Sales and Use Tax

Presented by:Wade Farquhar

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The (somewhat complicated) nature of sales tax.

What we will cover today:

Sales vs. Use tax.

Specific transactions and exemptions.

Nexus and interstate commerce.

Compliance issues.

Determining a company’s tax profile.

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Quiz1) What is sales tax?

a) A straight value-added tax remitted to the federal government.

b) An age-old practice dating back as far as ancient Egypt.

c) Completely irrelevant. We should all just move to Montana.

2) Who is responsible for knowing the pertinent tax rate?a) The seller.b) The buyer.c) It depends…3) T/F: Sales tax is a way for jurisdictions to raise funds to provide important public services to residents.

4) Agent of the state refers to:a) The newest Tom Clancy novel.b) The Internal Revenue Service.c) The responsibility of a seller to

collect an remit sales tax on receipts.5) A NOMAD state is:

a) A state you wander through on your way from New York to California.

b) A state that wishes to secede from the Union.

c) A state that has no sales tax.

Important phrase for today:

“IT DEPENDS.”

Sales Tax.

• A tax on sales or the receipts on sales.• Questions we need to answer:

• Who is supposed to charge it?• How is it paid?• Who is it paid to?

• Value-added tax (V.A.T.):• Present in many countries, but

administered differently.

What is sales tax?

Can be traced back as far as ancient Egypt to fund public services – Pyramids (?)First appearance in the colonies.

Consumers were responsible for remitting tax.Had to keep all receipts for purchases and pay taxes on all purchases… monthly.

History of Sales Tax

A tax on sales receipts to fund public services for the common good within a jurisdiction.Sometimes they are temporary in nature, and end when a certain project is completed.Other times the taxes stick around and become permanent.

Sales Tax Now

This leaves us with two certainties in life:Death and…

You down with TPP?

Can be held, smelled, touched, weighed, seen, tasted, or otherwise perceived by the senses.Not bolted to the ground.

Not improvements that become part of a property.Pertains to the end user or consumer of a product.

Tangible Personal Property (TPP)

Personal• For consumption or

use.• Not attached to

physical property.• Taxable when

purchased.

Real• Once installed becomes

attached to the property.• Remains with property

once it is sold.• Is not taxed again when

property is resold.

Personal vs. Real Property

Transfer of title, possession, or both.Takes place at the point in time where possession is transferred.

Lease or rental of TPP.

A sale to the end user of a good or service.

Retail Sale

Layaways, deposits, and installments don’t count.

Generally, services are not taxable.

Services – not taxable unless specifically listed.Goods (personal property) – taxable unless specifically exempt.For more information on which services are taxable in Minnesota click here.

What About Services

Sale is made between parties located in two different states.

Sale is made between parties located in the same state.

Intrastate Transactions

Interstate Transactions

Primary state-level resourceDepartment of Revenues

PublishersWolters Kluwer (CCH Group)The Sales Tax Guy

ServicesAvalaraTaxifySalesTaxSupport.com

FirmsDeloitte – Perspectives

Minnesota Sales Tax Helpline (651) 296-6181

Sources for Today’s Discussion

States

• Over 12,000 different taxing jurisdictions in the U.S.

• These jurisdictions include counties, cities, transit districts, etc.

• More than 14,000 different tax rates that may apply.

• States with no tax, but where counties can level taxes.

• States with no sales tax… except in certain situations.

• States with mixed statewide and local taxes.• What is this whole “home rule jurisdictions” and

“self-administered” states?• We haven’t even talked about Canada yet, eh.

Types of States

• Taxation laws are in the State’s hands – they are the rule maker.

• As a business you are the agent of the state.

• The history on this goes back a long ways, but for simplicity sake businesses were enlisted as “agents of the state.”

• This means that the burden to collect and remit sales tax falls on you.

Agent of the State

1.Shifting – the economic burden of the tax is shifted from the seller to the buyer.

2.Absorption – the seller includes any tax in the selling price.

3.Separation – the tax must appear separately on the invoice or receipt.

3 Characteristics of States

1. Seller Privilege – the seller has the privilege of selling and is liable for the tax.

2. Consumer Privilege – the buyer has the privilege and is liable for the tax, with the seller (who is registered with the state as a dealer) serving as a trustee or agent for the state in collecting and remitting the tax.

3. Transaction Privilege – the transaction has the privilege and the buyer is liable for the tax. If the seller fails to collect the tax from the buyer, the buyer and seller remain jointly liable.

4. Gross Receipt – the seller has the privilege of selling and is liable for the tax.

4 Types of States

New HampshireOregonMontanaAlaskaDelaware

NOMAD States

SalesVs.

Use Tax“It depends…”

Tag teams with sales tax.A way to ensure that all taxable transactions are, in fact, taxed.

Usually remitted by the buyer, not the seller.

Compensate for sales tax that isn’t paid for out of state purchases, consumed wholesale goods, etc.

Use Tax

Prevent sales tax evasion.

Let me be Frank with you for a

moment.

Frank’s Fab Coffee

Frank rocks!Thanks. Mi cup

est su cup.

Frank’s Cup

X 300 per year (each employee)

What is wrong with this?

Did Frank pay tax when he purchased the cups?

If the sales tax doesn’t get you the use tax will.

Consumer• A tax that

consumers remit when they buy something in Montana.

• Buyer’s use tax or purchaser’s use tax.

• Covers the tax burden not collected by the seller.

Seller• Also called merchant or

vendor use tax.• Usually takes place in an

interstate transaction.• Rather than collecting

sales tax the seller collects the seller’s use tax rate.

• The rate could be different.

Consumer or Sellers Use TaxBoth are remitted where property is used or

enjoyed.

Make sure your AP or purchasing department has procedures to capture use tax.Be cautious with out-of-state, mail order, or internet purchases.Find out what the Minnesota DOR says about use tax here.

What do you need to do?

Be careful – according to a recent survey by the publisher of the RIA tax guide the second most common issue in an audit is failure to remit use tax.

Nexus• Do I need to collect taxes here?

Exemptions• Does the customer have an exemption

certificate?Product taxability

• What is the taxability of this product or service?

3 Main Considerations

NexusMore than a way to cut line at the border.

Nexus relates to the seller.A “connection” with a state establishes nexus.What triggers Nexus? 

• Physical presence in a state.• Employee activity in a state.• Activity of agents in a state (including affiliates).

Some surprising Nexus triggers:• Attendance at trade shows in a state. • Certain amounts of revenue earned in a state (this

level of revenue is determined by each individual state).

Important decision regarding Nexus: Quill vs. ND

What establishes Nexus?

100 or more sales within the state in a 12 month period.10 or more sales totaling more than $100,000 within 12 consecutive months.Retailers that maintain a place of business in the state.

Minnesota Nexus

Or any agent operating under the authority of the retailer.

“The avoidance of taxes is the only intellectual pursuit that still carries reward.”- John Maynard Keynes

Stuff fur sale

Interstate

Commerce

Intrastate• Buyer and seller are

both within the same state.

• Sales tax is collected by seller and remitted to the state.

• Easy, peazy, lemon squeezy.

Interstate• Buyer and seller are not

within the same state.• Seller may collect sales

tax, may collect seller’s use tax, or may collect nothing

• “It depends.”• Either way, somebody is

going to need to cough up some taxes.

Intrastate vs. Interstate Transactions

The vendor is located outside the state.

Quill Corp. vs North Dakota

The vendor sells taxable property to customers within the state.The property is stored, used, or consumed in the state.The vendor has sufficient nexus in the state.

2

3

4

1

Goods moving between states “in commerce” are only subject to tax at the origin or destination.Goods that are in transit are not subject to tax.There are some special cases.

Interstate Commerce Exemption

This can be a common, and often costly, tax trap.

Seller

Buyer

Warehouse

Does Utah get any tax?

The four-pronged test:1. The transaction must have sufficient taxable nexus

with the state. 2. The tax cannot discriminate against interstate

commerce. It cannot unfairly favor a local vendor by charging a lesser rate.

3. The tax must be fairly apportioned, i.e., the property is taxed in proportion to its presence in the state or the activity of the taxpayer in the state.

4. The tax must fairly relate to the benefits received, i.e., the benefits the taxpayer receives from the state are commensurate with the tax imposed.

For more information see: Complete Auto vs. Brady

Interstate Transactions

DestinationVs.

OriginWhich tax rate applies?

Life is a journey, but we still care about the

destination.

Journey smurny, I care about the origin of

things.

Some states are title transfer, some states are possession transfer, some require both.Depends on the terms of the contract for sale.If not specified, the possession transfers when goods are delivered.

Where does possession transfer?

In destination states (most states), only the state where the buyer takes possession has legal right to tax.

• Minnesota is a destination state.• Taxes are assessed where products or

services are delivered in the case of intrastate transactions.

• In these cases there is no change for deliveries outside the state or sales where customers transport goods across state lines before consumption.

Minnesota Specifics

Examples• A resident of Bloomington orders a pizza from a

restaurant located in Richfield. The store delivers the pizza to the customer in Bloomington.

• Should you use the sales tax rate in Bloomington or Richfield?

• Sales tax is based on the customer’s location in Bloomington.

Examples• A St. Paul resident purchases a computer online

from a merchant in Minneapolis. The computer is a gift for a student attending college in Bemidji. The buyer directs the seller to ship the computer to the student’s address in Bemidji.

• Does title transfer in St. Paul, Minneapolis, or Bemidji?

• The sale is based on the location of the student in Bemidji. The merchant should collect sales tax based on the “ship to” address in Bemidji.

Examples• A Brainerd resident purchases a mattress at a

store in Minneapolis. The merchant delivers the mattress from its warehouse located in St. Paul to the customer’s home in Brainerd.

• Where should sales tax be assessed?• Sales tax is based on the customer’s location in

Brainerd.

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Reciprocity• Where reciprocity exists, the state gives

credit for sales or use taxes already paid on the product in another state.

• Not all states have reciprocity.• Individual states decide whether or not to

grant reciprocity.• Minnesota allows reciprocity under the

SSUTA.

Most states tax sales made over the internet like catalog sales. Who remits the tax? 

• If the seller has nexus in the destination state, the seller charges the tax.

• If the seller does not have nexus, the buyer remits use tax.

• Simple right?Problems and confusion:

• Internet Tax Freedom Act – not related to items purchased via the internet.

• Internet Tax Nondiscrimination Act

Internet Sales

• Cooperative effort of 44 states, D.C., local governments and the business community to simplify sales and use tax collection.

• Reduce administrative costs for retailers operating in multiple states.

• Seeks to make local "brick-and-mortar" stores and remote sellers all operate by the same rules.

• Minnesota is a charter member state.• This is what effectively makes Minnesota “destination-

based.”• Retailers that deliver products to customers need to

code the local sales tax to that of the destination city or county.

For Minnesota-specific information click here.

The Streamlined Sales Tax Project

• Prescribes methods and resources to help you confidently research tax issues.

• Provides resources such as a Uniform Sales and Use Tax Exemption Certificate that is accepted in 38 states..

• Provides assistance for fundraiser rules.• Voluntary Disclosure Program allows those with

potential liability in multiple U.S. states to negotiate a settlement agreement through a single point of contact and a uniform procedure.

For more information click here.

Multistate Tax Commission

• Allows previously unregistered businesses to pay back taxes.

• Generally has a look back period for 4 years plus the current.

• Can result in up to a 35% potential discount in waived penalties.

• The DOR can summarize the liability on one assessment.

For more information click here.

Voluntary Disclosure Program

• Compact members - states that have enacted the Multistate Tax Compact into their state law. 

• Sovereignty members - states that support the purposes of the Multistate Tax Compact through regular participation in, and financial support for, the general activities.

• Associate members - states that participate in Commission meetings and otherwise consult and cooperate with the Commission.

Key Terms Related to the MTC

Tax Treatment of Specific Situation

ManufacturingGeneral

Treatment Minnesota

Non-Taxable Non-Taxable

Machinery and equipment used in the production of TPP.

ManufacturingGeneral

Treatment Minnesota

Non-Taxable Non-Taxable

However, in some cases repair labor is taxable.

Repair or replacement parts for production machinery

ManufacturingGeneral

Treatment Minnesota

Non-Taxable Non-Taxable

Unless raw materials are supplied by a consumer for production.

Ingredients and component parts that become part of TPP

ManufacturingGeneral

Treatment Minnesota

Non-Taxable Non-Taxable

This is specifically related to fuels or utility services consumed in manufacturing.

Materials used or consumed in manufacturing.

ManufacturingGeneral

Treatment Minnesota

It depends It depends

Tools

For more information on the M&E exemption click here.

ManufacturingGeneral

Treatment Minnesota

Taxable Non-taxableThis includes utility services. However, this tax does not relate to agricultural use.

Fuels

ManufacturingGeneral

Treatment Minnesota

Taxable Non-TaxableMore specifically, these are exempt. Sales of packing materials to businesses in the commercial packing industry are taxable in the case of consumption. Containers sold to be reused by vendors are also taxable.

Containers, packing material, labels, wrapping, etc.

ConstructionGeneral

Treatment Minnesota

Non-Taxable Non-Taxable

This is non-taxable for many cases, and non-taxable for custom construction of real property. For more information on the construction industry and taxes click here.

Building materials

ConstructionGeneral

Treatment Minnesota

It depends Non-Taxable

Tools and equipment

Computers and Software

General Treatment Minnesota

Taxable TaxableHowever, computer sales to students are

exempt.

Computer hardware

Computers and Software

General Treatment Minnesota

Taxable TaxableThink of “canned” software as software off the shelf. In Washington downloads are specifically mentioned as taxable.

Prewritten or canned software

Computers and Software

General Treatment Minnesota

Non-Taxable Non-Taxable

This is an exemption that applies unless there is a required hardware component to run the custom software. In that case, the hardware can be taxed separately.

Custom software

ServicesGeneral

Treatment Minnesota

Taxable Taxable

Personal services

ServicesGeneral

Treatment Minnesota

Non-Taxable Non-Taxable

Professional services

ServicesGeneral

Treatment Minnesota

Taxable It dependsUsually services to real property in Minnesota are exempt.

Services related to real property

ServicesGeneral

Treatment Minnesota

Taxable TaxableThis includes installing, repairing, cleaning, altering, improving, constructing or decorating TPP.

Services related to TPP

ServicesGeneral

Treatment Minnesota

Taxable Taxable

Seller’s transportation or shipping charges

ServicesGeneral

Treatment Minnesota

Taxable Taxable

Shipping and handling charges

ServicesGeneral

Treatment Minnesota

Taxable Taxable

Third-party delivery charges

ServicesGeneral

Treatment Minnesota

Taxable It dependsThis relates to personal and real

property.

Repair labor

ServicesGeneral

Treatment Minnesota

Taxable TaxableAgain, personal and real property.

Installation charges for TPP

ServicesGeneral

Treatment Minnesota

Taxable TaxableOnly applies to leasing of housing services for less than one month.

Leases

ServicesGeneral

Treatment Minnesota

Taxable TaxableThis is mostly related to personal

equipment rental.

Rentals

ServicesGeneral

Treatment Minnesota

Taxable TaxableWarranties will be covered later, and yes they

are taxable.

Maintenance agreements

For More Information on Taxable Services click here.

Taxable Basis

• Specific to accrual-based businesses.• You may not claim a bad debt allowance for:

• Finance charges.• Once credit is received you may deduct the

amount previously paid.

Bad Debts

• These are charges to a consumer for borrowed money.

• Fees are not associated with the transfer of TPP.

• Therefore, no taxable basis.• However, it depends.

• In certain states finance charges are taxable.

Finance Charges

• Three ways to figure taxable basis.• Minnesota opts for the way most beneficial

to consumers.• The taxable amount is the difference in

value between the value of the trade and the value of the full-price item.

Trade-In Allowances

Ways of TradesYour Car New Car

$5,000 $350,000Difference:$345,000

• Use tax is generally remitted for withdrawals from stock.

• Examples:• Samples• Display models – again, it depends

• The key idea is that these items were purchased with the intent to sell.

• Taxable basis is figured on the purchase cost.

Withdrawal from Stock

The Electronics ShopDisplay Model

Cost: $400

Return to Stock

Discounted Model

Sales Price: $500Who pays the tax?

Situation 2Display Model

Cost: $400

Return to Stock

Discounted Model

Sales Price: $300Consumer pays sales tax on $300.Retailer pays use tax on $100.

• This usually relates to sales of inventory and items as part of a sale of a business.

• These are not considered as retail sales.• Items that are not part of stock are

considered as “occasional sales.”• Warning: this does not relieve the new

owner of any previously owed tax liabilities.

Bulk Sales

• This calculation depends on the normal course of business.

• Cost of materials can be claimed for items outside of core inventory.

• Fair market value must be claimed for items assembled within a normal inventory.

Self-Produced Assets

Warranties

1. Optional – extended warranties.

2. Mandatory – usually included in the purchase price.

Taxable or Non-taxableTaxable

It depends

For more information about the taxable nature of extended warranties click here.

Replacement parts for mandatory warranties are taxable unless they are covered in the warranty agreement.

Exemptions

Two Reasons for Exemption1.How something is

used.

2.The purchaser’s status.

• Resale• Manufacturing• Etc.

• Government• Tribal organizations• Religious organizations and non-

profits

ExemptionsExempt Entities Exempt Transactions

Federal government, tribes, etc.

Wholesale, specific industry

use, etc.Either way, you need proof of the

exemption.

Nexus

YesCollect at 0%

Collect correct %

Taxable Customer(Exemptions)

Item taxability

Determining Your Tax ProfileNo

No

Yes

Yes

No

Registration and Compliance

Register Collect

ReconcileRemit

RemitReconcileCollectRegister

Register Collect

ReconcileRemit

Minnesota eRegistration Service

RemitReconcileCollectRegister

Register Collect

ReconcileRemit

Sales Tax Rate Calculator

RemitReconcileCollectRegister

Register Collect

ReconcileRemit

Reconciling Sales Tax Payable

RemitReconcileCollectRegister

Register Collect

ReconcileRemit

Remittance Options and Instructions

Audits

Auditors will usually examine all open years (determined by the statute of limitations) for: • Sales, including exemption certificates

Make sure you have all the current certificates as required.

• Purchases, including out-of-state purchases Make sure you can answer questions about where

and how the property is used. • Other records, including ledgers, journals, and

adjustments Make sure these support the reported values on any

returns. • Reporting and remitting, including all filed returns

Have these handy, including proof of filing if available.

Auditors will conduct the examination of these records on: • A detailed basis,

• A sampled basis, or

• Some of both.

For sampled records, they may use either: • A block sample,

• A random sample, or

• Some of both.

• Books, records, invoices, and receipts must be open for examination by the DOR at any time.

• Managed audit procedure – Taxpayers are allowed to perform some or all of the audit functions.

• Statute of limitations – typically no more than 3.5 years past the close of the tax year. However, there are exceptions:• A non-registered taxpayer.• Fraud or misrepresentation.

Minnesota Audits

… AND YOU’RE DONE!

Thank you.

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www.LeanTeams.ca/resources

Wade Farquhar

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