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Sales and Use Tax Key Fundamentals Mastering Tax Base, Compliance, Nexus, and Other Essential Multi-State Concepts
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THURSDAY, NOVEMBER 15, 2012
Presenting a live 110-minute teleconference with interactive Q&A
Monika Miles, Co-Founder, Labhart Miles Consulting Group Inc., San Jose, Calif.
Dru Beguelin, Sales Director, Sales and Use Taxes, Meridian Global Services, White Plains, N.Y.
Joseph Geiger, Senior Tax Consultant, Vertex Inc., Berwyn, Pa.
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Sales and Use Tax Key Fundamentals Seminar
Joseph Geiger, Vertex Inc.
Nov. 15, 2012
Monika Miles, Labhart Miles Consulting Group
Dru Beguelin, Meridian Global Services
Today’s Program
Sales Vs. Use Tax
[Monika Miles]
Sales And Use Tax Nexus
[Monika Miles]
Essential Compliance Concepts
[Joseph Geiger]
Revenue Agency Administration Of Sales Tax
[Dru Beguelin]
Role And Status Of SSTP
[Dru Beguelin]
Slide 8 – Slide 13
Slide 14 – Slide 33
Slide 34 – Slide 57
Slide 58 – Slide 66
Slide 67 – Slide 69
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
SALES VS. USE TAX
Monika Miles, Labhart Miles Consulting
Sales Tax 101
Sales tax is one of the most common taxes encountered every day by
businesses and consumers alike.
9
Sales Tax 101 (Cont.)
The concept of sales tax is prevalent in daily conversations because:
• States need revenue.
• Increasing numbers of online transactions
• Smaller companies are able to expand their sales footprints quickly
because of increased technology.
10
Some Terms And Definitions
• Sales tax
• Use tax
• Nexus
• Tangible personal property
11
Sales Tax And Use Tax
• Sales tax and complementary use tax are imposed by state and local
jurisdictions on retailers for the privilege of selling ―tangible personal
property‖ in the jurisdictions.
• 45 states and the District of Columba impose sales taxes.
12
Sales Tax
• The responsibility of sales tax collection is generally borne by the
seller, if the seller has the minimum connection necessary with the
state to require the seller to collect and remit the tax. (Nexus)
• If the seller does not have the minimum connection necessary to
collect, then the purchaser must self-remit the use tax.
13
SALES AND USE TAX NEXUS
Monika Miles, Labhart Miles Consulting
Nexus
• ―The sufficient connection that an entity must have in order for a
state to impose a tax‖
• Generally, physical contact between a taxpayer and state must
occur.
• Defined by U.S. constitutional principles and U.S. Supreme Court
cases
15
Nexus Examples
• An employee living or working in a state
• An independent contractor working on behalf of the company in a
state
• Soliciting sales in a state (i.e., regular travel to visit prospective
customers in a state)
• Ownership of property in a state
• Rental of property
• Participating in trade shows
16
Nexus: Why It’s Important
• Sales tax is a gross tax. Net operating losses will not reduce a
sales/use tax liability.
• Taxes based on capital stock may also apply.
• An aggressive state may assert that tax is due when in fact nexus
has not been established.
17
Tangible Personal Property
• The term ―tangible personal property‖ (TPP) refers to property that
can be seen, weighed, measured, felt or touched, or perceived by
the senses.
• In general, unless otherwise exempt, sales of TPP are subject to
sales tax.
18
History
• Our current system stems from various state statutes and
regulations,
• From the U.S. Congress, and
• From U.S. Supreme Court decisions in multi-jurisdictional cases.
19
U.S. Constitutional Basis For Sales Tax
• Two constitutional provisions that are regularly discussed in state
tax cases are:
– Due Process Clause
– Commerce Clause
20
Due Process Clause
• No state shall ―deprive any person of life, liberty or property, without
due process of law.‖
• Taxes = ―Property‖
21
The Commerce Clause
• Authorizes Congress to regulate commerce among the
states
• Prohibits states from enacting laws that might unduly
burden or inhibit the free flow of trade among the states
(dormant Commerce Clause)
22
Summary
• A state cannot impose a tax obligation on an out-of-state corporation
unless the Due Process Clause ―minimal connection‖ and the
Commerce Clause ―substantial nexus requirements‖ are satisfied.
• The landmark case in this regard is Quill Corp. v. North Dakota 504
U.S. 298 (1992).
23
Quill: Facts
• Mail order office supply retailer
• Locations in California, Illinois and Georgia
• No employees or other offices in North Dakota
24
Quill (Cont.)
• In Quill, the U.S. Supreme Court concluded that in addition to any
minimum connection with a state (Due Process Clause), a business
must have substantial physical presence nexus (under the
Commerce Clause) before the state could impose sales/use tax
collection requirements.
25
Catalog Sales
• In Quill, the Supreme Court concluded that Congress was better
qualified to resolve the matter of state taxation of catalog sales.
• Congress has taken no action!
26
Catalog Vs. The Internet
VS.
27
Sales Over The Internet
• The Internet is, for sales tax purposes, in essence a virtual catalog.
If the seller has nexus in the state to which the order is to be
shipped, the seller should collect and remit those taxes.
VS.
28
The Growth Of Internet Sales
• Non-existent when the high court decided Quill
• No tax collection obligation on seller without a physical presence in
a state (like catalog sellers)
29
Example
• Susie, who resides in Texas, received a catalog from ShoesGalore
and has selected a pair to order.
• She reviews the order form and notes in the fine print that
―customers in CA, FL, and IL must add sales tax.‖
• Susie happily sends in her order form and feels like she has saved
the sales tax
30
Why It’s Important
―Sales tax is a pass-through tax. The thing that concerns most
companies is the burden and cost of collection and remittance of the
taxes.”
31
The “Amazon Dilemma”
• Large vs. small companies
• ―Tax loopholes‖
• Compliance burden
• Use tax
32
Why It’s Important
• Sellers of items via the Internet must collect and remit
applicable sales tax, if the seller has nexus in the state of the
destination of the sale. If the seller does not have nexus, the
seller is not yet required to collect and remit the tax.
33
ESSENTIAL COMPLIANCE CONCEPTS
Joseph Geiger, Vertex Inc.
35
Sales tax – General definition
Imposed on the sale of tangible personal property or services
Seller may pass tax on to the consumer; it must be separately
stated on the invoice.
Applies only to intrastate transactions
36
Five states without a sales tax:
―NOMAD‖ states:
New Hampshire
Oregon
Montana
Alaska (although, local jurisdictions may impose a tax)
Delaware
37
Transaction tax
Imposed on the sale of tangible personal property or service
Purchaser is liable to the seller for tax due.
Must be separately stated on the invoice
38
Privilege tax
Imposed on seller’s gross receipts for privilege of doing
business in state
Seller is liable for tax but can pass tax on to the purchaser.
Can be included in the sales price or separately stated on the
invoice
39
Consumer levy – The ―true sales tax‖
Imposed on sales of tangible personal property and services
Imposed on the purchaser, but collected by the seller
Must be separately stated on the invoice
40
Gross receipts tax
Imposed on the sale of tangible personal property and
services, but with fewer exemptions or exclusions to the
taxable base
Hawaii — If the tax is passed on to the purchaser, then it
becomes part of the gross receipts, for tax calculation.
Must be separately stated on the invoice
41
Use tax – General definition
Imposed on the storage, use or consumption of a taxable item
or service on which no sales tax has been paid
Complimentary to sales tax
Purchases made outside the taxing jurisdiction but used in the
taxing jurisdiction
42
Types of use tax
Seller’s use — Tax collected by registered vendor on interstate
sales
Consumer’s use — Tax owed by the purchaser when the
vendor does not collect tax
43
When you have determined nexus and reviewed situs rules in
those states:
Determine your tax obligation for sales or use tax remittance
(seller’s use and consumer’s use)
Determine software requirements for correct tax type
calculation outcome
Jurisdiction data sent to automated tax system determines
situs.
Not all states have absorption laws
1) A seller may not want to charge the buyer the tax. These
are usually states in which the burden of the tax is intended
to be imposed on the seller, not the buyer.
2) States often provide an exemption when separately
charging sale tax would be really inconvenient (bars, food
vendors at sporting events, vending machines, etc.) There
may be a requirement that a sign be posted saying that the
price includes the sales tax.
44
Not all states have absorption laws (Cont.)
3) There are a few states that say that if the invoice says ―tax
included,‖ that’s good enough.
4) Some states have no problem with the seller saying that it
will refund the sales tax, even it has to charge the tax.
5) Many states allow the seller to say something like, ―The
state makes us charge you tax, but we’ll give you a rebate
of 6%,‖ as long as the seller is not saying that it is
refunding the tax itself.
45
46
The point at which tax is legally due
Origin
Destination
Administrative origin
47
Goods shipped from one state and delivered across state lines to
another state
Taxing situs is where the
goods are consumed.
48
Ship-from and delivery locations are in the same state.
Taxing situs varies state by state.
49
Origin States Modified Origin States
Arizona California
Illinois Texas
Missouri
New Mexico
Ohio
Pennsylvania
Tennessee
Utah
Virginia
Below is a listing of origin states. The taxing situs in these states is
the seller’s location, when transactions are conducted within the
state. All other states are destination states.
50
Once you have registered with a state:
Review whether the state is an origin or destination state (for
local tax application)
Review whether you have any physical presence in the state
Determine software requirements for correct situs
determination outcomes
51
Transaction tax at the state and local levels can be imposed differently:
Local taxes are authorized by state statute.
Some items have reduced rates at the state level and are
exempt at the local level.
Home rule jurisdictions administer tax separately from states.
Some states have locals that override the other local rates.
The amount on which the tax is imposed
Defined as the total amount of the sales price, without any
deduction for the cost of the goods sold, interest paid, other
expenses or transportation
52
Taxable and non-taxable components must be stated
separately, to preserve the non-taxable portion.
Tax base is adjusted for exemptions, exclusions or deductions.
53
Coupons
Retailer
Manufacturer
Cash discounts
Excise taxes
Finance charges
54
Installation charges
Installment sales
Returns
Repossessions
55
56
Nexus Study Taxability Rules Tax Calculation
1. Sales activities
2. Physical
locations
3. Business
changes
1. Situs rules
2. Tax base
3. Jurisdiction
4. Exemptions
1. Jurisdiction data
2. Tax rates
3. Customer data
4. Line item data
To minimize audit exposure and increase tax compliance
outcomes, review your nexus decisions and taxability rules, and
know what data must/can be sent to an automated tax compliance
system.
57
8
2 0
7 9
5
7
2
Nexus
Situs
Tax base
Exclusions and
exemptions
Administrative and
compliance issues
REVENUE AGENCY ADMINISTRATION OF SALES TAX
Dru Beguelin, Meridian Global Services
Administration Of Sales Tax
Typical approaches to filing frequency
Typical approaches to e-filing
E-payment options available
Common exemptions and exemption certificates
Vendor compensation
59
Filing Frequency
State and local jurisdictions
• Determining monthly, quarterly, semi-annual or annual
returns
• Each jurisdiction has its own guidelines.
Thresholds
• Dollar amounts
• Time period
Registrations
• May determine frequency
60
Filing Frequency (Cont.)
Pitfalls
• Registrations
• No-change jurisdictions
• Processes
Remedies
• Proactive
• Persistent
• The old fashioned way
61
E-Filing
Streamlining the process
• Saves time and money
Automated solutions
• E-file capabilities
Manually
• Jurisdictional Web sites
Third party
• Peace of mind
62
E-Payments
Streamlining the process
• Saves time and money
Automated solutions
• E-pay capabilities
Manually
• Jurisdictional Web sites
Third party
• Value-added resources
63
– Exemptions Exemptions
Generally fall into three categories
• Who is the purchaser?
• What is being purchased?
• How is it being used?
Documentation
Miscellaneous exemptions
64
– Exemption Certificates Exemption Certificates
Types of certificates
• Unit
• Blanket
• Specific
Forms
Documentation
65
Vendor Compensation
Many jurisdictions provide discounts.
Timely filer
Errors
66
ROLE AND STATUS OF SSTP
Dru Beguelin, Meridian Global Services
Streamlined Sales Tax Project
Role and status
• Purpose
• Administration
• Simplification
• Uniformity
68
Streamlined Sales Tax Project (Cont.)
Streamlined Sales and Use Tax Agreement
• 24 member states
Relevance
• 12 years later
• Benefits
• Goals
69
