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  • 1. How To Understand & ManageHow To Understand & ManageSales and Use TaxSales and Use TaxPresented ByPamela Shull1Any tax advice included in this written or electronic communication is not intended or written tobe used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties thatmay be imposed on taxpayer by any governmental taxing authority or agency.
  • 2. 2The Theory of TaxThe Nature of TaxThe Application of TaxThe Measure of TaxAuthority to TaxDefinitionsExemptions and ExclusionsAdministrative IssuesThe Basics of Sales and UseThe Basics of Sales and UseTaxTax
  • 3. 3What is being sold/purchased?Who is the seller?Who is the buyer?Where is the order being shipped?How is the order being shipped?When does the sale occur?Where does the sale occur?What industry are the buyer and seller engagedIn?Factors that Influence the TaxFactors that Influence the TaxConsequences of a Business TransactionConsequences of a Business Transaction
  • 4. 4At seller’s place of business, orThe point of delivery, orThe purchaser’s domicile• Generally, tax is imposed at the point atwhich title, possession or control passes.• When the buyer becomes the ownerWhen Is The TaxWhen Is The TaxImposed?Imposed?
  • 5. 5No Sales TaxNo Sales TaxNo broad-based, statewide, generalsales tax is imposed in:• Alaska• Delaware• Montana• New Hampshire• Oregon
  • 6. 6 Sales and Use taxes are excise taxesimposed on the sale or use of tangiblepersonal property (TPP) at retail andsome services The tax is defined by the transactionor saleIntroduction to Sales andIntroduction to Sales andUse TaxUse Tax
  • 7. 7The Nature of Sales and Use TaxesThe Nature of Sales and Use Taxes Sales taxes are excise taxes.◦ Purpose: Generate revenue forspecified services. Use taxes are imposed on theprivilege of ownership,possession, use, storage orconsumption. Supplementalto the sales tax.◦ Purpose: to prevent sales tax evasion byout-of-state purchases and◦ To make an equitable adjustment betweenlocal and interstate businesses and◦ Prevent discriminationWB-1
  • 8. 8Definitions You Must Be Aware of toDefinitions You Must Be Aware of toUnderstand LegislationUnderstand LegislationSale and Purchase– Transfer of title or possession or both, exchange or barter,license to use, license to consume, conditional orotherwise, for a consideration, including the rendering ofspecified servicesSale at retail (retailer/seller/dealer)– A sale of tangible personal property to the consumer oruser of it for any purpose other than for resaleUse or consumption– Found to mean destruction by usePerson– Includes individuals, partnerships, societies, associations,joint stock companies, corporations, estates, receivers,trustees, assignees, referees and any other persons actingin a fiduciary capacityTangible personal property– Something you can see, touch, feel, etc.
  • 9. 9UCC – Article IIUCC – Article II Contract Takes precedence Outlines all terms Determines liability Purchase Order In absence of contract – next in line Determines liability - FOB Invoice Determines liability – FOB destination unlessotherwise stated
  • 10. 10Audit ToolsAudit Tools Administrative and Compliance Guides Give specific guides to administration ofstate specific regulations Policy and Procedures Manual Tells auditor you know what you are doing Allows you to monitor other personnel forcompliance Proves to auditor you have “done it right” anda pattern of being in compliance
  • 11. Decision MakingTaxableOrExempt?Rate?TangiblePersonalProperty?Nexus?What state duethe tax?Sales Tax? Use Tax?
  • 12. 12Alabama Web-sitesAlabama Web-sites http://www.revenue.alabama.gov• Pitney Bowes Tax Tables by address• www.geotax.com
  • 13. 13APPLYING SALES TAXAPPLYING SALES TAXSection 1Workbook Page 2
  • 14. 14 Sales tax is an excise tax imposed on thetransaction of retail sale of tangiblepersonal property. Some services are taxable in many states. Sales tax applies to intrastatetransactions A sales tax accrues when a sale occurs When the buyer becomes the ownerThe Theory of Sales TaxThe Theory of Sales Tax
  • 15. 15Seller Privilege Tax:Seller has liabilityConsumerLevy/Privilege Tax:Buyer has liability =ALTransaction Tax: Bothparties have liabilityGross Receipts: Sellerhas liabilityTypes of Sales TaxesTypes of Sales Taxes
  • 16. 16CharacteristicsCharacteristics1. Shifting the economic burden of the tax is shiftedfrom the seller to the buyer1. Absorption• the seller including any tax in the sellingprice1. Separation the tax must appear separately on theinvoice or receipt
  • 17. 17Yes, buyer must pay the tax. = ALNo, seller may ask buyer for reimbursement.OptionalShifting RequiredShifting Required
  • 18. 18Yes, seller may market to pay taxNo, seller may “not” market to pay tax = ALOptionalAbsorption AllowedAbsorption Allowed
  • 19. 19Yes, tax must be a separate line item = ALNo, stated price includes taxOptionalSeparation RequiredSeparation Required
  • 20. 20 Sales tax is based on purchase priceor gross receipts. Exclusions vary from state to state Alabama uses “gross sales” as thebasis for sales tax, with specifieddeductions (Sec 40-12-222, Sec. 40-23-2(1) and 2(2)The Measure of Sales TaxThe Measure of Sales Tax
  • 21. 21General RuleGeneral RuleSeller Privilege and Gross Receipts statesusually permit absorption and do notrequire shifting and separation.Generally, Consumer Privilege andTransaction states are just the oppositeof the above.
  • 22. 22Seller PrivilegeSeller PrivilegeStates operating as seller privilegeinclude:California, Michigan, Nevada, SouthCarolina, South Dakota, Tennessee,and Wisconsin
  • 23. 23Consumer PrivilegeConsumer PrivilegeStates which operate generally asconsumer privilege include:Alabama, Connecticut, Louisiana, Maine,Maryland, Mississippi, Nebraska, NewYork, North Carolina, North Dakota, Ohio,Oklahoma, Pennsylvania, Rhode Island,Utah, Vermont, Washington, WestVirginia, and Wyoming
  • 24. 24TransactionTransactionJurisdictions which operate generallyas transaction include:Arkansas, Arizona, Colorado, Districtof Columbia, Florida, Georgia, Idaho,Illinois, Indiana, Iowa, Kansas,Kentucky, Massachusetts,Minnesota, Missouri, New Jersey,Texas, and Virginia
  • 25. 25Gross ReceiptsGross ReceiptsStates which operate generally as grossreceipts (for sales taxes, not for grossreceipts taxes) include:Hawaii and New Mexico
  • 26. 26Exercise 1Exercise 1Consider the Issue of Sales Tax From the Purchaser’sPerspective1. On a taxable sales tax transaction in a seller privilege taxstate or a gross receipts tax state, where shifting is notrequired, absorption is allowed, separation is notrequired and there is no exemption certificate, thebuyer should accrue and pay tax directly to the state oninvoices where the seller failed to charge the tax on theinvoice.True or False
  • 27. 27Exercise 2Exercise 2Sales tax not billed by the seller on ataxable sale in a consumer levy tax stateshould be added to the invoice by thepurchaser, thereby voluntarily paying thesales tax to the seller.True or FalseExplain your answer
  • 28. 28Exercise 3Exercise 3I have decided to buy a new $20,000 car.The dealership has agreed to give me$5,000 as a trade-in value for my old car.The sales tax will be measured on:– a) $20,000– b) $15,000– c) Depends on the taxing state’sjurisdiction
  • 29. 29Exercise 4Exercise 4Buyer and seller are located in a consumer levytax state. The buyer is set up in the seller’srecords as a resale exempt customer. The buyerorders tangible personal property which will notbe for resale and tells the seller to charge tax.(Salesperson forgets to tell A/R to charge the tax)When the A/R invoices the buyer, sales tax is notcharged.How should accounts payable handle thissituation?
  • 30. 30APPLYING USE TAXAPPLYING USE TAXSection 2Workbook Page 3
  • 31. 31Sometimes called a consumption tax Use tax is imposed on the privilege ofownership, possession, storage or use oftangible personal property Compliments the sales taxThe Theory of Use TaxThe Theory of Use Tax
  • 32. 32Nature of Use TaxNature of Use Tax• Complimentary or supplemental to salestax• To ensure everything taxable is indeedtaxed• Prevent tax evasion• Even the playing field for in-state andout-of-state sellers• Catch taxable use of untaxed items likewithdrawals of stock
  • 33. 33Interstate TransactionChange of intentionThe Nature of Use TaxThe Nature of Use Tax
  • 34. 34Use Tax ExamplesUse Tax Examples• Catalog or internet purchases• Consumption of resale property, usageof stock• Using self-constructed assets• Transfers• Rentals from out-of-state
  • 35. 35Self AssesmentSelf AssesmentProcedure - InvoiceProcedure - Invoice1. Accounts Payable examines invoiceagainst PO for taxation billed2. A/P makes a note on the invoice for thetaxation due3. Journal entry is generated into the taxaccount in the general journal as aliability4. Tax is paid when return is filed –satisfying the liability account andpaying the appropriate tax.
  • 36. 36Self Assessment ProcedureSelf Assessment Procedurefor Change of Intentfor Change of Intent1. Documentation is generated byappropriate personnel regarding thechange of intent and sent to accountingor tax department2. Journal entry is generated into the taxaccount in the general journal as aliability3. Tax is paid when return is filed –satisfying the liability account andpaying the appropriate tax.
  • 37. 37Use TaxUse Tax Use tax liability is not a question ofgross receipts, but a question ofsales price, purchase price ortaxable measure. Alabama basis of use tax is thesales price (Sec. 40-23-60(10))
  • 38. 381. Material cost – value of raw materials atpurchased cost2. Inventory or standard cost – direct costof placing the property into inventory3. Full retail – price at which the property issold to your customers4. Fair market value5. Fair rental value – rental value of theproperty in the open marketBases for Measuring Use Tax –Bases for Measuring Use Tax –varies from state to statevaries from state to state
  • 39. 39Exercise 1Exercise 1A reseller of television sets in state Apurchases its televisions from a vendor instate B. The sets are delivered FOBdestination. Subsequently, the customerdecides to put one of the televisions intheir corporate office. Which tax wouldapply?– a) Sales tax– b) Use tax
  • 40. 40Exercise 2Exercise 2A grocery store ordered paper towels for resale.One day an employee of the grocery storeopened a case of paper towels for the grocerystore’s own internal use. How would the grocerystore value the case of paper towels to accruethe use tax?– a) Cost– b) Retail value– c) Fair market value– d) Depends on the state
  • 41. 41Exercise 3Exercise 3A sales representative sells computers to a buyer in Texas forgeneral office use. The computer company’s corporate office islocated in California. The buyer has the invoice mailed to anaddress in Texas but wants the computers shipped FOBdestination to their office in Mexico. The computer companyhas nexus and is registered in Texas and California. How shouldthe computer company tax this invoice?– a) Texas sales tax– b) Texas use tax– c) California sales tax– d) California use tax– e) No tax
  • 42. 42AnswerAnswerNo tax.– Foreign commerce. No tax is required.
  • 43. 43NEXUS ANDNEXUS ANDINTERSTATEINTERSTATECOMMERCECOMMERCESection 3Workbook Pages 4-5
  • 44. 44NexusNexusA connection that requires registration andcompliance with another state tax code.S U B S T A N T IA L P H Y S IC A LP R E S E N C EF R E Q U E N T &C O N T IN O U SN E X U SWB-4
  • 45. 45A. Ownership of property in another state1. Maintain inventory or equipment2. Own a billboardB. A business presence in another state1. Maintain a building (office, warehouse, retail store,etc.)2. Lease or rent facilities3. Have an affiliate (parent, subsidiary, brother orsister)4. Participate in trade showsC. Employees (or agents) in another state1. Selling, consulting, installing, training, repairingPhysical Presence TestsPhysical Presence Tests
  • 46. 46Physical Presence TestsPhysical Presence Tests4. Delivering goods in another state using theseller’s own vehicles or employees1. A taxicab company offers services across state lines2. An employee delivers repair parts to a customer acrossstate lines3. The seller sends its trucks across state lines to repaircustomer equipment.4. Telephone, advertising, banking, InternetWeb pages in another state1. A business advertises in the yellow pages2. A company maintains a banking relationship in anotherstate3. A firm stores its Web page in a system in another state.
  • 47. 47How Nexus WorksHow Nexus WorksComputer, Inc. sets up a display booth at a national computerconference in Las Vegas, NV. Mr. Smith from Amarillo, TX, has shownsignificant interest in a $100,000 system over the past several months,thanks to the efforts of your SVP of Sales, Max Jones. Max has onlyspoken with Smith over the phone and mailed him some sales literature.Smith is attending the trade show. Late Thursday evening, Smith isvisiting with Jones in the company’s hospitality suite. All of theremaining issues have been settled, and Smith is ready to sign thecontract to purchase the system. Jones hands Smith the documents,which he quickly signs. Jones starts to put the documents back in hisbriefcase saying, something about reviews and approvals to be doneearly next week back in the home office in St. Louis. Smith takesexception to the delay and presses Jones to execute the contract or he’sgoing to revoke his signature. Jones agrees and signs the contract.
  • 48. 48How Nexus WorksHow Nexus Works• Has Nexus been triggered?Yes — in Nevada• If so, explain why and how:Binding contract — SVP signed• What responsibilities exist for taxcollection and remittance?Seller must register in NV.• Identify which state(s) are entitled to tax:Unclear
  • 49. 49How Nexus WorksHow Nexus WorksIn the above case, everyone has nowreturned home. Computer, Inc ships theequipment from St. Louis to Amarillo.Computer, Inc does not have nexus inTexas. The equipment is shipped FOBdestination. Has nexus been triggered? No What responsibilities exist for tax collection and remittance? Customer self-assesses. Identify which state(s) are entitled to tax: Texas
  • 50. 50Nexus and Interstate CommerceNexus and Interstate CommerceThe Federal Constitution, Federal Law, andthe Federal Courts are the ultimateauthority in regards to all things relatingto interstate commerce.WB-5
  • 51. 51Theory of InterstateTheory of InterstateCommerce TaxationCommerce Taxation• The US Constitution and all stateconstitutions contain restrictions on thenature and scope of state and localtaxation. Currently, the two mostimportant US constitutional restrictionson state and local tax are the Due Processand Commerce Clauses.– The Due Process Clause concerns itself withquestions of fundamental fairness between agovernment and those over whom thegovernment seeks jurisdiction.– The Commerce Clause imposes restrictions onstates with regard to interstate commerce. TheCommerce Clause is one of the specificconstitutional powers assigned to Congress.
  • 52. 52Interstate CommerceInterstate CommerceExemptionExemption No taxation may be imposed on sales made in commercebetween a state and any other state, or between a state andany foreign country unless:1. A break in transit occurs, the property may come to rest within a stateand become subject to the power of the state to impose a sales or usetax2. If interstate movement has not begun – contemplation of movementdoes not prevent a state from taxing the property3. Immune from taxation despite temporary interruptions due tonecessities or for the purpose of safety4. Formalities, i.e. form of billing and changes in method oftransportation• When property has come to rest within a state and is heldthere at the pleasure of the owner for disposal or use – thussubject to the state’s taxing power.
  • 53. 53OTHER ISSUES YOUOTHER ISSUES YOUNEED TO KNOW ABOUTNEED TO KNOW ABOUTSALES AND USE TAXSALES AND USE TAXSection 4Workbook Pages 6 - 16
  • 54. 54At seller’s place of business, orThe point of delivery, orThe purchaser’s domicile• Generally, tax is imposed at the point atwhich title, possession or control passes.• Most states follow the destination rule:– Sales or use tax apply at point ofdestination.When Is The TaxWhen Is The TaxImposed?Imposed?WB-6
  • 55. 55Use tax measure should not includeamounts upon which the buyer hasalready paid sales tax to the state inwhich the property will resideUse tax measure need not includeamounts upon which the buyer waslegally required to pay sales tax toanother state.Application of CreditsApplication of Credits
  • 56. 56• Caution is required not to extend theassumption of reciprocity to local taxes that donot offer it• Careful attention must be paid to what isdefined as “first use”– Reciprocity does not usually apply if the item ispurchased and used in one state and thensubsequently moved to and used in another state.– The second state has a right to assess use tax on usedproperty, although some do not assess it, and someonly assess use tax on the diminished (fair marketvalue) or depreciated value of used property.ReciprocityReciprocity
  • 57. 57• Property is purchased from a supplier in NorthCarolina (which has a sales and use tax), butdelivery occurs in Oregon (which does nothave a sales and use tax). It is not for resalebut for internal use by company.• The tangible personal property is then shippedto California, where another company modifiesthe property, after which it is shipped toArizona, where the property is used for itsintended purpose.• Absent any exemption certificates, the salesand use tax ramifications are????Example:Example:
  • 58. 58North Carolina– No sales or use tax should be paid orliability incurred because the deliveryoccurs out-of-stateOregon– No sales or use tax liability should beincurred because the state does nothave sales and use tax.Answer:Answer:
  • 59. 59If the tax was paid in Arizona first:California– California might assess a use tax and refuse to providea credit against the tax already paid to Arizona on thegrounds that because the property was first used inCalifornia, California had jurisdictional priority.Arizona– Because Arizona has already collected the tax, theonly question is whether Arizona would refund any ofthe tax based on a subsequent assessment byCalifornia. Arizona may or may not refund a creditableportion of the tax depending on whether it recognizesCalifornia’s jurisdictional priority.Answer (continued):Answer (continued):
  • 60. 60If the Tax Was Paid in CaliforniaFirst:California– Because California has already collected thetax and arguable, has jurisdictional priority, itis doubtful that California would provide acredit for a subsequent assessment byArizona.Arizona– Generally, Arizona would assess its tax,offsetting it by a credit for the tax paid toCalifornia, because California hadjurisdictional priority.Answer (continued):Answer (continued):
  • 61. 61Contract IssuesContract IssuesFOB– Destination or OriginDate and Location of SaleLiability for sales taxWhat special terms ofcontract existShipping instructionsWhat thesalespersonneeds to be sureis covered in thecontract.Why are each ofthese issuesimportant?
  • 62. 62Nexus Is WhatNexus Is WhatConnects UsConnects UsOverland Express Warehouse(located in California has soldtheir product to JunoEnterprises (located inAlabama).Juno Enterprises contracted tobuy the product through asalesperson representingOverland Express when thesalesperson came to Juno’soffices – contract was signed byboth parties. The cost was$150,000.Overland Express ships theproduct FOB origin to Juno.• Has nexusbeentriggered?• If so, whatwas thetrigger?• What needs tohappen next?• Which stategets the tax?• Is it sales oruse tax?
  • 63. 63SituationSituationABC Company orders a copymachine from Copy America.Copy America is located in NewMexico.ABC Company is located inHuntsville, Alabama.FOB is destination.Copy America ships the copymachine from it’s warehousein Alabama.6 months later ABC Companymoves the copy machine totheir Birmingham office.Which state isowed the salesor use tax?Is it sales oruse tax?What other taxissues arisefrom thissituation?
  • 64. 64InvoicesInvoicesAccountsPayable:Whatissues doyou havetoconsiderwith thisinvoice?ABC Supply Company5555 Any StreetMilwaukee, WI 12345Phone 555-55555INVOICEINVOICE #2850DATE: MARCH 31, 2013TO:Smith Manufacturing Inc.456 W 56thStMilwaukee, WI 12345Phone 666-6666SHIP TO:Smith Manufacturing Inc.456 W 56thStMilwaukee, WI 12345Phone 666-6666[Recipient Name]SALESPERSONP.O.NUMBERREQUISITIONERSHIPPEDVIAF.O.B.POINTTERMSGary Smith 49382 Jim Boles UPS DestinationNet 30daysQUANTITY DESCRIPTIONUNITPRICETOTAL12 Reams of 8 x 11 Paper 4.99 59.888 Cartons of Pens 6.99 55.924 HP 359 Black Ink Cartridges 21.95 87.804 HP 374 Color Ink Cartridges 34.99 139.9612 Boxes - #10 Envelopes 5.99 71.88TOTAL 415.44Make all checks payable to ABC Supply Co.THANK YOU FOR YOUR BUSINESS!
  • 65. 65Uniform definitions for all statesConsistent tax ratesCentral administration for all sales anduse taxes.Sourcing all sales at point of destinationLimit the scope of audits to oneconsistent model.Alabama is a member of the SSTP65Goals of the Streamlined Sales TaxGoals of the Streamlined Sales TaxProjectProjectWB-7
  • 66. 66Example: Drop ShipmentsExample: Drop Shipments• A seller in Alabama accepts an orderfrom a buyer in California• The seller in Alabama places an orderwith a third party (i.e. manufacturer,etc) in Louisiana• The third party in Louisiana shipsdirectly to the buyer in California andinvoices the seller in Alabama.• The Seller in Alabama invoices thebuyer in California
  • 67. 67If seller does not have nexus and is notvoluntarily registered in the statewhere the sale occurs but…The third party drop shipper does havenexus and is registered in the statewhere the sale occurs, then……Results in conflict between some statesexemption processing laws.67Drop Shipment – What Is theDrop Shipment – What Is theProblem?Problem?
  • 68. 68 Seller C, located in Alabama, does not have anexus in California and is not registered to collectCalifornia sales or use tax Seller C receives an order from CaliforniaCustomer X for construction equipment Seller C’s retail selling price of the equipment is$50,000. Seller C places an order to buy this equipment for$45,000 with Third Party J, a manufacturer thathas a nexus in California and is registered tocollect California sales tax. Seller directs Third Party J to drop ship theequipment to Customer X’s California locationwhere the sale occurs.Example: States Allowing ResaleExample: States Allowing ResaleCertificate to Drop ShipperCertificate to Drop Shipper
  • 69. 69 In the case of drop shipment sales, SSTPmember states must allow the third partysupplier to accept a resale exemptioncertificate from the seller regardless of whetherthe seller is registered to collect and remitsales and use tax in the state where the sale ismade The customer is subject to use tax if the sellerdoes not collect the appropriate sales tax dueon the sale unless the customer can claim anexemption.Streamlined Sales Tax ProjectStreamlined Sales Tax ProjectDrop Shipments RecommendationDrop Shipments Recommendation
  • 70. 70• The sale by Third Party J to Seller C isnot subject to sales or use tax becauseit is for resale.• Customer X is subject to use tax on the$50,000 purchase price, unless anexemption applies.AnswerAnswer
  • 71. 71Multistate Tax CompactMultistate Tax Compact Facilitatesdetermination of taxliability. Promotes uniformityof tax systems. Addresses the issue ofreciprocity.Joint agency of state governments established to improve thefairness, efficiency, and effectiveness of state tax systemsas they apply to interstate and international commerce andto preserve state tax sovereignty.WB-8
  • 72. 72Taxable BasisTaxable BasisTaxable basis is the amount on your Salesand Use Tax return from which you figureyour sales and use taxes.Factors influence whether that figure goesup or down.WB 9 - 13
  • 73. 73Tax TreatmentTax TreatmentTransaction orPropertyTaxable NonTaxableCommentsManufacturingMachinery and Equipmentused in production of TPPX Reduced rate of tax – Sec.40-23-2(3), Sec. 40-23-61(b)Repair or replacement partsfor production machineryX Same as aboveIngredients and componentparts that enter directly into orbecome a part of the productsproducedx Same as aboveOther material used orconsumed directly inproductionx Same as aboveMaterials otherwise used orconsumed in manufacturingx Same as above
  • 74. 74Transaction orPropertyTaxable NonTaxableCommentsManufacturingToolsSame as previous slideFuels Same as previous slideContainers, packing material,labels, wrappers, etc.x Sec 40-23-1(a)(9c), Sec 40-23-60(4c), Ala Admin Code r.810-6-1-.69ConstructionBuilding materialsTools and EquipmentComputer andSoftwareComputer hardwarex Equipment used for manufacturingTPP is non taxable undermanufacturing exemption
  • 75. 75Transaction orPropertyTaxable NonTaxableCommentsComputer andSoftwarePrewritten or canned softwaresold with tangible personalpropertySold without tangible personalpropertyDownloadedXxxAla Admin Code r.810-6-1.37(4)Ala Admin Code r 810-6-1-81Ala Admin Code r.810-6-1.37(4)Custom software x Admin Code r 810-6-1.37(6)ServicesProfessional servicesx Entertainment services are taxableServices with respect to realpropertyx Janitorial services are nontaxable –ode 40-23-2Ala CIn relation to TPP x Movable TPP is taxable. Ifunmovable – nontaxable.
  • 76. 76Transaction orPropertyTaxable NonTaxableCommentsSeller’s transportation orshippingxShipping and handling x Shipping charges must beseparately stated and deliveredby common carrier or US PostalService. Ala Admin Code 810-6-1-.178Third party delivery x See aboveRepair labor only x Ala Admin Code r,810-6-1-.84(2)(b)Installation charges for TPP x Must be separately stated. AlaAdmin Code r, 810-6-1-81Leases x Ala Code 40-12-222, Ala AdminCode r, 810-6-5-.09Rentals x Ala Code 40-12-222, Ala AdminCode r, 810-6-5-.09Maintenance agreements x
  • 77. 77Taxable BasisTaxable BasisBad Debts– This recovery may be by credit, deduction, or refund,depending on the state. AL allows refund or credit.– To qualify for sales tax recovery, the debt must usually bewritten-off for income tax purposes or qualify as an expenseunder generally accepted accounting principles.Finance, Interest and CarryingCharges– To qualify, these charges must usually be a reasonableseparate and distinct charge. Some states further require thecharges be optional or not be used as a means of avoidingsales tax on the property being sold. AL excludes fromtaxable measure as long as separately stated.WB 11
  • 78. 78Coupons and Cash DiscountsCoupons and Cash Discountsand Trade-In Allowancesand Trade-In Allowances• Discounts and retailers (dealers) coupons areexcluded from taxable measure.• Manufacturer’s coupons and rebates areincluded in taxable measure• Trade-ins allowances are included in taxablemeasure. Some exclusions are allowed forcertain items, e.g. parts, vehicles, trailers, andagricultural machinery.
  • 79. 79Returns andReturns andRepossessionsRepossessions• Returns: Deductible if full sales pricerefunded.• Repossessions: Deduction is allowed forthe unpaid purchase price of repossessedproperty• AL Code 40-23-1
  • 80. 80WarrantiesWarranties• Mandatory - No option is given to the buyer of theTPP. Most manufacturers’ warranties are “built in” to newarticles of TPP and fall into this category. The value of amandatory warranty, even if separately stated, is includedin the price of the article sold and taxed accordingly.Optional - Some dealers offer warranties with additionalcoverage or beyond the original manufacturer’s warrantyperiod (if any) at the buyer’s option. This is often referredto as an “extended warranty.” The states are split on thetax treatment of optional warranties.WB-14
  • 81. 81Resale (Retail) ExemptionResale (Retail) Exemption• All sales are taxable unless theseller receives an exemptioncertificate from the buyer.• Alabama recommends updatingevery 3 years or according toexpiration date.• The certificate allows you to buywithout paying taxes.WB-15-16
  • 82. 82Economic ConsiderationEconomic Consideration Reduced rates for certain investmentsExample:Machinery and equipment used inmanufacturing
  • 83. 83Social ConsiderationSocial Consideration Provision of exempt tax statusExample:Charitable, educational and religiousorganizations
  • 84. 84Equitable ConsiderationEquitable Consideration Humane exemptionsExample:Food (not prepared and sold in bulk),prescription medicines and medicalproducts
  • 85. 85Exempt BuyersExempt BuyersBuyer Taxable NonTaxableCommentsFederal government x Sec 40-23-4(a), (17), Sec. 40-23-62(24)State government X Same as abovePolitical subdivision x Same as abovePublic Schools x Same as aboveOther educationalinstitutionsx Same as aboveReligious organizations x Same as aboveCharitable organizations X Same as aboveScientific organizations X Same as abovePhilanthropic organizations x Same as above
  • 86. 86Buyer Taxable NonTaxableCommentsFor profit hospitals XNot-for-profit hospitals x Same as aboveOther organizationsexempt from federal andstate taxesx Same as aboveAgricultural x For use in normal course ofbusiness – Sec 40-23-4 and Sec40-23-62
  • 87. 87• Allows buyer to pay tax directly to thestate instead of the retailer(seller/dealer)• Receipt of the permit dischargesretailer (seller/dealer) from any duty tocollect or liability for the taxesDirect Pay PermitDirect Pay Permit
  • 88. 88CAN YOU SHOW ACAN YOU SHOW A“PATTERN OF BEING IN“PATTERN OF BEING INCOMPLIANCE”COMPLIANCE”Section 4Workbook Pages 17 - 19
  • 89. 89Audit PreparationAudit Preparation• Good records lead to good audits• Preparing good records begins before thetaxpayer receives an audit notice• Keeping good records is an on-going taskWB-17 - 19
  • 90. 90AL PenaltiesAL Penalties• Failure to file• 10% of tax due or $50• Failure to pay• 10% of tax due• Intent to Evade• Up to 100% of tax dueWB-17
  • 91. 91Accounts Receivable• Invoices and contractsAccounts Payable• Purchases, bills oflading, paymentsGeneral Ledger• Cash disbursements• Cash receiptsAudits—Areas of ConcernAudits—Areas of ConcernWB-18
  • 92. 92Ensure commerce is always continuousNever store property, materials, orequipment in a foreign state.Always use freight forwarder forexporting out of country.Tax TipsTax Tips
  • 93. 9310 Steps to Audit10 Steps to Audit1. Be prepared2. Treat the auditor asa professional3. Keep the auditunder control4. Be consistent inanswers5. Convince auditoryou are doing itright6. Watch foroverpayments7. Negotiate8. Get help9. Climb the ladder10.Never lie.WB-19
  • 94. 94 Request a letter of documentation. Provide only required documentation. Establish proposed time to complete theaudit Audit the auditor when necessary. Request informal meeting with auditor’sboss. Don’t be afraid of challenging the auditor. You are the expert in your businesselementsProven Audit TipsProven Audit Tips
  • 95. 95Any tax advice included in this written or electroniccommunication was not intended or written to be used, andit cannot be used by the taxpayer, for the purpose ofavoiding any penalties that may be imposed on taxpayer byany governmental taxing authority or agency.Seminar DisclaimerSeminar Disclaimer