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On December 28, 2012 the Tennessee DOR issued Ruling 12-110 attempting to clarify its rule on the taxation of gold and silver bullion.  I’m not sure that it hit the mark, though.

TN, like most states, does not tax currency transactions when they are completed based on the explicit value of the coin or currency.  When the exchange or the price is based on the intrinsic value of the item then it is a taxable sales of personal property.  The most compelling evidence that an item is being sold based on “intrinsic” value is when the price varies according to weight and not its value established by the government.  As I read this opinion, then, a $20 gold coin sold for $1800 because of its weight would be considered a taxable transaction subject to 9.25% TN Sales tax.  http://www.tn.gov/attorneygeneral/op/2012/op12-110.pdf

Other states, like Georgia, address this in a rule that excludes gold and silver transactions unless they are in the form of jewelry or art or other “objects”.  However, given this ruling it may open the door for other states to reexamine their historical practices on the taxation of these types of transactions.  I think most of these rules were written when the price of gold and silver was much lower and maybe closer in price to the face value of the coin being exchanged.

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Last week it was reported that the Governors of Nebraska and Louisiana would start movements to eliminate their state’s individual and corporate income taxes and adopted a broader based sales tax.  I’ve been writing about this for the past several years.  These states would join other Southern states such as TN, FL, and TX that rely heavily on sales tax as their primary source of revenue.  TN, FL, and TX do have corporate level income taxes but no individual income tax.

Making such a transition could be tough to achieve given the tax credits and other incentives that are built into the income tax codes.  Both Governors talked about eliminating sales tax exemptions as a way to broaden the base to make up for the lost income tax revenue.  There are certainly some exemptions that could be eliminated, but others serve a very real economic development purposes and would likely be retained.

I suspect that these two states will not be the first during 2013 to make these types of announcements.  When states do this, it puts a lot more pressure on the sales tax collections of these states.  That means more audits and tougher enforcement rules.  https://www.salestaxstrategies.com/white-papers/whitepaper-Effective-State-Sales-Tax-System.pdf

Ned Lenhart, CPA

The Georgia Department of Revenue has published revisions to Rule 560-12-2-.64 to explain interpretation of the new statute that exempts energy used by manufacturers.

In this rule, the DOR explains that the energy exemption applies energy use “for any purpose at a manufacturing plant” including:

1. machinery operations
2. create conditions necessary for the manufacture of property
3. Perform an actual part of the manufacture for personal property
4. administrative or other ancillary activities that are located at the manufacturing plant
5. Is related to operations that convey, transport, handle or store raw materials or finished goods
6. for heating, cooling, ventilation, illumination, fire safety, and other comfort and convenience purposes.

This includes electricity, water, natural gas, propane, heating oil, wood, and others forms of fuel

This exemption is phased in over a 4 year period of time beginning January 1, 2013.

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Ned Lenhart,CPA
President

On August 28th, the PA Department of Revenue ruled that the presence of an instate affiliates will not create nexus for the out-of-state seller unless there is a commission paid by the out-of-state seller for the services performed by the in-state affiliate.  This is especially true where the commission is based as a percentage of sales.   While the state is trying to tie this “commission based” nexus rule to the recently passed Amazon laws in other states, the truth of the matter is that any commission based agent will create nexus for the out of state principal.  

There may be a lot of internet sellers who are only monitoring the development of the “Amazon” legislation and are not really paying attention to the traditional nexus rules.  These would include the presence of property in a state.  In many situations, the out-of-state e-tailers use Amazon and other “fulfillment” centers for delivery of goods that are ordered.  In these cases, the e-tailer may actually ship property to the fulfillment center and then pay a fee for fulfillment.  The presence of this property in the state will, in most cases, create nexus in most state and create a sales tax collection responsibility for all the sales shipped to that state by the e-tailer regardless where they were shipped from.

Ned Lenhart, CPA
President

In the September edition of the Journal of Accountancy, the section entitled “From the Tax Adviser” ventures into the world of sales tax and the concept of successor liability for income and franchise tax.  I’ll confess that this was new to me.

In his article, the Editor notes that Illinois and Pennsylvania have provisions that the buyer of assets can succeed to the income tax liabilities of the seller when a “major part” of the business is purchased.  To avoid this liability, the buyer must notify the state that the bulk-sale is occurring. 

These provisions sound similar to the sales tax bulk-sale notifications which are mostly ignored in every M&A deal I’ve ever been involved with.  Rather than go through the pain of getting tax clearances from the states, most sellers and buyers just work out a hold-back or escrow of the taxes due.  Speaking of sales tax, the purchase of assets will make the buyer the successor to the seller’s known and unknown sales tax liability.  If due diligence is not conducted, these issues can be significant.

Ned Lenhart, CPA
President

Be alert to the state sales tax rules where out-of-state customers come into your home state to take delivery of products for delivery back to their home state. 

If the products being sold are for “resale”, make sure you get the appropriate resale certificate.  This might require that your customer first register with your state to obtain a valid number.  The failure to obtain a valid resale certificate will make these sales taxable in your state.  It’s tough to get tax collected after the sale has been completed.

If the property sold is taxable in your state, then your obligation is to charge sales tax.  It is irrelevant that the property purchased may be exempt in the state where it will be used.   This often happens with manufacturing machinery and equipment.  The out-of-state purchaser comes to your state to take delivery of machinery which will be exempt in their “home state”.  However, the state where the buyer takes possession of the equipment does not have an exemption for machinery or only allows the exemption for machinery which is used in that state.   

In most cases, the “export” sales tax exemption only appies to items place on common carriers for their delivery or are delivered outside the state by the seller’s vehicle.  There are some specific exemptions for aircraft and other common carrier vehicles.

Ned Lenhart, CPA
President

It’s hard to image, but many companies find themselves in the very uncomfortable position of having collected tax from customers but not remitting the tax to the state.  I’m currently working with 4 clients that have this scenario.  In one case, the tax collections only go back a few months.  In the other 3, the collections go back several years.  Over the years, I’ve helped many companies deal with this situation.  My first question is always the same: “How did this happen?”  The answers are varied.  In most cases, sales tax or billing software is to blame.  In other cases, the sales tax obligation was given to an individual who had no experience with sales tax and they just failed to understand what needed to be done.  So far, I have yet to find anyone who admits to intentionally collecting the tax as a way to improve profits or cash-flow. 

Before I outline steps to resolve this issue, I want to briefly outline ways to prevent this issue or shorten the lentgh of time it may exist.

1. Make sure sales tax collected is recorded in its own account and do monthly reconciliations.  This will show if you are remitting all the tax collected to jurisdictions where you are filing or whether you owe tax to a jurisdiction where you are not filing.  

2. Make sure all your tax billing data feeds are going into the tax account.  I had one large client that had four billing systems each with its own tax engine.  Unfortunately, only 3 of the billing systems were transferring data to the sales tax payable account on a monthly basis.  

3. Make sure that all sales tax staff are knowledgeable in the rules on when to remit sales tax.  They need to alert executives if there is a problem.  

You have collected tax but don’t know what to do.  Here are some steps I’ve used in the past

1. Return the money to the customer.  This can have some unintended consequences, but it may be the best solution in some cases.  Works best if this is an isolated case and one that’s recent.  I would not suggest this if the tax was collected 2 years ago. 

2. Enter into voluntary disclosure with the states.  Even in situations where the tax has been collected, states will routinely allow the waiver of penalty through the VDA process.  New Jersey and Florida impose a small penalty for taxes collected, but it’s still a lot less than the 25% they could impose under audit. For taxes collected there is no “limited look back” for the VDA. 

3. Prospective tax registaiton only.  This might work best if the tax has been collected within the past quarter or so.  It’s not ideal, but its a practical solution to the problem and it gets the cash out of your account.  This would involve registering and including the taxes collected on the first return filed. 

Each of these options should be analyzed with the help of a sales tax specialist familiar with your business and these issues.  In most states, the failure to remit sales tax collected can result in criminal penalties as well as civil penalties.  Becoming paralyzed about your situation will not make matters better.  Once you recognize that there is a problem, you need to move on it.  If your customers are audited and the state sees sales tax on your invoices but does not see that your business is registered, you will have serious problems.

Regards

Ned Lenhart, CPA
President

When consulting with clients who provide services on a multistate basis, the focus of my discussion quickly turns to Texas.  This state appears to have the broadest reach of sales tax on services.  This always seems to catch clients off guard both when they provide these services and when they are in Texas as the purchaser of these services.  At a high level there appear to be about 20 specific services that Texas will tax when these are consumed in the state.  This does not include services like production labor, shipping, handling, and the like when they are included in the sales price of products.  Here is a quick list of some of the “business services” that companies should be aware of both as the provider and consumer of these services.  The broad reach of the real property services can pull in a lot of contractors who might otherwise think they are in good shape in Texas.   Texas also broadly taxes data processing and information services which can be troublesome. These are taxed only at 80% of the saeles price.

Credit reporting
Data Processing
Debt Collection
Information Services
Insurance Services
Internet Access
Vehicle storage fees
Nonresidential Property repair, restoration, and remodeling
Personal property maintenance
Pest control, garbage collection, landscaping service
Security Services
Telecommunications Services
All fabrication labor
Temporary staffing services under certain conditions

 Ned Lenhart, CPA
President

Now that the Sate of Georgia has become a full member of the SSTP, there is a need to update many of its sales tax regulations to come into compliance with the program.  Two proposed drafts have been issued by the Georgia Department of Revenue.  The links to these regulations are below.  

One regulation deals with grocery and prepared food items and the other regulation deals with drugs, prosthetic devices, and durable medical equipment.  Both regulations, in my humble opinion, are flawed in some respects. The current food exemption provides an exemption based on the “point of consumption” and not on the “prepared vs non-prepared” food distinction.  The current practice is easy to administer and works fairly well.  The proposed regulation makes the sales tax determination on food much more difficult to deal with. 

The same for the drug regulation.  There is an improvement in how the exemption for prescription drugs is administered which is good.  However, the exemption for prosthetics, DME, and mobility enhancement equipment is cumbersome and adds some new requirements that are not in statute.  I am not sure if the Georgia DOR is attempting to increase revenue by changing these regulations or is just unaware of how radical their proposed changes really are.  Neither is very comforting.

Ned Lenhart
President

Food Regulation

https://etax.dor.ga.gov/inctax/proposed_regs/1-30-12%20%20Sales%20Tax%20-%20revised%20order.pdf

Drug Regulation

https://etax.dor.ga.gov/inctax/proposed_regs/2-8-12_Promulgation%20Package_for_Proposed_SUT%20Regulation–560-12-2-30.pdf

On May 11 and again on June 20 the Virginia Department of Revenue issued rulings indicating that the burden of proof is on the seller of software to prove that it was electronically delivered.  In a 2005 Ruling, the Tax Commissioner stated that invoices for the sale of electronically delivered software must contain language that “certifies” that the software was delivered electronically.  If this language is not on the invoice, then the taxpayers face an uphill challenge to conclusively prove that the software was delivered electronically. 

This is the most aggressive stance I’ve seen on this issue.  Given the shortage of revenue in most states I’d expect to see more of this positon being taken.  In working with software companies over the years, there has always been a challenge in providing conclusive proof that the software was delivered electronically. 

If you sell software electronically and have Virginia customers be sure your invoice language is in accordance with the Virginia standard or that you can conclusively prove that the software was delivered.  If not, your clients and you could be in for a surprise on your next sales tax audit.

Ned Lenhart
Interstate Tax Strategies, P.C.
Nlenhart@salestaxstrategies.com