CSU 101 Tax Discussion Monterey 2011 Marc F. Benadiba Assistant Director Fiscal Services Cal Poly San Luis Obispo CSU Tax Discussion Contrary to popular belief, there are significant tax issues on CSU campuses. While CSU campuses are not subject to federal and state income tax, there are other taxes that do apply. Since most of you will not be primarily Since most of you will not be primarily focused on tax, this presentation will provide an overview of the different tax issues that arise on CSU campuses. 1
Agenda Campus and auxiliary tax status Common payment types and related tax issues CSU tax responsibilities Sales and use tax Out of state tax withholdings on service providers Non Resident Alien (NRA) taxes Unrelated Business Income Tax (UBIT) University provided housing issues Sample frequently asked tax questions Campus Tax Status and Related Filing Requirements Using my campus as an example, Cal Poly SLO is exempt from federal and state income taxes based on Title 26 of the IRS code, section 115, which states: Gross income does not include income derived from any public utility or the exercise of any essential governmental function. 2
Campus Tax Status and Related Filing Requirements Cal Poly is not a 501C-3 and as a result is not required to file a form 990, which h is filed by organizations exempt from income tax under section 501 of the Internal Revenue Code Auxiliary Tax Status and Filing Requirements What is an auxiliary organization? An auxiliary is a separate legal entity, usually on your campus, with a separate taxpayer identification number and legal status. The auxiliary s primary purpose is to support the university and is exempt from federal and state taxes under IRS code section 501 As a result of it s 501(c) status, auxiliaries are required to file an Organization Exempt From Income Tax 990 Form 3
Why Do I Care About Auxiliary Organization Tax Obligations? Ultimately any underreported or underpaid tax liability that t arises from one of your auxiliaries i is the responsibility of the President of the University. Can Payments Issued by an Auxiliary Receive Special Treatment? The simple answer is.no. Departments on campus will sometimes assume that running a transaction thru one of the auxiliaries instead of the University will enable an individual to be compensated with little to no tax implications. Employee and independent contractor payments have Employee and independent contractor payments have the same tax withholding requirements whether payments are issued by an auxiliary, or the University. 4
Common Non-Wage or Salary Payment Types: Allowances Reimbursements Independent Contractor payments Honorariums/Stipends Allowances An allowance is a payment made to an individual that compensates them for a certain type of expenditure they have incurred, including: Housing Car Cell Phone Meals Allowances do not require the submission of receipts by the payee and are recurring (usually monthly). Housing and car allowances must be approved in writing by the Chancellor s Office in order to be granted, are relatively rare, and are fully taxable. Recommended treatment for allowances is that they be issued as a separate check from the Payroll office and then be flat taxed based on the current federal and state tax rates in effect. 5
Reimbursements Reimbursements can be issued for a variety of different purposes: Travel (including meals and airfare) Supplies and equipment purchased Moving and relocation Conference registration Reimbursements are not taxable as long as they meet the accountable plan rules. Accountable Plan Rules To be an accountable plan, your University s reimbursement or allowance arrangement must include all three of the following rules. Your expenses must have a University connection - that is, you must have paid or incurred these expenses while performing services as an employee of the University. You must submit receipts. You must return any excess reimbursement within a reasonable period of time. 6
Independent Contractor Payments First ensure that the individual can indeed be considered an independent contractor: An independent contactor is someone that the employer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. Faculty are the only class of employee that may independently contract with the CSU while working as an employee of the CSU. CSU Tax Responsibilities Sales and use tax Out of state tax withholdings on service providers Non Resident Alien (NRA) taxes Unrelated Business Income Tax (UBIT) 7
Sales and Use Tax Sales and Use tax are generally only applied to purchases of tangible goods (equipment, furniture, etc.). Sales and Use tax are applied at the same percentage rate (8.25% for the County of San Luis Obispo). Vendors (usually) include sales tax on their invoices billing the University for the purchase of tangible goods. If the vendor does not charge the University sales tax for the purchase, then it is the responsibility of the University to apply use tax to the purchase. This includes purchases made by Procurement Card. Sales Taxes on Labor In general, sales taxes are not applied to stand alone labor charges. However, some labor charges in relation to taxable sales may be subject to sales tax. For example; Fabrication Labor is considered taxable Manufacturing a new piece of machinery Sizing and engraving a ring you are selling Cutting metal or lumber being provided to a customer Altering a new suit to better fit the buyer 8
Non Sales Taxable Types of Labor Sales tax generally does not apply to charges for installation labor. For example; tax would not apply to your itemized charges for installing a car stereo. Sales tax generally does not apply to repair labor. Repair labor is work performed on a product to repair or restore it to its intended use. For example: Repairing the broken the keypad on a cell phone Replacing a hard drive in a used computer Repairing damaged paint on your car Use Tax Example An employee purchases books from Amazon using the University Procurement (credit) card. The receipt provided to the employee does not include sales tax. Accounts Payable records and pays the charges for the books purchased, charges the department use tax and remits the use tax to the State Board of Equalization. Please note: Purchases made with the Procurement Card (campus credit card) can generate a significant amount of use tax that must be accrued and remitted on a monthly basis. 9
Out of State Tax Withholdings Vendors coming from out of state to provide services will have 7% in state taxes withheld from their payment, once their total payment received exceeds $1,500. Exception: If the vendor has a business office or physical presence in the state of California, then they do not have taxes withheld from their pay Out of State Tax Withholdings Cont d Example 1: Software programmer comes from Nevada to your campus to provide services and submits an invoice for $1,400. The programmer has no physical presence in California Result: no taxes withheld from their payment Example 2: Same as above, but submits an invoice for $1,600. Result: 7% is withheld from the entire $1,600 Example 3: Same as example 1, but submits an invoice for $1,400 followed by an invoice for $300 in the same calendar year Result: 7% is withheld from $300 ($300 payment puts total calendar year payment over $1,500) 10
Non Resident/Resident Alien As defined by the IRS An alien is any person who is not a United States citizen. The Internal Revenue Service (IRS) classifies aliens as either nonresidents or residents. A nonresident alien is an alien who does not meet either the IRS's green card test (i.e. a lawful permanent resident) or substantial presence test. These test are discussed further in IRS Publication 519. Resident aliens are taxed the same as a U.S. citizen. Non resident alien tax withholding and reporting requirements are significantly different. How Do I determine if the Payee is an NRA vs. RA? Each campus has a Non Resident Alien Taxation (NRAT) specialist that does the analytical work to make the determination. Most campuses are using a third party software product, either Glacier or Windstar, to assist with the determination. Glacier (used by Cal Poly SLO) provides a detailed web-based intake process that leads the Non U.S. Citizen thru a series of questions to gather information necessary in order to determine the appropriate immigration status for tax purposes. 11
How Does an NRA vs. RA Determination Affect the Payee? Resident aliens receive the same tax treatment as a U.S. Citizen. Payments to a resident alien independent contractor do not require federal taxes to be deducted. Resident alien employees may adjust their payroll tax withholdings (within IRS guidelines) as they see fit. Non resident aliens are taxed differently than U.S. citizens. Payments to a non resident alien independent contractor must have 30% federal and 7% state taxes withheld and remitted to the IRS and Franchise Tax Board Non resident alien employees generally must claim Single and 1 exemption on their W-4 (EAR) Tax Treaties There are tax treaties that are in effect between the U.S. and other countries. Under these tax treaties, a campus may grant the right for the employee or independent contactor to claim an exemption from taxes subject to the limitations listed in each treaty (different for each country). Alternatively the University has the legal right to not Alternatively, the University has the legal right to not honor the tax treaty at the time of payment and instead have the payee file a tax return at year end to claim back any taxes withheld that they are allowed to have returned based on IRS guidelines and the appropriate tax treaty. 12
Non Resident Alien Tax Filing In March of each year all NRA tax related activity is compiled and used to prepare the form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. This tax return will summarize the tax liabilities accrued vs. tax payments made and reflect any over or underpayments made for the calendar year. Unrelated Business Income (Ubi) Tax UBI is defined as any trade or business which is regularly carried on and which is not in furtherance of the purpose for which the entity was granted their tax exempt status. Examples of activities on your campus that may generate UBIT include: Rental income, in conjunction with other services Sponsorships Research Summer camps 13
Unrelated Business Income Tax Cont d IRS rules used to determine UBI and calculate the potential tax are complex. The individual responsible for UBI on your campus has to constantly engage with University personnel and departments to proactively assess potential UBI situations. University personnel and departments don t generally offer information about potential UBI scenarios, and usually don t have any idea that they may be engaging in an activity that will create a tax liability for the University. University Provided Housing Common occurrence on campuses is the situation in which a college wants to provide on campus housing to an employee. Can the campus provide housing? Will there be a tax consequence to the recipient? Will there be a tax consequence or tax liability assumed by the University as a result? 14
University Provided Housing The University can provide housing without the individual or the University incurring tax liabilities as long as the housing is provided in accordance with IRS Code Section 119 which states: The value of lodging furnished to an employee by the employer is excluded from the employee s gross income if three tests are met 1. The lodging is furnished on the employer s premises 2. The lodging is furnished for the convenience of the employer 3. The employee is required to accept the lodging as a condition of employment Please note: These three criteria should be incorporated into the employee s offer letter Current Tax News April 1, 2009 the sales and use tax rates across California increased by 1%. The 1% increase expires July 1, 2011 depending on the outcome of a special election that Governor Brown wants to put in front of voters to extend the increases in vehicle and sales taxes for an additional 5 years. Th P ti t P t ti d Aff d bilit A t i th t ll The Patient Protection and Affordability Act requires that all payments for goods AND services be reported on a 1099 effective 1/1/2012. Currently only services are reported. The house has passed a provision to repeal this section of the new health care law The repeal is now being considered by the senate 15
Sample Tax FAQ s Question: My department t will be providing a $5,000 travel allowance for a volunteer that is traveling overseas for one quarter to assist with teaching a class, are there any tax consequences? Answer: Yes and No. If the volunteer incurs the expense and then submits receipts for the amount expended then there is no tax consequence. If the volunteer submits a travel claim form with no receipts, then the volunteer would receive a 1099 for the $5,000 and be required to report the amount on their tax return. Sample Tax FAQ s Question: My department will be providing a housing allowance for a dean or faculty member, are there any tax consequences? Answer: An employee that receives a housing allowance will require authorization from the Chancellor s Office and will be paid thru the payroll system with the appropriate amount of payroll taxes deducted from each payment. 16
Sample Tax FAQ s A couple of campus employees regularly sell T-shirts to the local l community in order to raise money for their college to be able to send faculty members on a sabbatical. Are there any tax issues that I should be aware of? Since this appears to be a business that is regularly carried on and the proceeds are not used in furtherance of the University s purpose, there would most likely be UBI tax implications. Useful Tax Links Tax withholding on out of state service providers: http://www.ftb.ca.gov/individuals/wsc/agent_decision.shtml# decision shtml# WhReq Moving and relocation expense Tech Letter: http://www.calstate.edu/hradm/pdf2009/tl-ben2009-01.pdf Current travel & relocation expense Tech Letter: http://www.calstate.edu/hradm/pdf2008/hr2008-10.pdf New travel policy, effective 4/1: http://www.calstate.edu/icsuam/sections/3000/3601.01.shtml Independent Contractor Determination: http://www.irs.gov/businesses/small/article/0,,id=99921,00.ht ml 17
Contact Information Marc Benadiba Phone: 805-756-5864 Email: mbenadib@calpoly.edu Campus: Cal Poly San Luis Obispo 18