The Sales Tax Guy: Taxing Policies

Showing posts with label Taxing Policies. Show all posts

Wednesday, June 18, 2014

FAQ - Keeping the Lights On in the Manufacturing Plant

This issue comes up a lot in seminars...

Usually, environmental equipment (keeping the lights on, maintaining a comfortable temperature in the plant, etc.) is taxable, even in states that grant exemptions for manufacturing equipment and materials. The problem is that, while necessary, the lights and temperature in the plant don't have a direct impact on the product being processed. If you want to make the argument that you need the lights on to operate the equipment, I'd agree with you. But you also need the sales and marketing department to keep the plant operating. That doesn't make them exempt. The rules are generally that the item must be directly used in the manufacturing process.

What does directly mean? This is not the rule in the majority of states, but it's my rule of thumb.

In order for an item to be exempt under manufacturing rules, the item must touch the product.

I admit that's strict and most states aren't quite that nuts. But if you're going to argue for an item to be exempt before the Sales Tax Guy Tribunal, you'll need to rationalize from that statement. Good luck.

The Sales Tax Guy http://salestaxguy.blogspot.com

See the disclaimer on the right.

Don't forget our upcoming seminars and webinars. http://www.salestax-usetax.com and there's more sales tax news and links here http://salestaxnews.blogspot.com

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Thursday, April 19, 2012

Nutty Rules: Georgia and the DAR

I did a "Taxing Policies" webinar for Georgia today. While putting the finishing touches on my research, I took note of their rules for non-profit organizations. Georgia is one of those states that doesn't have a broad exemption for non-profit organizations. In fact, they only have exemptions for a handful of groups. But one of those few is the Daughters of the American Revolution. Now, I've looked at Georgia's rules many times before, but it hit me this time because the wife of a friend just became a "daughter."

Here are the questions that leap to mind. First, how can they justify this treatment? They don't have a similar exemption for the Sons of the American Revolution! Which sounds vaguely discriminatory. And why in the hell (oops, we're talking about the DAR here) - I'll start over. Why in the heck would they give an exemption for the DAR when they don't even exempt the Boy Scouts and Girl Scouts?!? Seems...tacky.

Hmmmm. I'll just let these float out there as rhetorical questions. Because I'm absolutely sure there's a perfectly valid reason.

Nothing to see here. Move along.

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details that haven't been discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: any images above are hosted on Flickr. If you'd like to see more, click on the photo.

Wednesday, March 21, 2012

Great Article: Sales Tax: Not Just for Widgets Anymore

from Intuit and Shane Ratigan

Back in the good old days, sales and use taxes applied to tangible personal property. But that changed and now many services are taxed depending on the state. A nice discussion about this change and what it means to you. Enjoy the article.

This link is part of a series called "Excellent articles that I wish I had written." The short name is "Great Articles."

The Sales Tax Guy
http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Saturday, March 03, 2012

Adventures in Sales Tax: Spas

If you follow my Twitter feed, you may have noticed that I have a weird interest in tweeting about sales tax violations that result in felony charges. The vision of someone doing the "perp walk" because of sales tax is a strangely intriguing one to me. These situations usually occur because a small business has collected sales tax and failed to remit it to the state. The business has charged the customer tax, but not remitted it. That's defrauding the customer. That's a pretty clear and "perp-walkable" crime to me. And they failed to pay the money to the state, which really ticks off the revenuers.

Today I came across this article about a couple of massage parlors getting busted in Columbus, Indiana. There were the obvious charges that you would associated with such a business. But there were over $350,000 in sales tax assessments!

I tweeted the article, but then thought about it. Some states impose a tax on massage services. Not many, but some do. I knew that Indiana didn't impose such a tax (they don't generally tax services). What could the assessment be for? Yeah, they might sell a bottle of oil once in a while, but not enough to get to that kind of liability. And if these places really are being used for what the criminal complaint describes, who buys oil?

So I opened up my trusty sales tax database. I confirmed that there was no tax on massage services. Then I searched Indiana for "spa." Nothing. Then I searched for "massage." Bingo!

Under Ind. Code § 6-2.5-4-4 (which is the section of lodging, accommodations and hotel rooms):

(a) A person is a retail merchant making a retail transaction when the person rents or furnishes rooms, lodgings, or other accommodations, such as booths, display spaces, banquet facilities, and cubicles or spaces used for adult relaxation, massage, modeling, dancing, or other entertainment to another person: (1) if those rooms, lodgings, or accommodations are rented or furnished for periods of less than thirty (30) days; and (2) if the rooms, lodgings, and accommodations are located in a hotel, motel, inn, tourist camp, tourist cabin, gymnasium, hall, coliseum, or other place, where rooms, lodgings, or accommodations are regularly furnished for consideration.

Those sneaky sons of guns in Indianapolis. They nailed 'em on a section of the tax law I didn't expect...hotel rooms. Now, nobody would ever think the business of a massage parlor is renting cubicles - it's incidental to the "service" being performed. But if you're looking for a way to tax this kind of activity, and your state doesn't tax services, this will do quite nicely. Everyone taxes hotels, just slide this extra "booth" clause in there.

What a great way to nail the bad guy. Create a tax he would never have thought of and nail him with it just as the SWAT team bursts in! (OK, I'm making that up).

So I learned something new today about Indiana. And I'm going to be looking at those lodging statutes a little more carefully in the future. And if you operate a massage parlor, you probably should as well. Before those guys with the bullet-proof vests knock on your door.

Tuesday, February 28, 2012

Great Articles: Clothing Confusion

from Avalara and Mark Wilhelm
In the few states that have clothing exemptions, the rules are very confusing. The first article deals with New York and the second, Massachusetts. But for you poor folk in the rest of the country, you can only dream. Enjoy the articles: NY and MA.

Friday, January 20, 2012

Great Articles: Two on Groupon and Living Social, etc.

For whatever reason, I've had two good (and technical) articles circling for too long in my bookmarks. They're both on Groupon, Living Social and other similar services.

Yes, there are rather interesting sales and use tax issues associated with these type of offers. And I don't want to write about these topics. I mean I REALLY don't want to write about them. So I'll refer you to two excellent treatments. I have written a couple of articles on generic coupons, which were hard enough.

The first is from Sylvia Dion on allbusiness.com

And the other is from Rusty Little on http://dowlohnesprice

Personally, I don't use these offers. My life is complicated enough as it is.

Thursday, January 19, 2012

Movie Production Equipment

There have been a few articles written about this issue, mostly along the lines that it's a stupid exemption and that states should repeal it. I don't disagree. I have the sense that politicians like to grant these exemptions because they get to rub shoulders with Hollywood types, and they like to brag about how they got the latest Transformer movie made in their state. But according to what I've read, the economic and long-term job impact of movies doesn't seem to justify the giveaways that states offer.

I recently saw one state talk about $20,000,000 in credits given in one year. But they could only point to about 1000 long term jobs created, and they weren't even full-time jobs. That's $20,000 per job. I'm not sure that money couldn't have been better spent. But hey, what do I know?

States offer a couple of different types of movie exemptions for production materials and equipment:

1. The purchases are exempt from tax at the time of purchase and the producers present exemption certificates, etc. to the seller

2. The producers pay the sales and use tax and then get a refund, rebate or credit

3. There aren't any sales and use tax exemptions, but there income, franchise or occupation tax credits. Some states even offer grants.

For many states, these exemptions are conditional on the amount spent in the state or the money available to the state to fund the exemption.

As of this date (January 19, 2012) these states have some sort of sales and use tax exemption (item 1 or 2). If their special treatment is in the form of item 3, then I won't list it here. And some cities may do special things that won't be shown here either. Remember, this is just for education. Check these out yourselves to get more details.

Alabama
California
Connecticut
Florida
Georgia
Idaho
Kentucky
Louisiana
Maryland
Massachusetts
Mississippi
New Jersey
New Mexico
New York
North Carolina
Oklahoma
South Carolina
South Dakota
Texas
Utah
Washington

Remember, these are only for sales and use tax exemptions and there are details you need to check!

So get out there and make that movie. Tom Hanks is waiting for your call!

Wednesday, January 04, 2012

A Short Course in Sales and Use Taxes for Artists (Part 2)

This is Part 2 of a "short course" on sales and use taxes for artists. Read the first article in the series for foundational information, more on how this series came to be, and a list of articles (at the bottom). Consider it a prequisite to this article.

Services that you sell (and buy)

In Part 1, the discussion covered the works of art that you sell (hint: they're taxable).

In this part, we'll talk about the services you may sell and buy. And yes, they're sometimes taxable.

Models
If the model is working independently, it's very rare that this service would be taxable (but never say never). However, if you've hired him or her through an agency, there are a couple of states where the fee is, to some extent taxable. And that includes any worker hired through a help supply service.

Make-up artists
Their services are even more taxable than models. Several states tax personal services including make-up. No agency needs to be involved for their services to be taxable.

Digital transfer
If you deliver your work to someone digitally, you might think there's no tax. Well... In the last few years, more and more states have started passing laws and regulations essentially declaring that digital downloads are taxable. And they usually include in the definition photographs, art, music, movies, books, photographs, etc. Essentially, if it was taxable before, and the only thing that's changed is the method of delivery, it's still taxable. Note, this hasn't happened yet in the majority of states. But it's coming. Let's face it. The states were counting on the sales tax on all those CD and DVD sales, but that's going away. I blame iTunes and Netflix.

Commissioned work
This is usually taxable. Even though it's custom and commissioned, you are selling "stuff" and therefore it's taxable. There are a couple of interesting exceptions. One state says that commissioned work that has no value to anyone else is not taxable when sold by the artist to the person who commissioned the work. And another state has an exemption for artists producing work at parties as long as the person giving the party hired them, not the individuals in the portraits. But if you're on the street doing cartoons for hire, you better be charging tax.

Restoration and repair
This is a big one. This type of labor is taxable in about half the states. So if you've been hired to repair, restore, or clean an item, there's a good chance you're performing a taxable service.

Doing work on the customer's property
This is even bigger. This type of work could range from pin-striping a car, to silk-screening, to engraving. Even though you haven't technically transferred any property to the customer, you have sold them a service which has improved their property and made it more valuable. This is usually taxable (and often called a fabrication service).

Admissions
If you charge an admission to a performance or display of your art, you may need to give the state some of that money. In many states, admission charges are a taxable service. And occasionally, the state doesn't impose a tax on admissions, but the local county or city will. Thankfully, there are frequently exemptions for registered (with the state) non-profit organizations.

Finally, remember that the rules are completely different in every state.

Part 1 - Introduction and overview
Part 2 - Services that you sell and buy

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details that haven't been discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Wednesday, December 28, 2011

When Construction Contractors Install Tangible Personal Property

This is part of a series of articles on construction contractors

In virtually every state, contractors pay tax on the equipment and supplies that they use to build a structure. As with any business, they're using those items. But what about building materials? These are the ingredients that become a part of the structure. They are tangible personal property when purchased by the contractor and, after being affixed to the building, become real property. Examples would be structural steel, bricks, shingles, millwork, concrete, etc. That's what contractors do: they turn tangible personal property into real property.

In most states, the contractor pays tax on the building materials as well as equipment and supplies and he (or she) doesn't charge his customers tax - either on the materials or his services*. The materials transferred as part of the sale aren't taxable for two reasons:

1. The materials were used by the contractor to provide the construction contracting service. Therefore they are consumed by the contractor and he pays the sales or use tax.

2. The materials, when transferred to the buyer, are no longer tangible personal property - they're now real property. And sales and use taxes generally only apply to sales of tangible personal property. The contractor is the last person to buy the building materials as TPP and therefore he pays the tax.

Now the customer isn't getting something for nothing here. She (or he) does pay the tax; it's just buried in the overall price of contract as another cost of the contractor. Note that there's a danger when the contractor shows the tax separately on his invoice.

Sometimes a contractor does a job that doesn't involve major construction (eg. new or expanded building, or major remodel). What if they do a minor remodel or repair, or a smaller project like install flooring, fences, signs, communications equipment, appliances or other machinery and fixtures?

The question then becomes: is the contractor still doing construction contracting, or are they selling tangible personal property, with installation?

If they're still performing a construction contract, they they don't charge tax to the customer - they pay tax on the building materials, as described above.

But if they're selling TPP with installation, they should be charging their customers tax and buying the building materials for resale.

Easy, right? But how do you tell? When, for example, does a minor remodel become a major project?

In the absence of any specific rules, here's the general idea. If the contractor is installing something that is permanently affixed to the structure and integrated into the value or use of the structure, then the contractor has done construction contracting. In that case, he pays tax on the building materials and doesn't charge tax to his customers. But if he hasn't done all of those things, then it is considered a sale of TPP with installation and he buys the materials for resale and charges the customer tax.

White Building, Green Shutters, Red Leaves

Examples:

1. A telecommunications rack is installed in the wiring closet. The installation is not permanent - everyone knows that it'll be replaced in a few years. It's not affixed since permanent damage wouldn't occur if it was removed (it's just bolted to the floor). And it doesn't have any affect on the value or purpose of the building.

One way of telling if an item has any affect on the value or purpose of the building is to ask, "if the building were sold, would the new owner care about the addition?" Other examples of this kind of thing would be signs, satellite dishes, draperies and blinds.

2. A landscaping contractor plants a nice tree in the front of the building. In this case, it is intended to be permanent, and damage would be caused if it was removed after a few months. And the value of the building is enhanced by the landscaping. So it's construction contracting and the contractor would pay tax on the tree when he purchased it and would not charge the customer tax.

Except it doesn't always work that way.

Many states will override the logic, or help it along, by simply declaring that certain types of contracting are sales of TPP with installation, and are taxable to the customer and purchased for resale for the contractor. A typical project that is handled this way is carpeting and sometimes other flooring. Why?

Well, the cynical Sales Tax Guy notes that the state gets more money. Remember, if the contractor pays tax on his purchase of building materials (as a construction contractor) the state will get less money because the tax is based on his cost. But if the state can figure out a way to call it the sale of TPP with installation, then the tax is on what the contractor sells it for, which would typically be higher - more money for the state.

The other reason is that, with certain purchases, the true object of the customer is to buy a specific type of TPP, paying attention to things like the brand, model, features, capabilities, and price. They are really buying the TPP and the contractor is merely the installer. So it would be appropriate to treat as the sale of TPP with installation.

In a normal construction contract, the customer is more concerned about the capabilities and service of the contractor than the materials they use. I'm guessing that most customers don't really care about the brand of furnace (as long as it's a name brand) or the manufacturer of the bricks or shingles. Color and appearance? Yeah. But they'll let the contractor worry about the details.

Here's a stumper. What about window installation? In this case, appearance, features, brand and other attributes are very important to the buyer, probably as much as the ability of the contractor. So wouldn't it be the sale of TPP with installation? I'd say no, it would probably be construction contracting. Why? Because the windows are permanently affixed to the structure and integrated into the value or use of the structure.

So, when you're trying to figure out if it's a sale of TPP with installation; as opposed to a contruction contract, you can use logic, as I've described above. But check to make sure that the state doesn't have their own ideas. These are usually shown in the regulations, and sometimes, if you're lucky, in a publication on the state web site.

There are other ways that some states will determine if the sale is treated as the sale of TPP with installation. One is if the deal is billed as a time and materials contract where the labor is separated from the materials. Another is if the customer takes title and possession of the materials before the actual work is done (eg. a roll of carpet delivered a week before the installers arrive).

To summarize:

When contractors do construction contracting (eg. new or expanded building or major remodeling) they typically pay tax on the building materials and do not charge their customers tax.

But when the contractor does a job that is more of a sale of tangible personal property with installation, then it's likely that the materials will be taxable to the customer and the contractor will be able to buy for resale.

*Remember, the rules are different in your state. Probably.

Wednesday, December 21, 2011

Restaurant Container Exemptions (or the Sales Tax Guy talks McRibs)

It's time to talk about containers again, for several reasons. First, this article gave me an excuse to take the above picture. Second, I therefore had a reason to visit McDonald's for a McRib. Third, how often do you get to write off a McRib as a business expense?

Most importantly, in my previous articles about containers, I didn't really talk about restaurants. But lately, I've started using McDonald's in the container section of my Taxing Policy webinars, so I thought it was time for a picture to illustrate the PowerPoint presentation. And, well, I haven't written an article in a while.

I put my crosshairs on the target, took careful aim, fired the shot and hit the bullseye. It was a satisfying shoot.

Most states have container exemptions. These allow the vendor to be able to purchase containers tax free if the containers will be sold, with the product, to the customer. Basically it's an extension of the resale exemption. The seller is essentially buying the containers for resale. Even though they're not billing the customer separately, they are billing them for the containers as part of the cost of the actual merchandise sold. In other words, Target didn't have to pay tax on the bag. Just like the socks inside the bag, they bought the bag for "resale."

So let's take the top picture apart and talk about each item.

1. The bag for the delicious fries, cup (and lid) for my iced tea, the box for the holiday pie, and the clam-shell for the wondrous McRib are all clearly containers. McDonald's doesn't expect them back from you. You bought them with the food. Therefore, they are containers that generally qualify for the exemption.

2. What about the napkins and straw? In most states, disposable items like these that are available for the customer to take, are also exempt. They obviously aren't containers, but they are clearly part of the selling price of the food and, once you've taken a straw, the restaurant would really prefer you not put it back. This kind of "free for the taking" rule is only for restaurants.

3. What about the brown tray? Did you buy it with the food? Can you take it with you? No. They didn't sell you the tray with the food. That tray was purchased by McDonald's to use over and over again (after they've cleaned it, of course). Unlike the above items, it was not sold to you with your food. It is a "returnable container." Therefore the restaurant paid sales tax for the tray.

4. Finally, what about the "place mat" on the tray? That's a stumper and I can see it going both ways. It is certainly something that has value to the customer providing a clean place for your fries to spill out of the bag. But it's also usually a marketing piece for the restaurant. I personally would take the position that it meets the test for a disposable item and therefore is not taxable. But the auditor might argue that one.

So there you go. Containers for restaurants. Remember, every state is different. Some states have broader rules, some are stricter. Do your research and don't take my word for it. See the disclaimer. And it's almost lunch time as I write this. Hmmm. Wonder if they still have McRibs at my McDonald's?

Merry Christmas and/or Seasons Greetings. May all your holidays be glad and let there be McRibs available at your McDonald's.

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details that haven't been discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Tuesday, November 22, 2011

Sales Tax on "Software as a Service" / SaaS / Cloud Computing

"How do we tax SaaS* services"

This question came up in a webinar yesterday (thanks, Heather) and, after Googling it, I thought I'd share the tiny bit that I've learned, my brilliant solutions, and some relevant articles.

Essentially, there isn't much published on this. There are some articles that pretty much say the same thing: there isn't a lot of law to get your teeth into. As with most new technology, the states are taking their time catching up. Some of them are still trying to deal with downloaded software! And only a few have ventured into downloaded content, like music and movies.

But I have come up with two solutions to the problem. and you're not going to like it.

Solution 1 - Rental

1. I think that the closest existing type of transaction that would cover Software as a Service (SaaS) is software rental. Think about it. That's really what is going on.
2. Downloaded software is treated like TPP in most states and therefore taxable.
3. Rental of TPP is taxable in most states.
4. Therefore, SaaS should be treated as the rental of software and should be taxable in states where downloaded software is taxable, and rental of TPP is taxable.
5. Don't do this! Hold off, at least until you've chewed this over with your sales and use tax consultant. Heck, your own state may not take this position, and therefore why self-assess when they wouldn't. But from a theoretical sense, this seems to be the answer.

Solution 2 - Tax SaaS as a service

Alternatively, if we consider SaaS as a service, then it gets stickier.

In states that tax data processing services (not many), SaaS would seem to be taxable. That's easy.

With other states, they'll probably have to start passing laws. Which, given the amazing skills of our politicians, will take some time. Get back to me in 20 years.

Where is it taxable?

The next question is, since it's in "the cloud" how does any given state tax it? Where is it taxable? There seems to be a lot of hand-wringing about this. But I think that this has already been dealt with, to a degree. Whenever a taxable service is performed in one state, but the buyer receives the benefit in another state, it's usually taxable in the state where the buyer receives the benefit. This isn't absolute, and I'm short-circuiting a lot of theory, but that seems to be the way that it usually works out.

For example, if you're in a state that taxes alarm monitoring services (many do), and you hire an out of state company to provide that service, the purchase of the service will usually be taxable in your state because that's where you're receiving the service. Either the seller collects the tax if they have nexus, or you self-assess use tax. But it's still taxable.

So, if you're using SaaS, and if the service is taxable based on one of the above methods, it'll probably be taxable in the state where the benefit of the service is received. Seems simple to me.

Selling SaaS

What about companies that sell SaaS? Well, if you have nexus in states that have figured out how to make this taxable, then you're going to have to start collecting tax. Welcome to the business world. Of course, if Congress makes it easier for states to create nexus for you, that's not good. But quit whining. It just means you'll have to hire at least one more accountant. Speaking as an accountant, that's not a bad thing.

Nobel Prize

I've just given everyone a guide to solving this SaaS / Cloud Computing problem. So when will I be picking up my Nobel Prize for Sales and Use Taxes?

Links

Here are a few articles I found on the subject. I didn't go deep in my search, so if you wish to mine the web further, please do so.

brianstrahle at Accountingweb.com February 2010
forum discussion at softwareceo.com March 2006
Gene Hoffman at http://blog.vindicia.com April 2010
Jeremy Aber at aberlawfirm.com September 2010
grantthornton.com - there are a couple of links within the article too

*Ya gotta love an acronym made up of upper and lower case letters. Credit must be given to the techoids that came up with that one.

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details that haven't been discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Wednesday, November 02, 2011

Fabrication Services

In most states, fabricators provide a taxable service. Fabrication broadly means taking stuff, then doing work on it and adding value to it (as opposed to repairing it).

A more limited description of fabrication services is: receiving the customer's property, working on it, and then returning it to the customer. The problem in this case is that, from a sales tax perspective, there is no sale of tangible personal property, other than some insignificant material like ink, solder, etc. So in states that typically do not tax sales of services, this presents a problem.

Here is a short list of examples of fabrication services:

keymaking and locksmithing
tailoring (usually more than letting out the hem)
meat cutting and butchering
taxidermy
custom welding
custom assembly

Similar businesses, but that aren't quite the same are:

imprinting and silkscreening
engraving

What's the difference between these two types of businesses? In fabrication services, something new is created. To use a common manufacturing definition: "taking something in one form with one name and turning it into something else, with a different form and a different name." Taking ten pieces of metal and welding them together per the customer's drawing is a fabrication service - something new has been created.

But a silkscreened t-shirt is still a t-shirt, even if it now has a cool Harley-Davidson logo. Nothing new has been created.

Many states will impose sales and use taxes on fabrication services, including imprinting and engraving.

But others will tax just fabrication services, excluding imprinting and engraving.

And still others won't tax either service.

It's up to you to check in the states that apply to you (where you perform the work or where the customer receives the work).

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details that haven't been discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. And if you think I just wrote this article so I could use the picture, well.....

Tuesday, August 30, 2011

Enterprise Zones

Most states have economically depressed areas, usually urban but sometimes rural. Politicians want to encourage businesses to locate in those areas (more jobs, more votes). So they offer sales and use tax exemptions as incentives. They also often offer non-sales tax incentives, like income tax and property taxes. But I think I'll just talk about the sales and use tax piece, if you don't mind. Enterprise zone is the generic name for this exemption, and most states call it by some variation of that term.

Interestingly, this is about the only exemption that is based on where an item is purchased, sold, or used.

The incentives usually include some mix of the following exemptions, depending on the state:

No sales and use taxes on purchases of building materials used inside an enterprise zone.

No sales and use taxes on any purchases to be shipped to and used in the enterprise zone.

No sales taxes on items sold in the enterprise zone by a business in the zone.

There are usually some mix of the following restrictions, depending on the state:

Companies receiving the exemptions have to meet employment and/or investment targets.

Companies can't simply move from one part of the state to the enterprise zone, causing growth in the enterprise zone and loss in the former location of the business.

The seller AND the buyer have to be located in enterprise zones, but not necessarily the same one.

Companies have to register with and get prior certification from the economic development agency du jour.

The exemption is available for local taxes only.

The sales may not be exempt. But the company can apply for a refund or credit.

Zones have expiration dates.

The certifications of businesses in the zones have expiration dates.

Some states have a variety of different types of zones with different rules. For example, Pennsylvania has: Keystone Opportunity Zones, Keystone Opportunity Expansion Zones, Keystone Improvement Zones and First Class City Improvement Zones. Sheesh.

Why I hate Enterprise Zones (warning, you're entering the "editorial zone")

Let's see:

1. Politicians want private companies to do something, like set up businesses in blighted areas.

2. So they write tax exemptions encouraging that.

3. But they want to make sure those sneaky businesses don't make TOO much money in tax savings, nor abuse the exemption.

4. So they add nuttier and more complicated restrictions into the rules. Notice that I wound up listing a whole lot more restrictions above then actual exemptions.

5. Politicians also appear to be too lazy to just update the rules for a zone. They have to write new ones piling on the old ones (see Pennsylvania above).

6. Businesses that might move into the area look at the rules, sigh, and say, "never mind." Therefore these enterprise zones don't accomplish what the politicians wanted and promised.

What you should do

Check to see if your company, or any of your vendors or customers, are already located in an enterprise zone. In other words, are there exemptions available to you that you weren't aware of?

Factor any tax exemptions into your expansion plans.

Make sure you understand the rules clearly before taking action.

Get a professional to assist with this if the rules are as complicated in your state as I've implied.

Get a professional anyway. If you're making business decisions based on some system a politician has set up, you want to make sure you do it right.

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
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Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Friday, July 15, 2011

Illustrations and Parables: Intercompany Transactions

Bill* invented a machine to curry wockies.* His problem was that while he knew the machine would be a real boon to the wocky service industry, it was really, really expensive. He had a lot of trouble convincing the industry to use his machine because of the ridiculously high initial cost. Finally, one of his investors suggested a tactic that has been long used by inventors with money. He bought his customers and made them use the Frazier Wocky Currier*.

In the Great State of East Dakota*, which is in the heart of the wocky region of the country, he bought ten small little wocky service companies, spread throughout the state. Since he didn’t really want to get into the wocky service business, the typical deal was, “Here’s a pile of money for your company. You keep running it the way you like. You can even keep the same name on the sign. I don’t care. But, whenever a situation comes up where you need to curry wockies, you have to use my machine.”

From a financial perspective, he simply bought all of the shares in the corporations of these little service companies and let them stand as separate, but commonly owned, subsidiaries of his own company, The Frazier Currier Company*.

His corporate empire looked something like this*

The machine was a success. It was incredibly effective and the customers were thrilled. In fact, the local companies actively looked for opportunities to curry wockies, so they could use the machines even more. Everyone made money.

The Frazier Currier Company manufactured the machines and then shipped them to the service companies.

Business got so good that sometimes they couldn’t get enough machines. So they would move machines from one service company to another to meet local demand.

Then the State of East Dakota audited them.

And the auditor noticed that they were selling these very expensive machines from the parent to the subsidiaries and no sales tax was being charged. And that the subsidiaries were selling the machines to each other, and no sales tax was charged.

Frazier Currier Company argued that these were just movements of machines between branch locations, that they weren’t sales.

But the auditor pointed out that every branch, as well as the parent, was a separate corporation. And in East Dakota (and in most states), corporations are legal persons. Transfers of tangible personal property and taxable services between persons, are sales. Period. The assessment was over $10,000,000.

The only way the Frazier Currier Company was able to negotiate the assessment down, was by bringing East Dakota’s leading bankruptcy attorney to the negotiations.

So what’s the moral of the story here?

First of all, bring a bankruptcy attorney to the negotiations.

Seriously, you need to make sure, when you are transferring taxable goods and services among subsidiaries and parents, that you are properly taxing the transactions. In most states, they look at the form and nature of the transaction. Is there formal paperwork? That makes it look more like a sale. Is there just a note to the bookkeeper so he knows where the machine is? Maybe it’s not a big deal. Is it an occasional sale? That might get you off the hook. But you need to know.

And here’s the kicker. This is not well documented in most state’s statutes and regulations. This is one of those areas where you need a local consultant who knows the customs and audit practices of East Dakota or whatever state you're in.

The irony is that, of all of the accountants and lawyers that Bill used when he set up the business, he didn’t have a sales tax expert. That august personage could have told Bill to set up leasing arrangements so that every machine is owned by The Frazier Currying Company and is LEASED to the subsidiaries. Because, in East Dakota, there’s an exemption to the rule for intercorporate transactions if they're leases.

*I’m using fake names to either protect the innocent, the guilty or to just be funny.

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information

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Monday, June 06, 2011

Historical Places

I had a question from a webinar participant last week about the "landmark exemption." I had to honestly respond that I didn't have a clue about what he was talking about. In a subsequent exchange of emails, I figured out that Texas has an unusual and obscure exemption for contractor's services performed on buildings that are the National Register of Historic Places.

I've been doing training on Texas sales and use taxes for eight years and that's the first time I'd ever heard of it. My excuse is that Texas has some of the more spectacularly complicated rules about contractors. And this is a pretty obscure rule. In order to find information on it, I finally had to resort to doing a text-search for "historic" in my RIA database. But once I figured out what was going on, I found that there were a couple of good lessons for you folks.

First of all, who would have thought there was an exemption such as this? I did some additional research in other states and only found one other state, Connecticut, that has a generic exemption for construction related costs on historic buildings. TWO STATES! There are a couple of other exemptions floating around, but they tend to be for specific projects such as a YWCA building in DC, provide tax credits if the projects promote tourism, or are for projects covered by non-profit organization exemptions.

I find it hard to justify this exemption. The tourism related credits I get - there's a tax revenue pay-off for the state that will probably offset the credits. But, with states desperate for money, they're giving exemptions for restoring a historic building? Now I am a big fan of historic places - they're one of my photography projects. But is the presence or absence of a tax credit really going to have an affect on an owner's decision about restoration? I'll bet the net result is that some well connected folks get some tax benefits, and the state loses a lot of money unnecessarily. Sigh.

The second point is that there are some really obscure exemptions out there. Always be looking to take advantage of the lack of common sense on the part of our elected representatives. Pay particular attention to continuing transactions that will result in big dollars, as well as the one-off big deal. And, now that you've read this, keep an eye out for historic site exemptions while you're at it.

Finally, to complete the discussion about historic places, there's another exemption that is a little more common. Many states impose sales tax on admissions charges. And many of those states grant exemptions for admissions to historic sites.

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
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Friday, February 25, 2011

An Interesting Issue with Rental of Tangible Personal Property

I came across an interesting item when I was browsing New Jersey's sales and use tax rules today. It's regarding the leasing and rental of tangible personal property.

First of all, to recap the general rule in most states: the rental of tangible personal property is a taxable sale. The lessor must charge sales tax on the rental charge of the TPP. But this also allows the lessor to buy the equipment "for resale" so he doesn't have to pay sales tax on his purchase. All he has to do is provide a resale certificate to his vendor. Done.

Now this particular glitch is one I noticed because it was clearly spelled out for New Jersey. But it probably applies in the other states as well.

The lessor buys equipment to rent. He pays no sales tax. He charges his customer tax. But what happens when there's an operator involved?

Now we have to figure out if the real transaction is the hiring of the operator, with the equipment becoming incidental to the real purchase of the operator's services. Or are we still renting a machine and the operator is just there because we don't know what levers to pull?

There are a couple of different ways that the states handle this:

1. If the operator has control over how the machine is used, it's no longer a taxable rental (with some variations on what is meant by control).
2. If the cost of the operator is more than the cost of the rental, it's no longer a taxable rental.
3. If there's an operator, it's no longer a taxable rental. Period.

Here's the glitch: Let's say you routinely provide your equipment with an operator. And based on the way the state's law works, the rental becomes non-taxable. Then you really can't be purchasing the equipment with a resale certificate anymore, because you're really not buying for resale. You're not charging sales tax anymore because you're not making taxable sales. You're really using your equipment, or rather, your operator is.

So, if you're the lessor, you should have had your vendors charge you tax (or you should have paid use tax) when you bought the equipment you rent with an operator. Which means, if this is new to you, you owe the state a bucketload of money.

Interesting huh? I wonder how many leasing companies do this; Or have gotten busted on this. And I wonder how many auditors even check for this.

This illustrates a larger issue. Many sales tax exemptions are based on how you will use the purchase (or not use it, in the case of the resale exemption). But if you change your mind later, you lose that exemption. How many of you are paying attention to this? Here's another example where sellers get burned all of the time.

Hope I didn't ruin any weekends.

Well, OK, yeah, I kinda do. (grin)

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
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Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Tuesday, December 28, 2010

Sales Tax on Big Chickens?

You're on vacation and you stop in at an interesting looking art gallery. A giant chicken catches your eye and you buy it for $10,000,000. You're a collector of over-sized fowl and this one will be the crowning glory of your private art gallery. It's a good thing you've got that really high limit on your MasterCard.

The dealer prepares the invoice.

Chicken.............$10,000,000
Sales tax (8%)..........800,000
Total...............$10,800,000

Oh, come on! Whoever heard of paying $800,000 in sales tax? This can't be taxable!

Actually, it is. And you've just made the revenue department in this state very happy.

Let's use the golden rule of taxable sales:

1. There's a sale
2. It's tangible personal property. It's obviously tangible. You saw it and you sat on it. And it wasn't permanently affixed to the floor. So it's tangible personal property.
3. The sale was made by an art gallery - someone in the business of selling art - a retailer.
4. You're buying this for your home or office, not to resell, so you're the end user.

Congratulations, you owe sales tax.

Now, you didn't get rich by just throwing around $800,000 here and $800,000 there. There's got to be a way out, right?

Hmmm. Not really. There are some common evasions, but no real and legal way out.

1. You can ask the gallery to ship it out of state to your home in Gotham City, where all the best Big Chicken collectors hang out. There's no sales tax when you ship out of the state, right? The dealer, who just got audited last month, points out that he can't do that. Since you're in the store, and effectively have control of the Big Chicken as soon as the sale is signed, you have taken delivery in the store. That means that the state you're in has jurisdiction and will impose tax. If the seller doesn't do this properly, he'll get nailed by the auditor (again) when she comes back in six months.

2. Even if you convince the dealer (maybe he's new and hasn't been audited yet) to not charge tax and to ship it to your home in Gotham City, you will now owe use tax on that objet d′art in the great state of Gotham. And since you're so stinkin' rich, you know they're going to audit you one of these days. Actually, unfortunately this doesn't happen all that often. You do owe the use tax. Whether you pay it or not is more of a reflection of your character. Bruce Wayne would pay the use tax. Just sayin'.

A different scenario

Let's say you're driving down a dirt road while on vacation, and see a yard sale with that chicken standing there in all of its glory. In a cloud of dust you slam on the brakes and kind of casually ask the rube what he wants for that "old chicken."

"Ah'll take $10,000,000 please. Ah inherited that from mah Daddy and he durn told me whut it were worth."

Dang. You write him a check since he can't take a credit card, and have him arrange for shipment to Gotham City.

Now, there's been a change in the situation. It's no longer a sale by a retailer, it's an occasional sale. Since the farmer isn't a retailer (he was having his annual yard sale) he doesn't collect sales tax. And since you purchased the item in an occasional sale, you owe no use tax, either in the state where you bought it, or in Gotham. Remember, the sale wasn't by a retailer, therefore it wasn't a taxable retail sale.

So in this scenario, you've saved the $800,000 in sales and use taxes. Legally! But only because you bought it in an occasional sale. Buy it from a dealer, and you owe the tax.

As is usually the case, not every state does it in the ways I've described. There are variations in several states on the way they handle in-store purchases that are shipped out of state, as well as use tax on occasional sales. Do your research!

Which leaves us with the moral of this story:

If you're going to buy big chickens, stick to the dirt roads.

Yep, I know. Sometimes these articles just write themselves.

This is our last article for 2010. It has been a good year for us and I hope it has been for you as well. We currently have January and February on our webinar schedule and will be adding March, hopefully by the first of next week. Happy New Year!

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Monday, October 18, 2010

Newspapers

Newspapers are treated a little like magazines in many states. If they're sold by subscription, they may be exempt. However, they're not always taxed in the same way.

In fact, in most states, newspapers are simply exempt from sales and use tax. Whether sold over the counter, from a newsstand, or by subscription, they're usually exempt. The reason that I've heard most often for this state of affairs is that imposing sales tax on newspapers would somehow interfere with freedom of the press.

My own opinion is that, if you're the hapless politician who decides that imposing a sales tax on newspapers is a good idea, you should probably not count on getting any more endorsements or favorable coverage from your local print media. If you know what I mean.

But there are complications. There are states where newspapers are taxable. And there are some significant questions that don't come up when you're talking about magazines. While magazines AND newspapers are sold from stores and newsstands, what about the sales made from folks just standing on the street hawking papers; or sales from vending machines? And do they tax the sales of newspapers by carriers ... you know, the paper boy? These are all situations that are up for grabs in states where sales tax is imposed on newspapers.

You, the consumer, will rarely even notice that there's a tax on newspapers. This will be one situation where the tax will usually be absorbed, even if illegally. Which is probably why the publishers would really be upset if it came up as a way of balancing the state's budget.

But then, who reads newspapers anymore? (I kid).

Friday, October 08, 2010

Manufacturing Exemption: The "Use It Here" Rule

Here’s a sneaky situation involving the manufacturing exemption.

There are quite a few states who require that, in order for the exemption to work, the use of the exempt items must be within the state. This makes logical sense, given the purpose for the exemption. But there are a couple of situations (that I can think of) where a problem would occur:

Situation 1

The reason I even thought about this rule was because of a guy in the class who ran a truck routinely from his plant in state B to pick up manufacturing equipment at a dealer in state A. He had asked an unrelated question, and I started thinking about it and realized that there was a problem.

Let’s say you’re the seller in state A. Your customer, from state B, comes in and picks up manufacturing equipment. You try to charge him state A’s sales tax, but he waves around his exemption certificate from state B, maintaining that he’s going to be using this equipment in manufacturing. But in YOUR state, the manufacturing exemption only applies to manufacturing equipment that will be used in state A. The "use-it-here" rule. Since the purchase will not be used in state A, the customer’s state B manufacturing exemption is worthless.

Even if the buyer fills out state A's manufacturing exemption form instead, it won't be valid because he's not "using it here." And you will owe state A the sales tax you should have charged your customer.

The solution is easy - simply ship the equipment to the customer in state B. Then, since it’s a shipment out of the state, state A has no jurisdiction, and the delivery is in state B. Everybody happy.

A similar problem exists if state A didn’t have any manufacturing exemption at all. In that case as well, the buyer’s state B certificate is irrelevant. Same solution.

Situation 2

You purchase equipment and have it shipped to your location in state B. There’s a manufacturing exemption in state B, so no sales or use tax. But you then reship the machine to state C. Since you never used, or intended to use, the purchase in your plant in state B, and state B has a “use it here” restriction, you will owe use tax on that machine to state B.

Note that state C has a manufacturing exemption, but state B doesn’t care. And since you stored (used) the equipment in state B, they get to nick you for the use tax.

Remember, not every state has this "use it here" rule, so check it out first.

And if you can think of any more situations where this "use it here" rule would be a problem, please let me know.

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Monday, September 20, 2010

Illustrations and Parables: Bulk Sales

I was chatting with an old friend, and he was telling me a sales tax horror story that deserves repeating here. It involves bulk sales (ie. the sale of a business as a whole - lock, stock and barrel, as it were).

Don (not his real name) wanted to expand his computer business. He was based in Illinois, and heard about Arnie, who was in New York. Arnie said he wanted to retire and cash out. Don and Arnie both got their attorneys involved, and Don had his CPA thoroughly review Arnie's books. Don thought he had been very careful. And, because Don was buying the entire business including the inventory, fixtures, equipment, customer list and even keeping the employees on, it was a bulk sale. After the sale was closed, Arnie retired to his new boat in the south Pacific.

A short time after the sale, the New York Department of Taxation and Finance showed up to do a sales tax audit. And they assessed Don, the new owner, for $1,550,000 in sales taxes, almost all of which applied to sales that happened long before he had even heard of Arnie.

You see, Arnie had not been collecting tax on his sales of computer services. Hardware? Yeah, he was collecting on that. But not on the repair labor, which is taxable in New York. And Don, who was from Illinois where those services aren't taxable, didn't even think of this when he took over the business. He continued to make the same mistakes that Arnie had made.

Because Don had bought Arnie's business as a bulk sale, he bought everything from Arnie including any sales tax liability that Arnie had acquired. Don had to write a check to the state of New York that was more than half of the check that he had written to Arnie.

When you buy a business, and it looks like a bulk sale, the state will generally hold the new owner responsible for any sales and use tax debt from the previous owner. Even if the previous owner didn't know about it.

The way to avoid this problem varies from state to state. But it usually involves notifying the state revenuers that the business is about to be sold. The state then has a limited amount of time to either notify the parties that there is an outstanding liability, do an audit, or give the buyer a waiver. Remember, the process varies enormously, but that's the outline.

---

How many ways did this get fouled up?

1. I don't know a lot about business sales, but there's usually not a complete cash out. The new owner holds some of the money back just for this kind of contingency. Don didn't do that.

2. Don and the attorneys and CPA's didn't know about the bulk sale rule. Now they do.

3. Don and the attorneys and CPA's didn't know that repair services are taxable in New York. Now they do.

4. And of course, Don didn't call his old friend Jim. But it never occurred to him because...

5. ...Don didn't know what he didn't know.

---

The obvious question is did Don try to sue Arnie? Yep. But the former owner was in the south Pacific on a boat and not terribly accessible to the courts of New York.

So Don was, how to say this? Screwed. The business closed about six months later. With that gigantic audit assessment, Don didn't have enough cash flow to keep it going.

Truly a horror story.

The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/

Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.

Other relevant key words: mergers and acquisitions

Articles You Need to Read!

Welcome to the Sales Tax Guy, a production of salestax-usetax.com.

If you're new here, you may wish to start your exploration with our article on Sales Tax in a Nutshell and our subject index.

We've also written master articles on sales and use taxes:

a Guide to The Sales Tax Guy

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Disclaimer

Please keep in mind that our purpose is to provide general information to familiarize you with certain issues. The information we provide may not apply to your particular situation or to the applicable state, may oversimplify an issue, or may omit a point that is relevant to you. In addition, exceptions, unwritten rules, and different interpretations abound. And every state (and sometimes local jurisdictions) will do it differently. Therefore you should not rely on the information provided for your specific needs.

After reading any of our material or participating in training or coaching, you should always consult with an attorney, CPA or tax adviser who is a local expert in sales and use taxes for the applicable state, and/or do your own research in authoritative publications before applying the principles or suggestions mentioned.

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