All Posts By

Ned Lenhart

Dec 30
0

States Relying More on Sales Tax to Increase Revenue

By | Sales Tax, Uncategorized

The week between Christmas and New Year is pretty slow.  This gives me a chance to clean out files, gather my year-end financial information, line up meetings for January, and take a look at some of the articles that have been laying around my office for a few months.  In my last blog entry, I noted that states are going to be short of revenue overall in the coming fiscal year and that sales tax will get special attention for closing the revenue gap.

I was looking at the fall 2010 NASBO report and decided to compare this to the fall 2008 NASBO report.  The contrast was dramatic.  For Fiscal 2008, the states were reporting sales tax, individual income tax, and corporate income tax collections of $541.4 Billion.   For Fiscal 2010, the states are reporting only $496.9 billion from the same revenue sources.  That is a decline of $44.5 billion or 8.2%.  For Fiscal 2008, sales tax revenues were 39.6% of the total revenue.  For Fiscal 2010, sales tax revenue is estimated to be 41.6%.  That is a 5% increase in sales tax revenue in a 2 year period of time.  Individual income tax stays pretty constant at 51%.  Corporate income tax receipts declined from $5.2 billion to $39.3 billion. That is a 9.3% decline.

These numbers support my thesis that sales tax is quickly becoming the tax of choice for states as a way to raise revenue.  This increase in sales tax comes from increased rates, increased enforcement, expansion of the tax base, and expansion of the taxpayer base.

In 2011, you should expect more of the same.  More enforcement, more rate increases, more tax base expansion, and more taxpayer base expansion.  Many companies are completely unaware of the unrecorded liabilities they face by not paying attention to the sales tax rules in the states where they operate.  There is so much in correct information being circulated on web chat rooms about sales tax. There is also a lot of incorrect information being distributed by well meaning CPAs who really don’t know what they are talking about.

If you any questions or even suspect that your company has a sales tax issue, give me a call.

Happy New Year

Ned Lenhart
President
States Rely More on Sales Tax Revenue

Dec 02
0

State Revenue Looking Bad for 2011

By | Legislative, Tax Audit

If the states thought they were facing difficult revenue and budget issues in 2010, they may not have seen anything yet.  Based on a report issued by the National Association of State Budget Offices (NASBO), the 2011 fiscal condition for many states may be much worse than the 2010 position.  This revenue shortfall has direct implications for tax policy and tax enforcement, including changes to sales tax collections and audits.

According to NASBO, the slow organic revenue growth combined with decreased funding from the 2009 “Stimulus” program combined with increased Medicare payments will lead to a dramatic need for budget cuts and increased revenue. 11 states are reporting budget gaps of nearly $10 billion which must be closed through revenue and budget cuts.   Because so many of the new governors were elected on an anti-tax campaign, it is unlikely that taxes will be changed much and that most of the shortfall will be made up by budget cuts.  The full report can be found at http://www.nasbo.org/LinkClick.aspx?fileticket=C6q1M3kxaEY%3d&tabid=38

Finally, with the revenue shortfall comes greater enforcement.  States have already ramped up enforcement but I suspect more is to come in 2011.  For businesses that have not carefully assessed their multistate obligations, now is the time to do so.  Each week I talk with companies that are getting notices for audits, nexus questionnaires, and sales tax complaints from customers.  These are strong signals that there is a problem and a possible sales tax exposure.

Failing to act does not make the problem go away.

Ned Lenhart
President
2011 state revenue outlook

Nov 17
0

IT Staffing Servcies Can be Taxable

By | Retail, Technology

As state move into taxing more service, I’m getting more calls from companies that provide various types of staffing services.  Many of these are IT related.  This could include computer programming as well as IT administration services.

As odd as it may sound, a handful of states may consider this staffing to be a taxable service under a couple of different theories.  First, some states tax almost all kinds of “staffing services”.  PA for example, has a broad tax on “help services” and that can subsume the IT staffing folks.

Other states tax certain kinds of IT services when performed by independent contractors and not employees.  This could include custom programming, IT administration, and various consulting services.  Even thought these services are arranged for in a loan staffing format and not a consulting format, these states may still consider this services to be taxable.
If you provide any type of IT loan staffing service, you need to evaluate the rules in the states where you conduct business.  Even in those states that tax these services, there are exemptions that could apply

Ned Lenhart
President

Loan Staffing Services

Nov 15
0

New York Continues to Tax ASP/SaaS servcies

By | Technology

A couple of years ago, the New York Department of Taxation and Finance issued a string of rulings concluding that the provision of ASP/SaaS software that was accessed only through the Internet was the sale of software and not a non-taxable data processing services.  There has not been much discussion on that point during 2010 and I thought they had retrenched on their position.  Not so!!  On Oct. 18, the New York Commissioner issued his latest in a string of rulings that seems to increase the scope of the NY sales tax as it applies to almost any type of on-line data access or data processing.  Here is a very brief summary of the case and my comments.

TSB-A-10(52)S   October 18, 2010

Company is a provider of various information technology management serves to the railroad industry.  The company is located in Atlanta and customers access Company’s services through the Internet.  There is no downloading of software to the customer’s location.  There is no specific license of software by the Company to their customers.  In their ruling request, the Company listed 9 separate services they provide. Each services provides some blend of information retrieval and manipulation.  Each service is billed uniquely based on the type of service provided. Of the 9 online services provided by the Company, the Commissioner determined that 4 of these constitute the taxable sale of software. These are briefly discussed below.

1. e-Repair and e-Bol Services: Allows customers to generate repair cards for the repair of rail cars.  Customers enter data through website.  The repair card is generated and transmitted to rail carrier.  Customer is charged for service based on number of repair orders submitted.

Held: Taxable sale of computer software.

2. Business Intelligence: Allows customers to access data to extract information on railroad and various information.  Most information is related to customer’s own data.  Company charges flat fee for service.

Held: Taxable sale of computer software.

3. Transportation Management Services: Provides customer with information to enable them to manage their railroad operations, car inventory, yard control, train operations, and management reporting. Customers can monitory and query information, and generate reports on specific cars, shipments, and equipment.

Held: Taxable sale of computer software

4. Electronic Data: Company purchases and resells data to customers in order for it to provide the other services.  The cost of the data is passed to customers in addition to the cost of the underlying purchase of the service.

Held: These charges are taxable when provided in conjunction with at taxable information service.

Conclusion

This case is another example of how aggressive NY is in taxing ASP/SaaS services as computer software even when there is no license for the software use and when there is no actual transmission of computer software.  If you company provides any type of SaaS service and has New York customers, you need to immediately evaluate the application of this case and the others to your situation.  The NY auditors are taking this position on audits.  Further, more states are taking this same position.  After two years of publishing these notices, taxpayers are on notice that the state is serious about its position.

Please contact me if you have any questions or need help with this issue.

Ned Lenhart
President
New York Taxation of SaaS

Oct 26
0

Michigan Amnesty–in 2011!!

By | Amnesty Programs

Michigan Governor Granholm just signed legislation that will create a tax amnesty program for any unpaid Michigan tax due for periods prior to January 1, 2010.  The amnesty period is short-May 15, 2011 to June 30, 2011.  Taxpayers must pay the full tax and interest.  Penalties will be waived.

Sounds OK, but I could never recommend a client participate in that process given the other programs that are currently available in Michigan.

Michigan currently has voluntary disclosure and “taxpayer initiated” request opportunities that allow both registered and unregistered taxpayers to pay the tax and interest due and petition for abatement of penalties.  Under the amnesty program, 2010 liabilities are not eligible for penalty abatement.  However, under both the VDA and the taxpayer initiated program, all liabilities for the past 4 years are eligible for penalty abatement. Further, the amnesty program wants all the taxes due.  Under the VDA or taxpayer initiated the look back in just 4 years.

Finally, why wait 6 months for this deal.  If you owe back taxes to Michigan, act now, don’t wait for this deal.  The longer you wait the more risk you take that you will be audited.  If that happens, then there will be no penalty abatement and the state might go back several years. Most of the states that have an amnesty program start immediately and don’t wait 6 months to get going.

Let me know if you have any questions.

Ned Lenhart, President
Michigan Tax Amnesty Program

Sep 30
0

Pre-Audit Reviews Can Spot Sales Tax Problems Early

By | Tax Audit

States have set lose an army of sales tax auditors who’s job it is to collect as much revenue as possible. Their target is virtually any business operating in their state. For many of these businesses, this may be their first audit by that state.  For others, it may be a repeat audit with a new auditor.  In either situation, the deck is stacked in favor of the state and against the taxpayer. Businesses that are unprepared for an audit will not have a good experience.

I recently met with a company that is about to be audited.  It is their first audit and they were feeling rather confident that there would not be any problem.  I encouraged them to sit down with me to review some high level reports and discuss the processes they use.  In short, this exercise was eye-opening to them.  Not only did I spot significant process issues with how tax was being collected but there were serious use tax issues that had been completely missed.  There were missed refunds and missing exemption certificates. Having found these issues, we could then develop and approach to manage the audit to minimize exposure and to ensure the auditor understood the actual scope of some of these small problems.

Without this review, the company would have been playing defense from the minute the auditor walked through the door.  Now they know where problems exist and have already started to gather support to fill in the gaps in their processes and documentation. The best defense is a good offense.

Every company should have and independent pre-audit review once they are notified of an audit.  Company personnel are too close to the situation to be objective at spotting problems and understanding the consequences of these problems.  Further, many companies may be overpaid on tax and need to take actions to file refund claims before the auditor arrives.  Auditors are not hired to look for over payments!!

If your company has been notified of an audit, pick up the phone and call me at 404-403-6540.  DO NOT try to manage sales tax audits alone.  Invest a little time and money in a pre-audit review so that you will know the problems before the auditor arrives.  Only then, can you fully manage the audit process and minimize your liability.

Ned Lenhart
President
Pre-Audit Reviews

Sep 29
0

New York Suspends Clothing Tax Exemption

By | Legislative, Retail

The New York Department of Finance has issued a notice indicating that the state tax exemption for clothing items costing more than $110 will be suspended from October 1, 2010 until March 31,2011.  As such, state tax and MCTD tax (where applicable) will be due on all sales of clothing items.  If a local exemption for clothing exists, it will remain in force unless the local government also suspends their exemption.

New York is one of just a few states that has an exemption for clothing items.

Ned Lenhart
President

New York Clothing Exemption

Sep 24
0

“Load and Leave” exempt in Missouri!!

By | Technology

On August 20, 2010,  the Missouri Administrative Hearing Commission issued a 27 page ruling which concluded that software transferred under the “load and leave” method is not a taxable sale of software in Missouri.  The Department had issued a few rulings stating that “load and leave” was a taxable transfer of software.  In this case involving Filenet Corporation (part of IBM) the tax assessment was over $770,000 so the issue was worth litigating.

In reaching its decision, the AHC did an excellent job at outlining Missouri’s history of taxing software.  This started back in 1982 with the Tres computer case.  In short, for software to be taxable in Missouri there must be a transfer of tangible property from the seller to the purchaser.  So long as the purchaser does not take possession or control of the media that has the software before it is loaded onto the computer, then there is no taxable sale.  Under the facts in his case, the Filenet employee had control and possession of the software at all times and no one from the purchaser’s company ever touched the hard drive that held the software.

If your company has paid tax or has been assessed tax on “load and leave” software, now is the time to file a refund claim.

Ned Lenhart
President
Missouri Load and Leave Software

Sep 13
0

“What is status of taxation of Internet purchases?”

By | Legislative, Retail

I was at a networking breakfast last week and was asked this question.  I’m sure this was intended as some form of icebreaker or as a way for questioner to show me that he was in tune with some of the sales tax current events.  About once a month, I get asked this question in one form or another so I thought it would be appropriate to post some sort of public response.

Even though it was not specifically stated, his underlying question was really “when will states be able to tax purchases of property made from Internet retailers?”  The answer to that question is quite easy.  Most states have had the ability to tax the purchases of property made from Internet retailers since the early 1960s when “use” tax was adopted by the states as a complement to the sales tax.   The taxation or taxability of the product purchase is not the issue.  The issue is how to collect that tax.

After explaining that all of the property they have purchased from Amazon and the myriad other e-retailers is taxable, I then ask when was the last time they filed a Georgia use tax return to pay the tax due?   This usually results in a blank stare.  And that’s the point.  Individual consumers don’t file use tax returns even though it is required.  Further, many, but not all, businesses file use tax returns but the accuracy of these reports is often suspect.

The “status of taxation of Internet purchases” is not much different than the “status of taxation of mail order catalog purchases”.  The product is taxable but until the retailer is required to collect the tax, only a small percent of the tax will ever be collected.  Some have estimated the lost revenue from this gap to be in excess of $10 Billion per year.

The next question is usually, “what is keeping the states from forcing the retailers to collect the tax?”  My response is simple: the U.S. Constitution!!  That’s all.  This is no place for a detailed analysis, but the U. S. Supreme Court has ruled that the Commerce Clause of the U.S. Constitution requires that the e-commerce retailer have some physical contact with the state before they are legally required to collect the tax.  This physical connection can take many forms.  Without some connection, the states can’t “force” the e-retailers to collect the tax and it cannot require the catalog companies to collect the tax.  Does that mean the property purchased is not taxable?  NO!!  It just means that the purchaser must file use tax returns with the state to pay the tax directly.

The state of Alabama recently reviewed is use tax filings and determined that less than 1% of Alabama taxpayers were filing use tax returns.  That seems about right!!  To raise this percent, the state is sending letters to taxpayers informing them of their use tax obligation.  Some states, like California, actually have a place on the individual income tax return for taxpayers to report their untaxed purchases.  I’d expect to see that in more states.

As states look for revenue, this is an easy target.  This is an enforcement issue not a tax policy issue. The question is not “whether” to tax purchases made from the Internet, but “how” to collect the tax that is due.

Ned Lenhart

President

Taxation of Internet Purchases

Aug 27
0

I’m Now On Twitter @salestaxpro

By | Sales Tax, Uncategorized

I finally broke down and joined the social media network twitter.  You can follow me on twitter at @salestaxpro.  I was really surprised how easy it is to set up a twitter account. It’s hard to do a lot of content in only 140 characters, but I’ll give it a try.   Here is what I will be doing on Twitter:

1. Posting updates to my blog

2. Announcing technical updates to my document library and other resources

3. Alerting you to new issues that may be of interest.

4. Once I get enough followers, I’ll be announcing special technical webinars and phone calls for only twitter followers.

If you are already a twitter member, I’d appreciate you re-tweeting my messages to your groups.  There are just a few sales tax folks on twitter and I seem to be the only consultant. The others are either bloggers or software companies.

Thanks for your help and support.

Ned Lenhart
Now on Twitter @salestaxpro