Sales Tax in the News

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

2008-07-11T14:42:00.001-05:00

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

2008-07-10T16:39:00.000-05:00

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?

2008-05-28T16:32:00.001-05:00

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

2008-04-28T16:07:00.001-05:00

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

2008-04-25T15:17:00.001-05:00

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

2008-04-11T11:52:00.001-05:00

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

2008-04-11T11:18:00.001-05:00

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

2008-04-11T11:01:00.001-05:00

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

2008-04-11T10:48:00.001-05:00

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?

2008-03-28T16:52:00.001-05:00

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

2008-03-25T16:13:00.001-05:00

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

2008-03-25T14:50:00.001-05:00

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

2008-03-10T16:38:00.001-05:00

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?

2008-03-10T12:46:00.001-05:00

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

2008-03-07T16:59:00.001-06:00

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

2008-03-07T16:09:00.001-06:00

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

2008-03-07T15:34:00.001-06:00

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

2008-02-22T13:23:00.001-06:00

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

2008-02-22T11:18:00.001-06:00

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

2008-02-11T10:19:00.001-06:00

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

2008-02-11T09:52:00.001-06:00

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

2008-02-11T09:33:00.001-06:00

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."