Sales/Use Tax Updates & Developments - Texas & Louisiana - Streamlined Sales Tax - Affiliate Nexus. IPT - San Antonio March 28, 2012

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Sales/Use Tax Updates & Developments - Texas & Louisiana - Streamlined Sales Tax - Affiliate Nexus IPT - San Antonio March 28, 2012 Scott Steinbring David Somerville Tracy Watts

Overview Updates & Developments Texas - Tax Amnesty Texas - Compression Equipment Texas - Temporary Storage Texas - Aircraft Texas - Offsets and Application of Credits and Payments to Liabilities Louisiana - Proposed Policy - Contractor's Use of Materials Louisiana - Managed Audit Program Louisiana - Software, Digital, and Media Products Streamlined Sales Tax Affiliate Nexus Questions 2

Texas Tax Amnesty Program Texas Fresh Start Tax Amnesty Program is set for June 12, 2012 through August 17, 2012. Tax Amnesty program is a chance for businesses to report delinquent tax with waiver of penalty and interest. Businesses may also amend previous reports in which they incorrectly stated lower amount. Tax Amnesty applies to taxes and fees originally due before April 1, 2012. Tax Amnesty does not apply to underpaid tax due under audit. Fresh Start Tax Amnesty Program applies to sales tax, franchise tax, and other state and local taxes or fees administered by the Texas Comptroller. Does not include Public Utility Commission gross receipts Other programs to consider for waiver of penalty and/or interest: Voluntary Disclosure Program Manage Audit Program (sales/use tax) 3

Texas Compression Equipment Compression Equipment Hearing Number 101,773, dated June 3, 2011. Claimant moved gas from producing wells to a compressor station. Sales tax was not due on compressor rental payments, compressor repair parts, and compressor repair services. Compressor equipment that is necessary for the operation of field dehydrators and compressors used to compress processed gas qualifies as processing (manufacturing) equipment. The compressors qualify as exempt equipment, thus services performed on the compressors are exempt. 4

Texas Temporary Storage In Combs v. Chapal Zenray, Inc., No. 03-10-00646-CV (Tex. App. Austin, November 18, 2011, no writ history), the Third Court of Appeals in Austin ( Court ) determined that certain packaging materials were subject to use tax in Texas. Tex. Tax Code 151.101(a) imposes use tax on the storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state. However, Tex. Tax Code 151.011(f) excludes from the definition of taxable use and storage the following activities: processing, fabricating, or manufacturing the property into other property or attaching the property to or incorporating the property into other property to be transported outside the state for use solely outside the state. The Court did not allow the temporary storage exclusion for the taxpayer; instead the Court accepted the Comptroller's narrow interpretation of the exclusion. Decision may be appealed to Texas Supreme Court. 5

Texas Aircraft Texas Comptroller Docket No. 304-11-8763.26 for audit period Jan 2007-May 2008 Purchaser requested redetermination contending entitlement of tax credit per Texas Tax Code ANN. Section 151.303 for sales tax paid to state of Oregon for purchase of aircraft. Staff rejects purchasers request because the state of Oregon does not impose sales tax. The Administrative Law Judge recommends that purchasers request be denied and that the assessment be affirmed, except for the adjustment to the purchase price. Texas Comptroller Docket No. 304-11-7615.26 for audit period July 2005 Purchaser argued aircraft exempt as sale of aircraft to a purchaser who acquired it for the purpose of resale and subsequent lease of aircraft is exempt because it was leased to person using the aircraft as a certified or licensed carrier of persons or property. Administrative Law Judge recommends assessment of tax be upheld. Texas Comptroller Docket No. 304-11-8767.26 for audit period Nov 2003- July 2004 Purchaser argued aircraft exempt as sale for resale. Administrative Law Judge recommends penalty waived but interest and sales and use tax deficiency be upheld. 6

Texas Aircraft Texas Tax Policy STAR Document 200611755L dated November 15 th, 2006 states: transaction should be analyzed by looking at all the facts and circumstances from its inception to its ending. If the method of transfer(s) of an aircraft, or other tangible personal property, does not have a business purpose other than tax avoidance, then the transitory entity should be ignored and use tax should be assessed accordingly. This analysis will be applied to all such transactions that occur on or after December 1, 2006, and transactions that have not been completed, meaning the taxable item has not actually been brought into Texas for use, as of December 1, 2006. Document 9502L1333G03 on the STAR System, and any similar documents, are being superseded accordingly. 7

Texas Offsets and Application of Credits and Payments to Liabilities Comptroller Hearing No. 104,956 (2011) for Audit Division Policy Memo 102 : The taxpayer contended that the credits for the refunded error tax should be applied as an offset to the audit assessment and asserts that the tax overpayments comprising the refund warrant should offset the tax underpayments arising in the same period. AP 102 states credit transactions processed outside of the audit are treated as part of the refund request separate from the audit. This is affirmed in Decision No. 100,837-Petitioner's refunds were properly processed separately from the audit, even though the refund claim was subsequently withdrawn. Comptroller Hearing No. 104,636 (2011) for General Rule 3.2-Offsets and the Application of Credits and Payments to Liabilities: What is the Correct Procedure? The taxpayer contended that credit interest on overpayments should be computed based on the gross credit or refund that resulted from the managed audit of each relevant reporting period, and without regard to any liability incurred for the same period. Tax overpayments are determined by report period and not on a transaction by transaction basis. Additionally, interest on refunds is computed on the net amount due after tax that is erroneously paid is first credited against any other amounts due and payable. 8

Texas Offsets and Application of Credits and Payments to Liabilities Comptroller adopted amendments to General Rule 3.2: Further explanation of information that must be provided. Credits will be automatically netted against liabilities in same period. Credits will be applied as payments to liabilities in prior periods if current period nets as credit. Application of credits will begin in oldest liability period first. Refund will be issued for credit amount and interest after all liabilities are satisfied and taxpayer is current on all filings. 9

Louisiana Proposed Policy Contractor's Use of Materials Proposed Administrative Rule, LAC 61:I.4372 Contractor's Use of Materials Proposes that sales of tangible personal property made to contractors are sales to consumers/users (not sales for resale). This relates to items used in the construction, alteration, or repair of immovable property. The contractor would be liable for sales/use tax on its purchases. 10

Louisiana Managed Audit Program The Managed Audit Program allows a taxpayer to conduct a "self audit" where most tasks are performed by taxpayer with guidance and review by the Louisiana Department of Revenue ("DOR"). Taxpayer must timely request the Managed Audit (within 30 days of scheduled appointment date). Authorizing a taxpayer to enter a Managed Audit Agreement is at the discretion of the DOR. The following factors will be considered: Complexity of the business Tax reporting and payment history Accounting system and internal controls Availability of electronic records Taxpayer's time and resources available to perform the audit Cost vs. Benefit: Efficient use of the State's resources DOR and taxpayer agree on audit plan and timeline. DOR reviews audit adjustments and schedules prepared by the taxpayer. DOR will not assess penalty, and may waive all or a portion of interest. 11

Louisiana Managed Audit Program Computer Audit Specialist will assist taxpayer if managed audit is granted: CAS will outline procedures and timelines with specific written instructions outlined in Managed Participation Agreement. Average timeframe allowed for a managed audit ranges from 6 to 12 months; an additional 6 to 12 months may be granted if justified. Tax refunds identified during the managed audit period will be processed with the managed audit. Taxpayer's appeal rights under a managed audit are the same as under a regular audit. The managed audit program has been authorized at the state level; the managed audit program is not necessarily authorized at the parish or local levels. 12

Louisiana Software, Digital, and Media Products Revenue Information Bulletin No. 11-010 The Louisiana DOR is repealing the implementation of Revenue Ruling No. 10-001 Revenue Ruling No. 10-001 stated: Taxable tangible personal property includes all electronically delivered products, including computer software and applications, stored media, and entertainment media or products located in Louisiana. Taxable transactions include remotely accessed software, information materials, and entertainment media or products. Taxability on transactions whether one time use or ongoing subscription Any consideration paid for electronic receipt or access to communications that are converted to readable, viewable, or usable form by browsers or software installed on mobile hardware or system hardware located in Louisiana is subject to sales/use tax. 13

Streamlined Sales Tax Background & Status Initiative started in March 2000 to reduce complexity in state sales tax systems in which a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state. 24 states have adopted Streamlined Sales Tax Agreement to improve sales and use tax systems for sellers and all types of commerce through: State level administration of sales and use tax collections Uniformity in the state and local tax bases Uniformity of major tax base definitions Central, electronic registration system for all member states Simplification of state and local tax rates Uniform sourcing rules for all taxable transactions Simplified administration of exemptions Simplified tax returns Simplification of tax remittances Protection of consumer privacy SSUTA certificate Participating states accept the certificate, rather than using a different certificate for multiple states. 14

Streamlined Sales Tax Exemption Certificate 15

Streamlined Sales Tax 16

Streamlined Sales Tax Federal Bills Proposed 2011 "Main Street Fairness Act" S.1452, H.R. 2701 July 29, 2011 Introduced by Sen. Durbin (IL), Rep. Conyers, Jr. (MI), Rep. Welch (VT) Collection authority limited to SST member states SST states must comply with 18 minimum simplification requirements Similar to previous federal Streamlined legislation introduced in 2010 but no longer says SST states have to apply minimum simplification requirements to communications taxes and deletes the simplification requirement for "A single sales and use tax rate per jurisdiction, except as provided in section 308 of the Agreement." Provides there must be uniform rule for small seller exception. Provides vendor compensation per SST Agreement and allows for modifications to compensation if there are changes to small seller exception, adoption of additional simplification, or addition of provisions that increase collection costs. 17

Streamlined Sales Tax Federal Bills Proposed 2011 "Marketplace Equity Act of 2011" H.R. 3179 October 13, 2011 Introduced by Rep. Womack (AR), Rep. Speier (CA) Collection authority open to all states that meet simplification requirements (not tied to being an SST member state) State has to provide small seller exception if remote seller does not exceed $1 million in gross annual receipts in the previous calendar year or $100,000 in that state. State must also provide for remote seller return and a single revenue authority to file return with, and a uniform tax base for products and services and uniform exemptions throughout state. State must allow for sales and use tax rate structure for remote sellers that is either 1) a single blended rate, 2) equal to the maximum state rate, or 3) destination rate (state and local tax rate). 18

Streamlined Sales Tax Federal Bills Proposed 2011 "Marketplace Fairness Act of 2011" S. 1832 November 9, 2011 Introduced by Sen. Enzi (WY) Hybrid of two previously introduced federal bills that allows SST member states and any non-sst states that meet its simplified tax administration requirements to have collection authority requiring remote sellers to collect tax. Small seller exception if remote seller does not exceed $500,000 in total remote sales in the United States in preceding calendar year. Non-SST state must provide single state level administration, uniform sales and use tax base, destination rate for interstate sales into the state, adequate software and services to identify rates, 30 day notice of rate changes, and hold harmless provisions for reliance on state provided tax and rate information. Allows for consolidated providers but no vendor compensation requirement. 19

Affiliate Nexus Enacted Enacted affiliate nexus: Arkansas affiliate nexus effective on July 26, 2011 Colorado affiliate nexus effective on March 1, 2010 Illinois affiliate nexus effective on July 1, 2011 New York affiliate nexus effective on June 1, 2009 Oklahoma affiliate nexus effective on June 9, 2010 South Carolina enacted nexus safe harbor provision that lasts for five years and must meet certain requirements effective on June 8, 2011 South Dakota affiliate nexus effective on March 11, 2011 Texas affiliate nexus effective January 1, 2012 20

Affiliate Nexus Texas Texas Tax Code Section 151.107 now provides that a seller has nexus in Texas if the seller holds substantial ownership in, or is owned in whole or substantial part by an entity that either: Has a business location in Texas that sells substantially the same product line under substantially the same business name as the related entity or the related entity uses its facilities or employees in Texas to advertise, promote, or facilitate sales or maintain a marketplace or exchange returned merchandise for the seller, or The related entity maintains a distribution center, warehouse or similar location in Texas that delivers property sold by the seller. 21

Affiliate Nexus Texas Affiliate nexus is in effect January 1, 2012. For the purpose of this law change, "ownership" includes direct, common, or indirect ownership through a parent entity, subsidiary or affiliate. "Substantial" ownership means a 50 percent ownership interest or more with the type of ownership (i.e., beneficial, combined voting power, etc.) determined by the entity type. 22

Affiliate Nexus Proposed States with proposed affiliate nexus/proposed changes to affiliate nexus: Arizona proposed expansion of definition of affiliate nexus on February 8, 2012 Florida proposed multiple provisions to affiliate nexus in December 2011 and January 2012 Hawaii proposed provisions to affiliate nexus in January 2012 Indiana proposed provisions to affiliate nexus on January 4, 2012 Iowa proposed provisions to affiliate nexus on February 20, 2012 Missouri proposed provisions to affiliate nexus in March 2012 New Jersey proposed provisions to affiliate nexus in January and February 2012 Oklahoma proposed expansions of provisions to affiliate nexus on January 19, 2012 Pennsylvania proposed provisions to affiliate nexus on October 3, 2011 Tennessee proposed provisions to affiliate nexus on January 12, 2012 Utah proposed provisions to affiliate nexus on February 21, 2012 Vermont proposed provisions to affiliate nexus on January 27, 2012 Virginia proposed provisions to affiliate nexus on January 19, 2012 23

Questions? Scott Steinbring (832) 476-5070 scott.steinbring@us.gt.com David Somerville (832) 476-3601 david.somerville@us.gt.com Tracy Watts (832) 476-3607 tracy.watts@us.gt.com Grant Thornton. All rights reserved.