Sales Tax Jumpstart October 11, 2018 2.4 CPE Credits ......Webinar attendees can earn 2.4 hours of...

Sales Tax Jumpstart

October 11, 2018

2.4 CPE Credits

Presented by the Sales Tax Institute

Speaker:

Diane L. Yetter, Sales Tax Institute

Sales Tax Jumpstart September 13 to November 8, 2018

Before the Class: Please join the webinar 7 minutes before the scheduled time of the call for a prompt start. If you have never used Go To Webinar before please take time today to test your connection before your session here: http://bit.ly/UKElWx . If you have trouble logging on to GoToWebinar, please view the System Requirements: http://support.citrixonline.com/s/G2W/Help/SystemRequirements. We are aware that some past users have had issues logging in using Internet Explorer or if they have an older version of Go To Webinar installed on their machine. If this is the case you can try uninstalling GoToWebinar and reinstalling or you might want to try an alternative browser. If you continue to have trouble logging on, please call in on the phone using the number and passcode provide in your log-in email from GoToWebinar. You can follow the PDF materials which can be accessed at https://www.salestaxinstitute.com/20jumpstart-course-18materials. Day of Class: You will have received a personalized link for each class session to use to log into the webinar. Use this link and do not share the link with anyone else. It helps us monitor attendance and gives us the ability to assist you if there are technical issues. You will be able to listen to the webinar either through your computer or via a telephone connection. This information will also be in your personalized email. If you have not received the dial in information, please contact us immediately at [email protected] for assistance. If you have technical difficulties during the webinar, you will be able to chat online with our technical support through the Go to Webinar application. If you cannot log into Go To Webinar, please call our office at 312-701-1800 x3 for immediate assistance or email [email protected]. Please be aware that it is a violation of our copyright to record the class sessions. CPE Information: Webinar attendees can earn 2.4 hours of CPE credit in the “Taxes” field of study for today’s session. During the webinar, we will use polling questions throughout the scheduled presentation time. In order to receive CPE credit, you will need to participate in the polling questions. After the webinar, you will receive an email from [email protected] containing a link to complete a webinar evaluation form. To receive CPE credit, you will need to complete the evaluation form online and have participated in the polling questions.

The Sales Tax Institute is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org. Other Sales Tax Institute Courses and Webinars Please visit www.salestaxinstitute.com for more information on the Sales Tax Institute’s live and online course offerings and webinars. The following webinars and live courses are currently scheduled. Visit www.salestaxinstitute.com for additional details and registration and additional offerings. Live Webinars:

October 22, 2018 – Sales Tax Issues for Retailers After Wayfair November 28, 2018 – Manufacturing Sales Tax Exemptions That'll Save December 20, 2018 - Construction & Real Property Sales Tax Deep-Dive

Webinars On-Demand - available anytime: Sales Tax 101 Basic Concepts of Drop Shipments Sales Tax for E-Commerce Effective Audit Defense Techniques Sales Tax Challenges with Services Save Time & Eliminate Guesswork with Effective Tax Research

Diane L. Yetter, CPA, MST Diane L. Yetter is a strategist, advisor, speaker and author in the field of sales and use tax. She is president and founder of YETTER TAX, a sales tax consulting and tax technology firm in business since 1996. She is also the founder of The Sales Tax Institute, a premier think tank that offers live and online courses to educate business professionals about sales and use tax. Diane works with an extensive network of capable partners to deliver a variety of sales tax services ranging from tax technology to tax policy and planning and training. She works with clients of all sizes—from Fortune 10 to small, family-owned companies—in a variety of industries. She is a Certified Implementation Partner and Trainer with Thomson Reuters ONESOURCE Indirect Tax, a Certified Training and TDM Specialist for Vertex, Inc. and a Business Partner of Avalara and VertexCloud. As a speaker, Diane is frequently asked to present to industry groups concerning sales and use tax issues including the Council on State Taxation (COST), Chicago Tax Club, Diversified Communications (IOFM and Accountex), the Institute of Professionals in Taxation (IPT), National Association of Credit Managers (NACM), National Association for Retail Marketing Services (NARMS), Vertex User Conference, Thomson Reuters User Conference, and Avalara. As an author, Diane has written articles concerning sales and use tax issues; was editor for the 1995-1996 edition of the Information Technology Association of America Software & Services State Tax Report and authored Drop Shipments: Taxation, Compliance and Planning and Multistate Guide to Sales and Use Tax: Manufacturing, both published by CCH. She also is the author of the US Sales Tax Chapter for the IBFD VAT Worldwide Research Database. Diane provides answers to sales tax questions on the website www.salestaxsupport.com. She has also appeared as an expert witness. Diane is a member of the AICPA, Illinois CPA Society, Chicago Tax Club, Chicagoland Chamber of Commerce Taxation Committee, Taxpayers’ Federation of Illinois and the Institute of Professionals in Taxation. She is a member of the Practitioner Connection with the Council on State Taxation, and represents client concerns on a number of task forces. Diane was named in Accounting Today’s 100 Most Influential People in Accounting for 2011, 2012, 2017 and 2018. Diane serves on the KU Endowment Association’s Board of Trustees and is a Past Chair of the Dean’s Board of Advisors, University of Kansas School of Business where she is also an adjunct professor, teaching topics on state and local taxation and entrepreneurship. Diane earned a BS in accounting and business administration from the University of Kansas in 1985 and an MS in taxation from DePaul University in 1994. Prior to founding the company, Diane was a state and local tax manager in the Chicago office of Arthur Andersen LLP, the sales and use tax director for the Quaker Oats Company, and a sales and use tax auditor for the Kansas Department of Revenue.

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Copyright © Sales Tax Institute 2018 1

Efficient Tax Research| October 11, 2018

Copyright © Sales Tax Institute 2018

Exemption Homework Debrief

Copyright © Sales Tax Institute 1997‐20182

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Exemption Processes

• New Customer Process Ideas• Include with credit application• Use an exemption portal (Avalara & Vertex have tools)

• Add a question about whether they are exempt to new customer set up


Exemption Processes

• Certificate Maintenance• Expiring certificates –

oStart at least 90 days before expire

oTurn to taxable if don’t receive

• Non Expiring CertificatesoRecommend renewal requests every 3‐5 years

oBusiness process decision if don’t receive updated certificate

• Retention of prior certificates


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Drop Shipment Review

• Certificate for Ship to State•Most states accept alternative documentation

• SST certificate with any state number on each state line

• MTC certificate with any state number on state lines that accept

• Delivery state certificate with home state number

• Delivery state certificate with no nexus statement

• Home state certificate

• Customer certificate in delivery state if customer exempt


Tax Base


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Definitions

• Tax Base: the value of the items that are subject to sales or use tax

•Most states define the tax base as the total amount of the sales price, without any deduction for the cost of goods sold, interest paid, other expenses or transportation


Definitions (cont.)

• SSTP has no uniform definition of Tax Base, but does for Retail Sales Price• “Sales price” applies to the measure subject to sales tax and means the total amount of consideration, including cash, credit, property, and services, for which personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise, without any deduction for the following:

A. The seller's cost of the property sold; B. The cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller, and any other expense of the seller; C. Charges by the seller for any services necessary to complete the sale, other than delivery and installation charges; D. Delivery charges; E. Installation charges; and F. Credit for any trade‐in, as determined by state law

• A state may exclude from “sales price” the amounts received for charges included in paragraphs (C) through (F) above, if they are separately stated on the invoice, billing, or similar document given to the purchaser.


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Definitions (cont.)

• Under SSTP, all local jurisdictions must have uniform tax base with their state.

• The tax base is adjusted for exemptions, exclusions, or deductions that are determined by specific statutory authority.


Definitions (cont.)

• Examples of items that may be excluded from tax base:• bad debts• discounts • trade‐ins • freight and transportation charges (freight out) • installation • Interest• finance or carrying charges• refunds and returns• other taxes and licenses


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Definitions (cont.)

• Each state’s definition of a sale needs to be reviewed• Most states define a sale as transfer of title or possession and may include a lease or rental.

• Storage may be defined as a taxable use.

• Selling an item at a significantly discounted price may constitute a sale at the reduced price or tax may be due on the normal retail value or the cost of the item sold.


Items Subject to Tax – Sales of Personal Property

• Tangible or Intangible• Normally, intangible items are not subject to sales and use tax (i.e., stocks, bonds, goodwill).

• However, this issue has been the subject of much litigation, in particular the sale or purchase of software.


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Items Subject to Tax – Sales of Personal Property (cont.)

• Personal or Real• Personal property is typically movable and not affixed to the land.

• Controversies arise with respect to fixtures and leasehold improvements.

• In the construction of real property, the contractor is normally considered the consumer of the personal property incorporated into the real property.

oThe contractor, therefore, pays tax on the incorporated personal property and includes the cost in the sales price of the building.

oThe sale of the building, as realty, is not typically subject to sales tax.Copyright © Sales Tax Institute 1997‐201813


• Property or Services• If tangible personal property is conveyed with services, some states may construe the transaction as a sale of property, thereby transforming a nontaxable service into taxable tangible personal property.


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•Mixing Taxable and Nontaxable Items• When one lump price is charged for a bundle of taxable and nontaxable goods and services, the state may attempt to impose tax on the entire sales price.

• The taxpayer is left with the burden of proof.• This burden of proof can be overcome if the bundled items are stated separately on the invoice or contract.


Items Subject to Tax – Sales of Services

• Normally not taxable unless specifically taxed within a state’s statute

• Some of the services states have taxed are amusements, telecommunications, repair and maintenance of tangible personal property, parking fees, cable television, information services, remodeling of real property, and data processing.

• States that have broad tax on services include Hawaii, New Mexico, South Dakota, and West Virginia


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Items Subject to Tax – Sales of Services (cont.)

• Lump sum vs. separated• If an item being sold has both a taxable and non‐taxable component, generally the non‐taxable component must be separately stated or the entire receipt becomes subject to tax.

• In some states, if the predominant cost of the items lumped into one amount are taxable, the entire amount is subject to tax.

• Some states allow the percentage of taxable items in the lumped amount be only subject to tax.

• Nontaxable components should be separately stated.



• True Object Test• When services are commingled with tangible personal property, the true object test should be used to determine what is being sold.

• Was the intent to receive tangible personal property or was the intent to receive a service and the transfer of tangible personal property was incidental to the delivery of the service?

• TOOL: True Object Determination


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• De Minimis Rule• If taxable and exempt items are sold for a single price, look at whether the taxable is de minimis

oSST States – generally 10%

oTexas ‐ 5%

o Illinois – 35%


Items Subject to Tax (cont.)

• Sales of Real Property• Generally exempt• Florida taxes commercial rental property• Some states tax services to real property.

• Gifts and Donations• Tax is due by the donor if the good is taxable• If shipped to another state, delivery state rules apply

• If donor doesn’t have nexus in delivery state, no use tax due by donee

• Typically exempt status of donee is not relevant


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• Related Entity Transfers• Intracompany Transfers

oNormally, intracompany transactions, i.e., a transfer from one division to another are not subject to sales and use tax.

o In some states, transfers within the same corporate entity, such as withdrawals from inventory for use by the company, may be taxable.

oMovement from one state to another could result in tax• Intercompany Transfers

o Intercompany sales, transactions between two separate legal entities, are typically subject to sales and use tax.



• Freight• Taxability of freight can differ based on contract terms (FOB Origin or FOB Destination) and on method of delivery (Common Carrier vs seller truck).

• FOB origin terms are more often exempt than FOB Destination.• FOB Origin doesn’t change the sourcing from point of delivery• Customer pickup will change source to point of pick up• SSTP has defined “delivery charges” to mean “charges by the seller for preparation and delivery to a location designated by the purchaser of personal property or services including, but not limited to, transportation, shipping, postage, handling, crating, and packing.”


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• Freight (cont.)• Some states consider any freight or transportation charges as part of the sale of a taxable item and subject to tax regardless of the shipping provisions (i.e., Texas, Arkansas, Connecticut, Michigan, and Washington).

• Freight charges relating to a sale of a nontaxable item are not taxable if otherwise taxable.

• Typically courier services and common carrier services, i.e., UPS or Federal Express, and U.S. postage are not taxable when billed by the carrier and not the vendor

• A combined shipping and handling charge is generally taxable.Copyright © Sales Tax Institute 1997‐201823


• Other Taxes• Other taxes such as federal and state excise taxes and property taxes may be included in a state’s taxable base.

oThese types of taxes are commonly related to telephone services, leases, tires, and motor vehicles.

• Cash Discounts & Rebates• Cash discounts applied before the sale are deductible but those after the sale (2%10day) typically are not

• Rebates earned and paid after the sale are not deductible


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• Deposits vs Progress Payments• Deposits are normally not subject to tax until the sale is made.

• Progress payments are more likely taxed at each payment

• Trade‐ins• An adjustment to the selling price for trade‐ins may be allowed, but the treatment varies by state.

• In some states, the trade‐in must be of like kind with the new item being purchased.



• Returns and Allowances• Generally, a deduction may be taken from gross receipts and sales reported by the seller for items that are returned for full credit on which sales tax was originally paid

• Tax should be refunded at the rate paid and for the original jurisdiction• Bad Debts

• Most states allow an adjustment to reportable sales for a bad debt provision for tax reported under accrual basis.

• The adjustment is usually not allowed until the sales are written off for Federal tax purposes.

• Bad debt deductions only apply to taxable sales.


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• Restocking Charge• Some states do not permit a reduction of previously reported gross receipts for a restocking charge.

• Considered a cost of production included in the tax base.


Tax Research Tools & Methodology


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Tax Determination

•Who is responsible? It’s a team effort

• For use tax determination • BIGGEST PROBLEM ‐ NOT ENOUGH INFORMATION

• Information must be gathered from many sources

• Understand all aspects of business to evaluate if there is a sales and use tax impact


Company‐Wide Interaction

• In order to adequately administer the sales and use tax function, information must be gathered from many sources.

• This information is used for many purposes:• Nexus determination

• Evaluate taxability• Prepare returns• Defend audits• Evaluation business issues


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Company‐Wide Interaction (cont.)

• Importance of interaction with other departments is critical to support the sales tax function.

• Some issues that others in the company may not realize have an impact could result in liability or overpayment.

• Be aware of public communication messages that are made by your company. • These public messages may indicate to taxing authorities information contrary to what you have indicated on registration forms or audit inquiries.


Company‐Wide Interaction (cont.)

• Be aware of product or business changes. • Entering new market areas usually results in additional collection responsibilities.

• Offering different products or enhanced services for existing products could have different tax implications.

• It is imperative to educate management on the importance of keeping the tax department, especially the sales and use tax department informed of these issues.


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Departments to Involve in the Sales and Use Tax Function

• Sales Department

•Marketing

• Credit Department

• Billing Department

• Accounts Receivable Department


Departments to Involve in the Sales and Use Tax Function (cont.)

• Requisitioning• Production/Plant/Operations Personnel• Engineering• Purchasing• Receiving• Accounts Payable


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Departments to Involve in the Sales and Use Tax Function (cont.)

• General Accounting Department

• IT• Tax Department

• Legal


Maintenance of Taxability Decisions

• Taxability of items sold and purchased need to be determined and maintained.

• In many cases, the process for sales will differ from that for purchases.

• The first step in this process is an accurate and complete understanding of the items and how they are represented on the invoices.


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Maintenance of Taxability Decisions (cont.)

• The second step is to determine how taxability will be determined, manually or systematically. • Understanding who will be making the decisions will impact the format and information provided.



• Taxability charts or “cheat sheets” should be prepared and provided to the decision makers. • All jurisdictions where business is conducted and tax responsibility exists should be covered.

• Cheat sheets should be updated on a regular basis, and superseded charts should be removed from the decision maker to minimize utilization of outdated materials.

• Copies of all versions of the sheets should be maintained by the tax department for audit purposes.


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• In either a custom or canned solution, it is still necessary to ensure that changes in taxability are monitored and entered into the solution and that new products and customers are added as necessary.



• There are many ways to keep up‐to‐date on law changes that affect your business: • State tax journals• States generally publish information bulletins. Subscribe to the list servs for your states. Be sure you review these for key items.

• Internet discussion groups (Linked In)• Industry and trade associations

• The key is to find the combination of resources that meet your needs and your business issues and then to use them regularly.


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Research on the Internet

• TOOL: Tax Resources Links• Link Web pages

• State DOR websites


State Tax Reference Materials

• Commercial Resources: • Wolters Kluwer (CCH) (STI discount)• Thomson Reuters • BNA• Industry Sales Tax Solutions• Vertex, Inc.• Lexis• Sovos• Tax Analysts• Avalara• Industry Manuals Copyright © Sales Tax Institute 1997‐201842

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State Tax Reference Materials (cont.)

• State Resources:• Statutes, Rules, and Regulations• Court Cases (Attorney General’s Office)• Advisory Opinions• Letter Rulings• Taxpayer Publications• State’s Web Page



• Publications: • State Tax Notes• Journal of State Taxation• Journal of Multistate Taxation

• Sales and Use Tax Alert• Sales Tax Review• Law, Accounting and Consulting Firm Newsletters


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• Associations and Research Institutes:• Multistate Tax Commission

• Federation of Tax Administrators

• IPT ‐ Institute of Professionals in Taxation• COST – Council on State Taxation• TEI – Tax Executives Institute• Chamber of Commerce

• Industry Association



• Social Media: • Linked In• Twitter• You Tube• Facebook• Tax Portals

oSales Tax Support ‐ http://www.salestaxsupport.com

oTax Connections ‐ http://www.taxconnections.com


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Administrative Authority Hierarchy

• United States Supreme Court• U.S. Supreme Court decisions apply to all jurisdictions with similar statutes and can be relied on as primary law.

• State Court• A state’s court decisions are determined by reviewing the state’s statutes and the intent of the law.

• A state court decision applies primarily on to its laws.

• Other states’ decisions can be used as precedent, but may not be recognized as authority in the secondary jurisdictions.


Administrative Authority Hierarchy (cont.)

• State Statutes• A state’s statutes are the laws passed by the state’s legislative body.

• It is important to look at the legislature’s intent with the laws passed.

• In performing research in a particular state, the state’s statutes should be reviewed first to determine the laws governing the particular transaction.


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• State Administrative Rulings• The administrative rules are the state’s Department of Revenue’s interpretation of the state’s statutes and the legislature’s intent.

• A DOR’s interpretation may not necessarily conform to the legislature’s intent.



• Advisory Opinions and Letter Rulings• Issued by the DOR after reviewing a particular transaction or situation. These are normally precipitated by a taxpayer request.

• When issuing letter rulings, the states warn that the conclusions are based on the facts presented by the taxpayer.

• It is advisable for a taxpayer to request a letter ruling addressing the exact issues rather than apply the states’ ruling to another taxpayer’s situation.

• In some situations, the taxpayer may wish to apply for a ruling anonymously rather than disclose the company’s name.


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• Other Interpretations of the States’ Statutes and Regulations• Newsletters printed by the states or organizations also address the states’ statutes and regulations.

• The newsletters explain the states’ laws, identify new law changes or related court cases.

• They may also give suggestions or commentary on taxing a particular item or situation.


How to Read Statutes & Regulations

• Reading a statute or a regulation is a lot like putting together a puzzle.

• The title of a statute or regulation is similar to the picture on the box.

• Usually the first section will be a general statement explaining the provision with the following section providing the specific conditions or definitions.

• Subsections of the statute are read together. Punctuation and hierarchy of the subsections are important to observe and assist in the interpretation of the section.


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How to Read Statutes & Regulations (cont.)

Arkansas Code Annotated 26‐52‐403: Farm Equipment and Machinery

(a) The sales of new and used farm equipment and machinery shall not be subject to the Arkansas gross receipts tax levied by 26‐52‐301(1), (2), (3)(A), (B), (C)(i)‐(iii), (4), and (5), but shall be exempt there from.

(b) (1) (A) As used in this section, “farm equipment and machinery” means implements used exclusively and directly for the agricultural production of food or fiber as a business.

(B)Implements used to harvest crops for others shall be considered as used in the agricultural production of food or fiber as a business for the purposes of this exemption.

(2) Irrigation pipe used to carry water from the irrigation well to the crop shall be considered “farm machinery or equipment” regardless of whether the pipe is used above ground or is buried underground.

(c) (1) Each purchaser of farm machinery must certify, in writing, on the copy of the invoice or sales ticket to be retained by the seller that he is engaged in farming and that the farm machinery will be used only in farming.

(2) The seller shall certify to the Arkansas Department of Finance and Administration that the contract price of the items has been reduced to grant the full benefit of the exemption.

(3) Violation of this subsection by the purchaser or seller shall be a misdemeanor and, upon violation or conviction for a second offense, the Director of the Department of Finance and Administration shall revoke the seller’s sales tax permit.


How to Read Statutes & Regulations (cont.)

• Example Statute Interpretation• Generally Farm Equipment is exempt

• Section (a) exemption statement

• Section (b) restrictions on use• Section (c) certification• Coordination of Sections• Presentation


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Research Tips and Tricks

• Pick the right resource• Find the right words• Search structure


Boolean Search Operators

• Inclusion (AND): manufacturing AND exemption


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• Alternative (OR): manufacturing OR exemption



•W#: two words within proximity in order entered

• N#: two words near each other regardless of order


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• Exact phrase (“”): “manufacturing exemption”



• Other helpful operators• Exclusion (NOT): manufacturing NOT exemption

• Nested search operators (Manufacturing OR exemption) AND Ohio

• Title: ‐ word must be in the title

• Operators must be in CAPS

• Google doesn’t recognize all Boolean operators• TOOL: Boolean vs Natural Language Search


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Questions?


Homework & Next Week


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Homework

• Link to homework: https://www.salestaxinstitute.com/20jumpstart‐course‐18materials


Next Week

• Thursday, October 18, 11:30 – 1:30 EDT• Compliance Deep‐Dive


https://www.salestaxinstitute.com/20jumpstart-course-18materials

10/11/2018


Thanks to our Sponsors!


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