sales tax on warranties - strafford...

Presenting a live 110‐minute teleconference with interactive Q&A

Sales Tax on WarrantiesNavigating Divergent State Treatment of Product and Service Warranties and Software Maintenance Contracts

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THURSDAY, FEBRUARY 9, 2012

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Tom Johnson Director Ryan Fort Lauderdale FlaTom Johnson, Director, Ryan, Fort Lauderdale, Fla.

Linka Gomez, State and Local Tax Supervisor, McGladrey & Pullen, Miami

Sean Evans, Director, Tax Advisory Services, DuCharme McMillen and Associates Inc., Overland Park, Kan.

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Sales Tax On Warranties Seminar

Feb. 9, 2012

Linka Gomez, McGladrey & [email protected]

Tom Johnson, [email protected]

Sean Evans, DuCharme McMillen andAssociates Inc. [email protected]

Today’s Program

General State Tax Issues With Warranties[Tom Johnson]

Slide 7 – Slide 27

Complex Issues With Warranties[Linka Gomez]


Tax Treatment Of Warranties In Various States[Sean Evans and Tom Johnson]


Options For Multi-State Tax Compliance[Sean Evans]


GENERAL STATE TAX ISSUES Tom Johnson, Ryan

GENERAL STATE TAX ISSUES WITH WARRANTIES

O li F Thi S iOutline For This SectionI General state tax issues with warrantiesI. General state tax issues with warranties

A. Mandatory vs. optional warranties and maintenance agreements

1. Nexus issues

2. What should be stated on an invoice?

B. Physical products vs. software

C S i l i i h d d iC. Special issues with extended warranties

D. Taxability or exemption parts and labor

1. Purchases of parts for warranty1. Purchases of parts for warranty

E. Inventory related issues

1. Tracking inventory internally, to properly allocate use tax

2. Establishing taxable basis of inventory taken out

8

d lMandatory Vs. Optional Warranties

Example: Mandatory vs. optional software maintenance agreements

• Maintenance agreements for canned software packages often Maintenance agreements for canned software packages often include:

• Customer services, i.e. telephone consultations

• Software updates (tangible): Updates on disks, CDs, tapes, etc.

Software updates (intangible): In the form of remote • Software updates (intangible): In the form of remote downloads or telecommunications

• Program enhancements (add-ons, new features, etc.)( )

9

Mandatory Vs. Optional Warranties (Cont.)

Example: Mandatory vs. optional software maintenance agreements (Cont.)

• These can be automatically included with the These can be automatically included with the program/software purchase (mandatory warranties) or can be added with the choice or discretion of the customer (optional warranties)warranties).

• The tax treatment of both differs across various states and jurisdictions. But, in general, mandatory warranties are almost always taxable (precluding any exemptions).

10

M d W iMandatory Warranties

Mandatory maintenance agreements/warranties

• Generally, most states tax mandatory software maintenance if the original software package was taxablethe original software package was taxable.

• Many states consider mandatory software maintenance to be services that are part of the sale of tangible personal property.

• There may be exemptions if the software purchase qualifies for them (e.g., R & D, manufacturing, economic incentive, etc.)

11

M d W i (C )Mandatory Warranties (Cont.)

Several states exempt mandatory maintenance contracts/warranties from tax.

• Arkansas: Software maintenance contracts are exempt; Arkansas: Software maintenance contracts are exempt; however, hardware is taxable.

• Georgia: Software maintenance contracts are exempt if delivered electronically.

• Vermont: Exempt if charges are separately stated

12

O i l W iOptional WarrantiesOptional maintenance agreements/warranties

• The taxabiliy of optional software maintenance agreements is much more complex.

• Those states that do impose a tax on optional software maintenance have adopted varying policies as to when and how to tax it. Some examples are:

• Minnesota: If only one charge in the optional software maintenance contract for both upgrades/enhancements and support services, then 20% of contract price subject to tax

• Virginia: 50% of the total charge for optional software maintenance

• Iowa: 50% of gross receipts from sale of software maintenance if the fee for the taxable personal property (the software itself) is not separately stated

• California: 50% if updates are considered tangible personal property

• Alabama: If non-taxble portions of a maintenance agreement are separately stated, then only the portion representing upgrades or enhancements and new operating manuals are subject to taxoperating manuals are subject to tax.

13

O i l W i (C )Optional Warranties (Cont.)

Optional maintenance agreements/warranties

• In those states where optional maintenance contracts are exempt from tax (in about half of the states) there are exempt from tax (in about half of the states), there are generally two conditions that must be met:

• (1) The optional maintenance contract must be separately stated.

• (2) There must not be a transfer of tangible personal property.property.

14

Mandatory Vs. Optional Warranties (Cont.)

• In many states, charges for new software and/or upgrades are taxable, whereas services are not. (Example: Nebraska)

• This applies to both mandatory and optional warranties and to service agreements.

15

N INexus Issues

I i l t t t i t bli h f ll In every single state, warranty repairs establish nexus for a seller in that state.

Examplesp

• Arizona: If employee is present in the state for more than two days per year

• California: If person performing repair is an employee (i.e., not independent unrelated contractor)

• Utah: If seller regularly services products in that stateUtah: If seller regularly services products in that state

16

N I Wi h W iNexus Issues With Warranties

E i th ti l t t f th l d li ith • Examine the particular state for the rules on dealing with warranties and support agreements

• Services/support only are generally not taxable, whereas tangible personal proprety is. One must evaluate under what category a warranty/support agreement falls in a particular category a warranty/support agreement falls in a particular state.

17

What Needs To Be Stated On Invoice?

I l f ti d i t / t tIn general, for warranties and maintenance/support agreements:

• Charges must be separately stated to be exempt.

• The agreements must be optional rather than madatory in • The agreements must be optional rather than madatory, in order to be exempt.

• There must only be service and support provided, and no tangible personal property transferred.

18

Physical Products (Hardware) Vs. Software

Th t t t f ti d i t t f • The treatment of warranties and maintenance agreements for hardware is almost identical to those for software, as well as for hardware/software bundles.

• In general, taxable if:

• Mandatory

• If not separately stated

• Involves the transfer of tangible personal property

19

Special Issues With Extended Warranties

E t d d ti ll id d ti l • Extended warranties are generally considered optional warranties.

• Accordingly, they fall under the same treatment discussed earlier (i.e, taxable or non-taxable depending on their nature and jurisdiction)and jurisdiction).

20

Taxability Or Exemption Of Parts And Labor

P t h d f i f i i d d t • Parts purchased for use in performing service under mandatory maintenance contracts are exempt in most states.

• Examples p

• South Carolina: Parts are exempt if, at the time of original purchase of the defective property, (1) the maintenance contract was given without charge; (2) the tax was paid on contract was given without charge; (2) the tax was paid on the sale of the defective part or on the sale of the property of which the defective part was a component; and (3) the

i h d f l b i lwaranty is not charged for any labor or materials.

• Nebraska: If agreement provides full coverage, the amount charged for parts is exempt.g p p

21

Taxability Or Exemption Of Parts and Labor (Cont.)

E ti • Exceptions

• Arizona

• Georgiag

• Hawaii

• Illinois

• Kentucky

• Vermont

• In these states, repair parts are taxable.

22


P t h d f i f i i d ti l t t • Parts purchased for use in performing service under optional contracts are also exempt in most states.

• However, there are several states that do tax parts under optional agreements, even if they do not tax parts under mandatory agreements.

• Examples: Missouri, Maryland, North Carolina

23


I l f b th ti l d d t i t th • In general, for both optional and mandatory service agreements, the issue of taxability is determined by the following:

• Coverage level: Does the agreement provide full coverage? If not, the repair parts are likely taxable.

• Timing: Was the sale of the service agreement/warranty purchased at the same time as the tangible property or after? If the contract is sold after (i.e., no tangible property transfered), then the parts for repair are likely exempt.

• Nature: Are the parts integral to the functioning of the tangible p g g gproperty? If not, they are likely taxable.

24

I R l d IInventory Related Issues

1 T ki i t1. Tracking inventory

2 Establishing taxable basis of inventory taken out2. Establishing taxable basis of inventory taken out

25

I R l d I (C )Inventory Related Issues (Cont.)

T ki i tTracking inventory

• Inventory should be carefully tracked internally to properly allocate use tax

• Use tax – complement of the sales tax

• Charged by one state for the ‘‘use’’ of purchases from another state

• Applies in situations where sales tax does not apply

E l h t l C h • Example where use tax may apply: Company purchases inventory items in Georgia to use in Florida (and thus does not pay Florida sales tax)

26

I R l d I (C )Inventory Related Issues (Cont.)

E t bli hi t bl b i f i tEstablishing taxable basis for inventory

• Important to properly allocating use tax

27

COMPLEX ISSUES WITH Linka Gomez, McGladrey & Pullen

COMPLEX ISSUES WITH WARRANTIES

O li F Thi S iOutline For This Section

I. Complex Issues with warranties

A. States that impose “true object” tests

B Thi d t t d i i t tB. Third-party warranty administrators

C. Handling inventory withdrawals of repair parts

D Taxability of deductiblesD. Taxability of deductibles

29

T Obj TTrue Object Tests

T bj t t t M t t th t bj t t t t • True object test: Many states use the true object test to determine if a transaction that involves both the rendering of services and the provision of tangible personal property is considered an exempt service or a taxable service (bundled services).

• If the “true object” of the transaction is to obtain the tangible If the true object of the transaction is to obtain the tangible personal property provided to the customer, then the transaction most likely is a taxable service.

If h “ bj ” f h i i b i h i • If the “true object” of the transaction is to obtain the service, and the transfer of tangible personal property is incidental to the performance of the contract, the transaction most likely is an exempt service.

30

T Obj T (C )True Object Tests (Cont.)

Th t bj t t t i tl d i St t th t d t t • The true object test is mostly used in sStates that do not tax services. In states where services are taxable, the issue becomes less important.

• Considerations in true object test:

• Buyer’s intent (service, TPP)

• The relative value of the elemets in question (service, TPP)

• The ability to identify and separate the elements (service, TPP)TPP)

31

T Obj T (C )True Object Tests (Cont.)

E l• Example

• Custom Hardware Engineering & Consulting, Inc. v. Director of Revenue, Supreme Court of Missouri No. f , pSC91415 (01/17/2012)

32

Thi d P A i i NThird‐Party Activity: Nexus

T i ll l d t i t d if t h h i l • Typically, sales and use tax nexus is created if a taxpayer has physical presence in a state.

• In most states, if a business is using an independent third-party contractor to perform services (repairs, maintenance, installation) on behalf of the business, nexus is created with that state. The state views the indepent third party as an agent acting on behalf of the b i business.

• Common activities creating nexus

• Repair or maintenance servicesp

• Installation

• Warranty repairs (separately charged and not separately charged)

• Example: Texas Comptroller’s Hearing No. 100,984

33

Thi d P A i i N (C )Third‐Party Activity: Nexus (Cont.)

E ti• Exceptions

• California: The use of a third party for repair and warranty services does not create nexus, provided the third party is , p p ynot under common control with the subject retailer.

• Wisconsin: The use of third party does not create nexus, provided the third party is not under the retailer’s provided the third party is not under the retailer’s authority.

• In these states, the use of a third party does not create nexus for the business.

34

I P Wi hd lInventory Parts Withdrawal

• Typically a service provider must pay tax when purchasing • Typically, a service provider must pay tax when purchasing tangible personal property (parts) to be used in the performance of non-taxable services (i.e., optional warranty).

• Mandatory warranty: Parts are considered sold with the original product. A repairer may purchase parts tax exempt for resale (part can be taken out of inventory with no use tax liability).

• Caution: If the part is taken out of inventory (purchased for resale, no tax paid on purchase), then the use tax is due when part is used to performed non taxable service (optional part is used to performed non-taxable service (optional warranty). The business must accrue the use tax on the item taken out of inventory. The item is not afforded the sale-for-

l tiresale exemption.

35

T bili Of D d iblTaxability Of Deductibles

T t f i t• Two types of service warranty

• No out-of-pocket expense for the warranty holder

• Out-of-pocket expense: Deductible paid by warranty holder • Out-of-pocket expense: Deductible paid by warranty holder when warranty used (i.e, $100 deductible on the vehicle repair).

• Depending on the state and the nature of the service warranty (taxable or exempt at time of sale), the deductible can be considered tax exempt or a taxable payment.

• Example: In Florida, a motor vehicle warranty is subject to sales tax. In addition, sales tax applies to any deductible paid by the warranty holder of a taxable service warranty by the warranty holder of a taxable service warranty.

36

T bili Of D d ibl (C )Taxability Of Deductibles (Cont.)

C lif i M d t d ti l ti ff d b • California - Mandatory and optional warranties offered by dealer

• When the customer is required to pay a deductible, tax q p y ,applies to the portion of the deductible for the charges of part. Unless the warranty states otherwise, the person providing the warranty contract is liable for the tax providing the warranty contract is liable for the tax amount. The dealer/repairer will owe sales tax on a portion of the deductable.

37

TAX TREATMENT OF Sean Evans, DuCharme McMillen and Associates Inc.

WARRANTIES IN VARIOUS STATESSTATES

T S fTexas: Software

• Canned and custom computer programs are taxable.

― Texas sales tax law defines software as tangible personal property.p ope ty.

― Software is subject to tax, whether delivered in tangible or electronic form. Unless otherwise provided, “the sale or use of a taxable item in electronic form instead of on use of a taxable item in electronic form instead of on physical media does not alter the item’s tax status.” Texas Tax Code §151.010

― Texas sales/use tax is due on a charge to download software to a computer in Texas, regardless of whether the software is downloaded from a server situated in or outside of Texas.

39

T S f R l d S i• Services connected with the sale of software are also taxable.

Texas: Software‐Related ServicesServices connected with the sale of software are also taxable.

― Tax Code §151.007 defines “sales price” to include a service that is part of the sale.

― Charges for certain services are considered part of the sales price of the software, if the software vendor charges for the services services.

― Such services are taxed in the same manner as the software, regardless of whether they are separately stated.

― Examples: Installation, warranties and delivery charges

40

T T bl S i Tax Code §151.0101 defines “taxable services” to include software

Texas: Taxable Services Tax Code §151.0101 defines taxable services to include software

repair, remodeling, modification, restoration or maintenance services provided by the software vendor.

― Maintenance = Providing error correction, improvements, or technical support

• These services are not taxable if purchased directly from a third-party service provider that did not sell the software.

41

S f I ll d O T S Comptroller’s Decision No. 44,127 (2005): Taxpayer purchased

Software Installed On Texas Server Comptroller s Decision No. 44,127 (2005): Taxpayer purchased

software and installed it on a server situated in Texas. The software was used by employees based in other states.

Taxpayer’s argument: The treatment of software as TPP is a legal fiction, and the legal fiction should be extended to where the users actually use the software.

Comptroller’s ruling: Installing software on a server situated in Texas is a use in Texas. The software is taxable in Texas regardless of whether users in other taxable in Texas, regardless of whether users in other states can access the software.

42

C lif i S f

• Canned and custom computer programs

California: Software


― California taxes the sale of “canned” computer software, which is software designed and manufactured for general

l l d d h f d d fretail sale and not under the specifications or demands of any individual client.

― Tax does not apply to sales of canned software that are pp ytransmitted electronically from the seller’s place of business to or through the purchaser’s computer, as long as the purchaser does not obtain possession of any tangible p p y gpersonal property in the transaction.

― Custom-ordered modifications to existing, pre-written programs are exempt provided that such charges are programs are exempt, provided that such charges are separately stated.

43

California: Software Maintenance And Warranties

• Optional vs. mandatory― If the purchase of the maintenance contract is optional to

the purchaser, and there is a single lump-sum charge for the contract then 50% of the lump sum charge for the the contract, then 50% of the lump-sum charge for the contract is subject to California sales and use taxes as a taxable sale of tangible personal property.

― If the contract is optional and is for support only then the If the contract is optional and is for support only, then the charge is tax-exempt.

― If the contract in optional and for upgrades received in physical form, then the charge is taxable.p y , g

― If the contract in optional and for upgrades received in electronic form, then the charge is non-taxable.

M d t i t d t t t t blMandatory maintenance and warranty contracts are taxable.

44

Fl id S f• Canned and custom computer programs

Florida: Software• Canned and custom computer programs

― The sale of pre-packaged software for use with computer equipment is subject to sales tax when the software, as purchased by the customer is fully usable without modifications purchased by the customer, is fully usable without modifications by the vendor and when the vendor does not perform a detailed analysis of the customer’s requirements in selecting or preparing the programs.p g

― In Florida, software delivered electronically is not considered an exchange of tangible personal property and is not subject to tax.

― The sale of software is exempt as a service transaction if the The sale of software is exempt as a service transaction if the vendor, at the customer’s request, modifies or alters the pre-packaged program to the customer’s specification and charges the customer for a single transaction.g

45

Florida: Software Maintenance And Warranties

― If the purchase of the maintenance/warranty contract includes both upgrades, then repairs and support are fully taxable in the state of Florida. It makes no difference if such charges are mandatory or optional.

Agreements that provide telephone support only are not ― Agreements that provide telephone support only are not taxable.

46

N h C liNorth Carolina

• Technical Bulletin Sect. 28-4

• Optional maintenance agreement

A i t t i ti l ithi th i f • A maintenance agreement is optional within the meaning of this bulletin when the purchaser is not required to purchase the maintenance agreement from the seller or lessor, and he is free to contract with anyone he chooses.

• Mandatory maintenance agreement

A maintenance agreement is mandatory within the meaning • A maintenance agreement is mandatory within the meaning of this bulletin when the purchaser, as a condition of the sale or lease, is required to purchase the maintenance

f h ll l agreement from the seller or lessor.

47

N h C li (C )North Carolina (Cont.)• Lump-sum maintenance agreements on the sale or lease of computer p g p

hardware


• With the furnishing of parts materials and labor necessary to • With the furnishing of parts, materials and labor necessary to maintain the hardware (whether the agreement is a separate contract or a part of the sale or lease of the hardware), tax is not due on the receipts derived from the maintenance agreement.

• The vendor or repairer is deemed to be using the repair parts and other materials in the performance of a service, and tax is due on the cost price of the repair parts and other materials used in performing the service. If, however, the vendor makes a charge for parts or other materials not covered by the maintenance agreement and bills his customer for the parts or other property, then the vendor is liable for

ll ti d itti th t h t ti collecting and remitting the tax on such transactions.

48

N h C li (C )North Carolina (Cont.)

• Lump-sum maintenance agreements on the sale or lease of computer hardware (Cont.)

• Mandatory maintenance agreement Mandatory maintenance agreement

• If the maintenance agreement is mandatory as a condition of the sale or lease of the computer hardware (whether it is a separate agreement or a part of the sale or lease of the hardware) the charge for the maintenance agreement is subject to the general rate of state tax and any applicable local sales or use tax.

49

N h C li (C )North Carolina (Cont.)

• Lump-sum maintenance agreements on the sale or lease of computer hardware (Cont.)

• Mandatory maintenance agreement Mandatory maintenance agreement

• If the maintenance agreement is mandatory as a condition of the sale or lease of the computer hardware (whether it is a separate agreement or a part of the sale or lease of the hardware) the charge for the maintenance agreement is subject to the general rate of state tax and any applicable local sales or use tax.

50

N h C li (C )North Carolina (Cont.)• Lump-sum maintenance agreements on the sale, lease or license of p g ,

taxable computer software (Cont.)


If t ti l i t t i t d (i • If a separate optional maintenance agreement is executed (in addition to the agreement providing for the sale, lease or license of the property), and it provides only for the maintenance of the property being sold leased or licensed then the separate property being sold, leased or licensed, then the separate maintenance agreement represents a sale of services and its receipts are not subject to tax. The agreement might include support services such as consultants or personnel to train support services such as consultants or personnel to train employees.

• The vendor is liable for sales or use tax on the cost price of any software enhancements or updates or other property used in software enhancements or updates or other property used in fulfilling such separate maintenance agreements.

51

N h C li (C )North Carolina (Cont.)• Lump-sum maintenance agreements on the sale, lease or Lump sum maintenance agreements on the sale, lease or

license of taxable computer software (Cont.)

• Mandatory maintenance agreement

• If a vendor sells, leases or licenses taxable computer software for use in this state; and, as a requirement of the contract maintains the property (whether the maintenance p p y (agreement is a separate document or a part of the sale, lease or license agreement), he is required to collect and remit sales or use tax on the total charge to his customers, remit sales or use tax on the total charge to his customers, notwithstanding that the maintenance charges may be separately stated on the invoices to his customers. Such maintenance might include support services such as maintenance might include support services such as consultants or personnel to train employees.

52

G iGeorgia

O ti l i t t t d ti • Optional maintenance contracts and warranties

• Will depend upon the taxability of the product being sold

• Example listed in GA Regulations Chap. 560-12-2 p g p

• Customer purchases an irrigation controller carrying the Water Sense label for $1,495.00 and an optional maintenance contract or extended warranty for $50.00. contract or extended warranty for $50.00.

• The items are purchased together, and the charges are separately stated on the seller’s invoice.

• The purchase qualifies for the exemption. The sales price of the irrigation controller is less than $1,500.00, because the amount charged for the optional maintenance contract or

t t l t t d th ll ’ i i warranty was separately stated on the seller’s invoice.

53

G i (C )Georgia (Cont.)

• However, if the charge for an optional maintenance contract or warranty is not separately stated on the seller's invoice, the purchase does not qualify for the exemption, because the combined sales price of $1,545.00 exceeds $1,500.00.

54

Mi S fMinnesota: Software


― Sales of pre-written computer software are taxable. The tax also applies when the software is delivered ta also appl es w e t e so twa e s del ve ed electronically, by load-and-leave, or otherwise.

― Sales, leases and licenses of custom software programs are exemptexempt.

55

• If the maintenance agreement for a pre-written software program is

Minnesota: Software Maintenance And Warranties

required by the vendor as a condition of the sale, lease or license to use the pre-written software, then the price of the maintenance agreement is taxable.

• If the maintenance agreement for pre-written software is optional If the maintenance agreement for pre written software is optional, then separately stated charges are taxed as follows:― Upgrades or enhancements: Information and directions, received

in any format, that provide new or significantly improved function to a computer program are taxable This includes information to a computer program are taxable. This includes information and directions that dictate the function performed by the computer. It also includes updated tables, such as employee withholding tables, and postage rates.

― Support services: Corrections received in any format, consultation services, or technical or telephone support for computer programs are not taxable.

― Combination charges: If there is only one charge for both Combination charges: If there is only one charge for both upgrades or enhancements and support services, tax applies to 20% of the entire price of the optional maintenance agreement.

56

M h S fMassachusetts: Software

Canned and custom computer programs

• Pre-written software is included in the definition of tangible personal property. Sales of pre-written (canned) computer software, regardless of the method of delivery and reports of standard information in tangible form are method of delivery, and reports of standard information in tangible form are generally subject to the Massachusetts sales tax.

• Taxable transfers of software include, but are not limited to, the following:

― Licenses and leases of pre-written softwareLicenses and leases of pre written software

― Granting the right to use pre-written software installed on a remote service

― Upgrades to pre-written software, including upgrades delivered pursuant to maintenance contracts, regardless of whether the software was taxable when initially transferred to the retail customer

― License upgrades for pre-written software

• Sales of custom software are generally exempt from tax as professional service transactions, regardless of the method of delivery.

57

Massachusetts: Software Maintenance And Warranties

• Charges for optional software maintenance contracts (which are defined as those in which the customer is not obligated to purchase as a condition to acquiring the software) that do not i l d d ll t t bl if t l include upgrades are generally not taxable, if separately stated. If the charges for upgrades and services are not separately stated, tax applies to 50% of the sales price of the maintenance contractmaintenance contract.

• If an “upgrades plus service” contract separately and reasonably charges for the service and upgrades portion of the contract, then charges for the upgrades are taxable, and charges for the service portion are not taxable.

58

S h C liSouth Carolina

• The South Carolina Revenue Department has issued a revenue ruling to remind taxpayers that, effective Sept. 1, 2011, a warranty or maintenance contract purchased after the tangible personal property is purchased is no longer taxable, with limited exceptions. If the warranty or maintenance contract is purchased at the same time as the tangible personal property, p g p p p y,it remains taxable unless the sale is otherwise tax-exempt. South Carolina Revenue Ruling No. 03-5 concerning “Software and Software Maintenance Contracts” has been reinstated and and Software Maintenance Contracts has been reinstated and is effective for sales of software and software maintenance contracts occurring on or after Sept. 1, 2011.

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OPTIONS FOR MULTI‐STATE Sean Evans, DuCharme McMillen and Associates Inc.

TAX COMPLIANCE

Tax Strategy For Dealing WithMaintenance And Warranty Contracts

I. Documentation is critical.

II. What does the contract cover?

A M d t ti l?A. Mandatory vs. optional?

B. Upgrades only?

C Service only?C. Service only?

D. Support only?

E. How will the upgrades will delivered?E. How will the upgrades will delivered?

III. Do those in purchasing include details on the purchase orders as to the specifics of the contract?

61

ERP F i d O F ?ERP: Friend Or Foe?

I. The key under a sales and use tax audit is to be able to show that the terms of the warranty and maintenance contracts state clearly how tax has been paid.

II. Review and confirm if your current ERP systems can handle the trend of states taxing only a portion of the total warranty and maintenance charged Examples would be states like and maintenance charged. Examples would be states like Minnesota, California.

III. Are there options in your purchase order systems to flag such details needed for correct tax determination (i.e., optional vs. mandatory)?

IV In the states where allocation is required can this be IV. In the states where allocation is required, can this be accomplished electronically with your ERP?

62

E S l Of W iExempt Sales Of Warranties

There are many different types of exemption certificates.

There are state-proscribed forms issued for several purposes.

The Multistate Tax Commission (MTC) issued a certificate for ( )resale purposes.

Purposes of exemptions

ResaleResale

Industry

Property

Exempt organization

Direct pay permit holders

Must be taken in good faith Must be taken in good faith

Obtained in a timely fashion

63

G d F i h R iGood Faith: Requirements

Non-SSTP full member states have two requirements. Must have the appropriate certificate on file under the

correct time frame required

Must be believable

A. If both of these are not proven, the state can refuse the exemption under auditexemption under audit.

B. Burden of proof of exemption is on the SELLER

States using the SSTP exemption formA. Must have the appropriate certificate on file under the

correct time frame requiredcorrect time frame required

B. Burden of proof of exemption is on the BUYER

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F ll M b S Of Th SSTPFull‐Member States Of The SSTP

• Arkansas

• Georgia

• North Carolina

• North Dakota

• Indiana

• Iowa

• Kansas

• Oklahoma

• Rhode Island

• South Dakota

• Kentucky

• Michigan

• Minnesota

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