skoda minotti: sales and use tax basics
TRANSCRIPT
Skoda Minotti
Sales and Use Tax Basics
January 21, 2015
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• Sales Tax Basics
• Use Tax Basics
• General Sourcing Rules
• Nexus
• Voluntary Disclosure Agreements
• Exemption Certificates
• Ohio Sales/Use Tax Audit Issues
• Market Place Fairness Act
• Commercial Activity Tax
• InvestOhio
• Small Business Deduction
• Ohio Identity Theft
AGENDA
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• Sales Tax – a transaction tax on
the retail consumption of tangible
personal property and selected
services
• Use Tax – imposed on the
privilege of ownership or
possession, storage, use or
consumption of certain goods in
state
DEFINITIONS
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• All exchanges of tangible personal
property are taxable unless the state
provides an exemption or an exception
in the law
• All services are considered exempt
unless the service is specified in the
law as taxable
GENERAL RULE
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• “Sale” is defined to include all transactions by which title
or possession is transferred. Also license to use is
considered a sale
• Consumer is ultimately liable for the tax
• If audited can bill customer for tax assessed through the
audit
SALES TAX
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• Not all sales are taxable – only
“retail” sales are subject to tax
• Retail sale is all sales except
those “the purpose of the
consumer is to resell the thing
transferred or benefit of the
service provided … in the form in
which the same is, or is to be,
received by the person”
RETAIL SALES
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• Transfer of title or possession
• Tangible personal property or selected services
• Supported by consideration
• Retail sale
• No exemptions available
COMPONENTS
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• Tangible personal property – must be
in same form as which you bought it
• Services – the focus is on the benefit
of the service being in the same form
as which you bought it
RESELLING
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• When operating in multiple
states must be aware of the
difference in the tax laws to
know exactly what is or is not
taxable
TAXABILITY ISSUES
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WHAT IS IT?
USE TAX
• Tax that is required to be paid for the use of an item
• Use tax is complementary to sales tax in a state
• All states imposing a sales tax also have a use tax
• Majority of a state’s sales tax rate is the same as the use
tax rate
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WHO IS SUBJECT?
USE TAX
• Any individual or business that
purchases an item in which sales
tax was not paid must pay use tax
on the item
• Purchased over the internet
• Purchased for use in one state but
purchased from a vendor located in
another state
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WHAT IS SUBJECT?
USE TAX
• Anything purchased that is subject to sales tax but sales tax was not paid
• Contractor issues when purchasing items for real property work
• Items purchased over the internet
• Items removed from inventory
• Samples given away
• Catalogs given away
• Promotional items given away
• Mixed-use items
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USE TAX
CONTRACTORS AND
• A construction contract pursuant
to which tangible personal
property is to be incorporated
into real property, is not a sale of
such property
This means that contractor is
consumer of such property and
must pay sales tax accordingly or
use tax if sales tax was not paid
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USE TAX
CONTRACTORS AND
• If contractor is installing tangible personal property or a business fixture, contractor should purchase materials exempt from sales tax (resale exemption) and charge the customer sales tax on the project
• If the contractor is installing tangible personal property that will become part of real estate, contractor is considered end user of the materials and should pay sales tax on the purchase of materials. If sales tax is not charged, contractor would owe use tax on these materials
• The use tax due would be based on where the contractor is utilizing the materials
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AND USE TAX
MANUFACTURERS
• If item and/or service being purchased is not used in the
manufacturing process, sales/use tax would be due on
the purchase
• The key to sales tax for manufacturers is to know where
the manufacturing process begins and ends
• Storage of raw materials and finished goods is
considered a taxable area for the state of Ohio
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AND USE TAX
MANUFACTURERS
• Just because you are classified
as a manufacturer, this does not
mean that everything you
purchase is exempt from sales tax
• Need to control when an
exemption certificate is provided
to make sure not purchasing
items exempt from sales tax that
are taxable items
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AND USE TAX
MANUFACTURERS
• Purchasing parts to repair
manufacturing equipment, parts
would be exempt
• Purchasing tools to repair the
manufacturing equipment, tools
are taxable
• Make sure you are taking
advantage of proper exemption –
Are you truly a manufacturer?
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• Origin Based Sourcing Sales tax charged is based on the rate in effect at the location
where the goods are shipped from
‒ Arizona
‒ Illinois
‒ Ohio
‒ Pennsylvania
• Destination Based Sourcing The rate of sales tax charged is based on the rate where the
product is being shipped – address of customer
‒ Florida
‒ Georgia
‒ Michigan
GENERAL SOURCING RULES
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• Services
Generally are going to be based on
where the service is being performed
May need to watch in Ohio could
depend on the type of vendor license
that the entity has
GENERAL SOURCING RULES
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• Must have connection with the state before collection of sales tax is required Location in state
Sales representative or independent contractor
Take breath
• Voluntary collection – customer requests collection of tax so that they do not have to self-assess use tax
• Has not been a Supreme Court case addressing nexus in years
SALES TAX NEXUS
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• Operations in which states
• Employees are located where
• Need to be aware of where business has locations and
employees
• Need to be aware of how business operates
• Good habit to review activity yearly to determine new
nexus requirements
• Generally created on an entity level basis so must
examine each entities activities separately
GENERAL/USE TAX NEXUS
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WHAT IS NEXT?
• What if nexus has been established what are
your next steps
Need to complete registrations
Make sure know method of charging tax origin or
destination method
Need to be able to charge sales tax
If potential exempt sales need to collect exemption
certificates
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• Often see this with an entity being
sold and/or purchased
• Buyer will discover the entity had
nexus with different states and
require a clean up be done before
completing transaction
• Best solution is a Voluntary
Disclosure Agreement with the
different states
DISCOVER HAVE NEXUS
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DISCLOSURE AGREEMENT
VOLUNTARY
• Great solution for handling prior nexus issues
• Been operating in state and then discover nexus
• Voluntary Disclosure Agreement (VDA) can either be anonymous or the state might require the identity of the taxpayer before entering into VDA
• Highly recommended to utilize an outside third party
• Possible also to utilize the Multistate Tax Commission for approaching numerous states
• Generally all states have some form of a VDA – some might call it a managed audit
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DISCLOSURE AGREEMENT
VOLUNTARY
• Limited look back period
Generally 3 or 4 years
Some 5 years
Hawaii 10 years
• Interest will be imposed
• Penalty generally abated
• Must register and file on a go forward basis
• If required will also look for state income tax
filings
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DISCLOSURE AGREEMENT
VOLUNTARY
• Can also be utilized if you have collected but not
remitted sales tax
• Entirely different beast though
• Look back period will not be limited will have to go back
to first date collected sales tax
• Generally penalty will be imposed
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DISCLOSURE AGREEMENT
VOLUNTARY
• If already filing in the state and have collected and not
remitted might have issue coming forward under a VDA
Must not currently be under audit
Have not been approached by the state for nexus
Not under criminal prosecution by the state
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EXEMPTION CERTIFICATE
• Given to the vendor at the time
the goods are being purchased
• Provided at time of establishing
customer account
• Can be provided for a variety of
reasons
Manufacturing
Construction
Resale
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CERTIFICATE TYPES
EXEMPTION
• Multiple Points of Use Exemption Certificate
Specific situation for use of certificate
• Multi-state Exemption Certificate
Accepted by vendor for multiple states
• Direct Pay Permit
• Various state resale certificates
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CERTIFICATE TYPES
EXEMPTION
• Protects vendor from audit liability in future
• Whenever customer is claiming an exemption from
sales tax
• Need to obtain an exemption certificate for any states
that you have nexus with – from customers shipping
to those states
• Good habit is to obtain an exemption certificate from
all customers - no matter what state the goods are
being shipped to
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REQUIRED ELEMENTS
EXEMPTION CERTIFICATE
• Vendor name
• Reason – exemption being claimed
• Signed
• Dated
• Vendor license number if registered
for sales tax
• Direct pay needs to reflect direct
pay number
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EXPIRATION
EXEMPTION CERTIFICATE
• Ohio never expires
• Florida expires every year
• Some states expire every two years some every five
years
Need to make habit of updating exemption certificates
Need to maintain old certificate as long as
sales are in statute
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EXPIRATION
EXEMPTION CERTIFICATE
• A new certificate needs to be issued to
vendors when the following events occur
Name change
Reorganization
Merger
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INTERNAL CONTROLS
EXEMPTION CERTIFICATE
• Obtain exemption certificate prior to the sale when setting
up customer account
• What is the company’s decision if exemption certificate is
not received prior to shipment of product
• Policy for updating exemption certificates
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AUDIT ISSUES
OHIO SALES/USE TAX
• It will be two years in May since Ohio had use
tax amnesty
• When amnesty enacted removed use tax liability prior to
2008. As a result of this look back period has
been reduced
• Issue is we are now just about back to a seven year look
back period. Current audits are going back to 2009
• Taxpayers need to consider entering into a Voluntary
Disclosure Agreement for Ohio use tax if they did not take
advantage of amnesty
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AUDIT ISSUES
OHIO SALES/USE TAX
• Currently if audit will incur penalty if not
registered for use tax
• Under Voluntary Disclosure will have a
shorter look back period – than if
just audit
Look back period would be three or four
years for use tax
• Will be subject to interest
• All penalties will be waived
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RESTAURANT PROGRAM
QUICK SERVICE
• Quick Service Restaurant Compliance Program (“QSR”)
State has conducted a series of meetings to address the issues
associated with a QSR and the collection of sales tax on dine in
meals. To Go meals are exempt from Ohio sales tax
The compliance program is an educational program being offered
by the State of Ohio for the restaurant industry
The program offers different alternatives to the normal test check
utilized by the State of Ohio for the determining the percentage of
taxable food to be utilized during an Ohio sales tax audit
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TAX PROGRAM
QSR SALE
• The new compliance program reduces a QSR’s likelihood of being selected for audit and will permit the waiver of the 15% penalty normally assessed as part of an Ohio sales/use tax audit
• Participation in the program requires the following: Completion by managers and cashiers of an educational webinar
The point of sale system (POS) must be programmed to a taxable setting as a default (other than drive through registers)
QSR must be registered for all applicable Ohio taxes
Returns must be timely filed
No outstanding assessments
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FAIRNESS ACT
MARKET PLACE
• Did not pass during 2014 – Passed Senate but never the House
• It is believed Congress will readdress the issue during 2015
• All new legislation would have to be introduced during 2015. The original bill that passed the Senate last year was invalidated at the end of the113th congress
• States have enacted legislation to try and get around some of the internet issues Colorado
Illinois
New York
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ACTIVITY TAX
COMMERCIAL
• The tax has been in place since
7/1/2005 now is the time to revisit
the receipts that are being reported
to Ohio for the CAT
• We are finding taxpayers are over
reporting these receipts
• The minimum fee was changed for
the Commercial Activity tax for tax
periods beginning 1/1/2014 the
minimum fee is based on the
reported gross receipts for the
prior year
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ACTIVITY TAX
COMMERCIAL
The New Minimums
Taxable Gross Receipts Annual Minimum
$1 million or less $150
More than $1mm but less
than or equal to $2mm$800
More than $2mm but less
than or equal to $4mm$2,100
More than $4mm $2,600
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INVESTOHIO
• InvestOhio is still available for investor’s in qualified businesses
• The credit is 10% of what is invested in a qualifying business to secure an equity investment in the business. The investment must be held for two years
• The state’s biennium will be ending 6/30/2015 so applications need to be submitted by this date
• When originally enacted the credit should be in place for another biennium 7/1/2015 through 6/30/2017
• There are still funds available if you want to invest by 6/30/2015
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BUSINESS DEDUCTION
OHIO SMALL
• H.B. 483 also made changes to Ohio’s Small Business Deduction For 2013 a small business owner was entitled to a tax deduction
equal to 50% of the first $250,000 of small business income
For 2014 this tax deduction was changed to 75% of the first $250,000 of small business income
This increase is only for 2014
For 2014 the deduction will be $187,500 for individuals with a filing status of married filing jointly or single
The deduction for married filing separately will be $93,750 ($125,000 x .75%)
Non-resident investors can also take advantage of the Small Business Deduction but to take advantage of the deduction an IT 1040 must be filed
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INCOME TAX
OHIO INDIVIDUAL
• Identity Theft
More and more of an issue for Ohio
Ohio is anticipating a slower response time when a tax return is
filed to try and catch additional fraudulent returns
If identity theft is suspected Ohio will send out a letter requesting
you to take an identity quiz
The identity quiz will be done on-line
Unless you received a letter requesting you to take the quiz, you
will not be able to access the quiz
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INCOME TAX
OHIO INDIVIDUAL
• Identity Theft
If you fail the identity quiz or chose
not to answer you will still have
opportunity to prove your identity
You will be required to submit certain
government issued identification to
prove your identity
Ohio now will be issuing refunds –
direct deposit in 10 to 15 days instead
of in the past 7 to 10 days
If requesting a paper check it will be
issued in 30 days
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CONTACT US
Mary Jo Dolson, CPA Partner
Amy J. Gibson, CPA Principal