Sales and Use Tax - Minnesota Specific

Sales and
Use Tax
Presented by:
Wade Farquhar

 9:00 Seminar begins
10:00 Ten minute break
11:00 Ten minute break
12:00 Lunch break
 1:00 Afternoon session begins
 2:00 Ten minute break
 3:00 Ten minute break
 3:50 Complete evaluations distributed
 4:00 Dismiss
Today’s Schedule:

Link for this and other
presentations:
www.LeanTeams.ca
www.Slideshare.net/leanteams

The (somewhat complicated) nature of sales tax.
What we will cover today:
Sales vs. Use tax.
Specific transactions and exemptions.
Nexus and interstate commerce.
Compliance issues.
Determining a company’s tax profile.
2
3
4
5
6
1

Quiz
1) What is sales tax?
a) A straight value-added tax remitted to
the federal government.
b) An age-old practice dating back as far
as ancient Egypt.
c) Completely irrelevant.We should all
just move to Montana.

2) Who is responsible for knowing the
pertinent tax rate?
a) The seller.
b) The buyer.
c) It depends…
3) T/F: Sales tax is a way for jurisdictions
to raise funds to provide important
public services to residents.

4) Agent of the state refers to:
a) The newestTom Clancy novel.
b) The Internal Revenue Service.
c) The responsibility of a seller to collect
an remit sales tax on receipts.
5) A NOMAD state is:
a) A state you wander through on your
way from NewYork to California.
b) A state that wishes to secede from
the Union.
c) A state that has no sales tax.

Important phrase for today:
“IT DEPENDS.”

• A tax on sales or the receipts on sales.
• Questions we need to answer:
• Who is supposed to charge it?
• How is it paid?
• Who is it paid to?
• Value-added tax (V.A.T.):
• Present in many countries, but administered
differently.
What is sales tax?

Can be traced back as far as ancient Egypt to
fund public services – Pyramids (?)
First appearance in the colonies.
Consumers were responsible for remitting tax.
Had to keep all receipts for purchases and pay taxes
on all purchases… monthly.
History of Sales Tax

A tax on sales receipts to fund public services for
the common good within a jurisdiction.
Sometimes they are temporary in nature, and
end when a certain project is completed.
Other times the taxes stick around and become
permanent.
Sales Tax Now
This leaves us with two certainties in life:
Death and…

Can be held, smelled, touched, weighed, seen,
tasted, or otherwise perceived by the senses.
Not bolted to the ground.
Not improvements that become part of a property.
Pertains to the end user or consumer of a product.
Tangible Personal Property (TPP)

Personal
• For consumption or
• Not attached to
property.
• Taxable when
purchased.
Real
• Once installed becomes
attached to the property.
• Remains with property once
it is sold.
• Is not taxed again when
property is resold.
Personal vs. Real Property

Transfer of title, possession, or both.
Takes place at the point in time where
possession is transferred.
Lease or rental ofTPP.
A sale to the end user of a good or service.
Retail Sale
Layaways, deposits, and installments don’t count.

Generally, services are not taxable.
Services – not taxable unless specifically listed.
Goods (personal property) – taxable unless
specifically exempt.
For more information on which services are taxable
in Minnesota click here.
What About Services

Sale is made between parties located in two
different states.
Sale is made between parties located in the same
state.
Intrastate Transactions
Interstate Transactions

Primary state-level resource
Department of Revenues
Publishers
Wolters Kluwer (CCH Group)
The Sales Tax Guy
Services
Avalara
Taxify
SalesTaxSupport.com
Firms
Deloitte – Perspectives
Minnesota Sales Tax Helpline (651) 296-6181
Sources for Today’s Discussion

• Over 12,000 different taxing jurisdictions in the U.S.
• These jurisdictions include counties, cities, transit districts, etc.
• More than 14,000 different tax rates that may apply.
• States with no tax, but where counties can level taxes.
• States with no sales tax… except in certain situations.
• States with mixed statewide and local taxes.
• What is this whole “home rule jurisdictions” and “self-
administered” states?
• We haven’t even talked about Canada yet, eh.
Types of States

• Taxation laws are in the State’s hands – they are
the rule maker.
• As a business you are the agent of the state.
• The history on this goes back a long ways, but for
simplicity sake businesses were enlisted as
“agents of the state.”
• This means that the burden to collect and remit
sales tax falls on you.
Agent of the State

1. Shifting – the economic burden of the tax is
shifted from the seller to the buyer.
2. Absorption – the seller includes any tax in
the selling price.
3. Separation – the tax must appear
separately on the invoice or receipt.
3 Characteristics of States

1. Seller Privilege – the seller has the privilege of selling and is
liable for the tax.
2. Consumer Privilege – the buyer has the privilege and is liable
for the tax, with the seller (who is registered with the state as
dealer) serving as a trustee or agent for the state in collecting
and remitting the tax.
3. Transaction Privilege – the transaction has the privilege and
the buyer is liable for the tax. If the seller fails to collect the
from the buyer, the buyer and seller remain jointly liable.
4. Gross Receipt – the seller has the privilege of selling and is
liable for the tax.
4 Types of States

New Hampshire
Oregon
Montana
Alaska
Delaware
NOMAD States

Sales
Vs.
Use Tax
“It depends…”

Tag teams with sales tax.
A way to ensure that all taxable transactions are,
in fact, taxed.
Usually remitted by the buyer, not the seller.
Compensate for sales tax that isn’t paid for out of
state purchases, consumed wholesale goods, etc.
Use Tax
Prevent sales tax evasion.

Let me be Frank
with you for a
moment.
Frank’s Fab
Coffee
Frank rocks!
Thanks. Mi cup
est su cup.
Frank’s
Cup

X 300 per year (each employee)
What is wrong with this?
Did Frank pay tax when he purchased the cups?

If the sales tax doesn’t get you
the use tax will.

Consumer
• A tax that consumers
remit when they buy
something in Montana.
• Buyer’s use tax or
purchaser’s use tax.
• Covers the tax burden
not collected by the
seller.
Seller
• Also called merchant or
vendor use tax.
• Usually takes place in an
interstate transaction.
• Rather than collecting sales
tax the seller collects the
seller’s use tax rate.
• The rate could be different.
Consumer or Sellers Use Tax
Both are remitted where property is used or enjoyed.

Make sure your AP or purchasing department
has procedures to capture use tax.
Be cautious with out-of-state, mail order, or
internet purchases.
Find out what the Minnesota DOR says about use
tax here.
What do you need to do?
Be careful – according to a recent survey by the
publisher of the RIA tax guide the second most
common issue in an audit is failure to remit use tax.

Nexus
• Do I need to collect taxes here?
Exemptions
• Does the customer have an exemption certificate?
Product taxability
• What is the taxability of this product or service?
3 Main Considerations

Nexus
More than a way to cut line at the border.

Nexus relates to the seller.
A “connection” with a state establishes nexus.
What triggers Nexus?
• Physical presence in a state.
• Employee activity in a state.
• Activity of agents in a state (including affiliates).
Some surprising Nexus triggers:
• Attendance at trade shows in a state.
• Certain amounts of revenue earned in a state (this level of
revenue is determined by each individual state).
Important decision regarding Nexus: Quill vs. ND
What establishes Nexus?

100 or more sales within the state in a 12 month
period.
10 or more sales totaling more than $100,000
within 12 consecutive months.
Retailers that maintain a place of business in the
state.
Minnesota Nexus
Or any agent operating under the authority of the
retailer.

“The avoidance of taxes is
the only intellectual
pursuit that still carries
reward.”- John Maynard Keynes

Stuff fur sale
Interstate
Commerce

Intrastate
• Buyer and seller are
both within the same
state.
• Sales tax is collected
seller and remitted to
the state.
• Easy, peazy, lemon
squeezy.
Interstate
• Buyer and seller are not
within the same state.
• Seller may collect sales tax,
may collect seller’s use tax,
or may collect nothing
• “It depends.”
• Either way, somebody is
going to need to cough up
some taxes.
Intrastate vs. Interstate Transactions

The vendor is located outside the state.
Quill Corp. vs North Dakota
The vendor sells taxable property to customers
within the state.
The property is stored, used, or consumed in the
state.
The vendor has sufficient nexus in the state.
2
3
4
1

Goods moving between states “in commerce” are
only subject to tax at the origin or destination.
Goods that are in transit are not subject to tax.
There are some special cases.
Interstate Commerce Exemption
This can be a common, and often costly, tax trap.

Seller
Buyer
Warehouse
Does Utah get any tax?

The four-pronged test:
1. The transaction must have sufficient taxable nexus with the state.
2. The tax cannot discriminate against interstate commerce. It
cannot unfairly favor a local vendor by charging a lesser rate.
3. The tax must be fairly apportioned, i.e., the property is taxed in
proportion to its presence in the state or the activity of the
taxpayer in the state.
4. The tax must fairly relate to the benefits received, i.e., the
benefits the taxpayer receives from the state are commensurate
with the tax imposed.
For more information see: Complete Auto vs. Brady
Interstate Transactions

Destination
Vs.
Origin
Which tax rate applies?

Life is a journey, but we still
care about the destination.
Journey smurny, I care about
the origin of things.

Some states are title transfer, some states are
possession transfer, some require both.
Depends on the terms of the contract for sale.
If not specified, the possession transfers when
goods are delivered.
Where does possession transfer?
In destination states (most states), only the state
where the buyer takes possession has legal right to
tax.

• Minnesota is a destination state.
• Taxes are assessed where products or services are
delivered in the case of intrastate transactions.
• In these cases there is no change for deliveries outside
the state or sales where customers transport goods
across state lines before consumption.
Minnesota Specifics

Examples
• A resident of Bloomington orders a pizza from a
restaurant located in Richfield. The store delivers
the pizza to the customer in Bloomington.
• Should you use the sales tax rate in Bloomington
or Richfield?
• Sales tax is based on the customer’s location in
Bloomington.

Examples
• A St. Paul resident purchases a computer online
from a merchant in Minneapolis. The computer is a
gift for a student attending college in Bemidji. The
buyer directs the seller to ship the computer to the
student’s address in Bemidji.
• Does title transfer in St. Paul, Minneapolis, or
Bemidji?
• The sale is based on the location of the student in
Bemidji. The merchant should collect sales tax
based on the “ship to” address in Bemidji.

Examples
• A Brainerd resident purchases a mattress at a
store in Minneapolis. The merchant delivers the
mattress from its warehouse located in St. Paul to
the customer’s home in Brainerd.
• Where should sales tax be assessed?
• Sales tax is based on the customer’s location in
Brainerd.

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Reciprocity
• Where reciprocity exists, the state gives credit for
sales or use taxes already paid on the product in
another state.
• Not all states have reciprocity.
• Individual states decide whether or not to grant
reciprocity.
• Minnesota allows reciprocity under the SSUTA.

Most states tax sales made over the internet like catalog sales.
Who remits the tax?
• If the seller has nexus in the destination state, the seller
charges the tax.
• If the seller does not have nexus, the buyer remits use tax.
• Simple right?
Problems and confusion:
• Internet Tax Freedom Act – not related to items purchased
the internet.
• Internet Tax Nondiscrimination Act
Internet Sales

• Cooperative effort of 44 states, D.C., local governments and the
business community to simplify sales and use tax collection.
• Reduce administrative costs for retailers operating in multiple
states.
• Seeks to make local "brick-and-mortar" stores and remote sellers all
operate by the same rules.
• Minnesota is a charter member state.
• This is what effectively makes Minnesota “destination-based.”
• Retailers that deliver products to customers need to code the local
sales tax to that of the destination city or county.
For Minnesota-specific information click here.
The Streamlined Sales Tax Project

• Prescribes methods and resources to help you confidently
research tax issues.
• Provides resources such as a Uniform Sales and UseTax
Exemption Certificate that is accepted in 38 states..
• Provides assistance for fundraiser rules.
• Voluntary Disclosure Program allows those with potential liability
in multiple U.S. states to negotiate a settlement agreement
through a single point of contact and a uniform procedure.
For more information click here.
Multistate Tax Commission

• Allows previously unregistered businesses to pay back
taxes.
• Generally has a look back period for 4 years plus the
current.
• Can result in up to a 35% potential discount in waived
penalties.
• The DOR can summarize the liability on one assessment.
For more information click here.
Voluntary Disclosure Program

• Compact members - states that have enacted the
Multistate Tax Compact into their state law.
• Sovereignty members - states that support the
purposes of the Multistate Tax Compact through
participation in, and financial support for, the general
activities.
• Associate members - states that participate in
Commission meetings and otherwise consult and
cooperate with the Commission.
Key Terms Related to the MTC

Tax Treatment of
Specific Situation

Manufacturing
General Treatment Minnesota
Non-Taxable Non-Taxable
Machinery and equipment used in the production ofTPP.

Manufacturing
However, in some cases repair labor is taxable.
Repair or replacement parts for production machinery

Manufacturing
Unless raw materials are supplied by a consumer
for production.
Ingredients and component parts that become part ofTPP

Manufacturing
This is specifically related to fuels or utility
services consumed in manufacturing.
Materials used or consumed in manufacturing.

Manufacturing
It depends It depends
Tools
For more information on the M&E exemption click here.

Manufacturing
Taxable Non-taxable
This includes utility services. However, this tax
does not relate to agricultural use.
Fuels

Manufacturing
Taxable Non-Taxable
More specifically, these are exempt. Sales of packing
materials to businesses in the commercial packing
industry are taxable in the case of consumption.
Containers sold to be reused by vendors are also
taxable.
Containers, packing material, labels, wrapping, etc.

Construction
This is non-taxable for many cases, and non-taxable
for custom construction of real property. For more
information on the construction industry and taxes
click here.
Building materials

Construction
It depends Non-Taxable
Tools and equipment

Computers and Software
Taxable Taxable
However, computer sales to students are exempt.
Computer hardware

Taxable Taxable
Think of “canned” software as software off the
shelf. InWashington downloads are specifically
mentioned as taxable.
Prewritten or canned software

This is an exemption that applies unless there is a
required hardware component to run the custom
software. In that case, the hardware can be taxed
separately.
Custom software

Services
Taxable Taxable
Personal services

Services
Professional services

Services
Taxable It depends
Usually services to real property in Minnesota
are exempt.
Services related to real property

Services
Taxable Taxable
This includes installing, repairing, cleaning, altering,
improving, constructing or decoratingTPP.
Services related toTPP

Services
Taxable Taxable
Seller’s transportation or shipping charges

Services
Taxable Taxable
Shipping and handling charges

Services
Taxable Taxable
Third-party delivery charges

Services
Taxable It depends
This relates to personal and real property.
Repair labor

Services
Taxable Taxable
Again, personal and real property.
Installation charges forTPP

Services
Taxable Taxable
Only applies to leasing of housing services for
less than one month.
Leases

Services
Taxable Taxable
This is mostly related to personal equipment rental.
Rentals

Services
Taxable Taxable
Warranties will be covered later, and yes they are taxable.
Maintenance agreements

For More Information on
Taxable Services click here.

• Specific to accrual-based businesses.
• You may not claim a bad debt allowance for:
• Finance charges.
• Once credit is received you may deduct the amount
previously paid.
Bad Debts

• These are charges to a consumer for borrowed money.
• Fees are not associated with the transfer ofTPP.
• Therefore, no taxable basis.
• However, it depends.
• In certain states finance charges are taxable.
Finance Charges

• Three ways to figure taxable basis.
• Minnesota opts for the way most beneficial to
consumers.
• The taxable amount is the difference in value between
the value of the trade and the value of the full-price
item.
Trade-In Allowances

Ways of Trades
Your Car New Car
$5,000 $350,000Difference:
$345,000

• Use tax is generally remitted for withdrawals from
stock.
• Examples:
• Samples
• Display models – again, it depends
• The key idea is that these items were purchased with
the intent to sell.
• Taxable basis is figured on the purchase cost.
Withdrawal from Stock

The Electronics Shop
Display Model
Cost: $400
Return to Stock
Discounted Model
Sales Price: $500
Who pays the tax?

Situation 2
Display Model
Cost: $400
Return to Stock
Discounted Model
Sales Price: $300
Consumer pays sales tax on $300.Retailer pays use tax on $100.

• This usually relates to sales of inventory and items as
part of a sale of a business.
• These are not considered as retail sales.
• Items that are not part of stock are considered as
“occasional sales.”
• Warning: this does not relieve the new owner of any
previously owed tax liabilities.
Bulk Sales

• This calculation depends on the normal course of
business.
• Cost of materials can be claimed for items outside of
core inventory.
• Fair market value must be claimed for items assembled
within a normal inventory.
Self-Produced Assets

1. Optional – extended warranties.
2. Mandatory – usually included in the
purchase price.
Taxable or Non-taxable
Taxable
It depends
For more information about the taxable nature of extended
warranties click here.
Replacement parts for mandatory warranties are taxable
unless they are covered in the warranty agreement.

Two Reasons for Exemption
1. How something is used.
2. The purchaser’s status.
• Resale
• Manufacturing
• Etc.
• Government
• Tribal organizations
• Religious organizations and non-profits

Exemptions
Exempt Entities Exempt Transactions
Federal government,
tribes, etc.
Wholesale, specific
industry use, etc.
Either way, you need proof of the exemption.

Nexus
Yes
Collect at 0%
Collect correct %
TaxableCustomer
(Exemptions)
Item taxability
Determining Your Tax Profile
No
No
Yes
Yes
No

Register Collect
ReconcileRemit

Remit
ReconcileCollect
Register
Register Collect
ReconcileRemit
Minnesota eRegistration Service

Remit
ReconcileCollect
Register
Register Collect
ReconcileRemit
SalesTax Rate Calculator

Remit
ReconcileCollect
Register
Register Collect
ReconcileRemit
Reconciling SalesTax Payable

Remit
ReconcileCollect
Register
Register Collect
ReconcileRemit
Remittance Options and Instructions

Auditors will usually examine all open years (determined by
the statute of limitations) for:
• Sales, including exemption certificates
 Make sure you have all the current certificates as required.
• Purchases, including out-of-state purchases
 Make sure you can answer questions about where and how
property is used.
• Other records, including ledgers, journals, and adjustments
 Make sure these support the reported values on any returns.
• Reporting and remitting, including all filed returns
 Have these handy, including proof of filing if available.

Auditors will conduct the examination of these records
on:
• A detailed basis,
• A sampled basis, or
• Some of both.

For sampled records, they may use
either:
• A block sample,
• A random sample, or
• Some of both.

• Books, records, invoices, and receipts must be open for
examination by the DOR at any time.
• Managed audit procedure –Taxpayers are allowed to
perform some or all of the audit functions.
• Statute of limitations – typically no more than 3.5
years past the close of the tax year. However, there are
exceptions:
• A non-registered taxpayer.
• Fraud or misrepresentation.
Minnesota Audits

… AND
YOU’RE
DONE!
Thank you.

Link to this
presentation:
www.LeanTeams.ca/resources
Wade Farquhar

Sales and Use Tax - Minnesota Specific

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