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The Minnesota Supreme Court just issued its opinion in LumiData, Inc. vs. Commissioner of Revenue (Sept 10, 2014).  The case involves the appeal by LimiData to a ruling by the Minnesota Tax Court stating that the sale of the software sold by LimiData was fully taxable even though significant customization took place.  Minnesota law very clearly states that separately stated software modification costs are not taxable.  However, LumiData did not separately state the modification charges and just billed its customers a lump-sum for the software and claimed it was all “custom” software which is not taxable.  The Supreme Court pointed out that the core software product was the same for each customer but that the core software had to be modified to fit each specific customer.  If LumiData had separately stated the customization costs, then LumiData would only have been required to charge tax on the core software product. https://www.salestaxstrategies.com/index.html

At the Tax Court level, the accountant for LumiData testified that based on her understanding of LumiData’s business, she had advised them that they were providing a nontaxable sale of customized software.  However, it was revealed the accountant never inquired about the degree of customization that took place of the software, she was not aware that LimiData was not registered for sales tax, and she was not not aware of the Minnesota requirement that customization services be separately stated.   Based on the Tax Court transcript, I’m not sure what basis the accountant had for rendering her opinion on the taxation of the LumiData product other than just guessing!

The unfortunate thing is that this same scenario plays out each day in accounting and CPA firms located throughout the country.  Professionals that are busy or are unprepared to handle these types of questions nonetheless render opinions that can have significant implications to their clients.  If you are a CPA or a tax professional and you have clients that are asking you questions about these sorts of things please contact me for help if you are not familiar with the issues.  As you can see from this case, the cost of your mistakes can be significant.

I hope that the accountant has sufficient malpractice insurance!

Ned Lenhart, CPA

On August 20, the New York Department of Taxation and Finance issued ruling TSB-A-14(28)S indicating that the software used to control devices used by patients with debilitating diseases such as ALS qualifies as a prosthetic device and is not subject to sales tax. The party submitting the ruling request produces a software product that enables a disabled person to utilize a single switch such as an eye blink, eye brow twitch breath puff, inhale/sip or head rock to operate a standard Windows based computer to restore some ability to communicate visa the computer.  The company argued that the software replaces or compensates for permanently inoperative or malfunctioning body parts rendered so by a disease or injury sustained by the patient. https://www.salestaxstrategies.com/sales-tax-issues.html

The ruling states that because the software replaces the disabled person’s motor skills to type of otherwise control a computer’s buttons or mouse, is used primarily for this purpose, and is not useful in the absence of the user’s disability, then the software meets the definition of a prosthetic device.   I think this is a very sensible and meaningful ruling by the Department of Taxation.  With the advance of medical technology and the incorporation of software into more devices, I would expect to see more states adopt this same position.

Ned Lenhart, President

The New York Tax Department just released the statistics for FY 2014 which ended June 30, 2014.  Total revenue received was almost $67 Billion!!  Personal income tax was 64.3% and State sales tax was 21%.  The remaining revenue came from corporate tax, property tax, excise tax, and fees. https://www.salestaxstrategies.com/sales-tax-audit-defense.html

Nationally, sales tax represents about 38% of total state revenue, but that percent is skewed by the states like Texas, Florida, and Tennessee which rely on sales tax for the bulk of their revenue.  Still, 21% is a pretty significant percent of state revenue to come from the sales tax.  In reviewing the stats from the past 10 years, sales tax actually contributed a higher percent of total state revenue during 2003 and 2004 (27% for each year) than it did in 2014.  Between FY2013 and FY2014, however, the sales tax collections grew by 3% while the individual income tax collections grew by 5%.

In addition, Governor Andrew M. Cuomo recently announced that New York State will expand its Crimes Against Revenue Program, providing an additional $860,700 to 12 county district attorneys’ offices to enhance their investigation and prosecution of State tax evasion and welfare fraud cases. Six district attorneys’ offices will receive grants for the first time while six others currently receiving grants will receive additional funding.

Ned Lenhart, CPA
President

This post has nothing to do with sales tax, but I was fascinated by the conclusions of a survey recently done by L. Harris Partners.  They recently surveyed 4,000 different clients of CPA firms and 600 partners of CPA firms.  The surveys took place throughout 2012 and 2013.  The survey’s covered a lot of different topics and reached a variety of conclusions. The conclusions that were most significant to me are:

• 29% of clients surveyed were not aware of the range of services offered by their CPA firms,
• 32% of the clients surveyed said that they use multiple CPA firms to get the services they want,
• only 8% of CPA partners believed their clients used other CPA firms!

So why do I find surveys like this interesting?  Because I get a lot of my work from clients who have other CPAs who they use for other work.  In essence, I am grateful that 32% of the companies are using firms other than their CPA.  I wish it were more.

However, there is no excuse for a client not to know the services provided by their CPA.  It’s also perfectly reasonable for CPAs not to offer all the services that their clients need.  In that situation, the CPA must have the network of specialists to refer clients to in that situation.  This is how I work with CPAs since most firms really don’t have a deep bench when it comes to multistate sales tax matters. www.salestaxstrategies.com.

If you are a CPA then you should pay close attention to the results of this survey.  Make sure your clients know what you do and make sure, if they are going to use another CPA, that you are involved with that selection process so you can hold onto that relationship and the revenue.

Ned Lenhart, CPA

Here is a post from my GA June Newsletter.  Although this mentions Georgia, the same principle applies to any state where you are filing returns.  Trust but Verify!!

“When I started my business, I hired someone to file my sales tax returns, but last week I just received a notice from the Georgia Department of Revenue stating that no returns or payments have been made for the past year. What do I do?”

 During May, I had heard this message (or something very similar) from five different Georgia businesses.  These are the worst calls to get because there is so little that can be done to fully mitigate the damage created by the people they entrusted to handle their sales tax filings.  My simple message to every business owner when it comes to having others file your sales tax returns is “trust but verify”. 

 Each scenario was different, but the common theme in these calls is the same.  The business owner hired an employee to file returns or has an external bookkeeper, accountant, or CPA to handle the tax filings.  Sales are made, tax is collected, and the business owner assumed everything is going just fine until a notice arrives from the Georgia DOR.  In some cases, the owner saw the notice and we were able to quickly respond.  In other cases, the notices went to the person responsible for filing returns and they were hidden. At this point, panic sets in and things quickly spiral out of control.  In addition to the back taxes that are owed, there is 25% penalty added, and interest is accruing at 1% a month. The interest and penalties are compounded if the state issues a fifa notice.  In one case, the late filing and payment of $120,000 of tax became a $235,000 sales tax problem with penalties and interest.

 CPAs must advise their clients that, as a business owners, it is THEIR obligation to ensure that the sales tax collect is remitted to the state.  It is THEIR obligation to “trust but verify” that the person hired to do this is, in fact, doing what needs to be done.  They must verify that the return is filed and that the return is paid. This verification should be part of your monthly financial analysis and closing process.  As business owners, they are personally liable for any mistakes made by other.

 Here are some basic sales tax pointers for small businesses:

 File sales tax returns even when no tax is due. Failure to file returns when due can subject you to a $100 penalty for each return. 

1. Don’t register for a sales tax number until you are sure that your business is operational. 
2. Don’t call the Department of Revenue to ask for help.  The DOR is not in the business of helping you manage your sales tax issues and they are not your friend.  Contacting the DOR will only complicate your situation. Get professional help as soon as you suspect you have a problem.
3. Don’t ignore the problem and hope it will go away.  It won’!  Get help immediately.  The sooner the better.
4. Get help immediately upon being contacted by the DOR.  Do not attempt deal with them directly. 
5. “Trust but verify.”  I don’t care who does your sales tax returns, make it a point to verify that each month your returns are filed and paid. If returns are not filed and taxes are due, see Question 3 above!

Just when you thought the chaos created by the Streamlined Sales Tax (SST) agreement could not get any more comical, they recently decided to clarify when flavored water becomes a soft drink. I’ve long been critical about how this group can micro-manage the sales tax rules of the member states and this is just another example of the hoops companies must jump through to understand the taxability of the products they sell.  On the flip side, this also shows how little control the states have over their own tax rules once they become a member of the SST. I know that this is an important issue for the retailers, but the problem was created by the SST project when it forced states to comply with these definitions.

The new ruling clarifies that flavors and essences added to water do not constitute “soft drinks” as long as there is no sweetener added.  Once sweetener is added, the drink become a soft drink and may become taxable as food.

Ned Lenhart, CPA
President

www.salestaxstrategies.com

So the Senate just passed S 743 the Marketplace Fairness Act of 2013.  That’s no surprise.  For the most part, the goal of this legislation is to get non-resident vendors to collect tax from customers in the destination state.  This bill applies only to companies with remote sales of over $1 million.  There are a lot of e-commerce companies with sales less than $1 million who will not be impacted by this Act.    https://www.salestaxstrategies.com/index.html

Because this Act is enforced separately by each state based upon the rules of their state, you may end up with a wide range of enforcement rules and different outcomes.  I am also concerned that wholesalers may be swept up in this issue and have to take on a much larger effort at compliance.  I am especially concerned with the impact on 3rd party drop-shipment transactions.

A lot of wholesalers don’t have nexus outside of just few states but they may have sales being shipped to a large number of states.  Because these companies don’t have nexus in the destination state, they may not have valid resale exemption certificates from customers who are located in that state.  Because of the way the term “remote sale” is defined in the law, it sounds like even wholesalers who are only selling to other retailers may now need to increase their collection of resale certificates in each of the states where they have customers.  The failure to have this certificate could create a taxable transaction during an audit by any state that has adopted this new provision.

This could become even more significant when dealing with 3rd party drop-shipments.  In these cases, a vendor requests that his supplier ship products directly to one of the vendor’s customers.  Historically, if neither the vendor nor the supplier had nexus in the state where the customer was located, then no tax was charged and the customer had the obligation of paying use tax if the product was taxable.  Now, however, it may be necessary for both the vendor and the supplier to be registered in any number of states so that resale certificates can be issued to support exempt sales.  This could create a real nightmare for wholesalers and companies that don’t make taxable sales.

I don’t want to be too suspicious of the motivation of some of the states that will adopt this Act, but my experience tells me that most of them will attempt to enforce this as aggressively as possible.  If you are a wholesaler don’t just assume that this Act does not impact your business, I think it does.

Ned Lenhart, CPA
President
Interstate Tax Strategies, P.C.

U.S. Senate Bill 743 (Marketplace Fairness Act of 2013) will impact many more businesses than you may think. The Bill allows states to demand that sales tax be collected on “remote sales” made by “remote sellers”.  The press is focusing on e-commerce companies such as Amazon and Overstock, but the Bill will also significantly impact companies that don’t make Internet sales.  https://www.salestaxstrategies.com/index.html

The Bill defines “Remote sale” to mean: a sale into a State in which the seller would not legally be required to pay, collect, or remit State or local sales an use taxes unless provided by this Act”.

Nowhere in this definition is the word “Internet” used and nowhere is the term “e-commerce” used.  This Bill will impact every company that makes a sale to a customer outside of its border regardless of how the sale was made.  No longer is is necessary for a company to have “nexus” in the state before it is required to collect the tax.  There is no de minimis level of sales in a state that would not require the company to collect the tax.

Any business with more than a total of  $1 million in “remote sales” is impacted by this Bill.  Given the huge disparity in state laws compliance with these rules could be crippling for small businesses.

Even if your business does not make Internet sales, you are likely to be impacted by this Act.  Stay alert to its progress through Congress.
Ned Lenhart, CPA
Interstate Tax Strategies

The US Senate recently re-introduced the Marketplace Fairness Act.  This is the latest version of the federal legislation necessary to allow states to force out-of-state vendors to collect sales tax on remote sales of property and services.  This bill addresses sales by retailers with over $1 million in sales.  While the intention of this bill may be to capture the sales of books, electronics, and other consumer items, the reach could be far more intrusive to businesses.   http://www.enzi.senate.gov/public/index.cfm/news-releases?ContentRecord_id=27ed84d0-5ab2-4054-afdc-423a8bd36699

In a nutshell, here are some of the highlights if the bill is passed:

1. Allow states to require and enforce collection of sales tax on any remote sale delivered to state even if the seller does not have nexus with the state.
2. Requires state to have singe return for remote sellers to use
3. Fosters a market for Certified Software Providers to serve as the primary sales tax collection agency for the state under the mechanism
4. Uses the Streamlined Sales Tax Project (SSTP) as the structure for the Act.
5. Does not “deem” companies to have nexus in the state where the sale is made.  Just allows states to enforce the sales tax collection absent commerce clause nexus.

From reading all the press on this issue, the intended focus seems to be collecting sales tax from individuals who purchase items from EBay, Amazon, Overstock, and the thousands of other sites that sell books, electronics, clothing, and household goods.  But as the bill is written, I believe the law could reach thousands of other businesses who may not realize it applies to them.  As written, this law gives a state the power to force collection of sales tax by any out-of-state business who delivers a product or service to a customer in their state.  Here are a few scenarios that might catch some businesses off guard:

Mailing houses/printers: When a printer produces and mails advertising and other direct mail they normally only need to collect sales tax on the cost of the items delivered to the state where they have nexus or production facilities.  Under the Marketplace Fairness Act these companies could end up collecting sales tax on the cost of mailings delivered to every state where they are directed.  Given the variability in tax bases that apply to this industry, this could be a nightmare.

Software sales: the sales and delivery of most computer software can now be done efficiently through electronic download.   About 1/2 of the states tax software delivered electronically and the maintenance agreements that go along with these licenses.  Most of the retailers can operate nicely without traveling to other states or creating nexus.  Under the Marketplace Fairness Act, their sales of downloaded software would now be sales on which they would need to collect tax when delivered to states that tax this product.   Maintenance agreements would also be taxable.  This may not happen immediately, but as more states adopt the SSTP provisions, this might become a reality over time.

Software as a Service: Many states tax SaaS, data processing, and information services.  Many times these services can be sold without creating nexus in the destination state.  Under the Marketplace Fairness Act, companies that provide these services would be subject to tax collection obligations when these services are delivered to states that tax the service.  This can be a very challenging taxation exercise because the seller may not always know where the services is being consumed and the service location is often different than the “bill to” location.  Again, this will depend on the states involved.  Over time, there could be a great expansion of the states that tax these services as a way to capture revenue from out-of-state businesses.

As this bill moves through Congress, it may change or get stalled.  As written, the Bill has a far reaching impact which can create a lot of work and expense for retailers of all sizes and types.  For companies that fail to recognize their responsibility, the audit efforts by the states will likely increase in intensity.

This Bill, or one like it, may actually pass this year.  If that happens, watch out!!

https://www.salestaxstrategies.com/

Ned Lenhart, CPA
President

During the process of closing a registration for a client in the state of Washington I found the attached document dor.wa.gov/Docs/Pubs/SpecialNotices/2010/SN_10_TrailingNexus.pdf that outlines the states view on companies that wish to close their account.

This is one of the few published policies on the “trailing nexus” theory that I’ve mentioned before.  Under this policy, the state of Washington requires out of state retailers who stop having nexus with the state must continue to file returns for 4 years under this trailing nexus theory.  This theory holds that the nexus created by your business has a lingering affect in terms of generating sales and creating revenue for your company.  As such, the state of Washington wants sales tax to be collected on any taxable transaction even though you don’t have direct nexus.

Many states take this position but this is one of the few I have seen that actually has a published policy on the matter.

Ned Lenhart
President