U.S. State and Local Indirect Tax Overview

transcript

U.S. State and Local Indirect Tax Overview12 July 2016

Agenda

• Key Concepts

• Governmental Matters

• Overview

• Nexus

• Taxability

• Exemptions and Exclusions

State legislative landscape

• State budgets

• Fluctuating revenue streams

• Balanced budget requirements

• States cannot balance by way of cash creation

What is Sales Tax?

• Sales tax is generally defined as a tax paid to a governing body on sales of goods or enumerated services

• Sales taxes are amongst the most important taxes imposed by states

• State sales tax is the largest and fastest growing revenue source for states

Sales Tax vs. Use Tax

Sales Tax – Generally levied against the transfer of title and/or possession of tangible personal property in exchange for consideration.

• Sales tax applies when the seller has nexus and is subject to the state taxing authority

• Sales tax is always collected by the seller

Use Tax - Tax imposed on the in-state, use, storage, or consumption of TPP and enumerated services (think unrecoverable reverse charge)

• How will states catch you?

• First Functional Use

Sales Tax Theory – Flow of Taxation

General Product Cycle

1. Raw materials are sold to manufacturer

2. Manufacturer sells to wholesaler

3. Wholesaler sells to retailer

4. Retailer sells to consumer

Consumer Pays Sales Tax

What's the Big Deal?

Example of Complexity

Software as a Service (SaaS)• What is it?

– TPP, Info service, Data Processing

• How should it be taxed?

• How are state laws defined?

• Where should it be taxed?– Download destination, user location, billing address?

Sales and Use Tax Nexus

• Seller must register with the state and collect sales tax for taxable transaction if the seller has a physical presence (e.g. nexus) in the state

• Employees, independent contractors, property, “click through,” affiliates, registration

• Nexus = some connection

• Quill Corp. v. North Dakota

– Quill met minimum connection standard of the Due Process clause via the economic nexus; did not meet the sufficient nexus standard of the Commerce Clause

Sales and Use Tax Nexus

• Erosion of physical presence rule by introduction of gray-area standards

• Economic Nexus

• Click-Through Nexus

• Bright-Line Nexus Standards

• Direct Marketing Ass'n. v. Brohl – Invitation to challenge physical presence

• States accepting invitation:• Alabama – pure economic nexus standard

• South Dakota – all remote sellers + "fast track" clauses

Who collects the tax?

• Most states collect tax on behalf the state as well as local jurisdictions

• The state will then allocate the appropriate amount

• Sourcing (Origin v. Destination)• Where the tax is due and at what rate

• Can be different for sales of property or services

• How to source or situs• Base on State, City, and Address

• Five digit zip codes are usually not enough• Same code may have 5+ different taxing jurisdictions

Tax Rates

• Any one transaction may be affected by multiple tax rates• Jurisdictions - State, County, City, Special Purpose

• For example, Dallas, Texas (8.25%)• 6.25% State rate

• 1.00% City of Dallas (Local)

• 1.00% Dallas Mass Transit Authority (Local)

• Home rule jurisdictions (AL, CO, LA, etc)

Tax Base

• Tax Base – Amount of purchase that is taxable• Adjustments before the sale, likely considered part of taxable measure

• Adjustments after the sale, probably not part of taxable measure

• Possibly excluded from tax base• Separately stated repair or installation labor

• Trade-ins, discounts, coupons

• Exempt property or buyers

Discounts, Coupons, and Rebates

• Purchase price discounts and retailers' coupons typically reduce the tax base

• Reimbursable manufacturer’s coupons and rebates, though, are generally included in the tax base

• State’s typically impose tax upon the gross selling price less discounts not reimbursed by a third party

• Tax is not generally allowed to be included in the sales price

Exemptions vs. Exclusions

• Exclusion - Not mentioned in the tax code

• Exemption - Tax code specifically says product/service is not taxable. All TPP generally taxable unless specified otherwise

• Documentation generally required

• Burden of Proof: Generally on state for exclusions & taxpayer for exemption*

Services are generally nontaxable unless specifically enumerated

Exemptions

• Types of Goods:

• Necessity goods – Food, medicine, sometimes clothing

• No exemption documentation generally needed

• Type of Use for Goods:

• Resale/Component parts

• Manufacturing

• Other uses

Exemptions Detail

1. Type of Use for Goods – Common Issues:

• Is product resold?

• What about airline meals, free samples, prizes, wrapping, hotel incidentals, etc.?

• Goods use:

� Packaging

� Manufacturing Repair parts

� Pollution control equipment

� Research and development

� Directly, predominately, more than 50%, etc.

Exemptions Detail

2. Type of Purchaser:

• Government

• Charity

4. Occasional Sales:

• Garage sale

• Sale of non-inventory items by a business

5. Bulk Sale:

• All or a substantial portion of a business’s assets

• See also, successor liability

Bundled Transactions

• Bundled Transactions contain both taxable and nontaxable Items• TPP and service

• TPP and intangible

• Taxable and nontaxable TPP

• Taxable and nontaxable services

• Tax Base Test• Is nontaxable item separately stated?

• If yes, then determine if item may be excluded

• If not, follow state test to determine taxability

Reciprocity

• Generally, each state should acknowledge taxes paid on the same product in another state

• Only applies if tax was due

• If tax was incorrectly paid, the other state may ignore

• Could lead to double taxation

Typically purchaser owes tax in only one state

Exemption Certificates

• Types• Exemption Certificate

• Manufacturing Certificate

• Resale Certificate

• Multistate Certificate

• Considerations• Good faith

• Certificate Management

• Expiration

• Physical/Digital Storage

• Systems Integration

Buyer gives to seller in lieu of sales tax

Sales and Use Tax Audits

• Triggers• Vendor/Customer Audits

• Size/Sales volume

• Complexity of returns

• Adjustments during prior audits

• Penalties & Interest can accrue for unpaid taxes

• Statute of Limitations• Generally 3 to 4 years for most states, if filing

Statute of Limitations

• How long after a transaction the client may claim a refund

• How long after a transaction the state may assess tax due

• Different for each state

• May be measured in months or years

• Based on• Date of transaction (invoice)

• Date of tax return

• Could be unlimited if no returns ever filed

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U.S. State and Local Indirect Tax Overview

Economy & Finance