to include any transfer of title, possession, or a right to use tangible personal property in this state or the provision of a designated taxable service in this state for a consideration. There is a presumption that all sales made in the state are subject to the tax until the contrary is established, R.C. 5739.02(C). 2

R.C. 5739.01(YY) defines "Tangible personal property" as:

* * * personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses. For purposes of this chapter and Chapter 5741. of the Revised Code, "tangible personal property" includes motor vehicles, electricity, water, gas, steam, and prewritten computer software.

Because compressed air can be weighed, measured and felt it falls within the definition of "tangible personal property" and is therefore a product that is sold by the Taxpayer to its customers. Accordingly, Ohio sales tax should be charged on the sale of the compressed air unless an exception to the tax applies. Tax should be charged regardless of whether the amount being invoiced is the standard charge or an overage charge for the purchase of additional air.

You indicate that you anticipate that your customers of the compressed air will be primarily manufacturers. R.C. 5739.02(B)(42)(g) provides an exemption for items, as described in R.C. 5739.011, primarily used in a manufacturing operation to produce tangible personal property for sale. R.C. 5739.011(B)(8) provides that "coke, gas, water, steam and similar substances used in the manufacturing operation" qualify for exemption. Therefore it is likely that you will have manufacturing customers that claim an exemption from sales tax on their purchase of the compressed air. Note that there is no status exemption for manufacturers; instead it is the use of the product being purchased that determines whether the purchased product is exempt from tax.

For any sale where a customer claims an exemption from sales tax, whether it be on the basis of the manufacturing exemption or some other exemption, you should obtain a fully completed exemption certificate as provided for in R.C. 5739.03(B)(1)(a). A vendor that obtains a fully completed exemption certificate from a customer is, in the absence of fraud or collusion, relieved of the liability for collecting tax on the sales covered by the certificate, R.C. 5739.03(B)(1)(b).

OPINION

Based upon the forgoing, it is the Opinion of the Tax Commissioner that the compressed air sold by Taxpayer is the sale of tangible personal property. Sales tax is to be charged and collected from customers on the sales of such tangible personal property unless and exemption is applicable and the Taxpayer has obtained a certificate of exemption as provided for in R.C. 5739.03(B)(1)(b).

This Opinion is limited to the legal issue addressed in this Opinion. This Opinion only applies to the taxpayer and it may not be transferred or assigned. In addition, the tax consequences stated in this Opinion may be subject to change for any of the reasons stated in R.C. 5703.53(C). It is the duty of the taxpayer to be aware of such changes. See R.C. 5703(E).

Richard A. Levin

Tax Commissioner

ITunes (and Other Downloaded Software) May Soon be Taxable in CA

2008-04-11T11:52:00.002-05:00

California is facing a huge budget deficit. That means they are going to cut spending and balance the budget right? Of course not. They are seeking more revenue. One thing that makes California different from most states is that they do not define software as tangible personal property.

A compact disk is tangible personal property. Software you buy on a tangible medium like a CD is taxable in CA. If you just download software and get no tangible media along with it, then the purchase is not taxable. Most people don't buy lots of software routinely, so you would not expect the general population to protest much if corporations have to pay tax on software downloaded electronically. But there is something that the general citizenry does buy and download a lot and that they will care about. That is a song from ITunes. Yes, that's also "software" and it's electronically downloaded. If CA passes a bill recently proposed, then Itunes would cost $1.08 instead of $.99. This could generate quite a backlash. Check out this article in the Mercury News.

Marland Computer Services Sales Tax REPEALED

2008-04-11T11:18:00.002-05:00

There was quite firestorm of protest ignited when Maryland passed the computer services sales tax bill during a special session convened in 2007. It was set to go into efrect on July 1, 2008. However, before it could take effect, it has now been repealed. Under the legislation enacted in 2007 that is now repealed, "computer service" included:

-- computer facilities management and operation;

-- custom computer programming;

-- computer system planning and design that integrate computer hardware, software and communication technologies;

-- computer disaster recovery;

-- data processing, storage and recovery; and

-- hardware or software installation, maintenance and repair.

In addition, sales and use tax is inapplicable to the sale of custom computer software services that relate to procedures and programs that:

-- are otherwise taxable, as specified;

-- are to be used by a specific person;

-- are created for that person or contain standard or proprietary routines that incorporate significant creative input to customize the procedures and programs for that person; and

-- do not constitute a program, procedure or documentation that is mass produced and sold to the general public or persons associated in a trade, profession or industry.

MN Tax Court Finds Company President Personally Liable

2008-04-11T11:01:00.002-05:00

The MN Tax Court confirmed once again, something we all should know. Corporate officers can be held personally liable for unpaid taxes. Sometimes, these cases reach an individual who really seems blameless for the situation, but in this case, it's hard to argue with the decision of the court. In this case, as reported by CCH, the individual had the ability to sign checks, and he could hire and fire employees. He had joint control of the corporation's financial affairs with other officers, and he had an entrepreneurial stake in the corporation. Thus, the court found that the individual had the authority and responsibility necessary to hold him personally liable for the corporation's unpaid tax.

I thought Findings of Fact nos. 3 and 4 showed that the state had a pretty strong case:

3. Appellant was involved in the day-to-day operations of the business and was a signatory on the business bank accounts. He had access to Mojito's accounts through paper checks, through on-line electronic access, or through communication with the bank. During the tax periods at issue, he had control or supervision jointly with others over the finances of Mojito, including the payment of taxes.

4. Mojito began having problems with unpaid sales taxes sometime in 2004. Although Appellant was on personal leave from September, 2004 through February, 2005, his partners copied him on email messages so he continued to be informed of Mojito's sales tax liability during that time. From March through October of 2005, he was involved in Mojito's operations and kept up to date on its sales tax status. As early as March 2005, he was advised of the risk that Mojito would be posted by the State for unpaid taxes so it could no longer purchase liquor. Again in April 2005, Appellant was notified that although Mojito's sales tax return had been filed, the amount owed ($13,778) had not been paid. By June 2005, Appellant was working with and proposing compromises to Mojito's creditors and negotiating with the restaurant's landlord to assist Mojito in paying down its outstanding sales tax liability to the state.

(Paddock v. Commissioner of Revenue, Minnesota Tax Court, No. 7856-R, March 31, 2008)

Changing a Light Bulb Taxable in FL, But Not Changing the Fixture

2008-04-11T10:48:00.002-05:00

The Florida Department of Revenue issued a Technical Assistance Advisement, No. 08A-006, on March 5, 2008 discussing the tax treatment of cleaning nonresidential properties. The specific question was whether store lighting retrofits performed by a contractor in Florida stores are subject to sales tax.

There is always a question in FL (and certain other states) on real property services. In FL, sales tax is imposed on charges for all nonresidential cleaning services included in SIC Industry Group Number 734. You might have considered changing a light bulb to be taxable because a rule provides that lighting maintenance services (bulb replacement and cleaning) are an example of nonresidential cleaning services. Another rule provides the general rule of taxability of real property contracts and it states that contractors are the ultimate consumer of the materials and supplies used to perform real property contracts and must pay tax on their cost of those materials and supplies. As such, charges made by a contractor maintaining and washing existing lighting are taxable. Note the word "existing". If you change lightbulbs in existing fixtures in FL, then that service is taxable. The replacement of lighting fixtures, however, referred to as "retrofitting," constitutes a real property improvement and, as such, is not included within SIC Industry Group Number 734, nonresidential cleaning services.

So, changing a light bulb is taxable, but replacing a fixture and "retrofitting" the lighting is not. It's like we always say, "Sales tax is not brain surgery -- it's worse."

What Local Taxes Do You Charge in Texas?

2008-03-28T16:52:00.002-05:00

What local tax to charge in Texas can be very tricky. And Texas, recently changed the statute on the MTA tax making it potentially more complex. The Comptroller of Public Accounts recently issued a letter with some explanation that is helpful. Here it is:

1. Look at the place of business from which the item is being mailed, shipped or delivered. Is there a:

City Rate? If yes, collect the city sales tax on all taxable sales in Texas.
County Rate? If the seller is located in a taxing county, then collect the county sales tax on all taxable Texas sales.
Special Purpose District (SPD)? If the seller is located in a special purpose district, then the seller must also collect the SPD sales tax on all taxable Texas sales.
Transit Authority? If yes, the seller must collect the transit authority tax on all taxable sales in Texas.

The seller must next determine if the total applicable tax rate being imposed for the place of business from which the item is being shipped is less than 8.25 percent, which represents the 6.25 percent state tax plus up to a maximum of 2 percent local tax that can be collected. If the combined local sales tax collected is less than 8.25 percent, the seller needs to look to the point of delivery to determine if any local use tax has to be collected. Sellers are required to collect the additional local use tax if they are engaged in business in the applicable local jurisdictions.
For example, if the sales tax rate at the seller's place of business is 7.25 percent-6.25 percent state tax and 1.00 percent local sales tax-the seller can possibly collect up to an additional 1.00 percent of local use tax for other types of local taxing jurisdictions other than the type of local sales tax collected. This means that if, for example, the local sales tax a seller is responsible for collecting is city tax, then the seller is not required to collect any additional city use tax even if the destination city has a city tax rate at or below 1.00 percent. In this situation, the additional 1.00 percent of use tax that could be due would be county, SPD or transit authority local use taxes.
Remember: sellers should collect local use taxes in the order indicated below and cannot collect more than 8.25 percent in total sales and use taxes.
2. Look at the location where the item is being mailed, shipped or delivered. Is there a:

City Rate? If there is a city tax rate, collect city use tax if no city tax rate exists at the place of business from where the item was shipped and collection of the city use tax will not exceed the 2 percent cap.
County Rate? If there is a county tax rate, collect county use tax if no county tax rate exists at the place of business from where the item was shipped and collection of the county use tax will not exceed the 2 percent cap.
SPD Rate? If there is a SPD tax rate, collect SPD use tax if no SPD tax rate exists at the place of business from where the item was shipped and collection of the SPD use tax will not exceed the cap. If use tax can be collected for multiple SPDs at the full rate of each without exceeding the 2 percent cap, do so.
Transit Rate? If there is a transit tax rate, collect transit use tax if no transit tax rate exists at the place of business from where the item was shipped and collection of the transit use tax will not exceed the 2 percent cap. If use tax can be collected for multiple transits, at the full rate of each without exceeding the cap, do so.

You May Never Want to Do Business in NJ After Reading This

2008-03-25T16:13:00.002-05:00

This article by Jason Method of the Gannett News Service may convince you never to do business in NJ. He tells the story of South Carolina businessman J. Barry Godwin whose company builds and delivers Stingray power boats.

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

"A New Jersey tax collector threatened to impound Godwin's company truck, which was stopped at the state border as it was moving $120,000 worth of Stingray power boats to another state, unless the company wired $46,200 in business taxes to New Jersey immediately. The state claimed that Stingray owed the back taxes because, although it had no stores in the state, it sold boats here.

Godwin said he had no choice but to wire the money to the state Treasury that afternoon.
"I was treated like a criminal," Godwin said. "When you cross the New Jersey state line, it's another world."
New Jersey officials say their tax enforcement is fair.
"We do this in order to obtain compliance from out-of-state companies conducting business in New Jersey so that they pay the appropriate taxes and do not receive an unfair competitive advantage over New Jersey businesses by avoiding these taxes," Treasury spokesman Tom Vincz said in an e-mail.
Vincz could not say how much money is collected under this legal principle, called "economic nexus." The state collected $2.7 billion in all corporate taxes last year.
But some out-of-state business owners say New Jersey has become so aggressive that the tax bills have crossed over to the absurd.
Godwin, of Stingray Boats in Hartsville, S.C., said in an interview that he thinks New Jersey has gone too far. Godwin said the company was unaware that it had any issue with New Jersey before the revenue agent stopped its truck at a weigh station in Carney's Point near the Delaware border. Godwin also was surprised because the truck loaded with six powerboats worth $20,000 each was only headed through New Jersey, to make a delivery in Massachusetts.
The revenue agent, Godwin said, asked the truck driver whether the company delivered boats to any dealers in New Jersey. The driver radioed the company headquarters and found out that Garden State Yacht Sales in Point Pleasant Beach sold the company's boats. The agent ordered the driver out of the truck and called Godwin. She wanted to know the company's revenue from its New Jersey sales for the past seven years.
The agent and company officials calculated the tax bill over the telephone.
"She told me, 'Your load of boats is not leaving here until you pay fines and back taxes,'" Godwin said. "'If we don't get the money by 1 p.m., I'm going to impound your truck and boats, and you'll have to find a place for your driver to go.'" Godwin said he pleaded for more time. "I asked, 'Can you let my truck go and we work this out?' She said, 'No, you have to pay the money,'" Godwin said.
The company had no choice but to wire the money to the state. The company since has decided it would be too expensive to pursue an appeal, he said. "
Stingray was not the only company to be stung by revenue agents. We'll tell you about those in another post. But this one is enough to see how aggressive some states are becoming in asserting nexus on out-of-state companies.

TN Agrees Telecom Sold to ISP Not Taxable

2008-03-25T14:50:00.002-05:00

The Tennessee Department of Revenue issued a Letter Ruling on February 8, 2008 stating that TN could not charge tax on telecommunications sold to an Internet service provider since Federal Law prohibited such taxation. (See TN --Letter Ruling No. 08-08.) If you would like a copy of the full ruling, we can get it for you. Here is their analysis:

"The purchase of telecommunications services by the Taxpayer is not subject to the Tennessee sales and use tax because of the federal Internet Tax Freedom Act, 47 U.S.C. § 151 which prohibits the imposition of a state sales tax upon the retail sale of telecommunications services to providers of Internet access for use in providing Internet access. The Internet Tax Freedom Act is federal legislation that preempts any Tennessee laws relating to the taxation of Internet access or telecommunications services purchased by Internet access providers."

Schwarzenegger Sorry That Services Not Taxed in CA

2008-03-25T14:23:00.001-05:00

Listen to (I mean read) what CA Governor, Schwarzenegger said last week at a town hall meeting in the Northern California city of Pleasant Hill:

"The way we are taxing. I mean, we are missing a lot out there," the governor said. "There's whole new economies that are developing, service-oriented economies. Manufacturing is going down."

So taxing services is on the horizon out there in CA. I would agree with the writer of this article in the Sacramento Bee, that the most likely first target will be telecommunications and cable television. I really have to shake my head though when an elected official thinks any item not taxed is a big dissapointment.

Nebraska Getting Tough

2008-03-10T16:38:00.002-05:00

Nebraska has 73 auditors out there trying to find companies who owe tax. This recent article in the Omaha World-Herald describes how the Nebraska Department of Revenue has added about $12.5Million to state coffers in the last 3 years and it all started with an amnesty program. The amnesty program funded the hiring of more auditors and a computer programmer. Let the data mining begin.

The article describes how the Department used various business records to find likely audit candidates. Let the company beware! Here comes Nebraska! "Data mining involves searching and comparing large quantities of information to find patterns and relationships. For the Revenue Department, it has meant looking through lists and databases to find clues that a person or a company might owe taxes.

Dearmont said the operation uses the Revenue Department's taxpayer databases, as well as information from the Internal Revenue Service and the State Department of Labor. It also uses data purchased from InfoUSA, an Omaha marketing and sales-leads company.

Enforcement employees found the three companies that owed around $1 million by looking at categories of businesses that typically would be paying sales and use taxes to the state, Dearmont said.

Sales taxes are collected from customers and are then turned over to the state. Retail businesses — auto parts stores, restaurants and discount stores, for example — commonly collect sales taxes. Businesses involved in personal services, such as law firms, typically don't.

Use taxes are supposed to be paid on goods or services bought for use in Nebraska from a state that doesn't charge sales tax.

Dearmont said he could not name the three companies — or their type of business — because of state confidentiality laws.

In those cases and others, Revenue Department employees started with a list of all companies engaged in a specific type of business that might be expected to owe sales or use taxes — all rental companies or all landscaping companies, for example.

Then they compared the list with a list of companies operating in Nebraska. Finally, they checked the Nebraska companies against state sales tax records to see if companies had taken out sales tax permits and had paid sales or use taxes.

When a company operating in the state was found not to have paid sales or use taxes, a revenue agent gave the company a call to find out more about its situation.

The three companies paid the taxes voluntarily. No court action was needed to collect the money, Dearmont said.

The Revenue Department is asking for $500,000 this year to buy the equipment and software needed to tap additional databases. The request is included in the Appropriations Committee's budget recommendation.

Whether clues come from data mining, tips from the public or other means, Revenue Department staffers follow up with traditional audits, tax questionnaires and letters to find out whether a taxpayer actually owes money."

How Many Auditors Are Out There?

2008-03-10T12:46:00.002-05:00

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

1. 730 -- California
No surprise here and probably none of our clients are suprised either. CA is very active with our clients. But usually CA, by any measure you come up with, is pretty much double the size of any other state.
2. 468 -- Texas
Texas came in 2nd, in terms of numbers of auditors out there, and it barely beat out number 3. Texas has had larger numbers of auditors in the past -- as many as 600. Diferent Comptrollers have come in and cut numbers to save costs.
3. 467 -- New York
New York is traditionally viewed as one of the more difficult states to deal with and when you see how many auditors they have, you're probably not surprised.
4. 390 -- Florida
States like FL and TX with no personal income tax, rely very heavily on the sales tax.
5. 279 -- Illinois
I bet if I had just asked you name the 5 "Big" states for sales tax audits these would have been the first 5 you would have named. Here is the rest of the top ten.
6.   218 -- WA
7.   236 -- MN
8. 200 -- MI
9.   178 -- TN
10. 175 -- NC
Besides the sttes with no statewide sales tax such as AL, DE, MT, NH and OR the following states have less than 20 sales tax auditors.
North Dakota and Wyoming

We got an interesting chart from one of the sources we subscribe to. It's the Sales and Use Tax Monitor published by Strafford Publications. You can subscribe also at www.straffordpub.com if you're interested. But anyway,

States Share Information on Use Tax Evaders

2008-03-07T16:59:00.002-06:00

There was this interesting article in Forbes magazine about the number of states that include a line on their individual state income tax form for people to voluntarily enter how much use tax they owe on their own purchases. The article discussed the various methods used to encourage voluntary compliance. In the end, though, even the most effective approach (which was to provide lookup tables for taxpayers) resulted in only 3% of taxpayers reporting any use tax. That's not very good. Now to quote from the article:

"So meanwhile, the states have begun to enforce their use-tax laws against consumers, particularly high-income purchasers of big-ticket items.

"Virginia, for example, routinely sends use-tax bills to residents who buy furniture in North Carolina and have it shipped home, Smith notes. How does Virginia know? North Carolina audits the furniture sellers and gets a list of tax-free sales to Virginia residents, which it shares with Virginia tax authorities. Such interstate tax sharing agreements are now common. "

Clients will frequently ask us how the states could possibly find them. This is a good example of how they do it.

Electricity Held to be Tangible Personal Property in CA

2008-03-07T16:09:00.002-06:00

This recent CA appeals court case about coal purchased by a producer of electricity caught my eye. (Searles Valley Minerals Operations, Inc. v. State Board of Equalization, California Court of Appeal, Fourth Appellate District, No. D049905, February 26, 2008). The court held that coal doesn't become part of the final product and therefore cannot be purchased for resale in CA. That could have been expected. The interesting part to me was that they first went through an analysis of whether electricity is even "tangible personal property" for purposes of CA sales/use tax.

As reported by CCH: "The term "tangible personal property" is defined in the sales and use tax laws as personal property that may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses. The evidence at trial established that electricity can be measured and felt and is perceptible to the senses. As such, electricity constitutes tangible personal property. Based on the unambiguous language of the applicable statute and the evidence presented, the court concluded that electricity is tangible personal property for purposes of the sales and use tax law." This is important because it might lead to other refunds being sought in CA, for example, plain old telephone service (POTS) is essentially an electric signal. Telephone companies spend a lot of money on electricity needed to generate telecommunications. So maybe telecommunications is tangible personal property and since the electricity purchased becomes a part of the ultimate item sold, maybe it's exempt in CA now? Or maybe, telecommunications is taxable as the sale of TPP in CA now?

Certain Conveyor Equipment Exempt in NY

2008-03-07T15:34:00.002-06:00

Here's an interesting Advisory Opinion hot off the presses out of NY that actually favors the taxpayer. Did you know that conveyors can be exempt in NY if they are used directly and predominantly in production activities? It's the truth, read on for some of the specific facts and some language from the Opinion.

If you'd like a full copy, let us know and we'll get it to you. Just keep in mind that in New York, an Advisory Opinion is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts.

The Issue

The issue raised by Petitioner is whether the conveyor used to move product outside of Petitioner's plant qualifies for the production exemption under section 1115(a)(12) of the Tax Law for equipment used directly and predominantly in the production process.

Opinion

Petitioner is in the business of producing various grades of concrete aggregate products. Petitioner uses aggregate conveyors to move products to conical stockpiles outside of the production plant.

Petitioner states that when the aggregate products are moved from within the plant to be stockpiled outside the plant, the products begin a dewatering process that continues until after the products are dropped in the stockpiles. The products cannot be loaded for delivery directly from the plant and are not ready for sale or delivery as they leave the plant on the conveyor system. In order to be ready for sale, the product must have a moisture content in a range below 5%. The process of drying a product or removing water from a product is considered to be a production activity. (See Matter of Albert H. Mast, St Tax Comm, September 3, 1982, TSB-H-82(97)S; Matter of National Fuel Distribution Corporation et. al., Dec Tax App Trib, March 14, 1991, DTA Nos. 801047 and 801048.) While Petitioner does not appear to "package" its products, based on the facts in this Opinion, the aggregate is not a finished product at the time it is placed on the conveyor and moved outside to the stockpile. Petitioner's conveyor system is used to transport the aggregate from the plant to the outside stockpile, during which time the drying process continues. Thus, the conveyor system is used directly and predominantly in production activities and qualifies for exemption from sales and use tax pursuant to section 1115(a)(12) of the Tax Law.

If You Call It Sales Tax, You Must Remit

2008-02-22T13:23:00.002-06:00

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

2008-02-22T11:18:00.002-06:00

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

2008-02-11T10:19:00.002-06:00

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

2008-02-11T09:52:00.002-06:00

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

2008-02-11T09:33:00.002-06:00

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?

2008-02-11T08:50:00.001-06:00

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

Buy Vehicles Tax Free with Montana LLC

2008-01-29T14:46:00.002-06:00

I want to say from the outset that I have not investigated this story independently. I do not claim that this practice will work in any state. But there was an article recently in a Framingham, MA newspaper about people using a Montana LLC to purchase RV's sans the sales tax. The practice is to set up an LLC in Montana, and that company will buy the vehicle. Montana will allow you to register your vehicle in their state. But, according to this article, Montana will not share any information about the owner of the LLC that would allow a given state to track them down.

The problem is this: this methodology relies on Montana's secrecy and on MA not being able to find you. The newspaper contacted Ann Dufresne, the director of communications for the Massachusetts Registry of Motor Vehicles for a comment on this. Ann warned drivers would face stiff penalties for trying to avoid the state's sales and excise taxes and other fees.

A person who drives a car in Massachusetts for more than 30 days is required to register and insure it here and pay the sales tax, she said. Residents who don't register their vehicles here could face more than $6,000 in fines and potentially have their license suspended, according to state law.

Big News! You Can Be an Origin-based State and Still Be in the SSTP

2008-01-29T12:14:00.002-06:00

Sounds like the SSTP is in danger to me.

Is this the beginning of the end of the SSTP?

The Streamlined Sales Tax (SST) Governing Board has amended the SST Agreement to allow states to become full members even while continuing to source sales on an origin basis. As reported in CCH, the Board and its predecessor organizations rejected repeated attempts in the past to change the Agreement to allow origin sourcing, most recently at its meeting in Kansas City, Kansas. However, the Board relented when confronted with the impending loss of at least two associate member states, uncertain prospects for adding further states, pressure from local governments, and a divided business community.

The chief cornerstone of the SSTP, regardless of how it's spun now, was uniformity amongst the several states. O one of the main impediments to uniformity/simplicity was always the question of origin vs. destination sourcing. Some states do it one way, some another. "Why can't we all just pick one way?" was the theme early on. Well, now faced with losing these associate states and never being able to coax certain origin states to come over to the destination-based approach, the Board blinked.

So what else will they cave on to get more states to participate? You get the feeling that we're in the same boat we were always in just rowing in circles.

Did You Collect (or Pay) That Michigan Sales Tax On Services for 10 Days?

2008-01-29T11:31:00.001-06:00

If you collected it or paid it, then you may be in the refund business.

Effective December 1, 2007, a 6% Michigan use tax was enacted on certain taxable services. That new tax was vastly unpopular and was repealed but not until December 10, 2007. What to do for the interim? Here's the answer (from CCH): A person that provided any service subject to the tax and collected the tax beginning December 1, 2007, before the legislation that repealed the service tax was signed into law, must return the amount of the tax to the person that received the service or remit the tax to the Department of Treasury, and the person that received the service may apply for a refund of the tax. A person that fails to remit any tax collected from a person that received a service is subject to penalties unless the collected tax was returned to the person that received the service.

The ERA Begs Congress Not to Pass SSTP Legislation

2008-01-25T01:40:00.002-06:00

Information Week had the story on a different retailers association that had the opposite opinion from the National Retail Federation. The Electronic Retailers Association issued a statement on Thursday squaring off over legislation that would require Internet merchants, mail-order houses, and other "remote sellers" to collect sales tax across state lines."

The debate is based around U.S. Representative William Delahunt's, D-Mass., bill (H.R.3396) that would allow states that have implemented the Streamlined Sales and Use Tax Agreement (SSUTA) to require out-of-state sellers to collect sales tax on merchandise sold their residents.

The ERA opposes the bill, saying it would stifle e-commerce and burden electronic retailers with costs and compliance problems.

"In a very short amount of time, the Internet has become an unprecedented marketplace where the playing field is level for retailers both large and small," Barbara Tulipane, ERA President and CEO, said. "The Streamlined Sales Tax Project and its provisions would create a cost-prohibitive barrier for smaller retailers who are the lifeblood of our economy."

ERA said it will actually discriminate against online sellers.

"Making electronic retailers responsible for computing, collecting, and remitting tax for thousands of taxing jurisdictions with different rates and coverage is unfair and will significantly harm the growth of e-commerce," the group said in a statement released this week. The group pointed out that the agreement allows states with multiple tax rates to adopt new an additional rate, which the ERA said could force electronic retailers to administer 15,000 tax rates. The ERA also said that direct marketers would have to pay for taxes customers fail to pay, while traditional retailers are not held responsible. Finally, it said that online retailers don't enjoy tax incentives available to in-state businesses. Those requirements would put online sellers at a competitive disadvantage, ERA said.

The ERA said more time is necessary to develop consensus among the affected parties for a "rational, practical and simple system for assessing and collecting taxes" from Internet sales.

Another State with a Surplus

2008-01-25T01:23:00.001-06:00

Here's the headline and story from the Missouri newspaper the Columbia Tribune:

State tax income higher than expected

Published Thursday, December 6, 2007

JEFFERSON CITY (AP) - Missouri's tax revenue is coming in ahead of what was budgeted.

The state Office of Administration says November's net general revenue was up more than 6 percent compared to November 2006. Missouri's annual budget takes effect in July. Through the first five months of its fiscal year, net general revenue was up about 4.5 percent compared to last year. The state budget was built on an assumption that revenue would grow by 3.8 percent this year.

The larger-than-projected increase is largely because of income taxes. Individual income tax revenue was up more than 7.5 percent during the first five months of the budget year. Sales tax collections were up barely 1 percent over last year.

National Retail Federation Begs for SSTP Passage

2008-01-25T01:20:00.002-06:00

It's hard to blame them really. If the big retailers are charging tax, but their competitors are not, that is a competitive disadvantage. Here's the compelling argument from J.C. Penney's Vice President and Associate General Counsel-Tax Wayne Zakrzewski. "We are here to ask you to level the playing field between sellers that collect sales tax and those who cannot be required to collect the tax because they do business in the community on a virtual rather than physical basis."
"Many of our competitors do not collect, which gives them a competitive advantage. This is not because they are innovative or provide incremental value to the consumer, but because the states do not have the ability to require collection of a tax that is due from the consumer." "We believe there are compelling reasons why Congress should act now to level the playing field," Zakrzewski, whose multi-state company collects sales tax on in-store, catalog and Internet purchases alike, said. "Passage of H.R. 3396 into law would be the appropriate next step to a modern, fair and responsive sales tax system across all participating states and sellers." Never heard of the NRF?

The National Retail Federation is the world's largest retail trade association, with membership that comprises all retail formats and channels of distribution including department, specialty, discount, catalog, Internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry's key trading partners of retail goods and services. NRF represents an industry with more than 1.6 million U.S. retail establishments, more than 24 million employees - about one in five American workers - and 2006 sales of $4.7 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations. www.nrf.com

Expanding Manufacturing Facility? Beware the Contractor Trap

2008-01-25T01:14:00.002-06:00

We frequently get involved in transactions where a client is expanding the manufacturing plant. Many times they hire a contractor to do the work. The contractor ends up buying all the materials (including certain equipment that would likely be considered manufacturing equipment) and installing it or incorporating into the structure they're building. This is NOT good.

Why is this a problem? In most states a contractor (especially one working under a lump-sum agreement) is considered to be a service provider not a seller of TPP. As such, the materials the contractor purchases are deemed to be "used" by the contractor in the course of the construction service. A contractor in most states is not a manufacturer and not conducting a manufacturing activity. Therefore, they consumed some equipment that would be exempt if purchased by the manufacturer but not if purchased by a contractor.

This is an area where it is crucial to be careful. And don't think this doesn't come up very often. Here's a recent case in point: Decision No. 19969, Idaho State Tax Commission, July 30, 2007 in which it was held that since the equipment was purchased by a contractor, the production exemption was not available.

If You Use an "Agent" in Another State, You Might Have Nexus

2008-01-25T01:04:00.002-06:00

Here's another example of a situation where non-related people acting as your "agent" can give you nexus with another state.

This was an administrative decision recently issued in Alabama. It involves an out-of-state company that rented graduation caps and gowns to students in Alabama.

This rental company used non-related individuals working on commission to measure the students for the caps and gowns. These "agents" also provided the students (or the schools) with the taxpayer's order forms. They collected the completed order forms and submitted them to the rental company. Although there was no written agency agreement between the rental company and the people doing the measurements, the facts established that the in-state representatives were de facto or implied agents of the taxpayer. The judge ruled that the in-state representatives were clearly acting on behalf of the taxpayer when performing those duties. The in-state representatives were also compensated for their activities or services on behalf of the taxpayer in the form of a commission. Ultimately, the in-state representatives were acting as agents of the taxpayer, and their actions on behalf of the taxpayer in Alabama allowed the taxpayer to establish and maintain its business of renting caps and gowns in Alabama. Thus, the taxpayer had nexus with Alabama.

But wait there's more: Even if the in-state company's representatives were not deemed to be de facto or implied agents of the taxpayer, the taxpayer still had nexus with Alabama because it owned caps and gowns that were being rented in Alabama, and it derived substantial income from the presence of the caps and gowns in Alabama. The physical presence of the taxpayer's income-producing property in Alabama established substantial nexus. Thus, the taxpayer was doing business in and was subject to Alabama's taxing jurisdiction.

Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. S. 05-751, November 20, 2007. Let us know if you'd like a copy of this case and we'll get it to you.

Durable Medical Equipment and Prosthetic Devices Exempt in GA

2008-01-25T00:51:00.002-06:00

We were alerted by CCH that a Georgia regulation (Reg. 560-12-2-.30) addressing the sales and use tax treatment of sales of drugs and medical equipment has been amended to provide additional guidance regarding prosthetic devices, durable medical equipment, and insulin.

Durable Medical Equipment

"Durable medical equipment" is intended to withstand repeated use, is primarily and customarily used for a medical purpose, is generally not useful absent illness or injury, and is appropriate to use in the home. The regulation gives examples of durable medical equipment. The sale or use of durable medical equipment is exempt from sales and use tax if paid for directly with funds of the United States or the State of Georgia pursuant to Medicare or Medicaid programs.

Prosthetic Devices

A "prosthetic device" is defined as a prescription replacement, corrective, or supportive device meant to artificially replace a missing portion of the body, correct or prevent a physical deformity or malfunction, or support a weak or deformed portion of the body. The sale or use of prosthetic devices is exempt from sales and use tax. The regulation gives examples of these devices.

Certain People Can Purchase Goods in Washington Tax Free

2008-01-24T18:15:00.000-06:00

Did You Know?

Residents of certain states, U.S. Territories, and Canadian provinces that have a state or provincial sales tax rate of less than 3% are eligible to purchase goods in Washington without paying sales tax if they will take and use the goods outside the state. BUT, sellers are not required to make these exempt sales, and no refund is available if the seller chooses to collect sales tax. According to CCH, this exemption is commonly used by residents of Oregon, Montana, and the province of Alberta, Canada.

Big Changes In Arkansas Sales Tax

2008-01-11T10:44:00.001-06:00

Effective January 1, 2008, big changes have happened in Arkansas. The changes include how local city and county sales taxes are to be administered in the following circumstances:

• Delivery of Merchandise to Customers --Beginning January 1, 2008, if your business makes a retail sale of property and delivers the tangible property through common carrier, your truck, mail, or by any other shipping or delivery method to your customer, you will charge the state, county, and city taxes based on where the purchaser takes receipt or delivery.

• Taxable Services Performed in Arkansas -- Beginning January 1, 2008, state and local sales and use tax for taxable services will be collected based on where the customer receives the service. If the service is not received by the purchaser at the seller’s business location, the local taxes due are based on where the purchaser takes receipt of the service provided. In most cases, the customer will take receipt of the taxable services where it is performed; however, this may not apply in all circumstances.

• Rental or Lease of Tangible Personal Property --A lease or rental that requires periodic payments is subject to sales tax as follows:

1. The first periodic payment is subject to state and local taxes based on where the lessee receives the property.

2. For periodic payments made after the first payment, the state, city, and county taxes are based on the "primary property location" of the tangible personal property for each period covered by the payment.

The primary property location is the address for the property provided by the lessee to the lessor in the ordinary course of business. The primary property location is not changed by intermittent use at different locations. If the property is moved to a new location and the lessor has been notified of the new location, the lessor will tax subsequent payments based on
the new location. If the lessor does not receive notice of a change in location, sales tax will continue to apply based on the address the lessee gave the lessor for the primary property location.

• Rental or Lease of Motor Vehicles, Trailers, Semi-Trailers or Aircraft -- If your business leases or rents motor vehicles, trailers, semi-trailers, or aircraft that requires recurring periodic payments, you will collect the state, county, and city taxes due based on the primary property location. The primary property location is the address provided by the lessee in the ordinary course of business. The primary property location does not change by intermittent use at different locations. For a lease or rental that does not require recurring periodic payments, the local taxes are based on where the leased equipment is received by the purchaser.

• Taxable Services Purchased from Out of State Vendors for Use in the State of Arkansas -- If you purchase services from outside the State that are subject to tax in Arkansas and first use the service within the State of Arkansas, then Arkansas state and local use tax is due based on where you take receipt of the services. Credit will be given for taxes legally imposed and paid in the state where the taxable service was performed.

• Elimination of City and County Local Tax Caps -- Beginning January 1, 2008, local tax caps on single transactions will no longer apply when retailers collect city and county sales and use taxes. Since the caps no longer apply, retailers will collect the full amount of state, city, and county taxes on all transactions. Your customer may be eligible to apply to DFA for a refund of the local tax for qualified business purchases made on or after January 1, 2008.

The local tax cap will continue to apply to the first $2500 per item on the sale of motor vehicles, aircraft, watercraft, modular homes, manufactured homes, or mobile homes. Sellers should continue to apply the cap on the sales of those items only.

• Rebates or Refunds of Local Tax Paid to the Seller – Business Purchasers Only
Qualifying businesses may be eligible for a rebate or refund of the additional local tax paid on qualifying business purchases on purchase invoices that exceed $2500.00. A qualifying business purchase means a purchase of tangible personal property or a taxable service for which a business may claim a business expense deduction or depreciation deduction for federal income tax purposes. The purchase will be eligible even though the business purchaser may not be
required to file an income tax return. In addition, governmental agencies (including schools and colleges or universities) and non-profit organizations (including churches) may apply for rebates/refunds of additional local taxes paid.

For purposes of calculating the rebate or refund amount, a uniform single transaction definition has been adopted effective January 1, 2008: "Single transaction shall mean any sale of tangible personal property or taxable service reflected on a single invoice, receipt, or statement for which an aggregate sales or use tax amount has been reported or remitted to the state for a single local taxing jurisdiction." Note: Refunds or rebates will no longer be issued by the city or county for purchases made on or after January 1, 2008. There is a six month time limit on requesting a rebate which begins on the date of the purchase or from the date of payment of the tax to the seller, whichever is later.

• Bad Debt Write Offs --Beginning January 1, 2008, bad debts may be deducted on the Excise Tax report for the tax period during which the bad debt is written-off as uncollectible on your books and eligible to be deducted for federal income tax purposes. The bad debt deduction is eligible for sales on which the tax has previously been reported and paid to DFA. The bad debt must have resulted from a sale that has occurred within the last three years. The deduction is available for taxpayers even though the business may not be required to file an income tax return. Some examples are governmental agencies (including schools and colleges or universities) and non-profit organizations (including churches). Bad debts include, but are not limited to, worthless checks, worthless credit card payments, and uncollectible credit accounts. Bad debts do not include financing charges or interest, uncollectible amounts on property that remain in the possession of the taxpayer or vendor until the full purchase price is paid, expenses incurred in attempting to collect any debt, debts sold or assigned to third parties for collection, or repossessed property.

Michigan Services Tax Was in Effect For a Few Hours -- What Do You Do If You Collected It?

2008-01-11T10:41:00.000-06:00

The MI Services tax was in effect for a few hours on 12/1/2007. The repealing law allows the businesses that collected the tax to either refund to the customer or pay to the state. For taxpayers that did not collect the tax the legislators have agreed to pass legislation to hold them harmless.

Tax "Paperwork Snafu" Results in Bad Pubilicity

2008-01-11T09:58:00.001-06:00

Just about the last thing a tax department wants is something they are responsible for to result in bad publicity for their publicly-held company. Here's an example of something that my guess is not the tax department's mistake, but was a major crisis to deal with for a well-known company.

Tax Department Pays $38,569 for a 12 Pack of Toilet Paper

2008-01-11T09:44:00.001-06:00

You've seen the headline that goes something like this: "Federal Government Pays $735 for a Hammer". Well, here's a case where a retailer probably had to spend many thousands dealing with a customer who filed what she called a "message lawsuit". The question you have to ask yourself is "what's the message?"

You try to get the tax rates right on the right items taking into account crazy tax laws all over the nation, and you get it wrong a 12-pack of toilet paper and you get sued over that? Give me a break. We must have bigger problems to fight than this.

Check out this article in the Pittsburgh Tribune-Review.

And I quote: "A Murrayville homemaker has won another legal battle against a retail giant.
Mary Bach, 63, sued Kmart after its store on Mall Boulevard in Monroeville charged her 7 percent sales tax on two 12-pack rolls of Angel Soft toilet paper -- a non-taxable item, according to the state Department of Revenue. On Thursday, Monroeville District Judge Herbst ruled in Bach's favor, finding Kmart twice levied the tax improperly. She gets $100, plus court costs.
Company spokeswoman Kim Freely said the tax was charged in error that the problem has been fixed. The Tribune-Review bought the same toilet paper yesterday tax-free.

"Bach, a self-proclaimed consumer advocate, has successfully sued other retailers including Wal-Mart and Radio Shack for incorrectly taxing items. Bach calls them "message lawsuits."

"I want to be in a position to educate consumers," Bach said. "The only thing retailers understand is a message lawsuit."

What's the message?

Do People Shop Online to Avoid the Tax -- Looks Like the Answer is No

2008-01-11T09:14:00.001-06:00

According to this article in Forbes magazine, 17 out of the top 20 Internet retailers are brick and mortar operations that collect tax. Also, it is estimated that consumers paid sales tax on half of their online purchases this Christmas.

So maybe avoiding sales taxes isn't the main lure of shopping online. Even though you wouldn't be surprised people would try to avoid the tax which now averages more than 8.5% in the taxing states.

This estimate that half the sales taxes owed by consumers on the purchases of goods online are being collected anyway was made by William Fox, director of the Center for Business and Economic Research at the University of Tennessee. He bases that estimate on surveys of Web sites he and his students have conducted over the last two years.

"I was surprised to find it was so high. And if anything, it's growing," says Fox.

Only three of the 20 largest online merchants in 2006 were pure online operations, according to Internet Retailer's annual rankings. Staples (nasdaq: SPLS - news - people ), Office Depot (nyse: ODP - news - people ), Sears Holdings (nasdaq: SHLD - news - people ), Best Buy (nyse: BBY - news - people ), J.C. Penney (nyse: JCP - news - people ), Wal-Mart Stores (nyse: WMT - news - people ), Circuit City (nyse: CC - news - people ) and Target (nyse: TGT - news - people ) all made the top 20. All collect sales tax. Limited Brand's (nyse: LTD - news - people ) Victoria's Secret, which collects taxes, sold more online last year than did Overstock.com (nasdaq: OSTK - news - people ), which only applies tax to shipments bound for Utah.

As the article in Forbes states, even non-traditional retailers have started moving into the tax line, too. Dell (nasdaq: DELL - news - people ) began collecting sales tax nationwide last year, prompting some grumbling online by surprised shoppers. CDW (nasdaq: CDWC - news - people ) began collecting in 2005.

Retailers are finding that customers like being able to return a defective DVD player purchased online to a local store.

We've blogged before about it being pretty well-settled that if you are a retailer that allows people to return items to a brick and mortar location, you have nexus -- even if the online retailer and the brick/mortar one are in separate legal entities.

A Separated Contract Would Have Solved This

2007-12-18T10:17:00.001-06:00

Generally speaking in most states, if you are a contractor doing work for an exempt entity like a school or a church, or if you are the church or school or other exempt entity, you are better off using a separated contract approach. It is generally better to separately state the charges for labor and materials.

Why is that? In many states, the contractor is deemed to be the "consumer" of materials they use in building a structure. So if the contractor enters into one lump-sum agreement say to build a new school for $10M, then the contractor will generally be liable for tax on purchases of steel, lumber, etc. Even though those materials would be exempt from the tax if they had been purchased directly by the school.

Another case with these type of facts has come up in Georgia. This is the headline from CCH: "Contractor's Purchases for Exempt Hospital Authority Were Taxable"

"The Court of Appeals of Georgia has held an Illinois contractor liable for Georgia sales and use taxes on purchases it made for a tax-exempt Georgia hospital authority because the purchases were made in the performance of the contract. The court found that Georgia law does not provide for a "derivative" sales tax exemption based on any agency relationship that the contractor had with the tax-exempt authority."

The contractor argued that it was functioning as the "agent" of the hospital when it bought materials. The contractor lost at every level from the administrative all the way to the appeals court. It appeared the appeals court was sympathetic to the contractor's plight, but said the legislature would have to cure this problem. Let us know if you'd like a copy of this case.

The better solution is usually for the school to enter into separate contracts with the contractor, or it may even be better for the school to buy the materials itself without even using the contractor in the middle.

So Exemptions are Called "Loopholes" Now -- Winds of Change Are Blowing In Florida

2007-12-17T09:36:00.001-06:00

Get ready Floridians, John McKay has you in his sights. See this article in the Bradenton Herald. And I quote: "The finance committee of Florida's Taxation and Budget Reform Commission has decided unanimously that the Legislature should have to review hundreds of sales-tax exemptions and exclusions, and revamp Florida's sales-tax system.

The measure opens the door for a plan suggested by Bradenton businessman and former state Senate president John McKay earlier this month. His plan calls for property taxes to be slashed by 40 percent, and replaced by about $9 billion worth of repealed sales-tax exemptions and exclusions that have allowed hundreds of materials and services to go untaxed for years."

What's interesting to me is that McKay calls these exemptions passed into law for a reason by the FL legislature "loopholes". That's going too far. Here's the quote in the article from Florida TaxWatch director of tax research Kurt Wenner, "A review of exemptions and services is a good thing. However, the rhetoric about there being $27 billion in loopholes is just wrong. The vast majority of exemptions are there for a reason, and mostly legitimate reasons."

What politicians seem to forget is that state's have legitimate reasons to encourage businesses and individuals to live and work in their state. People and businesses can vote with their feet and politicians can stay there and tax the few remaining companies into oblivion.

NY Decides to Go After Amazon, But Did Hillary Intervene on This Too?

2007-12-17T08:37:00.002-06:00

You know the New York State Department of Taxation and Finance and every other revenue department across the country would like to get their hands on Amazon.com. Well NY came up with an approach to do just that. Apparently it was at the behest of the Honorable Governor Elliott Spitzer.

The Department issued a Memorandum detailing its policies for out-of-state companies selling to customers in New York. A copy of the memo is included below. This was a well-thought out memo with a number of examples. It was obviously targeting companies like Amazon. So how does Amazon have nexus in NY you ask? Well, here comes the novel idea. NY said that Amazon had nexus because of all the agents operating in the state. Did they mean subcontractors or even agreements with Brick and Mortar stores to take returns or advertise for Amazon? No. But Amazon did have a "affiliate" program.

Almost every online seller has these programs whereby on website can post a link to the host website advertising, say a book for sale. If the visitor to the "agent" website clicks on that link to the host website and actually buys the book, then the agent website earns a small commission. NY said this created nexus for Amazon. That is a scary concept right there.

What this means of course is New Yorkers were going to have to pay tax on items purchased from outlets like Amazon. But what it really means in this political environment is it makes Hillary look like all she wants to do is tax people. So my theory is Hillary's people talked to Spitzer's people and said, "hey, are you secretly working for Obama or what?" Whether that actually happened is anyone's guess, but it's certainly not without precedent. Remember the driver's licenses. See this article in the NY Sun for more on this angle. And I quote: "In a second major policy reversal in less than a day, Governor Spitzer is backing down from a plan to require Amazon.com and other online retailers to charge state and local sales taxes on all purchases from New York...The turnabout came just hours after Mr. Spitzer said he was dropping his plan to allow illegal immigrants in New York to obtain driver's licenses."

But the bigger issue for state tax watchers is this new frontier blazing by New York. So they want to take the position that a link on someone else's website, who has no relationship to your company whatever, means they are your agent. This agency relationship gives the state the right to force you to collect their sales tax. Yikes.

Here's the original Memorandum (see the bottom of this post for a copy of the retraction) :

ADMN-RUL, STATE-ARD, ¶405-893, Technical Services Bureau, Taxpayer Services Division, New York Department of Taxation and Finance, NY --TSB-M-07(6)S, Sales and Use (Nov. 09, 2007)Technical Services Bureau, Taxpayer Services Division, New York Department of Taxation and Finance, NY --TSB-M-07(6)SW A Harriman Campus, Albany NY 12227 www.nystax.govNew York State Department of Taxation and FinanceOffice of Tax Policy Analysis Taxpayer Guidance DivisionTSB-M-07(6)SSales TaxNovember 9, 2007Requirement to Register as a Sales Tax Vendor for Out-of-State Companies Soliciting Sales Through Representatives
This memorandum explains the Tax Department's policy regarding the requirement of certain businesses that make taxable sales of tangible personal property or services to register as vendors for New York State sales tax purposes, and to collect New York State and local sales taxes. Specifically, this memorandum explains the application of the sales tax law and regulations to e-commerce retailers who use independent contractors, agents, or other representatives (representatives) within New York State to solicit sales or to make or maintain a market for their products or services.
E-commerce retailers may use persons who act as representatives to solicit sales or to make or maintain a market in return for commissions, referral fees or other types of compensation. The agreement between the e-commerce retailer and its representative usually takes the form of the e-commerce retailer agreeing to pay compensation to the representative for sales that can be directly attributed to the solicitation activities of the representative.
For example, the representative may be a private club that agrees to actively refer its members and to solicit other persons to purchase products from the e-commerce retailer's Web site by providing a specialized link from the club's Web site to the e-commerce retailer's Web site. Alternatively, the club may refer persons directly to the e-commerce retailer's Web site with instructions to enter a code number or other information that will identify to the e-commerce retailer that the club is responsible for the referral. The sales that result from these activities can be tracked and a commission or other compensation is paid to the club based on the amount of resulting sales.
Under the New York State Tax Law and the Sales and Use Tax Regulations, the term vendor includes persons who solicit business within the State through employees, independent contractors, agents or other representatives and, by reason thereof, make sales to persons within the state of tangible personal property or services that are subject to sales tax. Accordingly, if a business located outside New York State solicits sales of taxable tangible personal property or services through employees, salespersons, independent agents, or representatives located in New York State, the business must register as a vendor and obtain a Certificate of Authority for New York State sales tax purposes. (Tax Law Section 1101(b)(8) and Sales and Use Tax Regulation Section 526.10(a)(3)).
As illustrated by the examples below, the physical presence in New York State of a representative of an e-commerce retailer soliciting sales or making or maintaining a market in New York on behalf of the e-commerce retailer, for commissions, referral fees or other compensation, is sufficient to require that retailer to register as a sales tax vendor. (See Tax Law Sections 1101(b)(8), 1131(1), 1134(a), Sales and Use Tax Regulations Section 526.10 and Scripto Inc. v. Carson (362 U.S. 207)). As a registered vendor, the e-commerce retailer must collect New York State and local sales taxes on all of its sales of taxable products and services that are delivered within New York State, and must file the appropriate sales tax returns. However, a person is not considered a vendor merely because the person has advertising disseminated or displayed on the Internet. (See Tax Law Section 12 and TSB-M-97(1.1)S).
A business may apply for a Certificate of Authority by using the New York State Online Permit Assistance and Licensing link at Web site www.nys-permits.org, or by completing Form DTF-17, Application To Register For a Sales Tax Certificate of Authority, and mailing it to the Tax Department to the address specified on the form. (See Tax Law Sections 1131(1) and 1134).Example 1:
XYZ Company (XYZ) is an Internet-based retailer of sporting goods specializing in downhill skiing equipment. XYZ is located in Vermont, where it has its administrative offices and its warehouse, which holds its inventory for sale. XYZ makes sales of its merchandise throughout the United States and has customers in New York State. The merchandise sold by XYZ is delivered by the U.S. Postal Service or by common carrier, such as United Parcel Service or Federal Express.
As part of its marketing plan, XYZ has entered into an agreement with Downhill Ski Club (Ski Club), which is based in Saratoga Springs, New York, whereby Ski Club will maintain links to various skiing equipment listed for sale on XYZ's retail Web site on the Club's own Web site. XYZ will pay a commission to Ski Club based on the amount of sales that XYZ makes that originate from the links on Ski Club's Web site. Ski Club uses the commissions as a fundraising activity to partially offset the expenses for the ski trips it sponsors. To maximize its commissions, Ski Club actively solicits its members and the local community to purchase new skiing equipment through the Ski Club's Web site by clicking on the link to XYZ's retail Web site and making their purchases from XYZ.
XYZ may have similar arrangements with other representatives in New York, but otherwise has no other additional connection with New York State that would cause XYZ to register as a New York State sales tax vendor. Based on its agreement with Ski Club, XYZ is considered to be soliciting business in New York through Ski Club, which is acting as an independent contractor, agent or other representative of XYZ, and making sales of taxable tangible personal property to persons within New York State. Therefore, XYZ must register as a New York sales tax vendor, collect New York State and local sales taxes, and file the required sales tax returns.Example 2:
This example follows the same facts as in Example 1 except that Ski Club does not have its own Web site. Therefore, Ski Club solicits sales of XYZ's merchandise by directing its members and the local community to XYZ's Web site with instructions to enter a specific code number when making their purchase. By entering the code number, Ski Club is identified by XYZ as the organization responsible for referring the purchaser to the Web site, and a commission is paid to Ski Club by XYZ based on the resulting sales.
XYZ is considered to be soliciting business in New York through Ski Club, which is acting as an independent contractor, agent or other representative of XYZ, and making sales of taxable tangible personal property to persons within New York State. Therefore, XYZ must register as a New York sales tax vendor, collect New York State and local sales taxes, and file the required sales tax returns.Example 3:
John Smith is the author of a guide book to kayaking on New York lakes and rivers. The book is listed for sale on an e-commerce retail Web site. Mr. Smith maintains a Web site that contains a variety of information on kayaking and also contains a link to the e-commerce retail Web site through which visitors to his site may purchase his book. For each visitor that follows this link and purchases his book from the e-commerce retail Web site, Mr. Smith is entitled to receive compensation from the e-commerce retailer. Mr. Smith regularly speaks on the subject of kayaking at forums within the State. In the interest of earning commissions from the ecommerce retailer, he actively markets his book at these events by referring attendees to his Web site, where potential purchasers can click on the link to the e-commerce retailer's Web site and purchase his book.
Based on this arrangement, the e-commerce retailer is considered to be soliciting business through Mr. Smith, who is acting as an independent contractor, agent or other representative of the e-commerce retailer, and making sales of taxable tangible personal property to persons within New York State. Therefore, the e-commerce retailer must register as a New York sales tax vendor, collect the New York State and local sales taxes, and file the required sales tax returns.
This memorandum is intended to clarify current policy and does not reflect any change in requirements for vendors doing business in New York State. If an out-of-state business should have been registered based solely on the information contained within this memorandum, but was not registered, the department will not assess any prior sales taxes due or any civil or criminal penalties or interest for the failure to collect and remit any prior sales tax due, if the business registers and begins collecting sales tax by December 7, 2007.
For further information on what tangible personal property and services are subject to tax and how to register for New York State sales tax purposes, see Publication 750, A Guide to Sales Tax in New York State that is available through the department Web site at www.nystax.gov, or by contacting our Sales Tax Information Center at 800-698-2909.
NOTE: A TSB-M is an informational statement of changes and clarification of the law, regulations, or department policies. It is accurate on the date issued. Subsequent changes in the law or regulations, judicial decisions, Tax Appeals Tribunal decisions, or changes in department policies could affect the validity of the information presented in a TSB-M.

And here's the retraction:

Office of Tax Policy Analysis
Taxpayer Guidance Division
TSB-M-07(6.1)S
Sales Tax
November 15, 2007
Notice of Withdrawal of TSB-M-07(6)S
TSB-M-07(6)S, Requirement to Register as a Sales Tax Vendor for Out-of-State
Companies Soliciting Sales Through Representatives, has been withdrawn.

Taxable Crane Rental or Nontaxable "Lifting Service"?

2007-12-14T17:30:00.001-06:00

Florida has changed its position on the taxability of a crane rental with an operator. They now take the position that providing a crane to a customer on an operated and maintained basis constituted a "lifting service" in which control of the crane was never transferred to the customer, and Florida sales tax did not apply to that service. This ruling revises a Technical Assistance Advisement issued in 1995.

According to the ruling, the operation of a crane is an inherently dangerous activity, and an operator/employee could not shift control or operation to its customer. The customer had no right or authority to even enter the crane cab, and the crane company's operators were solely responsible for the operation and safety of the crane. An indemnity clause in the service contract stating that the equipment and operator were under the lessee's exclusive supervision and control did not change the character of the contract from a service to a lease or transfer control of the crane to the lessee for sales and use tax purposes. Since the crane company was using the cranes to perform a nontaxable service, a use tax would be due from the crane company on its purchase or lease of the cranes. Technical Assistance Advisement, No. 95A-022-R, Florida Department of Revenue, October 25, 2007

The Great Pumpkin Tax -- UPDATE -- Refund Opportunity!!

2007-11-09T15:15:00.001-06:00

In an earlier post we mused about what the IA DOR must have been thinking when it decided to impose the Pumpkin Tax. Well, the pen is mightier than the sword I guess. The Governor must have read our blog and decided to intervene.

According to CCH, "Governor Chet Culver has directed the Iowa Department of Revenue to suspend the collection of sales tax on pumpkins."

This directive was issued on October 31, though, so the tax savings would have been minimal, but the Governor must have been in a merry mood because he also directed that "Taxpayers who have paid the tax can apply for a refund with the Department."

Now, I think pumkins should be exempt everywhere, but, one must ask, how does the Governor have this type of authority anyway?

Amazon.com May Incur the Wrath of the Media

2007-11-09T14:47:00.001-06:00

Misunderstanding the tax law and how it works, does not mean a newspaper editor will refrain from bashing a company. Dean Baker wrote an editorial for the Chicago Sun Times on November 4, 2007, entitled "How Amazon got rich on our tax dollars". The title presages the content. Here's a few of the blistering quotes:

"The business press has written numerous stories explaining how Jeff Bezos, Amazon's founder and CEO, is a truly brilliant businessman. This may well be true, but the secret of his success is not in the futuristic world of the Internet, rather it's in the old-fashioned world of tax avoidance."

Whenever a writer uses the word "loophole", it's never good for the company being attacked.

"Thanks to a loophole in the law, Amazon is not required to collect sales tax on its sales. Amazon effectively splits this tax bonanza with its customers, giving them an incentive to keep coming back."

But isn't this a "win-win" situation? The company benefits and the customer benefits, right? I think so, but what I think doesn't add up to much. What the buying public thinks is a big deal. Will they be influenced by this type of vitriol?

"While Amazon and its customers can both be happy about this situation, this is not a classic win-win story. The sales diverted to Amazon and other Internet retailers came at the expense of old-fashioned brick-and-mortar retailers who haven't mastered the 21st century skill of tax avoidance. These old-timers are losing business and profits because of Amazon's tax subsidy.
State and local governments are also losing tax revenue. This means these governments must either cut back services provided to their residents or they must raise other taxes. Of course, buying goods over the Internet does not reduce the demand for services from state and local governments. So, when politicians promise not to tax the Internet, they are in effect promising to impose higher taxes on items other than Internet purchases."

Do You Have Nexus in IL?

2007-11-09T14:36:00.001-06:00

Illinois issued a recent letter ruling with some specific examples of activities that create sales tax nexus in their state. And I quote:

"The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904 (1992), set forth the current guidelines for determining what nexus requirements must be met before a person is properly subject to a state's tax laws. The Supreme Court has set out a 2-prong test for nexus.

"The first prong is whether the Due Process Clause is satisfied. Due process will be satisfied if the person or entity purposely avails itself or himself of the benefits of an economic market in a forum state. Quill at 1910. "

That's the first prong, it's their commenary on the second prong of the test that is interesting.

"The second prong of the Supreme Court's nexus test requires that, if due process requirements have been satisfied, the person or entity must have physical presence in the forum state to satisfy the Commerce Clause. A physical presence is not limited to an office or other physical building. Under Illinois law, it also includes the presence of any agent or representative of the seller. The representative need not be a sales representative. Any type of physical presence in the State of Illinois, including the vendor's delivery and installation of his product on a repetitive basis, will trigger Use Tax collection responsibilities. "

Officer Liable for Unpaid Tax Even Though Company Run by Independent Contractor

2007-11-09T14:27:00.003-06:00

In a recent administrative hearing in Illinois, an owner of a car dealership who did not actually run the day-to-day operations of the dealership was held liable for taxes not remitted.

This is a tough case. There was this car dealer who wanted to sell his dealership to another company. The other company was going to have to be approved by Chrysler. So while the application was in process, the two parties executed a management agreement. The new company would come in and run the place like they owned it. The management agreement covered the tax issue -- it would be the responsibility of the new company. You'd think you were in good shape from a sales tax standpoint. But not in IL.

But the new operator didn't remit the tax collected. The prior owner claims he had no idea that the tax wasn't sent in. On audit, IL assesses the prior owner saying he was a "responsible officer". IL won the case at the administrative level. The government always seems to get their money, and they get it from the easiest source. (Illinois Department of Revenue, IL --Administrative Hearing Decision No. ST 07-13)

Media Thinks Manufacturing Gets A "Whopping" Tax Break

2007-11-09T14:08:00.000-06:00

An article in the Atlanta Journal and Constitution caught my eye because it was all about how the medical industry is a big "winner" because it will retain some sales tax exemptions. According to the AP writer Shannon McCaffrey, the industries that contributed the PAC got the best deductions. Then there was this throw away line that reveals some bias, maybe, and lack of understanding of double taxation certainly:

"The biggest single exemption in Richardson's plan is on the sale of raw materials to manufacturers worth a whopping $3.2 billion."

Always interesting how things are viewed by the opinion shapers.

What's Going on in Michigan?

2007-11-09T11:44:00.001-06:00

On October 2, 2007, the Governor signed a bill imposing a sales tax on 23 new services to be effective December 1, 2007. These services are:

-- business service center services;
-- consulting services;
-- investment advice services;
-- janitorial and landscaping services;
-- warehousing and storage services;
-- packaging and labeling services;
-- document preparation services; and
-- many personal services, such as concierge and psychic services.

Now they're getting cold feet. That's good.

So then on November 1, the Michigan Senate has passed a bill (S.B. 845) to postpone the imposition of the new 6% use tax on services from December 1, 2007, to December 20, 2007.

According to CCH, the goal of this new bill is to provide the Legislature additional time to find an alternative to the new tax.

Then the Michigan Senate has passed S.B. 838, a bill to repeal the imposition of the new 6% use tax on selected services immediately when the tax takes effect on December 1, 2007. S.B. 845, a bill to postpone the imposition of the new tax from December 1, 2007, to December 20, 2007, can only take effect if S.B. 838 is enacted.

Sounds to me like it's back to the drawing board for MI, if the Governor signs this bill.

The Detroit Free Press even editorialized on the new tax law, saying it is "capricious, complicated and potentially burdensome to businesses big and small. It taxes an odd mix of services and exempts others, based, evidently, on legislative perceptions of what sort of spending for services is discretionary as opposed to necessary -- and on who had the loudest lobbyists when the tax plan was being duct-taped together."

Ouch.

They're saying it's "time to bring serious proposals out into public view, with plenty of time for everyone to dissect them, discuss them, and, if needed, present them to voters next August or November."

Let's see how things develop there.

Handing Out Coupons in CA Gives You Nexus There?

2007-11-09T10:08:00.001-06:00

You know Barnes & Noble, the big box bookstore operating all across the US. They just won a nice victory against the CA SBE in the CA Superior Court (Barnesandnoble.com LLC v. State Board of Equalization, California Superior Court, San Francisco County, Case No. CGC-06-456465, October 11, 2007). They are not a client of ours, but according to the published court case, here are some relevant facts regarding the corporate structure, during the applicable tax period.

They had a parent company, let's call it BN. BN had a number of subsidiaries. These included subs we'll call Booksellers (owned 100%), BN.com (owned 100%) and BN.com LLC (owned 40% by BN and 40% by another unrelated company and 20% by BN.com. That's a mindful, but it's important. BN.com LLC is the plaintiff in this case, at it is the Internet retailer. Booksellers (the 100% sub of BN) is the company that operates the actual brick and mortar stores. It is not an owner of the plaintiff, but it shares some common owners.

They were careful to set up this Internet reseller so that it would not have sales tax nexus in other states. They had no physical presence in CA for one thing. They were housed in a separate building from other BN entities, the management of the plaintiff was different and distinct. And finally, the plaintiff did not allow its customers to return books or other products.

States have used these factors and others to argue that while a dotcom entity itself may not have a physical presence in their state, they are using their sister companies as agents in the state. That agency relationship is what gives the states the right to force the dotcom to collect sales tax. California was successful in the Borders Online case, but in that situation, the online entity had substantially overlapping boards of directors, and perhaps most importantly, the brick and mortar stores accepted returns and their empoyees actively solicited business for the online entity.

Well the plaintiff in this case did not meet any of the criteria commonly used by the states. But that didn't stop CA from going after them. So what was the plaintiff doing that made CA think they should register and collect tax? Not much. But CA thought it was sufficient.

BN.com LLC, the Internet retailer, put coupons in Bookseller's customers' shopping bags adverstising the existence of the dotcom and offering a discount on online purchases. That's it. They didn't even ask Booksellers to stuff the coupons in the bags -- they hired an independent vendor to do that.

CA argued that on the "basis of the coupons alone" Plaintiff was "retailer engaged in business in the state" with a "substantial nexus in California". They contended that Booksellers acted as Plaintiff's agent.

Does that seem like a reach or what?

The Superior Court said this was not enough of a connection or enough of a relationship to call it an "agency relationship". They specifically said that "the fact that Plaintiff and Booksellers are sister corporations does not support a finding of fact that Booksellers as Plaintiff's agent." They also pointed out -- much to the chagrin of CA, I'm sure, that the "concept of agency requires something significantly more" than passing out coupons. They say this, and this helps: "An essential element is that the agent (or representative) must have the authority bind the principal..."

That's the good news.

The bad news is that CA thought they had a good case here. The bad news is that what this case really says is that you really have to go to great lengths not to have nexus. I think most dotcom affiliates of brick and mortar retailers are concluding that the risk of losing a case like this is not worth the effort of setting the structure up in just the right way to avoid a finding of nexus.

My opinion is that more and more people buy stuff online because its convenient to do so. Being able to return something you don't like, or doesn't work to a brick and mortar makes many people more inclined to shop at a brick and mortar dotcom affiliate, even if they still have to pay tax to do so.

We have a copy of the case available on our website if you'd like it.

What's the Rush to Tax? Maryland Trying to Solve Deficit

2007-11-09T09:51:00.001-06:00

So Maryland has a projected $1.5B deficit they're trying to deal with. What creative approach do they conceive? Increase taxes. The Governor wants to raise the tax rate to 6% from 5% and tax a raft of new types of businesses. But these things have to be done with input from the taxed businesses. But in politics, you have to strike while the iron is hot. Some legislators, don't like it though.

I like this quote from an impassioned Sen. E.J. Pipkin, R-Upper Shore, as quoted in the Maryland Daily Record who said the proposal was moving too quickly and there should be more time for people to respond to the proposal and for legislators to clarify the intent of the legislation. “What’s the rush this week …? You’ve just included millions of people into a tax bill, and you didn’t get the input of the industry, and you’re saying we didn’t have time.”

Even Maryland Comptroller Peter Franchot is quoted as saying “It’s an example of what happens when you try to implement tax policy at warp speed in a highly charged political environment... adding a tax provision of this magnitude to legislation at the 11th hour — without the courtesy of advance notice, the benefit of meaningful public input or sufficient understanding of its effects — plays into the hands of those who would unfairly question Maryland’s business climate,” Franchot wrote.

It appears that Maryland may end up taxing "computer services". That's always problematic. A number of states have tried that and always find that the big difficulty is determining whether to tax is due and to what extent on services that were performed out-of-state for in-state companies.