Minimize an Audit! Learn About Ohio Sales and Use Tax

Bill Hallmark Principal Clark Schaefer Hackett

Diane Merk Principal Clark Schaefer Hackett

Agenda • Sales & Use Tax Basics, Registration and

Reporting

• Nexus

• Definition of Selling Price and Sourcing

• Taxable Services

• Exemptions

• Voluntary Disclosure Agreements and Audits

Sales & Use Tax Basic, Registration and Reporting

History of Sales & Use Tax

Several states have no state level sales or use tax: • Alaska • Delaware • New Hampshire • Montana • Oregon

Sales taxes were first adopted in the United States during the 1930s. There are currently more than 13,000 tax rate jurisdictions in the United States.

Sales Tax vs. Use Tax

- Sales Tax is a tax on the sale, lease or rental of tangible personal property (TPP) or specified services. It is collected by the seller/vendor and paid by the purchaser.

- Use Tax is the complement to the sales tax and is a tax on the use, storage, or consumption of TPP or the receipt of the benefit of specified taxable services. It is paid by the user.

What is TPP?

Tangible personal property is property that can be seen, weighed, measured, felt, touched or that is in any way perceptible to the senses. It includes some items that would not normally fit into that definition such as electricity, water, gas, steam and pre-written computer software.

Registration

There are several types of vendor licenses: • Fixed place of business license - obtained

from the county auditor, Form ST-1, $25 fee

• Transient vendor's license - OH Dept of Taxation via OBG or Form ST-1T, $25 fee

• Seller - OH Dept of Taxation via OBG or Form UT-1000, no fee

Reporting – Sales Tax

- The primary reporting and payment responsibility for sales tax in Ohio is on the seller. They act as a collection agent for the state. - To compensate for the administrative costs of collecting and remitting the sales tax, the state allows a discount or collection allowance to the vendor of .75 of 1%, or .0075 of the tax liability. This can only be claimed on a timely filed and paid sales tax return.

Reporting – Sales Tax

- Consumer's use tax is required to be paid on untaxed purchases (often from remote sellers or those made over the Internet) that will be used, stored or consumed in Ohio. - Most Ohio businesses are expected to have a consumer's use tax account. The Department of Taxation is actively auditing those businesses that do not have an account.

Reporting – Filing Frequency

The State sets the reporting frequency based on the tax reported in prior periods.

• Sales tax reporting is either monthly or

semi-annually • Consumers' use tax reporting is quarterly

The sales tax return is due by the 23rd day of the month following the end of the reporting period.

Reporting – How to File

There are two ways to file Ohio Sales Tax Returns:

• On the Ohio Business Gateway (OBG) - requires advance registration

• By Telefile at 800-697-0440 - no advance

registration Payment can be made by ACH Debit, ACH Credit, credit card or paper check.

Reporting – Tax Rates

-The current state tax rate in Ohio is 5.75% - Local or county rates of .75% to 2.25% for total tax rates ranging from 6.5% to 8.0% Rate charts are available on the Ohio Department of Taxation's website at: www.tax.ohio.gov

Reporting – Tax Rates

• The Finder is a tool

that is available on the Department’s website that allows you to determine tax rates for jurisdiction by typing in the address.

Reporting – Tax Rates

Current Ohio tax rate information can be found at: www.tax.ohio.gov

Nexus

Definition of Nexus

• Nexus is defined as connection between a jurisdiction and a taxpayer that the jurisdiction seeks to tax

• Nexus is determined under the Due Process Clause and Commerce Clause of the U.S. Constitution

• Nexus standards can be different depending

upon the state and type of tax

The Physical Presence Nexus Standard for Sales Tax

• Quill v. North Dakota – 504 U.S. 298 Quill sold product to N.D. customers Quill had no sales force or retail outlet in the

state The State Tax Commissioner tried to require

Quill to collect and remit tax on sales to ND customers

U.S. Supreme Court held a business must have a physical presence to be subject to a jurisdiction’s collection and remittance responsibilities

Post Quill- Additional Developments

• Recall Quill requires a physical presence

• Economy now is much different than in 1992 – electronic commerce plays a bigger role

• Marketplace Fairness Act (H.R. 684) – would effectively overrule Quill and allow states to require collection of tax on electronic commerce sales

• Referred to U.S. House Judiciary Subcommittee on

Regulatory Reform, Commercial and Antitrust law • In time the physical presence standard will be replaced

The Physical Presence Std.

• Can be established by a temporary presence of people or property in a state

• Nexus requires a “substantial” physical presence – term is not defined

• What constitutes “substantial” varies from state to state

• Most states define as a retailer maintaining or occupying a place of business in the state but could also mean inventory presence in a state.

Two Specific Types of Nexus for Remote Sellers

• Click Through Nexus – Nexus results from activities of in state referral source Seller must meet minimum sales threshold Usually associated with commission payments to

an in-state referral source

• Affiliate Nexus (aka Scholastic Nexus) – Where remote retailer holds interest in or is owned by

an in-state retailer Both in state and out of state retailers sell similar

products Does not always require common ownership

What is a Sale?

A sales is any transfer of title, possession, or right to use TPP in the state, or the provision of a designated service in the state for consideration.

What is the “Sales Price”?

According to the Ohio Revised Code Section 5739.01(H)(1)(a), "sales price" equals the total consideration paid, including cash, credit, property and services for which TTP or services are sold, leased or rented and include the seller's cost of the property sold and the costs of delivery and installation. Delivery charges include charges by the vendor for transportation, shipping, postage, handling, crating and/or packing. The sales price does not include interest, financing or carrying charges from credit extended on the sale.

Sourcing for the Sale of TPP

• Intrastate sale - the transaction begins in Ohio and ends in Ohio

• Interstate sale - the transaction begins in one

state but ends in Ohio

This is important in determining the appropriate sales tax rate.

Origin vs. Destination Sourcing

• Intrastate sale = Origin sourcing An intrastate sale in Ohio is taxed based on

where the sale originated • Interstate sales = Destination sourcing An interstate sale is taxed based on the

destination of the sale, or where the consumer receives the property.

Sourcing for the Sale of Services

Generally based on destination - where the service was performed or where the benefit of the service was received.

Taxable Services

Ohio’s Taxation of Services

Ohio only taxes specific services • List found in Ohio Revised Code 5739.01 – lists 22

taxable services • Taxable services that impact most include

landscaping / lawncare, building maintenance / janitorial, exterminating, temporary labor, repair and installation of TPP, automatic data processing and computer services

• Remember tax is consumer based; if state audits and does not find tax charged, auditor will assess use tax.

What Services Are Not Taxable?

• Professional Services - Accounting, Legal, etc.

• Personal Services - Service providers are subject to sales tax or

use tax on property purchased and used to render the service.

What About Computers/ Software and Related Services

• Computer hardware is obviously tangible personal property and is taxable absent an exempt use

• Ohio treats software as taxable tangible personal property regardless of how it’s delivered.

• Computer Services are usually subject to tax

Computer Services in More Detail

Taxable computer services in Ohio include the following when provided in conjunction with the sale or lease of taxable computer equipment:

• Specifying computer hardware configurations • Evaluating technical processing characteristics • Computer programming • Training computer users

Other Taxable Electronic Services

• Automatic Data Processing – The processing of other’s data or providing access to computer equipment for the purpose of processing data (bank back-end processing and medical billing)

• Electronic Information Services – providing access

to computer equipment for purposes of examining or acquiring data stored or placing data on equipment to be retrieved by others

Exemptions

Exemptions

Exemptions are expressed in several ways, including: • Exemption granted on the nature of the product

(food) • Exemption based on the nature of the purchaser • Exemption based on the type of transaction

(resale) Ohio exemptions are found in the Ohio Revised Code section 5739.02.

Exemption - Nature of the Product

Ohio grants many different exemptions based on the nature of the product. Some common examples: • Food • Newspapers • Customized software • Certain medicines/drugs and prosthetic devices

Exemption - Nature of the Purchaser

Ohio grants exemptions to certain purchasers, such as:

• Federal government • State and local government units and their

political subdivisions • Educational institutions - public schools • Churches, 501(c)(3) organizations and

organizations operating for a charitable purpose • Direct pay holders

Exemption – Types of Transaction

Ohio has determined that certain types of transactions be exempt from sales and use tax. These can include: • Purchases for resale

• Purchases that will become part of real property

• Purchases that will be used in the manufacturing

process

What is the Manufacturing Exemption?

5739.02(B)(42)(a) To incorporate the thing transferred as a material or a part into tangible personal property to be produced for sale by manufacturing, assembling, processing, or refining.

What Purchases Are Included?

Materials and ingredients, including: • Materials to be incorporated as a component or

constituent of a product

• Catalysts, solvents and other consumables that interact with the product and are integral to the manufacturing operation

• Fuel, power, and electricity consumed to power

manufacturing equipment

What Purchases Are Included?

Equipment used to manufacture a product for sale: • Machinery used in manufacturing

• Repair parts for the above • Tangible personal property “consumed” in the

manufacturing process

What Purchases Are Included?

What about forklifts? • Used to move work in process between stations –

exempt • Used to move raw materials or finished goods-

taxable: But what if I use the same forklift to do

both? What about propane to power?

Not Everything is Exempt

The manufacturing exemption does not apply to all purchases. Here are some items that are taxable:

• Office Equipment - such as computers, monitors, printers, scanners, fax machines and staplers

• Office Supplies - such as paper, tape, business

cards, calendars, envelopes and folders • Furniture - such as desks, chairs, tables, lamps,

televisions and DVD players

Not Everything is Exempt (cont)

• Cleaning Supplies - such as mops, brooms, cleansers, paper towels, gloves and buckets

• Environmental products - such as those used to ventilate or collect dust

• Protection for employees - such as safety shoes, gloves, hard hats and respirators

• Snow removal, lawn care and landscaping • Janitorial services

Exemption Certificates

A seller/ vendor must collect and keep properly completed exemption certificates from the purchaser to support the absence of sales tax on the invoice.

A properly completed Ohio exemption certificate should include the following:

• The reason for exemption • The vendor's name • The purchaser's name • A signature and date • The purchaser's vendor number if the reason for

exemption is "resale"

Exemption Certificates

Ohio has two general use exemption certificates: • STEC-U: unit, or single use certification • STEC-B: blanket certificate

Ohio also has several special use exemption certificates, including those for construction contractors, and for sellers of motor vehicles and watercraft.

Voluntary Disclosure Agreements and Audits

Voluntary Disclosure

Question: So you realize you should have been paying tax to a particular jurisdiction (and the exposure amount is pretty large) – what should you do?

• Ostrich approach – Stick your head in the

sand • Just Start filing – better late than never,

right? • Voluntary Disclosure

The Answer – Voluntary Disclosure

Voluntary Disclosure (VDA) provides an opportunity for a taxpayer to anonymously come forward and remit tax owed >>>>>>>>>>> in return <<<<<<<<<<< The state will eliminate penalty and limit the “look back” period to 3 years – a pretty good deal if you have been making taxable purchases for many years.

Audits

The Audit Process in Ohio:

• State contacts taxpayer for audit • IDR request; Ohio and taxpayer agree to

sample type for expenses • Auditor conducts field work • Recommendation for assessment issued • Clearing meeting between state and taxpayer • Formal assessment – 60 days to appeal to

Legal or Administrative appeals • Final determination – appealed to BTA

Audits

Tips for managing an audit • Be polite – let the auditor do his/her field

work • Try to provide as much detail as possible

when the auditor asks questions as to property use

• Remember the preliminary proposed assessment is just that – a proposal. Additional information provided will often reduce the amount

• Seek professional guidance when in doubt

Diane Merk, CPA dmerk@cshco.com 513.241.3111

Thank You!

Questions?

Bill Hallmark, JD LLM wthallmark@cshco.com 937.390.7386