SALES AND USE TAX
FOR MANUFACTURERS
Oct. 3, 2013
1
TWO TRUTHS AND A LIE
Bakeries are
manufacturers
Restaurants
are
manufacturers
Cheese
cutting plants
are
manufacturers
2
TWO TRUTHS AND A LIE
Plastic wrap to
keep packages
on a pallet is
taxable
Plastic wrap
around dry
cleaning is
taxable
Plas...
TWO TRUTHS AND A LIE
Quality control
of raw
materials is
taxable
Quality control
of work in
process is
taxable
Quality con...
TWO TRUTHS AND A LIE
The safety guard
on a lathe is
exempt
The screw driver
to assemble the
lathe is exempt
The screw driv...
WHY WE’RE HERE
• Wisconsin sales tax collections were
roughly $4.3 billion in 2012
• Wisconsin has 340 field and office au...
WHAT IS SUBJECT TO TAX?
• All tangible personal property, unless an
exemption applies
• Listed services, including repair ...
WHEN I’M PURCHASING . . .
• What if my vendor doesn’t charge me tax?
• Not a freebie! Use tax applies
• Use tax is due on ...
VENDORS DON’T CHARGE TAX
BECAUSE . . .
• Out of state vendor
• Vendor not aware of sales tax obligations
• You’ve given th...
WHAT DOES THIS MEAN
FOR ME?
• Potentially significant tax liability, penalties
and interest
• For manufacturers, state wil...
WHAT SHOULD I DO?
• Best practice: consistent review process
for each vendor invoice.
• Where sales tax has not been charg...
EXEMPTIONS
• Exemptions in Wisconsin are narrowly
construed. The burden of proving an
exemption applies is on the taxpayer...
EXEMPTIONS FOR
MANUFACTURERS
• Equipment and machinery
• Inputs or consumables
• Fuel and electricity
• Containers and shi...
WHAT IS MANUFACTURING?
• The production by machinery
• Of a new article of tangible personal
property
• With a different f...
SCOPE OF MANUFACTURING
• Manufacturing begins when raw materials
begin to be changed.
• Manufacturing ends when the finish...
INCLUDED IN MANUFACTURING
• Conveying work in process directly
from one manufacturing process to
another in the same plant...
INCLUDED IN MANUFACTURING
• Assembling finished units in the same
plant by the manufacturer of those units.
• Packaging un...
MEANING OF “PLANT”
• A parcel of property or adjoining parcels of
property and the buildings, machinery, and
equipment tha...
NOT INCLUDED IN
MANUFACTURING
• Testing of raw materials
• Storage of raw materials
• Storage of unfinished goods if remov...
NOT INCLUDED IN
MANUFACTURING
• Processing or fabricating that does not
meet all the criteria of manufacturing
• Storage o...
FABRICATION VS.
MANUFACTURING
• Manufacturing requires a “new article” with
a different form, use and name.
• The applicat...
SERVICES FOR
MANUFACTURERS
• A company that is not a manufacturer
that performs a test or other service
for a manufacturer...
EXAMPLES OF
MANUFACTURERS
• Bakeries
• Breweries
• Creameries
• Cheese slicing and packaging plants
• Meat packers
• Food ...
NOT MANUFACTURERS
• Contractors
• Farmers
• Research and development firms
• Mining companies
• Recycling companies
• Phot...
EXEMPTIONS FOR
MANUFACTURERS
• “Machines and specific processing
equipment and repair parts exclusively
and directly used ...
WHAT IS A “MACHINE”?
• An item that is “principally and primarily a
significantly contributive factor in the
actual manufa...
“MACHINES AND SPECIFIC
PROCESSING EQUIPMENT”
• Includes small hand tools
• Includes repair and replacement parts
(augers, ...
SAFETY ATTACHMENTS
• Exemption applies to safety attachments
for exempt machines.
• Safety attachments may protect the
ope...
WHAT IS “EXCLUSIVE USE”?
• “Exclusive” means that the machines and
specific processing equipment are used by
a manufacture...
EXAMPLES OF
“EXCLUSIVE” USE
• Equipment used exclusively in testing
products through the manufacturing
process is exempt. ...
EXAMPLES OF
“EXCLUSIVE” USE
• Cranes, pallet jacks, fork lifts and conveyor
belts used exclusively within the
manufacturin...
BEST PRACTICE TO MEET
“EXCLUSIVE” TEST
• Assign specific equipment to testing
versus manufacturing areas;
• Use different ...
WHAT IS “DIRECT” USE?
• Machines or equipment must physically
impact the manufacturing process.
• Machines or equipment th...
EXAMPLES OF ITEMS THAT ARE
NOT USED “DIRECTLY”
• Tables and stands used to hold manufacturing
equipment are not used “dire...
EXAMPLES OF ITEMS THAT ARE
NOT USED “DIRECTLY”
• Tools used to repair manufacturing
machines
• Water softening equipment
•...
STORAGE TANKS
• Tanks used within the scope of the
manufacturing process may be taxable
or exempt, depending on their feat...
WHAT IS “TANGIBLE PERSONAL
PROPERTY”?
• Personal property that can be seen,
weighed, measured, felt or touched, or
that is...
EXEMPTION FOR INGREDIENTS
AND CONSUMABLES
• Different from the machinery exemption
• Must still be used in the scope of
ma...
“DESTINED FOR SALE”
REQUIREMENT
• Excludes inputs for items that will be used
internally or given away.
• Excludes inputs ...
WHAT THE EXEMPTION
APPLIES TO
• Product must be become “an ingredient or
component part of the article of tangible
persona...
EXAMPLES OF CONSUMABLES
• Gases
• Lubricants
• Filtering clay
• Foundry sand
• Lapping and grinding compounds
• Cleaning a...
EXAMPLES OF ITEMS THAT ARE
NOT EXEMPT
• Safety glasses, clothing, shoe covers, and
gloves used to protect the workers from...
USING PERCENTAGES
• To avoid having to track how individual
supplies are used, calculate a reasonable
percentage of exempt...
FUEL AND ELECTRICITY
• Fuel and electricity consumed in
manufacturing tangible personal property
is exempt.
• Fuel can inc...
FUEL USED IN
MANUFACTURING
• Calculations of the percentage of fuel
exemption claimed are subject to audit.
• Percentages ...
CALCULATING PERCENTAGE OF
EXEMPT FUEL
• Study must be reasonable and
documented.
• May consist of a list of machines, ener...
CONTAINERS
• Containers and packaging materials are
exempt when used to transfer
merchandise “destined for sale” to
custom...
CONTAINERS THAT QUALIFY
• Boxes, product and shipping labels, wrapping
paper, tape, barrels, bottles, sacks, cans,
drums, ...
ITEMS THAT
DON’T QUALIFY
• Advertising flyers, packing slips, coupons
and other items included in the package
• Lumber or ...
WASTE
REDUCTION/RECYCLING
• Exemption applies to machinery and
equipment used exclusively and directly
for waste reduction...
DEFINITIONS
• Solid waste means garbage, refuse,
sludge or other materials or articles,
including solids, semisolids, liqu...
EXAMPLES OF EXEMPT
RECYCLING EQUIPMENT
• Machinery used to produce fuel cubes by
shredding paper and other waste
products;...
QUALIFIED RESEARCH
• Exemption became effective as of 1/1/12
• Applies to those who are “primarily
engaged in manufacturin...
PRIMARILY ENGAGED IN
MANUFACTURING
• “Primarily engaged” means more than 50% of
the company’s activities must be
manufactu...
EXCLUSIVELY AND DIRECTLY
• Exclusive use means at least 95% of the
total use must be in qualified research
• If other requ...
QUALIFIED RESEARCH
• Must be undertaken for the purpose of
discovering information which is technological
in nature,
• The...
QUALIFIED RESEARCH
• Burden of proof is on the taxpayer
claiming the exemption
• All of the requirements listed above must...
NOT QUALIFIED RESEARCH
• Research that relates to style, taste,
cosmetic or seasonal design factors
• Research after comme...
DOCUMENTATION
• Same as required for an R&D study
• Project scope (including uncertainty as
to scope)
• Research and testi...
SALES BY MANUFACTURERS
• All sales of tangible personal property are
presumed to be taxable unless an exception
or exempti...
DOCUMENTING EXEMPT SALES
• Where sales are made out of state,
document out of state ship to address on
invoice
• Where sal...
EXEMPTION CERTIFICATE
REQUIREMENTS
• Name and address of buyer
• Name of seller
• Description of property
• Reason for exe...
ACCEPTING CERTIFICATES
• The seller must not have a reason to
know of false or misleading information
on the certificate
•...
AUDIT FLAGS
• Failure to report any use tax
• A vendor is audited
• A customer is audited
• Industry initiatives
• Recent ...
DEFENDING AN AUDIT – USE
• Institute consistent practice of reviewing all
vendor invoices and credit card charges
• Docume...
DEFENDING AN AUDIT - SALES
• Invoice all sales of used assets and
charge tax where appropriate
• Document where sales occu...
MULTISTATE ISSUES
• Where does a sale occur? Where
possession of the goods transfers.
• When shipped by common carrier or
...
SALES OUTSIDE WISCONSIN
• Not subject to Wisconsin sales tax
• Will be subject to the destination state’s
rules
• You may ...
WHAT IS NEXUS?
• Nexus is the threshold that must be met in
order for a state to require an out of state
business to colle...
PHYSICAL PRESENCE
• Salespeople, but doesn’t matter if they’re
employees or independent contractors
• Employees working fr...
MARKETPLACE FAIRNESS ACT
• Has passed the Senate; currently in
the House
• Would impose sales tax collection and
remittanc...
PREPARING FOR “FAIRNESS”
• Start collecting exemption certificates from
every customer wherever located
• Expect many more...
QUESTIONS?
Julie Bogle, JD
julie.bogle@sgcpa.com
828-3119
Peter Soman, CPA
peter.soman@sgcpa.com
828-3174
73
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Sales Tax Issues for Manufacturers

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Sales Tax Issues for Manufacturers

  1. 1. SALES AND USE TAX FOR MANUFACTURERS Oct. 3, 2013 1
  2. 2. TWO TRUTHS AND A LIE Bakeries are manufacturers Restaurants are manufacturers Cheese cutting plants are manufacturers 2
  3. 3. TWO TRUTHS AND A LIE Plastic wrap to keep packages on a pallet is taxable Plastic wrap around dry cleaning is taxable Plastic wrap to protect contents delivered to customers is taxable 3
  4. 4. TWO TRUTHS AND A LIE Quality control of raw materials is taxable Quality control of work in process is taxable Quality control of finished products is taxable 4
  5. 5. TWO TRUTHS AND A LIE The safety guard on a lathe is exempt The screw driver to assemble the lathe is exempt The screw driver to assemble the manufactured product is exempt 5
  6. 6. WHY WE’RE HERE • Wisconsin sales tax collections were roughly $4.3 billion in 2012 • Wisconsin has 340 field and office auditors • Wisconsin auditors assessed $295 million in 2011 • For every $1 spent on audit, $11 in additional revenue is generated 6
  7. 7. WHAT IS SUBJECT TO TAX? • All tangible personal property, unless an exemption applies • Listed services, including repair and maintenance, processing of tangible personal property, and telecommunications. 7
  8. 8. WHEN I’M PURCHASING . . . • What if my vendor doesn’t charge me tax? • Not a freebie! Use tax applies • Use tax is due on the storage, use, or consumption of tangible personal property in Wisconsin • Why might this happen? 8
  9. 9. VENDORS DON’T CHARGE TAX BECAUSE . . . • Out of state vendor • Vendor not aware of sales tax obligations • You’ve given the vendor an exemption certificate • Items were removed from inventory for internal use, including displays, samples, or giveaways 9
  10. 10. WHAT DOES THIS MEAN FOR ME? • Potentially significant tax liability, penalties and interest • For manufacturers, state will typically spend most their time auditing purchases rather than sales 10
  11. 11. WHAT SHOULD I DO? • Best practice: consistent review process for each vendor invoice. • Where sales tax has not been charged but should have been, record use tax. • Pay use tax with sales/use tax returns. • Keep good workpapers for audit trail. 11
  12. 12. EXEMPTIONS • Exemptions in Wisconsin are narrowly construed. The burden of proving an exemption applies is on the taxpayer. • If your facts don’t meet the requirements for an exemption, it doesn’t apply. • This requires diligence on your part to make sure an exemption applies as intended. • Requires communication between production and accounting to determine whether an exemption applies. 12
  13. 13. EXEMPTIONS FOR MANUFACTURERS • Equipment and machinery • Inputs or consumables • Fuel and electricity • Containers and shipping materials • Waste reduction/recycling • Qualified research 13
  14. 14. WHAT IS MANUFACTURING? • The production by machinery • Of a new article of tangible personal property • With a different form, use, and name from existing materials • By a process popularly regarded as manufacturing 14
  15. 15. SCOPE OF MANUFACTURING • Manufacturing begins when raw materials begin to be changed. • Manufacturing ends when the finished product reaches its first point of storage. • Items used either before manufacturing begins or after it ends are not exempt, even when used by a manufacturer. 15
  16. 16. INCLUDED IN MANUFACTURING • Conveying work in process directly from one manufacturing process to another in the same plant; • Testing or inspecting throughout the manufacturing process the product that is being manufactured; • Storing work in process in the same plant where the manufacturing occurs. 16
  17. 17. INCLUDED IN MANUFACTURING • Assembling finished units in the same plant by the manufacturer of those units. • Packaging units in the same plant by the manufacturer of those units. 17
  18. 18. MEANING OF “PLANT” • A parcel of property or adjoining parcels of property and the buildings, machinery, and equipment that are located on the parcel. • The activity at each plant must meet the manufacturing requirements. • If a second plant is not separately manufacturing, none of its equipment will be exempt. • Equipment, machinery, containers and other materials used to ship goods between plants are not exempt. 18
  19. 19. NOT INCLUDED IN MANUFACTURING • Testing of raw materials • Storage of raw materials • Storage of unfinished goods if removed from the manufacturing process • Storage of finished goods in inventory • Internally repairing or maintaining equipment 19
  20. 20. NOT INCLUDED IN MANUFACTURING • Processing or fabricating that does not meet all the criteria of manufacturing • Storage or transportation of work in process between two plants • Creation or duplication of digital goods 20
  21. 21. FABRICATION VS. MANUFACTURING • Manufacturing requires a “new article” with a different form, use and name. • The application of labor to an article is not manufacturing unless the finished article is “clearly and distinctively new and different.” 21
  22. 22. SERVICES FOR MANUFACTURERS • A company that is not a manufacturer that performs a test or other service for a manufacturer may not claim manufacturing exemptions. • Repackaging or reassembling products on behalf of a manufacturer for reshipping is not manufacturing. 22
  23. 23. EXAMPLES OF MANUFACTURERS • Bakeries • Breweries • Creameries • Cheese slicing and packaging plants • Meat packers • Food processing plants • Snowmaking for ski hills • Printers 23
  24. 24. NOT MANUFACTURERS • Contractors • Farmers • Research and development firms • Mining companies • Recycling companies • Photographers • Restaurants 24
  25. 25. EXEMPTIONS FOR MANUFACTURERS • “Machines and specific processing equipment and repair parts exclusively and directly used by a manufacturer in manufacturing tangible personal property.” 25
  26. 26. WHAT IS A “MACHINE”? • An item that is “principally and primarily a significantly contributive factor in the actual manufacture or production of the product.” • This is known as the “use and function” test. • Requires “activity” on the part of the machinery or equipment. 26
  27. 27. “MACHINES AND SPECIFIC PROCESSING EQUIPMENT” • Includes small hand tools • Includes repair and replacement parts (augers, bits, dies, wheels, jigs, drills, tool holders, cutters, saw blades) 27
  28. 28. SAFETY ATTACHMENTS • Exemption applies to safety attachments for exempt machines. • Safety attachments may protect the operator, the machine or the product being manufactured. • Safety attachments do not have to be original with the machine, but • Must be physically attached to the machine. 28
  29. 29. WHAT IS “EXCLUSIVE USE”? • “Exclusive” means that the machines and specific processing equipment are used by a manufacturer in manufacturing to the exclusion of all other uses, except for occasional and sporadic use. • “Occasional” use is generally defined as 5% or less. 29
  30. 30. EXAMPLES OF “EXCLUSIVE” USE • Equipment used exclusively in testing products through the manufacturing process is exempt. If the same equipment is used more than 5% of the time to test raw materials before the manufacturing process begins, or to test finished product after the first point of storage, the equipment will not qualify for the exemption. 30
  31. 31. EXAMPLES OF “EXCLUSIVE” USE • Cranes, pallet jacks, fork lifts and conveyor belts used exclusively within the manufacturing process to lift and move product are exempt. • If that same equipment is used more than 5% of the time to move product before or after manufacturing begins, or is used to move manufacturing equipment, tools, or other plant equipment, it will not qualify for the exemption. 31
  32. 32. BEST PRACTICE TO MEET “EXCLUSIVE” TEST • Assign specific equipment to testing versus manufacturing areas; • Use different fork lifts, pallet jacks and other conveyance equipment for the warehouse than used on the manufacturing floor. 32
  33. 33. WHAT IS “DIRECT” USE? • Machines or equipment must physically impact the manufacturing process. • Machines or equipment that are passive or that act on something other than the product being manufactured are not exempt, even if the machines or equipment are necessary or required for the manufacturing process. 33
  34. 34. EXAMPLES OF ITEMS THAT ARE NOT USED “DIRECTLY” • Tables and stands used to hold manufacturing equipment are not used “directly” in manufacturing and are not exempt unless the stand is purchased from the seller of the machine as an original component part of the machine. • Items used for waste disposal, air circulation, communication, lighting, fire suppression, and maintenance are not used “directly” in manufacturing even though they may be required for the manufacturing process to occur. 34
  35. 35. EXAMPLES OF ITEMS THAT ARE NOT USED “DIRECTLY” • Tools used to repair manufacturing machines • Water softening equipment • Refrigerated storage facilities, even if the refrigeration occurs during the manufacturing process 35
  36. 36. STORAGE TANKS • Tanks used within the scope of the manufacturing process may be taxable or exempt, depending on their features. • Tanks that are passive receptacles of product are taxable. • Tanks that cool or heat, agitate, change or mix raw materials are used “directly” in manufacturing and are exempt. 36
  37. 37. WHAT IS “TANGIBLE PERSONAL PROPERTY”? • Personal property that can be seen, weighed, measured, felt or touched, or that is in any other manner perceptible to the senses, and includes electricity, gas, steam, [and] water . . .” 37
  38. 38. EXEMPTION FOR INGREDIENTS AND CONSUMABLES • Different from the machinery exemption • Must still be used in the scope of manufacturing • Must still be used by a manufacturer • Additional requirement: must be used in manufacturing items that are destined for sale as tangible personal property 38
  39. 39. “DESTINED FOR SALE” REQUIREMENT • Excludes inputs for items that will be used internally or given away. • Excludes inputs used by a manufacturer that manufactures and installs real property improvements. • Examples: cement, countertops, cabinetry, ductwork, prefabricated buildings. 39
  40. 40. WHAT THE EXEMPTION APPLIES TO • Product must be become “an ingredient or component part of the article of tangible personal property . . .” or • Become “consumed or destroyed or lose its identity in manufacturing . . .” 40
  41. 41. EXAMPLES OF CONSUMABLES • Gases • Lubricants • Filtering clay • Foundry sand • Lapping and grinding compounds • Cleaning agents and solvents for maintaining manufacturing machinery • Safety supplies used to maintain the purity of the product being manufactured (gowns, gloves, shoe covers) 41
  42. 42. EXAMPLES OF ITEMS THAT ARE NOT EXEMPT • Safety glasses, clothing, shoe covers, and gloves used to protect the workers from the product or the process • Cleaning supplies used to maintain the facility, even in a clean room • Cardboard used to contain or absorb liquids or waste products • Shop towels, even if used to maintain manufacturing equipment 42
  43. 43. USING PERCENTAGES • To avoid having to track how individual supplies are used, calculate a reasonable percentage of exempt versus taxable use, and apply that percentage to your ongoing purchases. Update periodically. • Examples: cardboard, wrap, gloves, cleaning supplies. 43
  44. 44. FUEL AND ELECTRICITY • Fuel and electricity consumed in manufacturing tangible personal property is exempt. • Fuel can include oxygen, acetylene, and other gases used to produce heat or power. • Must be used directly in manufacturing, not for plant heating or cooling, lighting, receiving, storage, shipping or office. 44
  45. 45. FUEL USED IN MANUFACTURING • Calculations of the percentage of fuel exemption claimed are subject to audit. • Percentages may be calculated through third party utility studies, but may also be calculated by other methods. 45
  46. 46. CALCULATING PERCENTAGE OF EXEMPT FUEL • Study must be reasonable and documented. • May consist of a list of machines, energy consumption per machine, how many hours each machine operates per day compared to total plant energy usage. • Must be adjusted as circumstances change (machinery added or removed, shifts added or ended). 46
  47. 47. CONTAINERS • Containers and packaging materials are exempt when used to transfer merchandise “destined for sale” to customers. • Does not apply to containers used to transport products for further processing or products that are not “destined for sale” 47
  48. 48. CONTAINERS THAT QUALIFY • Boxes, product and shipping labels, wrapping paper, tape, barrels, bottles, sacks, cans, drums, and packaging materials used to keep the product safe in shipping • Packaging materials include items inside a package that preserve, stabilize, or protect the contents • It does not matter what the container is made of • It does not matter whether the container is returnable 48
  49. 49. ITEMS THAT DON’T QUALIFY • Advertising flyers, packing slips, coupons and other items included in the package • Lumber or other material used for bracing, blocking, or shoring items in shipping • Cardboard, paper and wrap that are used to protect products during shipping but are not transferred with the product to the customer. 49
  50. 50. WASTE REDUCTION/RECYCLING • Exemption applies to machinery and equipment used exclusively and directly for waste reduction or recycling activities that reduce the amount of solid waste generated, reuse solid waste, recycle solid waste, compost solid waste or recover energy from solid waste. 50
  51. 51. DEFINITIONS • Solid waste means garbage, refuse, sludge or other materials or articles, including solids, semisolids, liquids, and contained gases. 51
  52. 52. EXAMPLES OF EXEMPT RECYCLING EQUIPMENT • Machinery used to produce fuel cubes by shredding paper and other waste products; refrigerant recovery systems where the refrigerant is recycled back into the cooling unit; equipment used to remove impurities from lubricants in manufacturing machines so the lubricants can be reused; and a system for burning used oil to provide heat. 52
  53. 53. QUALIFIED RESEARCH • Exemption became effective as of 1/1/12 • Applies to those who are “primarily engaged in manufacturing or biotechnology” • Applies to items used exclusively and directly in qualified research 53
  54. 54. PRIMARILY ENGAGED IN MANUFACTURING • “Primarily engaged” means more than 50% of the company’s activities must be manufacturing. • Primary activity is determined by a reasonable measure of all activities conducted in Wisconsin. A reasonable measure of activity may use sales revenue, costs and expenses, or investment in plant, machinery and equipment. 54
  55. 55. EXCLUSIVELY AND DIRECTLY • Exclusive use means at least 95% of the total use must be in qualified research • If other requirements are met, is mixed use between manufacturing and qualified research allowed? Yes. 55
  56. 56. QUALIFIED RESEARCH • Must be undertaken for the purpose of discovering information which is technological in nature, • The application of which is intended to be useful in the development of a new or improved business component, and • Substantially all of the activities of which constitute elements of a process of experimentation relating to a new or improved function, performance, reliability or quality. 56
  57. 57. QUALIFIED RESEARCH • Burden of proof is on the taxpayer claiming the exemption • All of the requirements listed above must be met • Tests must be applied separately to each project, product or process 57
  58. 58. NOT QUALIFIED RESEARCH • Research that relates to style, taste, cosmetic or seasonal design factors • Research after commercial production • Duplication of an existing business component • Marketing studies • Routine data collection 58
  59. 59. DOCUMENTATION • Same as required for an R&D study • Project scope (including uncertainty as to scope) • Research and testing activities performed • Results of the research • The specific activities and manner in which the exempt items are used 59
  60. 60. SALES BY MANUFACTURERS • All sales of tangible personal property are presumed to be taxable unless an exception or exemption applies • The burden of proving a sale is not taxable is on both the seller and the buyer (not the state) • Manufacturers that sell both wholesale and retail in Wisconsin are required to have a seller’s permit • Sales of business assets are taxable 60
  61. 61. DOCUMENTING EXEMPT SALES • Where sales are made out of state, document out of state ship to address on invoice • Where sales are wholesale, manufacturer must obtain valid exemption certificates 61
  62. 62. EXEMPTION CERTIFICATE REQUIREMENTS • Name and address of buyer • Name of seller • Description of property • Reason for exemption • Must be signed by buyer • Must be dated • If the buyer is from out of state (but sale occurs in Wisconsin), must also obtain buyer’s state tax identification number. 62
  63. 63. ACCEPTING CERTIFICATES • The seller must not have a reason to know of false or misleading information on the certificate • The seller is presumed to know if an exemption could apply to the purchase • The seller may be held liable for soliciting invalid exemption certificates. 63
  64. 64. AUDIT FLAGS • Failure to report any use tax • A vendor is audited • A customer is audited • Industry initiatives • Recent press • Building permits • Claims for refund • Prior audit with poor results 64
  65. 65. DEFENDING AN AUDIT – USE • Institute consistent practice of reviewing all vendor invoices and credit card charges • Document reasons for exemptions • Document percentage allocations • Keep use tax calculation workpapers • Reconcile and document credit memos and adjustments • Be careful with exemption certificates! 65
  66. 66. DEFENDING AN AUDIT - SALES • Invoice all sales of used assets and charge tax where appropriate • Document where sales occur • Obtain exemption certificates, even if the exemption seems obvious • Check exemption certificates for accuracy 66
  67. 67. MULTISTATE ISSUES • Where does a sale occur? Where possession of the goods transfers. • When shipped by common carrier or delivery service, possession transfers when the goods reach their destination. Does not matter who chose or paid the shipper. 67
  68. 68. SALES OUTSIDE WISCONSIN • Not subject to Wisconsin sales tax • Will be subject to the destination state’s rules • You may (or may not) be required to collect the other state’s tax • Will depend on whether you have nexus 68
  69. 69. WHAT IS NEXUS? • Nexus is the threshold that must be met in order for a state to require an out of state business to collect sales tax. • For sales tax, a business must have physical presence in a state in order to create nexus. • Without physical presence, the state cannot require the business to collect tax on sales made to customers in that state. 69
  70. 70. PHYSICAL PRESENCE • Salespeople, but doesn’t matter if they’re employees or independent contractors • Employees working from home • Third party installers and repair people • Trade shows (in most states) • Delivery in a company vehicle • No physical presence = no sales tax obligation – or does it? 70
  71. 71. MARKETPLACE FAIRNESS ACT • Has passed the Senate; currently in the House • Would impose sales tax collection and remittance requirements on out of state businesses despite lack of physical presence • Would apply to sellers with more than $1 mm in out of state sales • Is not limited to “on-line” sales 71
  72. 72. PREPARING FOR “FAIRNESS” • Start collecting exemption certificates from every customer wherever located • Expect many more nexus questionnaires • Track sales by state • Become knowledgeable about states’ responses to the law change • Implement systems to record, collect and remit tax where appropriate 72
  73. 73. QUESTIONS? Julie Bogle, JD julie.bogle@sgcpa.com 828-3119 Peter Soman, CPA peter.soman@sgcpa.com 828-3174 73

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