State and Local Tax. Presented by: Judy Vorndran, CPA, Esq., Partner. Sponsored by Avalara. Avalara

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1 State and Local Tax Presented by: Judy Vorndran, CPA, Esq., Partner Sponsored by Avalara Avalara

2 Disclaimer These seminar materials are intended to provide the seminar participants with guidance in state and local tax matters. The materials do not constitute, and should not be treated as professional advice regarding the use of any particular state and local tax technique or the tax consequences associated with any technique. Every effort has been made to assure the accuracy of these materials. Eide Bailly LLP and the author do not assume responsibility for any individual's reliance upon the written or oral information provided during the seminar. Seminar participants should independently verify all statements made before applying them to a particular fact situation, and should independently determine the tax and non-tax consequences of any particular state and local tax technique before recommending the technique to a client or implementing it on the client's behalf.

3 Begin the Sales Tax Discussion Become a Sales Tax Superhero

4 Sales Tax a New Idea? Tomb paintings depict tax collectors in Egypt as early as 2000 BC Julius Caesar imposed a 1% sales tax

5 Sales Taxes in the USA State sales taxes imposed in: 1930s +24 states 1940s +6 states 1950s +5 states 1960s +11 states Early attempts involved the use of tokens

6 A Mile-High Perspective The City of Denver (pop. 634,000) Closed 693 audits in audits yielded $31.6 million 2/3 of the audit income results from unpaid taxes on company purchases

7 By Comparison The State of North Dakota (pop. 699,628) Employs 43 field auditors.

8 August 2012 California Board of Equalization announces hiring 35 auditors to target internet merchants.

9 Total U.S. E-Commerce Q $61,174,000,000

10 Isn t Sales Tax the Same Everywhere? The reported number of taxing jurisdictions depends on who is doing the counting and how complex their software is. Counts range from: 7,600 to 14,500

12 What Determines Taxability?

13 Taxability of a Donut North Dakota Minnesota Spelling in state publications Donut Donut Taxed as a Bakery item Exempt Exempt Donut with a napkin Taxable Taxable Donut with napkin available Maybe Taxable Donut normally served with a napkin Maybe Taxable 75% rule

14 The Culprit

15 Taxable or Not? Exempt Not Exempt

16 Taxable or Not? I just want my donut

17 Common Approach to Sales Tax

18 Client Perception of Sales Tax

19 Change Their Perception

20 Judy s Believe it or Not Federal Express has recently been accused of smuggling untaxed goods just like Smokey and the Bandit, but without the Trans Am. Fact or Fiction?

21 And The Answer is? FACT

22 Complete Article Available at Reuters (Reuters) - New York City sued FedEx Corp, accusing them of illegally delivering millions of contraband cigarettes to people's homes and seeking $52 million in fines and unpaid taxes. The City said FedEx delivered about 19.5 tons, or 55,000 cartons, of cigarettes to city residents in 9,900 shipments from 2005 to 2012 and deprived it of a $15 excise tax on each carton. A typical carton has 200 cigarettes. FedEx's activity violated various federal and state laws, including an anti-racketeering statute, the complaint said. City of New York v. FedEx Ground Package System Inc. et al, U.S. District Court, Southern District of New York, No

23 Use A Positive Message Begin with possible sales tax exemptions and refunds Common sales tax exemptions for business include: Manufacturing Equipment Electricity Repairs of industrial machinery R&D Medical Equipment

24 Uncommon Sales Tax Exemptions Some states exempt: Agricultural commodity processing centers Ethanol plants Warehouse expansions Automation upgrades Manufacturing expansions Data centers Space equipment

25 I Can t Track All These Exemptions Who Can Help ME?

26 State Economic Development Websites State websites provide: Live phone support Q&A Promotional materials References to statues Exemption listings Incentives by business type

27 How Do I Get Their Attention?

28 Visit the Client s Business How many tax topics do you see?

29 Educate Your Clients Eide Bailly sponsored an economic development luncheon. Speakers included: Director of Economic Development Director of Workforce Development Director of Tax Administration

30 Judy s Believe it or Not In 2007 the Iowa Tax Commissioner issued a position stating that pumpkins were taxable unless: An exemption certificate was provided stating it would be used as food. It was a specific variety used to make pumpkin pies. They were purchased with food stamps. Fact or Fiction?

31 And the Answer Is? FACT

32 Iowa later reversed their position on pumpkins This information is no longer valid. Pumpkins are considered food and exempt from sales tax. The Department has recently refined its position on whether pumpkins are subject to Iowa sales tax to more closely match what we believe to be the predominant use of those pumpkins. In the past, pumpkins have been exempt from sales tax as a food (edible squash); even if they were to be later made into jack-o'-lanterns or used as decorations. Our position now is that pumpkins are taxable if they are advertised to be used as jack-o'- lanterns/decorations or it is understood that that is how they will be used. Pumpkins are still eligible for exemption from tax under the following circumstances: The purchaser evidences their intent to use them as food by completing a sales tax exemption certificate stating they are being purchased for human consumption. The pumpkins are specifically of the variety to be used to make pumpkin pies and are advertised in that way. They are purchased with Food Stamps. Those retailers who sell pumpkins should keep these guidelines in mind during the Fall of 2007 and make any necessary changes to their tax treatment of pumpkin sales.

33 Warn Your Clients about SALY

34 SALY = Same As Last Year

35 SALY Many companies use SALY for their sales tax and fixed asset processes. In fact, SALY has been employed for decades at some companies. SALY hasn t changed, but the company has. Ask about sales tax on fixed assets when reviewing repair regulations during client interview.

36 SALY & Use Tax on Fixed Assets $100 chair * 7% Avg. Rate = $7.00 Tax

37 That s Not Much. $7.00 tax on one item may not be material exposure

38 But It s Just One Item How many untaxed fixed assets are there?

39 Tour of Premises: Was Tax Paid?

40 What about Here? Was Tax Paid?

41 Real World Example An oilfield service company was recently audited by North Dakota.

42 Care to Guess the Assessment?

43 Still Want to Use SALY? $900,000 (tax only)

44 Are There Red Flags? No sales or use tax accrual accounts Use tax accrual account with just a few entries Credit entries in tax G/L without documentation Entries in tax G/L referencing late fees or interest Nationwide sales and just a few monthly tax returns Payables with no indication of a tax review Handwritten or complex manipulation of tax data

45 Material Exposure Discovered: Option One

46 Dude, It s Only Sales Tax Hudson s North American segment (HNA) failed to implement a system to collect and remit sales tax accurately. Learned of errors in 2003 Corrected errors in 2007 HNA settled its tax liabilities with various taxing jurisdictions for approximately $3.9 million. On 1/10/2011 the SEC fined HNA $200,000. Violated Exchange Act Section 13(b)(2)(A)&(B) Internal control failure

47 Another Example of Bad Facts HNA problems: Failure to collect and remit sales tax to the taxing jurisdictions for several years. Inadequate accounting software. Software failed to source sales to the correct location. Software did not track exemptions. Understated financial statement reserve for sales tax liability. Incomplete records which required manual reconstruction of sales data to calculate taxes owed.

48 Basic Facts What we know so far: Poor internal processes can lead to a material loss from a sales tax audit. Not knowing where your clients have activities can lead to material assessments of tax. It is probable that a company will be audited. Even ND has 43 auditors (pop. 699,628) The amount of loss can often be reasonably estimated.

49 Does This Sound Familiar? ASC 450 requires accrual for and disclosure of probable and estimated material losses.

50 Material Exposure Discovered: Option Two Empower Your Client: Do a process review Calculate exposure Voluntary Disclosure Agreements (VDA) Participate in an Amnesty program

51 Can Past Errors be Corrected? Many states offer Voluntary Disclosure Programs Voluntary Disclosure Agreements (VDA): Typically, anonymous initial contact with state (except NY, but the PROMISE to keep it secret!) Waived or reduced penalties Limitation of look back period Audits can have unlimited look back in some states State amnesty programs may be available.

52 Wrong Approach The question is not IF you be will audited, but WHEN!

53 Better Approach Better Approach Let s see if there are any sales tax exemptions available.

54 The Big Question

55 Clients Want to Feel Like This

56 Not This

57 Practical Suggestions Bring a positive message Visit the clients business Don t listen to SALY Look for tax incentives

58 Useful Links Economic development websites listed by state Useful facts and research on sales tax Eide Bailly SALT Resources

59 Sales Tax Super Heroes on Call Judy Vorndran, CPA, JD State and Local Tax Partner

60 Questions?

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