Kamal Adeni - Nuts and Bolts Of Sales Tax


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Presentation to IMA about the basics of Sales and Use Tax compliance, audits, and the possibility of VAT in this country.


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Kamal Adeni - Nuts and Bolts Of Sales Tax

  1. 1. Keith Fleury 302.225.5146 Don Gillespie 301.296.7894 Kamal Adeni 610.409.1661 Scott Bricker 302-225-5153 Nuts & Bolts about Sales and Use Tax, Everything you wanted to know but (maybe) were smart enough not to ask. April 29, 2010
  2. 2. Agenda <ul><li>Sales Tax Function </li></ul><ul><li>States Imposing Sales Tax </li></ul><ul><li>Average state and local sales tax rates </li></ul><ul><li>Definitions </li></ul><ul><li>Nexus </li></ul><ul><li>Exemptions </li></ul><ul><li>Compliance / Automation (ADP) </li></ul><ul><li>Audit Appeal Process </li></ul><ul><li>Is VAT in our Future? </li></ul><ul><li>Strange Sales Tax and other Laws </li></ul><ul><li>Questions </li></ul>
  3. 3. Brief Fact #1 The IRS tax code itself fills 2,840 pages, and contains about 2.8 million words. In comparison, the Bible has 1,340 pages and about 0.8 million words.
  4. 4. Who Said What About Tax Complexity “ It’s time for a complete overhaul of our income taxes……I feel it’s a disgrace to the human race.” Future President Jimmy Carter campaigning in 1976
  5. 5. Who Said What About Tax Complexity “ The hardest thing in the world to understand is the income tax.” Albert Einstein, as quoted in Crown’s Book of Political Quotations.
  6. 6. Who Said What About Tax Complexity “ “ Every tax bill …is the culmination of strident debate and…compromise. This can lead to mind-numbing complexity as the different philosophies, fight for a bill that represents their respective agendas. To pass a bill, the competing political factions split the differences and come up with Frankenstein, leaving taxpayers with the impossible task of sorting it all out.” Senator William Roth
  7. 7. Who Said What About Tax Complexity “ Taxation of business is even more complicated (than individual taxation). The average Fortune 500 company spends over $2 million per year on tax matters; many of the largest corporations spend over $10 million per year,…” Tax Compliance Expert, Joel Slemrod
  8. 8. Who Said What About Tax Complexity “ No one should ever see how law or sausage is made.” Chancellor Otto von Bismarck
  9. 9. What is included in the Sales & Use Tax function? <ul><li>Compliance Aspect </li></ul><ul><li>Planning Aspects </li></ul><ul><li>Customers Service Aspects </li></ul><ul><li>Audit Aspects </li></ul><ul><li>Accounting Aspects </li></ul><ul><li>System Issues </li></ul><ul><li>Miscellaneous Issues </li></ul>
  10. 10. Sales & Use Tax function <ul><li>Compliance Aspects </li></ul><ul><ul><li>Filing of multi state returns </li></ul></ul><ul><ul><li>Payment of use taxes accrued on purchases </li></ul></ul><ul><ul><li>Filing of returns and remission of sales taxes withheld </li></ul></ul><ul><ul><li>Calculating items such as payer discounts for “self assessing” </li></ul></ul><ul><ul><li>Collecting exemption certificates from customers </li></ul></ul><ul><ul><li>Maintenance of taxability matrix in a ERP system </li></ul></ul>
  11. 11. Sales & Use Tax function <ul><li>Planning Aspects </li></ul><ul><ul><li>Reverse audits opportunities </li></ul></ul><ul><ul><li>Are the amounts accrued for use tax reasonably accurate (trend analysis) </li></ul></ul><ul><ul><li>Are the amounts being accrued technically accurate (from a legal perspective) </li></ul></ul>
  12. 12. Sales & Use Tax function <ul><li>Customer Service Aspects </li></ul><ul><ul><li>Includes BOTH internal and external customers…what is or is not taxable? </li></ul></ul><ul><ul><li>Assist customers that receive ruling that something they purchased was NOT taxable when they originally paid tax to vendor …How to credit? (Billing Issue or Tax Issue?) </li></ul></ul><ul><ul><li>Understanding of the business processes may lead to better results relating to sales tax issues </li></ul></ul>
  13. 13. Sales & Use Tax function <ul><li>Audit Aspects </li></ul><ul><ul><li>Distinguish audits involving pre and post prep years may be advisable? </li></ul></ul><ul><ul><li>In any event, need to “meet and greet and handle” the auditors will be an ongoing need </li></ul></ul><ul><ul><li>Who will be responsible for counsel selection/recommendation? </li></ul></ul><ul><ul><li>Voluntary Disclosure possibilities? Amnesty? </li></ul></ul>
  14. 14. Sales & Use Tax function <ul><li>Accounting Aspects </li></ul><ul><ul><li>Sales and Use Accounts (co-mingled?) may not have been reconciled for some time? </li></ul></ul><ul><ul><li>Need to determine how often these accounts ought to be reviewed…monthly; quarterly; yearly – to ascertain relative correctness </li></ul></ul>
  15. 15. Sales & Use Tax Function <ul><li>Systems Issues </li></ul><ul><ul><li>Maintenance of tax rate changes </li></ul></ul><ul><ul><li>Other systems issues…what system; who selects; who prices; who maintains </li></ul></ul>
  16. 16. Sales & Use Tax Function <ul><li>Miscellaneous Issues </li></ul><ul><ul><li>Staffing issues </li></ul></ul><ul><ul><li>Legislative changes and impact on the organization </li></ul></ul><ul><ul><li>Out sourcing of compliance work </li></ul></ul><ul><ul><li>Sales Tax Holidays How to take advantage of this? </li></ul></ul><ul><ul><li>Economic Zone, will the corporation Qualify? </li></ul></ul>
  17. 17. States Imposing sales tax <ul><li>There are 30,000 state and local jurisdictions in the United States with authority to impose tax. </li></ul><ul><li>7,500 have adopted legislation to impose sales tax and the number grows every year. </li></ul>
  18. 18. States Imposing Sales Tax <ul><li>45 States plus the District of Columbia </li></ul><ul><li>States NOT imposing Sales Tax “NOMAD” </li></ul><ul><ul><li>N ew Hampshire (except on communication services) </li></ul></ul><ul><ul><li>O regon </li></ul></ul><ul><ul><li>M ontana </li></ul></ul><ul><ul><li>A laska- no state tax however, local jurisdiction Sales Tax </li></ul></ul><ul><ul><li>D elaware- (except on leases of tangible personal property) </li></ul></ul>
  19. 19. State Tax Collections <ul><li>Table Shows the 2009 tax collection by source and sales tax is second to Individual income tax in total revenue collections ( Source: U.S. Bureau of the Census. ) </li></ul><ul><li>Sales tax is projected to become the largest source of state revenue by 2012. </li></ul>
  20. 20. 2009 Select State Tax Collection (Percentage of All States Total)      10.3 5.6 34.4 31.9 1.8 U.S. Total 49.1 -- -- 35.8 10.4 Wyoming 6.2 4.3 42.9 28.2 0.9 Wisconsin 9.2 -- -- 61.2 10.9 Washington 6.9 3.9 55.1 20.8 0.2 Virginia 22.7 -- -- 51.6 -- Texas 13.4 7.8 2.1 60.9 -- Tennessee 15.1 3.7 -- 56.7 -- South Dakota 6.8 3.1 32.9 40.7 0.1 South Carolina 12.1 5.8 31.8 28.3 0.2 Pennsylvania 3.1 4.3 48.5 33.0 0.5 Georgia 10.2 5.7 -- 60.2 0.0 Florida 43.2 7.4 32.5 -- -- Delaware 5.3 3.4 49.3 25.4 -- Connecticut 8.3 9.4 43.9 28.7 2.3 California 4.2 5.3 17.4 50.4 7.4 Arizona 80.1 12.8 -- -- 2.2 Alaska 7.6 5.9 32.1 24.9 3.8 Alabama             Other Corporate Income Individual Income Sales Tax Property  
  21. 22. Average Sales Tax Rates <ul><li>The five states with the highest rates (State and local rates): </li></ul><ul><li>(1) TN 9.41% (3) WA 8.78% </li></ul><ul><li>(2) CA 9.06% (4) OK 8.44% </li></ul><ul><li>(5) LA 8.43% </li></ul><ul><li>The States with the lowest State and Local Tax rates are the NOMADS </li></ul>
  22. 23. Definitions <ul><li>What is sales tax? </li></ul><ul><li>What is Use tax? </li></ul><ul><li>What is Tangible Personal Property? </li></ul><ul><li>What are Taxable Services? </li></ul>
  23. 24. Nexus <ul><ul><ul><li>Definition </li></ul></ul></ul><ul><ul><ul><li>Nexus Creating Activities </li></ul></ul></ul><ul><ul><ul><li>Court Cases debating Nexus </li></ul></ul></ul><ul><ul><ul><li>Why is it such a controversial topic? </li></ul></ul></ul>
  24. 25. Nexus <ul><ul><li>Nexus is the basis for sales tax. Nexus is a legal term that describes the concept of having a strong link to a taxing jurisdiction to allow the imposition of a tax. Nexus is the benchmark that determines whether a sales tax can be imposed and whether a merchant can be held responsible for collecting the tax. If a company does not have nexus with a particular state, that state should not impose tax on the company or require it to collect sales tax. </li></ul></ul>
  25. 26. Nexus Creating Activities <ul><li>Physical presence: </li></ul><ul><li>Agency nexus: </li></ul><ul><li>Affiliate nexus: </li></ul><ul><li>Economic nexus: </li></ul><ul><li>The nexus standard for sales and use tax is different from the standard applied for income tax, and it is possible for a company to have nexus for sales and use tax purposes but not for income tax purposes or vice versa. </li></ul>
  26. 27. Substantial Nexus <ul><li>Typically defined by physical presence , but may also be defined by business activity , affiliation or other kind of presence </li></ul><ul><li>Nexus Creating Activities </li></ul>
  27. 28. Agency Nexus <ul><li>Nexus will often be found if the out-of-state seller engages instate third party contractors to perform certain activities such as sales solicitation, installation or warranty repairs). </li></ul>
  28. 29. Affiliate Nexus <ul><li>Nexus is also determined by the in-state activities of an affiliate of the out-of -state seller – especially if the affiliate's activities facilitate the activities of the out-of-state seller. </li></ul>
  29. 30. Economic Nexus <ul><ul><li>Several states have attempted to assert nexus solely by reason of commercial exploitation of the in-state market by the out-of-state seller through advertising or licensing of intangibles by the in-state licensees </li></ul></ul>
  30. 31. Court Cases Debating Nexus <ul><ul><ul><li>Public Law No. 86-272 </li></ul></ul></ul><ul><ul><li>Prohibits a state from taxing the income of a corporation if its only business activities within the state consist of solicitation of orders for sales of tangible Personal Property that are sent outside the state for approval and are filled and shipped from outside the state . </li></ul></ul>
  31. 32. Case Study <ul><ul><li>Braskem </li></ul></ul>
  32. 33. Nexus Political Issues Are foreign companies at a higher risk of scrutiny?
  33. 34. Sales Tax Exemption Categories <ul><li>Identity of the purchase </li></ul><ul><li>Character of the item sold </li></ul><ul><li>Nature of the transaction </li></ul><ul><li>Use to which the product will be put </li></ul>
  34. 35. Sales Tax Exemptions <ul><li>For sales tax purposes exemption usually fall into the following classifications: (FLEEMNORD) </li></ul><ul><li>Federal Government </li></ul><ul><li>Local Government </li></ul><ul><li>Economic zones </li></ul><ul><li>Essentials ( food, clothing, prescription drugs) </li></ul><ul><li>Manufacturing </li></ul><ul><li>Non profits and other essentials Occasional sale </li></ul><ul><li>Resale & </li></ul><ul><li>Direct Pay </li></ul>
  35. 36. Compliance / Automation (ADP) <ul><li>Insert slides Here </li></ul>
  36. 37. Audits and Appeals Process <ul><li>Audit Appeals in most state consists of the following steps: </li></ul><ul><li>Informal hearing with the audit supervisor </li></ul><ul><li>Formal hearing at the local level </li></ul><ul><li>Hearing with a administrative law judge </li></ul><ul><li>Hearing before the tax board </li></ul><ul><li>Trail Court </li></ul><ul><li>State Appeal Court </li></ul><ul><li>State supreme Court </li></ul><ul><li>And finally </li></ul><ul><li>US Supreme Court </li></ul>
  38. 39. Fight Or Flight ?
  39. 40. Fight Or Flight?
  40. 41. Fight Or Flight?
  41. 42. Fight Or Flight? <ul><li>The taxpayer should note that this process may take several years from the initial stage to the final stage and even if the taxpayer wins, the cost of litigation may far exceed the benefit of the tax recovery. </li></ul>
  42. 43. Fight or Flight? <ul><li>However a victory by one tax payer at the state court level or the Supreme Court level benefits other bystanders’ taxpayers to jump in and apply for refunds. </li></ul>
  43. 44. THE STATE TAX AUDITORS (“We’re from the Department Of Revenue, and We’re Here to Help”) Yeah Right !
  44. 45. Is Vat in Our Future? <ul><li>Budget 39.9 percent of all federal income will be borrowed. </li></ul><ul><li>The next largest component of federal revenue is the personal income tax, which accounts for only 27.3 percent of federal funds. </li></ul>
  45. 46. VAT
  46. 47. VAT
  47. 48. VAT? <ul><li>One solution being considered by various policy makers is to implement a Canadian style of Value Added Tax. </li></ul><ul><li>In Canada a 5% GST ( Goods and Services) Federal level tax is levied on almost everything and the various provinces levy a PST ( Provincial sales tax) of 5- 10% depending on the Province. </li></ul>
  48. 49. VAT? <ul><li>The advantages </li></ul><ul><li>Disadvantages </li></ul><ul><li>Is this a possibility? </li></ul>
  49. 50. Fun Stuff ( Strange Sales Tax laws) <ul><li>Flu vaccines in Illinois:  in Illinois the patient without an insurance does not have to pay sales tax on the free flu shot but the donor has to cough up the sales tax on the donation because Illinois noted that the donor of the “gift” is deemed the end user of the property and is subject to the use tax on that property. Illinois Dept. of Rev. General Information Letter ST 09-0118-GIL. </li></ul>
  50. 51. Fun Stuff ( Strange Sales Tax laws) <ul><li>The Illinois candy tax </li></ul><ul><li>Candy is not taxable but if the candy contains flour or nuts ( Candy bar with nuts) it is taxed at a lower food rate. </li></ul><ul><li>Compare this to the sales tax law in Iowa </li></ul>
  51. 52. Fun Stuff ( Strange Sales Tax laws) In Iowa Milky Way is not taxable because it contains flour and is defined as Candy But MILKY WAY® MIDNIGHT does not contain flour is subject to tax
  52. 53. Fun Stuff ( Strange Sales Tax laws) <ul><li>Missouri charges a four percent sales tax the practice of yoga.  Talk about revenue generation. Ruling No. LR 2732. </li></ul><ul><li>Washington became the first state to specifically tax the streaming of digital products (i.e. music, movies HB 2075 ) Can they do that? How would they know? how can they keep track of the streaming videos? </li></ul>
  53. 54. Other Strange Ordinances <ul><li>CT Chapter 545 Sec. 30-97. (1949 Rev., S. 4298.) </li></ul><ul><li>Town records may not be kept where liquor is sold. </li></ul>
  54. 55. Other Strange Ordinances <ul><li>IN </li></ul><ul><li>Liquor stores may not sell milk. </li></ul><ul><li>(Formerly: Acts 1973, P.L.55, SEC.1.) </li></ul><ul><li>Why is that??? </li></ul>
  55. 56. Other Strange Ordinances <ul><li>NJ </li></ul><ul><li>It is illegal to wear a bullet-proof vest while committing a murder. </li></ul><ul><li>2 L.1983,c.152,s.1; amended 1999, c.306. </li></ul><ul><li>I guess it is to give the victim a fair chance to shoot you as he won’t be wearing a vest either? </li></ul>
  56. 57. Other Strange Ordinances <ul><li>AZ </li></ul><ul><li>It is illegal to manufacture imitation cocaine. </li></ul><ul><li>13-3453. Manufacture or distribution of imitation controlled substance ; prohibited acts; classification. </li></ul><ul><li>Does the negative hold true ? it is legal to manufacturing real cocaine? Wonder if there is a manufacturing exemption for this? </li></ul>
  57. 58. That’s All Folks!!!
  58. 59. Any questions?
  59. 60. Thank You for coming! For additional information please contact us at: Keith Fleury (302)225-5146 Gunnip & Company LLP [email_address] Little Falls Centre Two 2751 Centerville Drive Scott W. Bricker (302-225-5153) Wilmington, DE 19808 [email_address] Kamal Adeni (610)409-1661 [email_address]