Thursday, September 29, 2005

What constitutes "direct use?"

What constitutes "direct use?"

I get this question in EVERY seminar when we start talking about manufacturing. In most states, there are exemptions for manufacturing equipment directly used in production. The same idea, by the way, also applies to agriculture, mining, fishing, etc.

So what IS direct use?

Every state has a different definition, but here are my rules of thumb to help you, at least, understand the issues:

Space proximity: How close is the item to the actual process itself. If it is far removed from the production area, it probably isn't directly used.

Time proximity: How close, in time, is the use of the product to the actual production. If it's used at some point in time well before or after the production, then it probably isn't directly used in the process.

For example, a packaging machine used in the shipping department to wrap up a skid of product is used significantly AFTER production and away from the process. But a wrapping machine that packages the product while it's moving through the production equipment IS probably close enough in time and space to be considered to be directly used in the process.

Causal relationship: Does the item cause a change in the product. Or does it affect something else that causes a change. If it's not directly causing a change, it probably isn't directly used in production. For example, if a drill is used to drill a whole in the product, it's directly used. But if it's used to fix a piece of manufacturing equipment, it isn't used directly in the process.

Another example might be a step-down transformer. Does it act on the product? No. It acts on the electricity, which acts on the machinery, which acts on the product. So a step down transformer, under this logic, would be indirect. Note, however, that many states DO consider step-down transformers to be directly used.

Essential to the process: This ropes in a bunch of stuff that may not be previously covered, like foundations, step-down transformers, foundations, safety equipment, etc. The question may simply come down to this question: Would production SHUT DOWN immediately if this item was suddenly to disappear?

Remember, EVERY state has different rules for what they consider to be directly used in the process. So review their rules carefully. But hopefully, you'll now have a better perspective on what "direct use" means.

Sales Tax Guy

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Friday, September 23, 2005

Editorial: Expanding the tax base

I've been reading recently about states (Pennsylvania and California in particular, but others as well) that are considering expanding their tax base by taxing more services. Part of the deal is that the politicians will reduce other taxes, like property taxes, or reduce the general sales tax rate. There are obvious issues here with taxing services, but enough states already do this so it isn't new ground...we know that it can work, if not well.

However, what isn't mentioned enough is the more cynical perspective. Let's say a legislature expands the tax base by hitting services, but they offset this by reducing the general rate or dropping some property tax. But then, in a couple of years, when the state has another fiscal crisis (and you know they will), they simply raise the tax rate back up to where it was or reinstitute the property taxes. The ultimate result is no savings for the taxpaper - in fact it WILL be a tax increase.

Expanding the tax base is a rocket-sled to higher taxes. If not now, then later. Voters shouldn't allow politicians to expand a tax base based on a promise that other taxes will fall. They might temporarily, but they WILL go back up. We're talking about trusting politicians here. If a legislature wants to expand the tax base, they should be honest about it (yeah, sure) and not promote it with the promise of a reduction in other taxes. Because, long term, there will NOT be any reduction in other taxes.

In a previous life, I sold accounting software. During that period, I went through a couple of "commission plan restructurings." When management presented the new plans to us, they ALWAYS said that the objective was to make us more money. Because of my accounting background, I knew the real reason - to cut their commission costs. When you hear talk by a politician about "restructuring" the tax base, it means ONLY one thing, higher taxes in the long run.

Whew. Glad I got that out of my system.

Don't have to read the disclaimer on this one.


Wednesday, September 21, 2005

FAQ - Which tax applies when customer orders in my store?

FAQ - Which tax applies when customer orders in my store?

A customer comes into my store (let's say Louisiana) and orders TPP, which I then ship to his office in a neighboring state (let's say Texas). Which tax is due?

If your agreement with the customer is that you ship to his location in Texas, then Texas tax applies (along with Texas rules). That assumes this was equipment that the customer couldn't take with him - in other words, the sale wasn't consumated until he got the goods in Texas. If he could have taken it, and you shipped it "for his convenience", then the title probably transferred in your state, and therefore Louisiana tax and rules apply. This is a gray area and you need to look very carefully at your state laws.


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Monday, September 12, 2005

News: SSTP

Here's a good article from CNET on the Streamlined Sales Tax Project and some of the issues it's trying to resolve, as well as obstacles it faces.


Friday, September 02, 2005

FAQ: Do I have to charge tax on my shipments out of state?

FAQ: Do I have to charge tax on my shipments out of state?

It generally depends on two things:

1. What are the requirements of the state you ship from? Generally, if you HAVE to ship out of state to complete your legal responsibilities per your contract with the customer, then the ship-from state has no jurisdiction to tax, unless you know that the property will come back into the state after the transaction.

2. Do you have nexus in the destination state? If you have nexus, then you have to collect THAT state's "sellers use tax." Unless you're lucky enough to be shipping to a state with no sales tax.

What about shipments to Canada or another country?

Basically, it's the same answer. The shipment won't be taxable in the ship-from state, but I'm not an expert on Canada GST and provincial taxes - but I'm guessing they have equivalent rules about nexus.

Sates Tax Guy

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