IPT 2017 Sales Tax Symposium San Antonio, Texas I Scream, You Scream, We All Scream For Resale?
Presenters Jennifer White Attorney Reed Smith LLP 212.521.5406 jwhite@reedsmith.com Pamela Wegner Sales & Use Tax/Property Tax Manager Sonoco 843.383.7218 Pamela.wenger@sonoco.com 2
Agenda Variances in requirements between jurisdictions, including but not limited to: The application to tangible personal property ( TPP ) vs. services; The requirement that tax be collected on the resale; and The requirements for the form in which the item is to be resold. Administration of resale exclusion Conditions precedent to use of the exemption, how to defend a resale transaction on audit, and opportunities to apply the resale exemption in unique ways. 3
The Resale Exemption/Exclusion All states provide exemptions or exclusions from their sales and use taxes for sales for resale. The purpose of the resale exemption/exclusion is to prevent multiple levels of sales tax. General Characteristics. Applicable to inventory-type property. Requires resale certificate from buyer. Potential administrative burdens with resale certificates. 4
Resale Exemption availability for TPP v. Services Most sales taxes apply to all retail sales of TPP unless explicitly exempted. On the other hand, most sales taxes do not apply to the sale of services, except for those services that the state has expressly enumerated as taxable. Therefore, typically, there is no need for a state to provide for an exemption for transactions involving services, because they are outside the scope of the sales tax. 5
Resale Exemption availability for TPP v. Services New York New York imposes a statewide sales tax on sales, other than for resale, of TPP and certain enumerated services. N.Y. Tax Law 1105(a); N.Y. Tax Law 1101(b)(4)(i)(A); N.Y. Tax Law 1105(c). Pennsylvania The Pennsylvania sales and use taxes do not apply to sales in which TPP is transferred, or services are rendered, for the purpose of resale. 72 Pa. Stat. Ann. 7201(f); 72 Pa. Stat. Ann. 7201(k)(8)(i); 61 Pa. Code 31.3(1); 61 Pa. Code 32.3(a). 6
Resale Exemption availability for TPP v. Services 7 New Jersey The New Jersey sales tax is imposed on retail sales of TPP or specified digital product, and the sales of enumerated services, other than for resale, sublease, or subrent. N.J.S.A. 54:32B-3; N.J. Rev. Stat. 54:32B-2(e). Illinois Sales of TPP for purposes of resale are exempt. 35 ILCS 120/1; 86 Ill. Admin. Code 130.120(c); 86 Ill. Admin. Code 130.201(a)(2); 35 ILCS 105/2. However, Illinois does not have an exemption on sales of property for subsequent lease or rental, nor does the resale exemption apply to resale purchases of services.
Requirement that Tax be collected on Resale 8 New York TPP that is purchased and sold for a minimal charge, or given away for free, may not be purchased under a resale certificate. NYCRR 526.6(c)(4)(i), (ii). If purchases for resale are consumed rather than resold, the purchaser must pay tax on the purchase price. NYCRR 532.4(d)(3). Pennsylvania Anyone who uses or consumes an item of TPP that he or she bought for resale, or who disposes of an item bought for resale in a manner other than by resale, becomes the ultimate consumer or user of the item and must pay use tax. 61 Pa. Code 32.3(b); 61 Pa. Code 32.3(d).
Requirement that Tax be collected on Resale 9 New Jersey TPP that is purchased and resold for a minimal charge, or given away for free, may not be purchased under a resale certificate. e.g., GNOC, Corp. v. Director, Div. of Taxation, 167 N.J. 62, 768 A.2d 1051 (2001) (Casino owner's complimentary provision of alcoholic beverages to casino patrons, for no consideration or for legally insufficient consideration, constituted retail sales that were subject to sales taxes, rather than resales that were exempt from sales taxes). Illinois If purchases for resale are consumed rather than resold, or transferred to any other person for no valuable consideration for consumption, the purchaser must pay tax on the purchase price. 35 ILCS 120/1.
Requirement for the Form in which the Item is Resold 10 The provisions exempting the purchase of TPP for resale from sales tax generally require that the property be resold as a TPP. Because the sales tax is generally limited to sales of TPP, and the resale exclusion is designed to prevent multiple levels of sales tax, there is no reason to extend the resale exemption rule to resales in forms other than TPP, because such sales will generally not be subject to a later sales tax. If a purchaser of TPP is engaged in selling services, its purchase could fail to qualify as the resale of TPP, but rather be treated as the sale of services simply with the incidental transfer of TPP in connection with the provision of the services.
Requirement for the Form in which the Item is Resold 11 New York The forms of resale transactions allowed under the resale exemption: Sales of TPP for resale or as a physical component part of TPP; Sales of TPP for use in performing taxable services; and Sales of services for resale. NYCRR 532.4(d). Pennsylvania The forms of resale transactions allowed under the resale exemption: Sales, rentals or leases of TPP or services in the regular course of business; and Sales of TPP as a physically incorporated ingredient in other personal property sold in the regular course of business or transported in interstate commerce to a destination outside the Commonwealth. 61 Pa. Code 32.3(a).
Requirement for the Form in which the Item is Resold 12 New Jersey The forms of resale transactions allowed under the resale exemption: Sale of TPP for resale or as converted into or as a component part of a product produced for sale by the purchaser; Sale of TPP for use in the performance of taxable service in which the property becomes a physical component of the property upon which the services are performed or is later transferred to the purchaser of the service in conjunction with the service. N.J.S.A. 54:32B-2(e)(1). Illinois The forms of resale transactions allowed under the resale exemption: Sale of TPP to a purchaser for the purpose of resale in any form as TPP, to the extent not first subjected to a use for which it was purchased. 86 Ill. Admin. Code 130.210.
Resale Certificates A resale certificate is the documentation required by the state to support the exempt treatment for a resale transaction. The vendor who accepts the certificate must maintain a record that associates the sale for resale with the exemption certificate on file. Wholesalers making nontaxable sales for resale should be careful to collect properly made out resale certificates. Failure to obtain a resale certificate from every buyer may subject the wholesaler to sales tax liability on those sales. The MTC has issued a uniform certificate designed to be used when purchases are made for resale (TPP and services), lease, or rental or for use in manufacturing or producing. 13
Resale Certificates New York - NYCRR 20 532.4(b)(2)(ii) An exemption certificate is considered to be properly completed when it contains the following information: (1) date prepared; (2) name and address of the purchaser; (3) name and address of the vendor; (4) identification number of the purchaser or exempt organization number; (5) Signature of the purchaser; and (6) any other information required to be completed on the particular certificate or document. Pennsylvania - 61 Pa. Code 32.2(b)(1) The exemption certificate must be: (1) in the form of an officially promulgated state exemption certificate, or a substantial and proper reproduction; (2) it must be dated, properly executed, complete, and regular in every respect; and (3) the certificate must state a proper reason for exemption. 14
Resale Certificates 15 New Jersey - N.J. Admin. Code 18:24-10.4(c) For transactions entered into on and after January 1, 2008, the exemption certificate must contain: (1) purchaser's name and address; (2) type of business; (3) reasons(s) for the exemption; (4) purchaser's New Jersey tax identification number or, for a purchaser that is not registered in New Jersey, the Federal employer identification number or out-of-state registration number. Individual purchasers must include their driver's license number; and (5) signature of the purchaser, if a paper exemption certificate is used, including facsimile. Illinois - 86 Ill. Admin. Code 130.1405(b) The resale certificate must contain: (1) seller's name and address; (2) purchaser's name and address; (3) description of the items being purchased for resale; (4) purchaser's signature and the date of signing; and (5) registration number, resale number, or certification of resale to out-of-state purchaser
Resale Certificates 16 New Jersey - N.J. Admin. Code 18:24-10.4(c) For transactions entered into on and after January 1, 2008, the exemption certificate must contain: (1) purchaser's name and address; (2) type of business; (3) reasons(s) for the exemption; (4) purchaser's New Jersey tax identification number or, for a purchaser that is not registered in New Jersey, the Federal employer identification number or out-of-state registration number. Individual purchasers must include their driver's license number; and (5) signature of the purchaser, if a paper exemption certificate is used, including facsimile. Illinois - 86 Ill. Admin. Code 130.1405(b) The resale certificate must contain: (1) seller's name and address; (2) purchaser's name and address; (3) description of the items being purchased for resale; (4) purchaser's signature and the date of signing; and (5) registration number, resale number, or certification of resale to out-of-state purchaser
Sales for Resale Expiration of Resale Certificates 17 Florida Good for one year Connecticut Expires every three years Nebraska Expires every three years Michigan Expires every four years Maine Expires every five years Oklahoma Expires when the sales tax permit expires
Audits 18 New Jersey All certificates accepted by a seller as a basis for exemption from the sales and use tax must be retained by the seller for a period of not less than four years from the date of the last use of that certificate as a basis for exemption. N.J. Admin. Code 18:24-10.5(a). Illinois It the seller's responsibility to obtain a copy of the resale certificate from the purchaser and retain it for his records, should the sale later be called into question by the department. 86 Ill. Admin. Code 130.1405(a). Failure to present an active registration number or resale number and a certification to the seller that a sale is for resale creates a rebuttable presumption that a sale is not for resale. 86 Ill. Admin. Code 130.1405(d).
Traditional Resale Taxpayer purchases TPP, which it then sells to its customers. Examples: Wholesaler (purchases from manufacturers) Retailer (purchases from wholesalers) Purchasing company (bulk purchases followed by sales to affiliates) 19
Unique Opportunities to Apply the Resale Exemption Resale is much broader than traditional resale. Resale can be used to properly source transactions to states that do not tax the transaction or have a lower rate. For example, remotely accessed software is deemed resold when it is used by franchisees. 7-Eleven v. Combs (Tex. Ct. App. 2009). 20 Resale can be used to eliminate tax all together when doing business with a tax-exempt entity Resale v. agency
Practical Examples of Aggressive States What Can We Do? New Mexico The importance of timing! Upholding assessments based on missing documentation, even if the documentation can be subsequently provided. Alabama As per 810-6-1-.184, it is the sellers duty to know the general and customary business of the purchaser. 21
Practical Examples of Aggressive States What Can You Do? 22 Florida Under Fla. Stat. 212.07 (1)(b), a company can actually request that the auditor check and see if a customer is registered for resale when the audited company is unable to provide a resale certificate. New York A presumption of taxability may be overcome to get to the correct answer. Certificates are merely proof of exemption, but are not necessary. Resale certificates v. Contractor certificates
Conclusion 23 The resale exemption is broad. If you are paying sales tax, always ask whether the resale exemption could apply. Potential administrative burdens with resale certificates. The resale exemption and its requirements differ between states, for example: The application of the resale exemption to TPP vs. services; The requirement that tax be collected on the resale; The requirements for the form in which the item is resold; Certificate requirements; and Audit related rules.