Monthly Archives

February 2015

Feb 20
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Georgia Tax Tribunal Opinion Highlights Need for Sales Tax Planning!

By | Sales Tax, Uncategorized

On February 11, 2015 the Georgia Tax Tribunal issued one of the most interesting Georgia rulings during the past decade.  In the case of Inglett & Stubbs  vs Commissioner of Revenue, the Tribunal held against the taxpayer on two separate issues.  First, the Tribunal reaffirmed that contractors are consumers of the materials they purchase and are not generally retailers allowed to purchase items for resale. Second, and more importantly, the Tribunal affirmed that Georgia taxes items when them come to rest in Georgia unless they are held as inventory for resale.  That is, Georgia does not have any type of “temporary storage” exemption rule that many states have.

Inglett & Stubbs, purchased machinery and construction material for use in construction projects in Afghanistan and other countries where the U.S. military had bases.  Many large items were shipped directly to the overseas locations and these were not taxed in the U.S.  Many other smaller items were sent to Inglett & Stubbs in Georgia where it has a warehouse and distribution facility.  Many of the vendors charged Inglett & Stubbs sales tax on these items because Inglett & Stubbs could not provide any type of resale certificate.  Over $1.9 million in sales tax was paid on these purchases.  A refund claim for the tax paid was filed by the taxpayer and the Georgia DOR promptly denied the claim.  The taxpayer appealed and had its hearing before the Tribunal.

To me, the holding in this case was completely predictable given the body of law and previous rulings.  While this is a major decision by the Tribunal and one that dramatically impacts the taxpayer, I would have been more surprised if they had prevailed before the Tribunal.  The issue that I think this case addresses is how the failure of companies to make strategic decisions around sales tax can be a very costly mistake.  Very simply, had the taxpayer realized that tax was going to be due on the temporary storage of products in Georgia, they should have set up a temporary location in Tennessee which has an “import for export” exemption. Also, the company could have created a separate purchasing entity that would purchase these items “tax free’ from their suppliers and then exported them for sale to the construction company.  Two very easy and totally legal solutions to avoid every penny of Georgia sales tax.

This case will likely be appealed to the Georgia Supreme Court. Stay tuned.

Ned Lenhart, CPA
President

 

Feb 12
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Click Through Nexus Coming to Tennessee??

By | Legislative

Tennessee legislation (SB 603 and HB 644) would make some dramatic changes to the income and sales tax nexus definitions used for Tennessee tax purposes. Tennessee, like most states, is finding it more challenging to collect the revenue it needs to fund the state programs. Without a state personal income tax, Tennessee relies on a 9 to 10 percent sales tax and its corporate income tax to generate the needed revenue. Neighboring states, like Georgia, get 50% of their state revenue from individual income tax.
SB 603 and HB 644, outline the “bright-line presence test” as the new method for determining both income tax and sales tax nexus in Tennessee. Any company meeting any one of the three parts of this “bright-line” test is deemed to have nexus in the state. Parts “ii” of this test states that a company with average property in Tennessee of $50,000 will have nexus and part “iii” of the test says that a company with $50,000 of compensation will have nexus in Tennessee. There is nothing new here. The presence of property and payroll in Tennessee has always created nexus so I’m not sure why this needed to be added. However, Part “i” of the bright-line test deems nexus to be created if the company has the lesser of $500,000 in revenue or 25% of its revenue sourced to Tennessee. My guess is that a company that has 25% of its revenue in Tennessee or has $500,000 of sales in Tennessee may already have nexus in the state, so I’m not really sure why this specific provision is necessary for income tax purposes.
In addition, Tennessee is also adopting language that mirrors the “Amazon nexus” language in New York and in other states. Under this language if a remote seller located outside of the state of Tennessee had commissioned sales arrangements with agents inside of Tennessee and the remote seller has $10,000 or more of sales in Tennessee the previous year, then the remote seller is deemed to have nexus in Tennessee for sales tax purposes. This is also called “click through” nexus. If passed, Tennessee would joint about 20 other states that have similar provisions. The effectiveness of these statutes is questionable since many remote sellers just cancel their agreements with the instate sellers so that they can avoid the requirement. Also, Amazon is already registered in Tennessee for sales tax.
Lots of states are passing bills similar to what Tennessee is doing. Even thought they may pass and be signed into law, they must still pass Constitutional muster.
Ned Lenhart CPA
Interstate Tax Strategies, P.C.

Feb 03
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Hybrid-Origin Based Sourcing! What is Rep. Goodlatte thinking?

By | Legislative, Retail

Virginia Representative Goodlatte is circulating a “discussion” draft of a Bill intended to plug the “loop hole” related to uncollected sales tax on remote sales.  If adopted as drafted, this measure would transform the entire multistate sales tax collection and remittance mechanism, trash the notion of state sovereignty, and create a tax bureaucracy that will rival the IRS.  In my humble opinion, Goodlatte’s Bill does to sales tax what the Affordable Care Act did to healthcare.

Is the multistate sales tax system we have perfect?  Absolutely not.  Are their problems? Yes!  Are states losing revenue? Yes.  Do we need an entirely new system to deal with the problem?  NO!  From what I can gather, Congress is laboring under the notion that states are losing over $20 billion of sales tax revenue a year.  At a 7% sales tax rate this translates into over $285,000,000,000 of untaxed Internet/Remote sales.  That is absurd!  With Amazon as the largest Internet retailer now collecting tax in 23 states, with all of the “big box” retailers collecting tax, and with companies putting use tax systems into place, the amount of lost revenue is a fraction of this total;  I’ve heard as low as $5 to 6 billion.  That’s still a lot of revenue, but not so much that it justifies a complete change in the state sales tax collection mechanism.

Per Goodlatte’s bill, when remote sales are made the sales tax is collected based on the rates and the rules of the “origin state”.  The tax that is collected is then sent to a clearing house agency where it is distributed to the states based upon a formula agreed to by member states.  Gee, what could possibly go wrong with this plan?  The origin state is not the state where the shipment originated, rather, the “origin state” is the state where the seller has most of their employees!  Under this rule, all of Amazon’s sales would be taxed in Washington state since that is where Amazon has the most employees.  If you’re going to have an “origin” based tax, at least make it the state where the goods where shipped from.

Under this rule, consumers in Montana, Alaska, New Hampshire, Oregon, and Delaware would be charged tax based on the location of the shipper.  I’m still wondering how exemptions will work for items that are not taxable in the destination state but are taxable in the origin state; or vice-versa. Adopting a new system at this point in time would create significant confusion and would probably end up costing states more money than they are losing now.  Under Goodlatte’s draft, there does not seem to be an option for retailers that are currently collecting and remitting tax to opt-out.  They would have to stop what they are doing and change to this new system.

I’m not sure what the solution is to this problem, but I know what is NOT the solution.  What is not the solution is Rep. Goodlatte’s origin based approach.    I can hear it now, ” if you like your sales tax system, you can keep your sales tax system (period)!”

Ned Lenhart, CPA
President Interstate Tax Strategies.