Sales and Use Tax Fundamentals: Mastering Tax Base, Compliance, Nexus, and Other Essential Multistate Concepts

Transcription

1 Sales and Use Tax Fundamentals: Mastering Tax Base, FOR LIVE PROGRAM ONLY Compliance, Nexus, and Other Essential Multistate Concepts TUESDAY, JANUARY 29, 2019, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at ext.1 (or ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x1 (or x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 Sales and Use Tax Fundamentals Jan. 29, 2019 Joseph F. Geiger, Jr., CPA, Consulting Tax Manager Vertex, Berwyn, Pa. Monika Miles, President Miles Consulting Group, San Jose, Calif.

4 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.

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6 Vertex Sales and Use Tax Fundamentals January 29, :00 pm 2:50 pm EST

7 Presenter Joseph F. Geiger, Jr., Esq., CPA, MST, MSA Senior Tax Consultant, Vertex Over 30 years in accounting, audit and tax Public accounting and industry experience Specializing in indirect taxation, consulting and automation Represented audit clients at local, state and federal levels, including U.S. Tax Court 7

8 Presenter: Monika Miles Founder - Miles Consulting Group Website: MilesConsultingGroup.com; Monika@milesconsultinggroup.com Professional Affiliations: AICPA, Texas Society of CPAs, CalCPA NAWBO - Silicon Valley, AFWA (Past National President) Honored To Be Recognized As: 25 Most Powerful Women in Accounting by CPA Practice Advisor (2012, 2013, 2014 and 2015) Women of Influence by San Jose Silicon Valley Business Journal (2014) Woman of Influence AFWA National 2016

9 Tax Types

10 Tax Type: Sales Tax Sales Tax General Definition? Sales tax applies when seller has nexus and is subject to the state taxing authority A tax on the sale of tangible personal property or service Seller may pass tax on to the consumer; must be separately stated on the invoice Applies only to intrastate transactions 10

11 Tax Type: Sales Tax Five states without a sales tax: NOMAD States: New Hampshire Oregon Montana Alaska (local jurisdictions may impose a tax) Delaware 11

12 Tax Type: Privilege Tax Privilege tax General Definition? 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 12

13 Tax Type: Transaction Tax Transaction tax General Definition? Tax imposed on the sale of tangible personal property or services The purchaser is liable to the seller for the tax due The tax must be separately stated on the invoice If the seller is not registered in the state where goods are received, the purchaser is liable under audit for tax due on their purchases Examples: Colorado, Florida, Texas, and Virginia 13

14 Tax Type: Gross Receipts Gross Receipts General Definition? Similar to transaction tax, but with fewer exemptions or exclusions to the taxable base Hawaii - if the tax is passed on to the purchaser, the tax becomes part of the gross receipts for tax calculation The tax must be separately stated on the invoice In some states it is like the income tax and cannot be passed on (Washington B&O, Ohio CAT, Texas Margins) 14

15 Tax Type: Consumer Levy Consumer Levy General Definition? Imposed on the buyer with responsibility for collection by the seller Seller is still required to remit the tax even if it is not collected from the buyer, but it is usually easier to recover the tax from the buyer Generally imposed on the privilege of using or consuming the products or services purchased Under audit, the state can collect the tax from either the seller or the purchaser Most of the states are considered Consumer Levy states 15

16 Definition: Use Tax Use Tax General Definition? Imposed on the storage, use, or consumption of a taxable item or service on which no sales tax has been included on the invoice Complementary to sales tax Purchases made outside the taxing jurisdiction but used in the taxing jurisdiction 16

17 Tax Type: Use Tax 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 include tax on the invoice 17

18 Illustration: Intrastate Sales Tax vs Interstate Seller s Use Sales tax applies to supplies of taxable goods and services when the transaction occurs within a state. Vendor has a physical location in the state of the buyer warehouse, branch location, corporate office 18

19 Illustration: Intrastate Sales Tax vs Interstate Seller s Use Seller s use tax applies to supplies of taxable goods and services when transaction occurs between two states Vendor shipping product out of state Vendor approving order out of state Customer receipt of goods or service from out of state vendor 19

20 Intrastate Sales Tax vs. Interstate Seller s Use Tax Some locals within a state impose sales tax, but not seller s use tax Examples include: Alaska: no state sales tax, but local sales tax rates Arizona: many cities impose a sales tax, but not seller s use tax Colorado: many home rule cities impose a seller s use tax (intrastate transactions) while state administered cities do not Illinois: Chicago imposes a sales and consumer s use tax, but not seller s use tax 20

21 Intrastate Sales Tax vs. Interstate Seller s Use Tax Some locals within a state impose sales tax, but not seller s use tax. Examples in Pennsylvania: Allegheny County is the only county in the state that imposes tax at the county level. Allegheny county imposes sales and consumer s use tax, but not seller s use tax. Philadelphia City is the only city in the state that imposes tax at the city level. Philadelphia imposes sales and consumer s use tax, but does not impose seller s use tax. 21

22 Tax Type: Summary Intrastate Transactions - What tax type applies? Sales tax Interstate Transactions What tax type applies? Seller s use Purchase Transactions What tax type applies? Consumer s use 22

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24 Nexus: Some (Very)Hot Topics

25 Nexus Then & Now General Sales Tax Concepts Physical Presence Nexus Economic Nexus South Dakota v. Wayfair (2018) Wayfair Q&A

26 The concept of sales tax is prevalent in daily conversations because: States Need Revenue Increased On-line Transactions Smaller companies are able to expand their sales footprints quickly because of increased technology. There s been some national media and a US Supreme Court Case!

27 Recapping What Joe said Sales tax and complementary use tax are imposed by state and local jurisdictions on retailers for the privilege of selling tangible personal property and certain services in the jurisdiction. 45 states and DC impose a sales tax. Sales Tax

28 How About Some History? Let s call it Recent History!

29 Nexus For 50+ years 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.

30 Nexus OK! Now What? Once nexus is established, seller is obligated to collect sales tax. Unless there is a specific exemption.

31 U. S. Constitutional Basis for Sales Tax Our current system stems from various state statutes and regulations: From the U.S. Constitution: - Due Process Clause - Commerce Clause From U.S. Supreme Court Decisions in multijurisdictional cases: - Quill Corp v. North Dakota 504 U.S. 298 (1992) - South Dakota v. Wayfair (2018)

32 Quill In Quill (in 1992) 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.

33 Catalog vs. the Internet VS

34 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). Large part of the problem has been uncollected use tax Complementary to sales tax Paid by purchaser directly Protects in state companies (if remitted)

35 Uncollected Use Tax Pop Quiz The National Conference of State Legislators (NCSL) recently calculated the estimated amount of uncollected use tax in 2015 to be: a. $2.6 Million b. $26 Million c. $2.6 Billion d. $26 Billion e. $260 Billion

36 Uncollected Use Tax Pop Quiz The NCSL recently calculated the estimated amount of uncollected use tax in 2015 to be: a. $2.6 Million b. $26 Million c. $2.6 Billion d. $26 Billion e. $260 Billion

37 Economic Nexus A minimum amount of sales $$ or transactions creates nexus Even before Wayfair ruling, a growing number of states had passed these laws some examples: South Dakota, Alabama, Indiana, Rhode Island, Wyoming, Maine, Massachusetts

38 South Dakota: A good fact pattern Wayfair and other retailers sold more than $100K or 200 transactions to SD customers; State said that its economic nexus law applied and wanted them to collect sales tax; Companies disagreed and appealed all the way to South Dakota Supreme Court; and the state lost South Dakota appealed to US Supreme Court Early 2018 USSC granted certiorari agreed to hear case

39 US Supreme Court: Agrees to hear South Dakota case South Dakota v. Wayfair Court heard the case in April 2018; rendered its decision on June 21, 2018 We knew it would be close

40 US Supreme Court Wayfair Decision Overturned Quill Ruled 5-4 in favor of South Dakota Sales in excess of $100,000 or 200 transactions can create economic nexus Physical presence test under Quill no longer has to be met (in South Dakota) So nexus will be easier to trip into

41 Sales Tax Quick Decision Tree Nexus? Taxability of Product? Exemptions? Copyright Materiality? Register & File (maybe)

42 South Dakota v. Wayfair Some Relevant Q&A

43 Question 1: Q: Since this case is about economic nexus, does that mean physical presence doesn t matter anymore? A: No. Physical presence DOES still matter.

44 Question 2: Q: Do we need to start filing in the 45 states that have a sales tax immediately? A: You may not have to file in all states immediately, but it s time to do some serious analysis.

45 Question 3: Q: Does this case address retroactivity? Are we going to have to go back many years and pay prior years taxes? A: The South Dakota statutes (and most others) were written for no retroactivity. But there s still some retroactive exposure to consider.

46 Question 3 (continued): Q: Does this case address retroactivity? A1: If you had physical presence before and ignored it, it s not going away and you may have exposure. A2: It s January Many states have required filing since late Now you MAY have retroactive exposure!

47 Question 4: Q: Does this case relate to internet sellers only? A: It sounds like it does, but the answer is NO.

48 Question 5: Q: If we are a SaaS, software, or services company, could we be affected by this decision? A: Absolutely! The ruling made it easier to have nexus it doesn t impact the taxability of the product.

49 Question 6: Q: Have other states already jumped on the Wayfair bandwagon and crafted similar legislation? A: Yes. As of 01/15/19 the following 37 states have indicated they have economic nexus statutes similar to Wayfair: HI, ME, VT (7/1/18); MS (9/1/18); NC, NJ, SC, SD (11/1/18); CO, CT (12/1/18) AL, IN, IL, KY, MD, MI, MN, ND, WA, WI (all 10/1/18); GA, IA, LA, NE, UT, WV (1/1/19); CA (4/1/19); TX (10/1/19) Officially Pending : NV, TN, WY Some special states: MA, OH, OK, PA, RI, NY (varying dates & thresholds)

50 Question 7: Q: Do all sales (even resale and sales to nonprofit entities) count in the economic nexus threshold? A: States vary in their definitions and what sales count in the threshold. But we recommend that early/high-level analysis consider all sales.

51 Question 8: Q: How do you count a transaction to get to the 200 transactions? By invoice, or line item, or some other way? A: While some interpretation by state is still recommended, it appears that most states will defer to: an invoice = a transaction.

52 Question 9: Q: What s likely to happen next at the state or federal level? A1: At the state level, we anticipate the remainder of the states to enact economic nexus laws. (Most already have.) A2: Congress could still go back and codify Quill or enact other legislation. But will they? It s unlikely!

53 Question 10: Q: What do we recommend as next steps for clients? Begin the nexus/taxability question TODAY (or yesterday!) Perform a nexus study Track upcoming economic nexus legislation Be prepared to develop a compliance system

54 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

55 Collecting & Remitting = Compliance Compliance 101 Nexus? Rate? Exemptions? Registration Forms - Electronic vs. Paper Due Dates (vary)

56 Sales Tax Exemptions

57 Sales Tax Quick Decision Tree Once Again Nexus? Taxability of Product? Exemptions? Copyright Materiality? Register & File (maybe)

58 Sales of TPP & Services In general, unless otherwise exempt, sales of TPP are subject to sales tax. In general, unless specifically enumerated, sales of services are exempt BUT States are increasing enumerated services or broadening the definitions

59 Sales Tax Exemptions Due to the nature of the buyer Nature of the property/service transferred/performed Intended use by the purchaser Nature of the transaction

60 Sales Tax Exemptions Due to the nature of the buyer: US Government Some state governments Some exempt entities

61 Sales Tax Exemptions Due to the nature of the property or service transferred/performed: Food Medical Manufacturing

62 Sales Tax Exemptions Due to the intended use by the purchaser: Resale Manufacturing Construction Pollution Control

63 Sales Tax Exemptions Due to the nature of the transaction: Load & Leave Software Cloud applications (SaaS)

64 Sales Tax Exemptions - Mechanics Determine if exemption applies Determine who claims it Determine how to claim it Document it fully (today)

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66 Situs and Sourcing Transactions

67 Situs Situs Definition? The jurisdiction to which tax is legally due. Origin Destination Administrative Origin 67

68 Situs on Goods vs. Service Situs rules are different for sales of Tangible Personal Property (goods) vs. sale of services. This Photo by Unknown Author is licensed under CC BY-NC-ND 68

69 Situs Rules on Goods vs. Service Situs Rule on Goods Interstate Transactions - Situs determination is ship to location Intrastate Transactions - Situs determination depends on state Destination states Origin states Modified origin states Situs Rule on Services Situs is determined by: Where received Where performed Where enjoyed 69

70 Situs on Interstate Transactions Goods shipped from one state and delivered across state lines to another state Taxing situs is where the goods are consumed 70

71 List of Origin and Modified Origin States 71

72 Situs: Intrastate Transaction on Sale of Goods in Origin State Ship-to is Erie, PA and physical origin is Philadelphia, PA Pennsylvania is an origin state Taxing Situs is? Origin: Philadelphia, PA Tax type is? Sales Tax 72

73 Situs Some Things to Keep in Mind Once you registered with a state: Review whether or not the state is an origin or destination state (for local tax application) Review whether or not you have any physical presence in the state Determine software requirements for correct situs determination outcomes 73

74 State and Local Tax Jurisdictions Transaction tax at state and local tax jurisdictions can be taxed differently: Local taxes are authorized by state statute Some items have reduced rate at state and exempt at local Home rule jurisdictions administer tax separately from states Some state have locals that override the other local rates 74

75 Situs Determination for Intrastate Transactions in Colorado Colorado wants to know the vendor s relationship with the buyer Does the vendor have a physical location in the same county as the buyer? Does the vendor have a physical location in the same city as the buyer? If yes, collect sales tax in destination If no, collect seller s use tax in destination 75

76 Revenue Agency Administration of Sales Tax

77 Filing Frequency State and local filing frequencies Monthly, quarterly, semi-annually or annually Each jurisdiction has its own guidelines frequency can change Thresholds Dollar amounts Time period Registrations Initial frequency 77

78 E- Electronic Filing (E-Filing) State and local jurisdictions may require e-filing of returns Automated solutions save time and money Manual filing takes more time and increase risk of error Third-party providers Reduce compliance burden Simplify filing process Provide reconciliations 78

79 Electronic Filing (E-Filing) May be required if taxpayer is required to make E-Payments May be required based on the combined tax liability of a taxpayer All types of returns cannot be filed electronically (e.g., consumer tax returns in KY) Amended returns 79

80 E- Payment State and local jurisdictions may require E-Payments Dollar amount thresholds May be required based on the combined tax liability of a taxpayer Automated solutions save time and money Manual filing takes more time and increase risk of error Third-party providers Reduce compliance burden Simplify payment process Provide reconciliations 80

81 V Vendor Compensation Some states offer vendor compensation or a discount to taxpayers Timely filing (due date in most states is the 20 th of the month following reporting period) Compensation is calculated on the amount of tax the vendor has collected Compensation/Discount may be limited by dollar amount per return or period (See Federation of Tax Administrators State Sales Tax rates and Vendor Discounts List - January 2019) 81

82 States with Sales Discounts The following states have sales tax discounts: AL, AZ, AR, FL, GA, IL, IN, KY, LA, MD, MI, MS, MO, NE, NV, NY, ND, OH, PA, SC, TN, TX, UT, VA, WI, WY 82

83 Vendor Compensation Example Calculate the amount of tax the vendor has collected for the state of Georgia. Multiply the total tax collected by 3 percent, or ".03." Subtract $90 from the total, and multiply the remaining total by.167. The vendor compensation in Georgia only applies to 3 percent of the total tax collected up to $90, which is based on collecting the first $3,000. Anything collected above $3,000 is based on 1/2 of 1 percent, or.005, of the tax collected. This compensation is accrued on a monthly basis. 83

84 Some Final Thoughts

85 Some Final Thoughts Don t be on Defense (Offense is always better) Wayfair developments don t change retroactive exposure that might exist as a result of prior physical presence nexus Income tax questions will arise as well!

86 Some Final Thoughts Miles Consulting is a resource: Monthly Newsletter Weekly topical blog ½ hour Complimentary Consultations

87 How Can Miles Consulting Help You Provide Client Value? Perform Nexus Reviews Perform Taxability Studies Determine Appropriate Exemptions Wayfair/economic nexus navigation M&A Due Diligence

88 Sign up for our newsletter & Preview our State Tax Checklist Here

89 In Summary It s a crazy, interesting time States are aggressively pursuing revenue (really!) Wayfair ruling has changed the game Multi-state companies have interesting issues (and usually need help) Don t go it alone!

90 Questions

91 Thank You! Monika Miles (408)

92 C Contact Joseph F. Geiger, Jr., Esq., CPA, MST, MSA Vertex Consulting Telephone:

93 Questions?