1/25/2018. Disclaimer. Course Objectives. Basic Sales and Use Tax

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1 Basic Sales and Use Tax Minnesota Business Tax Education February 2018 Disclaimer This presentation is for educational purposes only. It is meant to accompany an oral presentation and not to be used as a standalone document. This presentation is based on the facts and circumstances being discussed, and on the laws in effect when it is presented. It does not supersede or alter any provisions of Minnesota laws, administrative rules, court cases, or revenue notices. If you have any questions, contact us at salesuse.edu@state.mn.us, , or (toll-free). Minnesota Business Tax Education Program Providing education opportunities about Minnesota tax laws. 2 Course Objectives After completing this course you will be able to: Apply the basic sales and use tax concepts for Minnesota and its local taxing jurisdictions to your business. Recognize the exceptions to the "rule" and the exemptions available. Identify how to use and when to accept an exemption certificate. Distinguish how sales and use tax law applies to different types of businesses and their business activities. Identify the documentation necessary for sales and use tax records and returns. List several resources that answer your sales and use tax questions. 3 1

2 Sales and Use Tax Basics Part 1 4 Sales and Use Tax Basics Sales and Use Tax Laws are not the same in every state. 5 Sales and Use Tax Basics Five categories of sales Real Property Intangible Property Services Tangible Personal Property (TPP) Digital Products 6 2

3 Sales and Use Tax Basics What are some examples of taxable services in your business? 7 Sales and Use Tax Basics Sales tax = transaction tax 8 Sales and Use Tax Basics Trust tax 1. Collect 2. File 3. Remit 9 3

4 Sales and Use Tax Basics What is a sale? Barter Providing a service Retail Sale Wholesale Lease Rentals 10 Sales and Use Tax Basics What is use tax? Complement to sales tax Self-assessed Paid directly to the state Applies to taxable purchases when sales tax was not charged 11 Sales and Use Tax Basics What is the tax rate? 6.875% 12 4

5 Sales and Use Tax Basics Sourcing determines where the sale takes place and which taxes are imposed on the sale. 1. Seller s Address (if that s where title to or possession of item takes place) 2. Delivery Address (if item is shipped or delivered to customer or where service is performed) 3. Billing Address (based on the address that the seller has in their records for the customer) Minnesota Statutes 297A.668 and 297A Sales and Use Tax Basics How do I determine what taxes apply to the sale? Sourcing rules for leases or rentals of TPP 1 st Payment General Sourcing Rules (where transfer of property occurs) Subsequent Payments Primary Property Location (address provided to lessor by lessee) 14 Sales and Use Tax Basics ALL charges that are a condition of sale Service charges Tips added to bill by seller Retail price of good or service Sales Price Taxes that are obligation of seller Fabrication labor Delivery charges Installation labor 15 5

6 Sales and Use Tax Basics Sales price does not include: Credit allowed for trade-in Term discounts Cash discounts Coupons, unless reimbursed by a 3 rd party Taxes legally imposed on consumer Interest charges Finance charges from extension of credit 16 Sales and Use Tax Basics Manufacturer s Coupon Light bulb Tax on $2.50 Subtotal Less coupon Total Due Retailer s Coupon 50 cents off 50 cents off $ 2.50 Light bulb $ (6.875%) Less coupon -.50 $ 2.67 Selling price $ Tax on $ (6.875%) $ 2.17 Total Due $ 2.14 Retailer s coupon seller reduces price by coupon before taxing Manufacturer s coupon apply tax before coupon is subtracted (seller is reimbursed by the manufacturer for the amount of the coupon) 17 Sales and Use Tax Basics When is labor taxed? Type of Labor Examples Is it taxable? Repair labor Construction labor Fabrication labor Installation labor Car repair Equipment repair Calibrating equipment Sharpening tools Build an office building Kitchen remodel Custom sawing Bending sheet metal Computer equipment Modular furniture No (if separately stated) No Yes Yes

7 Sales and Use Tax Basics When are repair and maintenance contracts taxed? Type of Contract Is the contract taxable? Optional maintenance contracts Yes. Tax is due when the contracted (bundled one nonitemized price) maintenance is sold. Optional maintenance contracts No. The service provider charges sales (unbundled separate itemized prices) tax to the customer on the taxable items when the repair is performed. Extended warranty contracts No. The service provider owes tax on the parts provided under the contract. 19 Sales and Use Tax Basics When are software maintenance agreements taxed? Details of agreement Taxability of agreement Required by vendor The entire charge is taxable Includes only upgrades or enhancements Optional and includes upgrades, enhancements and support services Optional and includes support services only The entire charge is taxable 20% of the charge is taxable Not taxable 20 Who Needs to Register? Part

8 Who needs to register? You must register if you: Make taxable sales in Minnesota Make purchases subject to use tax 22 Who needs to register? Sales made over the Internet 23 Who needs to register? Leasing or renting TPP Business location Performing services Delivering TPP in own vehicle NEXUS Repairing or installing TPP Performing construction work Agent, sales rep, solicitor, or affiliated company Tradeshow or convention 24 8

9 Local Taxes Part 3 25 Local Taxes Local taxes are added to the state general sales tax rate to compute the total tax rate. City tax County tax Special local tax(es) Motor vehicle $20 excise tax Note: Some cities and counties impose a $20 excise tax on sales of motor vehicles rather than a sales tax. See Fact Sheet 164, Local Sales and Use Taxes. 26 Local Taxes Where do I find local tax information? Select the Sales & Use Tax link under For Businesses on our website s home page. Then, click on the Tax Information tab. Select the Local Tax Information link. 27 9

10 Local Taxes Local Taxes The Department also has an interactive tool on our website that provides the state and local general sales and use tax rates that apply to sales made to specific locations in Minnesota. What is the name of this interactive tool? Sales Tax Rate Calculator 29 Local Taxes 30 10

11 When and How to Use Exemption Certificates Part 4 31 When and How to Use Exemption Certificates There are three ways for a sale to be exempt from sales and use taxes: 1. Product-based exemption (Do not need exemption certificate exempt by statute) 2. Entity-based exemption (Need exemption certificate unless exempt by statute) 3. Use-based exemption (Always need an exemption certificate) 32 When and How to Use Exemption Certificates Product-based exemptions Food (grocery items) for human consumption (F.S. 102A) Clothing for general use (F.S. 105) Prescription and over-the-counter drugs for humans (F.S. 117) Publications sold by subscription 33 11

12 When and How to Use Exemption Certificates Entity-based exemptions Federal government agencies Tribal governments State and local governments (exceptions apply) Exempt organizations (organized for charitable, educational, or religious purposes) Note: The sales tax exemption for entity-based organizations does not apply to prepared food, candy, soft drinks or alcoholic beverages; the purchases, lease or rental of most motor vehicles; lodging; or waste collection and disposal services unless purchased directly by the federal government. 34 When and How to Use Exemption Certificates Use-based exemptions Advertising materials shipped out of state Inventory purchased for resale Items consumed in performing a taxable service Items used or consumed in agricultural production Materials used or consumed in the manufacturing process Note: See applicable fact sheets for specific details on the exemptions. 35 When and How to Use Exemption Certificates Authorization letters and permits Businesses claiming these exemptions must complete an exemption certificate: Direct Pay Exempt Status (nonprofit exemption) Motor Carrier Direct Pay Resource Recovery Facility 36 12

13 When and How to Use Exemption Certificates Authorized exemption certificates: Certificate of Exemption, Form ST3 (Minnesota Department of Revenue form) Certificate of Exemption, Form F0003 (Streamlined Sales Tax form) Uniform Sales and Use Tax Certificate (Multistate Tax Commission form) Other state s exemption certificates (if all required elements are included) Self-prepared exemption certificate (if all required elements are included) 37 When and How to Use Exemption Certificates Required elements for a complete exemption certificate: Purchaser's name and address Purchaser's Minnesota tax ID number Purchaser s type of business Reason for exemption Purchaser's signature 38 The red boxes identify the fields that are required for a complete exemption certificate. The purchasing agent must retain the contract as supporting documentation. The seller s information is not required but it doesn t hurt to complete these fields. Jane Smith 39 13

14 When and How to Use Exemption Certificates Purchaser s responsibilities: Know if you qualify to claim an exemption Complete an exemption certificate Give it to the seller at the time of purchase Pay any use tax, penalty, and/or interest if used incorrectly 40 When and How to Use Exemption Certificates Seller s responsibilities Review all exemption certificates Keep exemption certificates as part of your business records Do not unlawfully solicit exemption certificates 41 How Sales and Use Tax Applies to Business Activity Part

15 Government Agencies Collect sales tax on taxable goods and services sold Determine taxability of purchases of taxable goods and services based on type of government: Federal government agencies are not taxable Tribal governments are not taxable State agencies are taxable (use direct pay authorization) Cities, counties, and townships are not taxable (exceptions apply) 43 Government Agencies Purchases made by government employees are taxable unless paid for directly by the government agency Purchases of prepared food, lodging, and motor vehicles are taxable (except by federal government) Other states or political subdivisions of other states may qualify for an exemption 44 Nonprofit Organizations Examples of nonprofit organizations are: Charitable (Federal 501(c)(3) organizations) Religious Educational 45 15

16 Nonprofit Organizations Collect sales tax on taxable goods and services sold, unless the fundraising exemption applies Do not pay sales or use tax on purchases used to further the nonprofit s activities Pay sales tax on the following: Lodging Motor vehicles Prepared food Purchases made by employees unless paid for directly by the nonprofit 46 Contractors A contractor is someone who: Supplies labor and materials Constructs, alters, repairs, or improves real property Is the end user of the materials and equipment 47 Contractors The following purchases are taxable: Building materials and supplies, unless an exemption applies for the job* Construction equipment and tools Business assets and office supplies * If the job is not exempt by statute, the contractor needs a valid purchasing agent agreement (see F.S. 128, Contractors) in order to buy the building materials exempt

17 Contractors For sales and use tax purposes, real property includes: Land Permanent buildings and structures Improvements and fixtures incorporated into a building or structure given its current use intended to be of a permanent benefit cannot be removed without causing substantial damage to the building or structure Exception: Real property does not include tools, implements, machinery, and equipment attached or installed into real property that qualify for exemption under section 297A.68 (for example capital equipment used in manufacturing to produce a product ultimately sold at retail.) 49 Contractors Examples of real property include: Commercial and residential buildings Drywall, flooring, and roofing materials incorporated into real property Landscaped lawns and gardens Roads, bridges, and railroad tracks 50 Retailers Retailers sell TPP to businesses and individuals. They must collect sales tax on goods they sell.* Their inventory bought for resale is not taxable.* Their purchases of business assets and office supplies are taxable. They are responsible for paying use tax on goods taken out of inventory for their own use. * The seller must charge tax unless the item is specifically exempt by law or they have a completed exemption certificate on file (if the sale is sourced to Minnesota and the seller has nexus here.) 51 17

18 Contractor/Retailer Primarily a contractor - at least 50 percent of your business purchases are used for construction activities Primarily a retailer - at least 50 percent of your business purchases are sold at retail 52 Contractor/Retailer If you are primarily a contractor: Pay tax on all your purchases. Charge sales tax on the actual sales price (including your mark-up). Deduct the cost of the materials on which you already paid tax when you file your sales and use tax return. 53 Contractor s Purchase Invoice Materials Materials $ Tax Tax (6.875%) (6.875%) $ Total Total $ Customer s Sales Invoice Materials Materials $ $ Tax Tax (6.875%) (6.875%) $ Total Total $ $ Amount Reported on the Sales and Use Tax Return Gross Receipts $150 Less: Original Invoice $ 50 General Rate Sales $100 Note: The $50 purchase amount from the contractor s original invoice is not recorded on your return. This is an example only. Report total taxable sales on the return

19 Contractor/Retailer If you are primarily a retailer: Buy the items exempt for resale. Pay use tax on your cost of the materials if any of the items are later used in a construction contract. 55 Nontaxable Service Providers Examples include: Accountants Attorneys Banks Consulting firms Counselors Health care providers 56 Nontaxable Service Providers The majority of services offered by these businesses are not taxable. Sales of TPP made by a service provider are taxable. Purchases of business assets and office supplies are taxable

20 Taxable Service Providers The majority of sales are taxable (see fact sheets for exceptions). Materials used or consumed in providing the service may qualify for exemption. Short-lived detachable tools may qualify for exemption. Machinery and equipment used in providing the services are taxable. 58 Manufacturers The industrial production process includes: Design, Research and Development for production of a product Removal of raw materials from stock to begin production activities Actual production activities that affect changes to produce the product Testing and quality control of the product Placement of the product in finished goods inventory 59 Manufacturers Business assets and office supplies are taxable Returnable packaging is taxable Product packaging and other nonreturnable packaging is not taxable* Raw materials, chemicals and utilities used or consumed in production are not taxable* Separate detachable tools and special tooling are not taxable* * The purchaser must provide the seller with a completed exemption certificate for these items

21 Manufacturers Upfront exemption for capital equipment available (effective July 1, 2015) Machinery and equipment may qualify as capital equipment if: used in Minnesota and essential to the integrated production process 61 Agricultural Production Agricultural production includes: Agriculture Aquaculture Floriculture Horticulture Silviculture 62 Agricultural Production Feed, seed, fertilizers, and herbicides are not taxable. Fuels, electricity, gas, and steam used or consumed in agricultural production are not taxable. Packaging materials used to package food products are not taxable. Farm machinery is not taxable. Returnable containers used to package non-food items are taxable

22 Sales and Use Tax is a Transaction Tax 64 Transaction Tax - Seller The seller must look at each transaction. A general contractor rents equipment (without an operator) to a subcontractor. A wholesaler makes a retail sale to an employee. A farm implement dealer sells equipment to a contractor. An accounting firm sells software to a client and installs it on the client s computers. A lawn care business provides snow removal services in the winter. 65 Transaction Tax - Purchaser The purchaser must look at each transaction. A general contractor buys materials for a tax-exempt job. A retail electronics store buys taxable office supplies. A manufacturer buys utilities to heat their facility. A farmer buys tires for a tractor. A building cleaning company buys vacuum cleaners

23 Managing your Use Tax Liability Part 6 67 Managing Your Use Tax Liability Review your invoices 68 Managing Your Use Tax Liability What is the basis for use tax? Use tax is based on: your purchase price of taxable items or services. This is true whether you buy items: for your own business use without paying sales tax, take them out of inventory and use them in a taxable manner, or donate them to a charitable organization. Note: Even if you paid Minnesota sales tax, a local use tax may still apply

24 Managing Your Use Tax Liability What should I look for when reviewing invoices? Review every invoice before you pay it. Determine if items on the invoice are taxable. Watch for taxable items purchased with an exemption certificate. Watch vendor changes (e.g. new computer system). Never add use tax to a vendor payment; always self-assess the tax and remit it directly to the Department of Revenue. Record the amount of use tax accrued on the actual invoice. 70 Managing Your Use Tax Liability What is a variable rate credit? Minnesota allows a credit for the amount of sales tax paid to another state Must be legally due to the other state to receive credit 71 Managing Your Use Tax Liability 1. Calculate the applicable amount of tax due (variable rate X sales price). 2. Enter the amount(s) as variable rate use tax when you file your Minnesota sales and use tax return. Minnesota sales tax rate 6.875% Wisconsin state and local sales tax ( 5.500%) Variable rate tax due to Minnesota 1.375% 72 24

25 Managing Your Use Tax Liability Recording your use tax liability Record this information: Date of purchase Invoice number Vendor s name and description of item Taxable amount Amount of state and local use taxes paid Keep a copy of the backup documentation. 73 Maintaining your Records Part 7 74 Maintaining Your Records Recordkeeping Basics Use a recordkeeping system that: Incorporates Generally Accepted Accounting Principles Allows you to keep track of the data you need Does not require an excessive amount of time Works for you and your business 75 25

26 Maintaining Your Records Recordkeeping Basics Record each transaction the same Do not mix personal and business transactions Do not mix records if you have more than one business Choose the appropriate accounting method 76 Maintaining Your Records Accounting methods Cash Basis Record income when actually received Report sales tax when actually received Report use tax when invoice is paid vs. Accrual Basis Record income when sales are made Report sales tax when sales are made Report use tax based on the invoice date 77 Filing and Payment Instructions Part

27 Filing and Payment Instructions You must do two things to avoid late filing and/or late payment penalties: 1. File your return electronically by the due date. (either online or by telephone) 2. Pay your sales and use tax liability electronically or by check on or before the due date. 79 Filing and Payment Instructions Filing Frequency Average Tax Liability Due Date Monthly filers Quarterly filers Annual filers More than $500 per month (more than $6,000 per year) Less than $500 per month (less than $6,000 per year) Less than $100 per month (less than $1,200 per year) 20th day of the following month 20th day of the month following the end of the quarter (April 20, July 20, October 20, and January 20) February 5 of the following year 80 Filing and Payment Instructions 27

28 Filing and Payment Instructions Filing and Payment Instructions Filing and Payment Instructions 28

29 Filing and Payment Instructions Common reasons you may need to file an amended return are: Reported too much or too little tax on your original return Reported the tax on the wrong tax line Charged tax incorrectly to a customer and have refunded the tax to the customer Received a completed exemption certificate from a customer (you reported the tax in a prior period and have since refunded the tax to your customer) Note: Do not file an amended return for tax paid to a vendor in error. 85 Communicating with the Department of Revenue Part 9 86 Communicating with the Department of Revenue Have a sales and use tax question? 87 29

30 Communicating with the Department of Revenue Sales and Use Tax Division Minnesota Revenue website: revenue.state.mn.us Questions relating to Sales and Use Tax Law? Questions relating to your Sales and Use Tax account activity? Prefer telephone assistance? Phone: or Communicating with the Department of Revenue for Other Divisions Business Income Taxes (Corporation Franchise Tax, Partnership Tax, S Corporation Tax, Estate Tax, Fiduciary Tax) businessincome.tax@state.mn.us Withholding Tax or withholding.tax@state.mn.us Business Registration or Business.Registration@state.mn.us 89 Minnesota Department of Revenue Website revenue.state.mn.us 90 30

31 Minnesota Department of Revenue Website revenue.state.mn.us 91 Minnesota Department of Revenue Website Sales and Use Tax Videos youtube.com/mnrevenue Available Videos: e-services Instructional Videos Education Video Series Inside Scoop: Streamlined Sales Tax Training Videos 92 Minnesota Department of Revenue Website GovDelivery Choose the updates you want - by tax type and publication type Choose the frequency of notifications Sign in directly or use your social media account Facebook, Yahoo! or Google 93 31

32 Minnesota Department of Revenue Website Social Media Keep up with the latest news from the Minnesota Department of Revenue on Twitter, Facebook, and LinkedIn. twitter.com/mnrevenue facebook.com/mnrevenue linkedin.com/company/minnesota-department-of-revenue 94 Communicating with the Department of Revenue Please notify us if you have changes to any of the following: Mailing address(es) Business location(s) Legal organization NAICS code Contact information Owners and/or officers 95 Communicating with the Department of Revenue Did you receive a letter or a bill from us? 96 32

33 Financial Consequences of Noncompliance Part Financial Consequences of Noncompliance Days Late Late Filing Penalty Late Payment Penalty 1-30 days 5 percent 5 percent days 5 percent 10 percent 60+ days 5 percent 15 percent Note: The maximum combined late file and late payment penalty is 20 percent. Additional civil and criminal penalties may apply. 98 Financial Consequences of Noncompliance Interest rates used by the Department of Revenue in recent years: % % 99 33

34 Financial Consequences of Noncompliance Collection tools available to the Department include: Levies License revocation Liens Property seizures Revenue recapture 100 Course Review During this class, we discussed The basic sales and use tax concepts for Minnesota and its local taxing jurisdictions. The difference between taxable goods and services and those that are nontaxable or exempt. The different types of users and how tax applies to different businesses. How to use and when to accept an exemption certificate. The documentation necessary for sales and use tax records and returns. Where to find information to help you answer your questions. 101 Basic Sales and Use Tax Review 1. Who is responsible for paying sales or use tax on these purchases? a. Retailer purchasing inventory for resale b. Cleaning service buying window cleaner c. Manufacturer buying raw materials d. Business leasing a photocopier e. None of the above

35 Basic Sales and Use Tax Review 2. Which of these are not considered part of the sales price? a. Installation charges b. Finance charges c. Retail price of product or service d. Service charges added to the bill by the seller e. All of the above 103 Basic Sales and Use Tax Review 3. Which of these services are not taxable in Minnesota? a. Motor vehicle washing b. Pet grooming c. Accounting services d. Detective services e. All of the above 104 Basic Sales and Use Tax Review 4. Which of the following is considered tangible personal property? a. Office supplies b. Food (e.g. fresh or frozen fruits, vegetables and meat) c. Machinery and equipment d. Utilities (e.g. gas, water, electricity, fuel, etc.) e. All of the above

36 Basic Sales and Use Tax Review 5. Which of these types of labor are taxable? a. Repair labor b. Construction labor c. Fabrication labor d. Installation labor (item remains TPP after installation) e. Both c & d 106 Basic Sales and Use Tax Review 6. An exempt organization cannot use their exempt status to purchase which of the following exempt from tax? a. Toilet paper b. Toner for their printer c. Lunch at a restaurant for a business meeting d. Cleaning service for the office e. None of the above 107 Basic Sales and Use Tax Review 7. What is the largest percent that can be charged for combined late filing/late payment penalties? a. 5% b. 10% c. 15% d. 20% e. All of the above

37 Basic Sales and Use Tax Review 8. According to contractor/retailer rules, a carpenter who builds cabinets and installs the majority of his products into real property can buy the materials used to fabricate the cabinets exempt. TRUE FALSE 109 Basic Sales and Use Tax Review 9. Taxable items taken out of inventory to be given away for a donation or as free samples are subject to use tax. TRUE FALSE 110 Basic Sales and Use Tax Review 10. Out-of-state customers who pick up their taxable merchandise in Minnesota have to pay Minnesota sales tax and all applicable local taxes. TRUE FALSE

38 Basic Sales and Use Tax Review 11. Making a phone call to a customer located in Minnesota is enough business activity to establish Nexus in Minnesota. TRUE FALSE 112 Basic Sales and Use Tax Review 12. Nonprofits who have been granted federal nonprofit status automatically qualify for sales tax exempt status. TRUE FALSE 113 Basic Sales and Use Tax Review 13. A business creates and sells custom DVDs and pays sales tax on the blank DVDs when they buy them. The business does not have to charge sales tax to their customer because tax was already paid. TRUE FALSE

39 Basic Sales and Use Tax Review 14. Since cutting hair is not a taxable service in Minnesota, a beauty salon or barber shop would not need to register for a Minnesota Tax ID#. TRUE FALSE 115 Basic Sales and Use Tax Review 15. I paid sales tax on capital equipment purchased. I can file a refund request (Form ST11) for the tax paid. TRUE FALSE 116 Questions?

40 Thank you! Permission of the Minnesota Department of Revenue must be secured before exhibiting, reproducing, distributing or making any other use of any part of this presentation. Produced by the Minnesota Department of Revenue 600 North Robert Street, St. Paul, Minnesota Copyright 2018, Minnesota Department of Revenue, All Rights Reserved Minnesota Business Tax Education 40