Sales and use tax laws contain many unexpected "gotchas" that can result in additional tax liability. Gotchas arise from poorly conceived tax laws that produce inconsistent and illogical outcomes, as well as from businesses' inability to adapt their standard procedures to legal technicalities. Examples of sales tax gotchas include establishing nexus through third-party warranty repairs, risk of loss passing in a state, affiliate activities, trade show attendance, and click-through or third-party server arrangements. These unexpected outcomes undermine the intended simplicity of sales tax compliance.

1. Reproduced with permission from Tax Management Weekly State Tax Report, 2014 Weekly State Tax Report
3, 9/12/14. Copyright ஽ 2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com
Ta x P o l i c y
Sales and use tax ‘‘Gotchas’’ are found in all areas of an organization directly or indirectly
driving the sales and use tax outcome. Gotchas can be technical in origin—the result of
poorly conceived, inconsistent tax law and operational in origin—the inability of businesses
to adapt standard operating procedures to the technical requirements of the law. Occasion-
ally, the cost of compliance is so steep that the company absorbs the tax as a cost of doing
business rather than pass it along to its customer.
Sales and Use Tax ‘Gotchas’: A Taxpayer’s Guide to Navigating
The Chaos Theory When Reading the Tax Code Is Not Enough
BY KATHERINE GAUNTT I. Introduction
A
ccording to Merriam-Webster.com, a ‘‘Gotcha’’ is
an unexpected problem or usually unpleasant sur-
prise and fully defined as an unexpected usually
disconcerting challenge, revelation or catch.1
A ‘‘Got-
cha’’ is also a colloquial expression meaning ‘I’ve got
you.’ In sales tax circles, a ‘‘Gotcha’’ is an unexpected
outcome usually from an audit that seems illogical and
counterintuitive. And when compared to the typical
treatment of similar transactions by other states or, to a
lesser extent, other tax types, is something you don’t
see coming.
1
http://www.merriam-webster.com/dictionary/gotcha.
Katherine Gauntt is an Engagement Manager
in the SALT Center of Expertise for Experis
LLP. She is a nationally recognized indi-
rect tax expert with over 20 years of experi-
ence specializing in management and admin-
istration of sales and use, property, gross
receipts and excise taxes. In addition, Kather-
ine has extensive industry and consultative
experience in compliance, tax accounting,
audit administration and defense, tax plan-
ning, corporate reorganizations, nexus
reviews, voluntary disclosures, refund review
and tax decision matrices.
Copyright ஽ 2014 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. ISSN 1534-1550
Tax Management
Weekly State Tax Report™

2. Gotchas are exceptions to the general rule. They re-
sult from activities with a high probability of error
caused by the many variables that must be considered
to comply with the law. Gotchas are difficult to auto-
mate and difficult to incorporate into everyday compli-
ance activities. They touch all areas of the organization
from how companies sell to how companies pay sales
and use tax and everything in between.
Gotchas happened over time. Somehow the simple
concept of applying tax rate to tax base on consumption
in a tax jurisdiction has twisted itself into the convo-
luted morass of conflicting rules and regulations we
have today. The logic is counterintuitive to the layman
who still operates and makes decisions based on the
former ‘‘simple concept.’’
Perfection in the form of 100 percent technical com-
pliance is not a state to which sales tax practitioners as-
pire. We know it will never happen and, if by some
miracle it does, it cannot be sustained in a changing
business environment. The best sales tax practitioners
can do is be perfect 80 percent of the time and aspire to
be almost perfect on the rest.
II. Sales and Purchase Gotchas Nexus
In the beginning, there was National Bellas Hess.2
Sales tax was easy to understand. One had to have real
or tangible personal property and people selling tan-
gible personal property in a state to trigger sales tax
collection, ( i.e. services were not taxed, traveling sales-
men were not taxed, intangible rights were not taxed).
North Dakota chose not to follow Bellas Hess and its in-
terpretation of the due process clause3
, but chose in-
stead to follow the U.S. Supreme Court’s decision in
Burger King, which held that ‘‘[S]o long as a commer-
cial actor’s efforts are ‘purposefully directed’ toward
residents of another State, we have consistently re-
jected the notion that an absence of physical contacts
can defeat personal jurisdiction there.’’4
The Court fur-
ther held ‘‘[O]nce it has been decided that a defendant
purposefully established minimum contacts within the
forum State, these contacts may be considered in light
of other factors to determine whether the assertion of
personal jurisdiction would comport with ‘fair play and
substantial justice’ ’’ 5
; the cornerstones of due process.
North Dakota statutes deemed a taxpayer to have
nexus if the taxpayer was ‘‘engaging in regular or sys-
tematic solicitation in the state.’’ As could be expected,
along came Quill. 6
While the facts and statutory lan-
guage were nearly identical to Bellas Hess, the U.S Su-
preme Court held that the due process clause did not
bar North Dakota’s sales and use tax. Instead, the due
process clause was intended to ensure fairness and no-
tice and that it required a taxpayer to only have mini-
mum contact in a state. The Court did not expressly
overrule Bellas Hess; however, it determined that the
due process reasoning adopted in Bellas Hess was anti-
quated. Thus, the due process physical presence test
under Bellas Hess gave way to the Quill minimum con-
tacts test.
In the ‘‘good ole days’’, Quill provided sales tax pro-
fessionals with a means to determine whether nexus ex-
isted merely by knowing where the customers were lo-
cated and/or where the goods were shipped. Corporate
records existed with these data elements. All one had to
do was run a query and check it against where sales tax
was charged. Any state with ship-to customers and no
tax collection warranted further investigation. Then
came the Gotchas!
A. The Nexus Gotcha
State courts and hearing officers have successfully
eroded some of the fundamental minimum contacts
standards outlined in Quill over the years. States have
been successful in establishing nexus when the com-
pany has no offices, stores, property, bank accounts or
employees in a state based on certain business prac-
tices. Huge paradigm shifts have occurred in the sales
tax world as a result of the Internet. Once the courts in
one state uphold broader nexus laws, other states fol-
low suit and enact broader laws. One of the more note-
worthy years during which states successfully eroded
the bright line test outlined in Quill was 2006.
s Warranty Repair Performed by Third Parties –
State v. Dell Int’l, No. 2004 CA 1702 (La. App. 1 Cir.
2/15/06); 922 So.2d 1257—Activities performed to estab-
lish and maintain a market create nexus.
s Risk of Loss and Control passes in the state – In
the Matter of the Protest of Dell Catalog Sales, L.P., No.
06-11 Gross receipts tax is due upon transfer of posses-
sion. Dell retained risk of loss and control until prod-
ucts were physically delivered. Dell established nexus.
s Affiliate Nexus – Arco Building Systems, Inc. v.
Chumley, 209 S.W.3d 63 (Tenn. Ct. App. 2006) In-state
activities of affiliates and independent contractors can
create substantial nexus.
s Trade Show Attendance – Texas Comptroller De-
cision Hearing No. 46,628 (Aug. 28, 2006) An out-of-
state seller was held to be ‘‘engaged in business’’
through solicitation efforts at trade shows; seller estab-
lished nexus.
These cases and rulings set the stage for today’s
emergence of an economic nexus standard. Jurisdic-
tions have begun using an economic nexus standard
rather than a physical presence standard to assert sales
tax collection obligations on Internet sellers. For ex-
ample, in Overstock.com v. New York Dept. of Taxn.
and Fin., and in Amazon.com, LLC v. New York Dept.
of Taxn. and Fin., in-state affiliates compensated based
on the linking of Internet traffic on their in-state web-
sites to the taxpayer’s out-of-state website (click-
through nexus) were deemed to be soliciting business
for sales tax purposes, thus establishing nexus in New
York for both taxpayers.7
Once New York changed its
law and won in the courts, other states followed.
According to the Bloomberg BNA 2014 Survey of
State Tax Departments8
(‘‘2014 BNA Survey’’), 15
states have click-through nexus laws on the books and
2
National Bellas Hess v. Illinois Dept. of Rev., 386 U.S. 753
(1967).
3
U.S. CONST. amend. XIV, §1.
4
Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985)
(held that when one purposefully extends one’s reach outside
of one state and makes contact with another state, contacts by
phone and by mail suffice to uphold jurisdiction to adjudicate
the dispute).
5
Id. at 476.
6
Quill v. North Dakota, 504 U.S. 298 (1992).
7
Overstock.com Inc. v. New York Dept. of Taxn. and Fin.,
20 N.Y.3d 586 (N.Y. 2013), cert. denied, 134 S. Ct. 682 (2013).
See also Amazon.com, LLC v. New York Dept. of Taxn. and
Fin., 81 A.D.3d 183 (N.Y. App. Div. 2010).
8
Bloomberg BNA 2014 Survey of State Tax Departments,
Vol. 21, No. 4, April 25, 2014.
2
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3. another 13 responded affirmatively to the survey al-
though they currently do not have click-through nexus
laws codified. (See Table 1: Enacted ‘‘Click Through’’
Nexus Statutes)9
While click-through nexus is a concept commonly
known by tax practitioners and layman alike (probably
because it was such a huge Gotcha at the time), lesser
known technology Gotchas exist through common ac-
tivities. These activities include leasing space on a third
party commercial network with some servers in the
state or engaging a third party web host with a server in
a state. The table below illustrates the findings of the
2014 BNA Survey. (See Table 2: Nexus Creating
Activities- Use of Third Party Servers in a State)
Services are presumed to be exempt unless specifi-
cally promulgated as taxable by law. Many states have
deemed services such as data processing and informa-
tion services taxable as well as ancillary services asso-
ciated with taxable sales of tangible personal property
or taxable services. Currently, this taxation is only as-
serted to the extent that specific rules and interpreta-
tions exist and are known. However, in response to the
2014 BNA Survey, 9 states said sales tax nexus was cre-
ated when an in-state customer was the recipient of a
taxable service performed out of state even if there was
no transfer of tangible personal property within the
state. In addition, if the taxable service resulted in the
transfer of an electronic document by an out of state
service provider, it was sufficient to create nexus for the
seller. (See Table 3: Nexus Creating Activities- Services
Performed Outside the State)
With the presumption that solicitation by in-state en-
tities creates nexus under Amazon,10
it is only a matter
of time before the 2006 Gotchas outlined above revisit
us in another form and erode any protections afforded
taxpayers under Amazon.11
With web services per-
formed by people and computers throughout the world
and the vertical trajectory of cloud services now occur-
ring, the stage is set for a huge eGotcha! It will be diffi-
cult to achieve a balance between leveraging technol-
ogy to its greatest extent for business and remain in
compliance since many of the states are relying upon
administrative policy rather than codified tax law. Many
states simply did not respond to the questions asked on
the 2014 BNA Survey, which is worrisome. Without
guidance and definitive law, taxpayers will likely base
compliance upon their risk tolerance. Nevertheless,
based on the states that did answer, the burden of proof
will increase substantially to disprove nexus (especially
since the proof will be electronic) and will definitely be
on the seller.
B. Situs and Sourcing Gotchas
The situs of the purchase or sale is determined by
multiple factors such as passage of title, possession,
first use, constructive possession and benefit of service.
Passage of title, control or possession of the property
have long been the common criteria for establishing si-
tus for tangible property for sales tax.12
With the emer-
gence of technology, ‘‘constructive possession’’ is be-
coming more commonplace. According to Black’s Law
Dictionary, ‘‘[A] person has constructive possession of
property if he has power to control and intent to control
such item.’’13
Sourcing of software that is accessed but not deliv-
ered in a state follows three basic tax scenarios accord-
ing to the state responses to the 2014 BNA survey.
Where the Gotcha comes into play is when software is
in multiple states with different sourcing requirements.
If the server is in Nebraska but the software is only ac-
cessed in New York, do both New York and Nebraska
have situs? Interestingly enough, when states were
asked about nexus creating activities involving access
to non-downloadable software on a server in another
state, (i.e., cloud computing) only Arizona and Utah in-
dicated that access would create nexus. (See Table 4:
Sourcing Software Accessed Remotely) 14
The Streamline Sales Tax Agreement attempted to
standardize the sourcing rules for its member states by
requiring states to use destination based sourcing rules.
However, certain member states such as Ohio received
considerable resistance from its localities with origin
based sourcing rules.15
As a result, the Streamlined
Sales Tax Agreement was modified to accommodate
origin based sourcing for intrastate sales.
With the emergence of technology and its ancillary
services, sourcing the sale has become very complex
and is fraught with Gotchas. ‘‘First use’’ is another
sourcing test for use tax situs.16
First use of taxable ser-
vices may occur in multiple locations. There is no clear
guidance if the software is exempt in one state (e.g., it
is downloaded) and taxable in another when the soft-
ware is co-located at two data centers. Most ‘‘mission
critical’’ technologies are duplicated on different serv-
ers in separate locations. Unlike disaster recovery ser-
vices, co-location services occur in real time so if one
server fails, traffic is routed to the other server without
missing a beat. In essence, the services occur simulta-
neously in two different states.
Cloud services also rely upon the almost instanta-
neous routing of data to geographically dispersed loca-
tions throughout the world in an effort to balance traf-
fic and maximize response time. In New Jersey, the sale
of a post-sale support for software is sitused to the same
location as the software.17
However, Massachusetts still
adheres to the Multiple Points of Use concept whereby
the tax is allocated according to the location of the us-
ers.18
What if the software is taxed in the state where it was
delivered and also in the state where the ‘‘benefit of the
services’’ occurs? What if you purposely located your
data center in a state that does not tax downloaded soft-
ware ( e.g., New Jersey19
) but has its co-location data
9
AZ, DC, HI, IA, LA, MD, NV, NM, ND, SD, TN, UT and
WA responded affirmatively to the 2014 BNA Survey although
they do not have click-through nexus laws.
10
Overstock.com v. New York Dept. of Taxn. and Fin., 20
N.Y. 3d 586 (N.Y. 2013), cert. denied, 134 S. Ct. 682 (2013). See
also Amazon.com, LLC v. New York Dept. of Taxn. and Fin.,
81 A.D.3d 183 (N.Y. App. Div. 2010). Note that the Overstock-
.com and Amazon.com cases were combined on appeal.
11
Id.
12
OKLA. STAT. tit. 68, §1352.22 (2001); See also Okla. Tax
Commission No. 94-12-13-026; See also Ford v. Okla. Tax
Comm’n, 285 P.2d 436-38 (Okla. 1955).
13
BLACK’S LAW DICTIONARY 314 (6th ed. 1990).
14
Bloomberg BNA 2014 Survey of State Tax Departments,
Vol. 21, No. 4, April 25, 2014.
15
SECTION 310.1 STREAMLINE SALES TAX AGREEMENT (2010).
16
In re Kadrmas. v. Wyo. SBE, No. 93-139( 1995); See also,
Ga. Code Ann. §48-8-30(c)(1)(2006).
17
N.J. Sales and Use Tax TB-51R (July 5, 2011).
18
830 MASS. CODE REGS. 64H.1.3 (2006).
19
N.J. STAT.ANN. §54:32B-8.56(15).
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4. center in a state that taxes ‘‘constructive possession’’ of
that same software (New York20
)? How do you deter-
mine the basis? The situs? Which state gets to collect
the tax since there is no throwback rule in sales tax? Yet
another Gotcha associated with your technology pur-
chase!
Sourcing and taxing of online services has the mak-
ings of a great big Gotcha! Putting aside the assertion
of nexus by the states for services, which clearly occur
outside their jurisdiction, how will the reciprocity rules
for like kind taxes be administered. Will buyers pay
more than once on services, software and other digital
products used in multiple jurisdictions? Will the rebut-
table presumption rely on reciprocity rules as a de-
fense? The administrative costs alone of pursuing the
reciprocity refund will be cost prohibitive in many cases
unless purchases are material.
C. Sales Price Gotchas
‘‘Sales price’’ includes the total amount for which a
taxable service or tangible personal property is sold and
includes services that are part of a sale. Even if the ser-
vices are exempt when sold separately, the addition of
taxable tangible personal property may render the en-
tire transaction taxable. Bundling of goods and services
into a single product which is sold for a single price re-
quires a determination as to whether we are buying a
taxable good with ancillary exempt services or an ex-
empt service with ancillary taxable goods. Known as
the ‘‘true object’’ test, it has long been recognized as the
bright-line test to determine taxability of bundled trans-
actions.21
Some states deem any inclusion of tangible
personal property (‘‘TPP’’) as converting a nontaxable
service into the taxable sale of TPP.22
Some other common Gotchas include shipping and
handling being taxable when bundled, but just handling
being taxable in some states if separately stated.23
There’s even the tax-on-tax Gotcha involving the inclu-
sion of property tax on leased equipment becoming part
of the sale price.24
In Tennessee, separately itemized
travel expenses incurred in conjunction with the sale of
software were deemed taxable as part of the sales price
of software since they are required to make the soft-
ware functional.25
The rule of thumb for determining ‘‘sales price’’ is to
decide whether a good or service can be marketed and
sold on a stand-alone basis without depending on the
sale of another good or service. If not, the interdepen-
dency between both creates a single sales price from
the bundled transaction. Even if the sale of the good
and the sale of the service are separate when offered by
the same vendor, they usually share the same taxable
status. However, if the service is optional and is pro-
vided by an unaffiliated third party, it may be exempt.
Nevertheless, exceptions do exist and constitute a
pretty big Gotcha.
Groupon, LivingSocial and other social media cou-
pon sites that offer goods and services at a steep dis-
count have brought the concept of ‘‘sales price’’ and
‘‘tax base’’ to the forefront. Groupon and like services
were so successful at first that states feared a massive
erosion in their tax base. One look at the responses to
the Streamlined Sales Tax 2012 Deal of the Day Sur-
vey26
and we’ve got the 21st
Century battle equivalent to
the 20th
Century battle over exemption certificates for
drop shipments. Some states said the deal company
was the seller; others said the retailer was the seller.
Some say the tax base is the stated value before the dis-
count; some say it’s the value after the discount. In the
2014 BNA Survey, 60 percent of the states indicated
they would use the discounted price and 40 percent
would use the full value price of the item purchased.
(See Table 5: Sales Tax Policies- Sales Price of Social
Media Coupons)
When the states are this far apart in their treatment
of something as fundamental as the tax base and com-
panies contemplate using a ‘‘Deal of the Day’’ concept,
they can expect a great big Gotcha in their future. At
the very least, companies have a great big operational
issue to program their computers for such a huge dis-
parity.
D. Sales Practices
Sales tax practitioners understand that without sales
and marketing, their jobs would not exist. However,
some of the biggest headaches are caused by the ac-
tions taken by sales people who unknowingly create
nexus, who structure deals without a thought for the tax
ramifications and who side with the customer making
tax practitioners the bad guy when they have to ensure
tax compliance. But the sales people are not the only
ones who unknowingly create nexus. Often, operational
and finance folks assume they know the tax rules and
unknowingly create the Gotchas. Below are some ex-
amples.
1. Sales to Exempt Customers
Technical sales tax expertise among non-tax people
is usually limited to exemption certificates. Laymen
generally assume that governments, non-profits and re-
sellers don’t pay sales tax and automatically flag them
as exempt when they are set up as customers. Tax prac-
titioners are almost guaranteed to have a great big Got-
cha upon audit if they let this happen. Below are some
typical misconceptions that lead to those Gotchas.
s Resellers – Resellers are defined as entities that
purchase goods and services to be resold to others. The
seller is required to accept the resale certificate in
‘‘good faith’’ meaning that it is reasonable to assume
that the item being resold is of a type or quantity that
would ordinarily or reasonably be resold by the buyer.
This is a concept that has not been explored of late but
is critical. It becomes a Gotcha when an auditor asserts
that the taxpayer did not exercise good faith in accept-
20
See N.Y. Advisory Opinion TSB-A-09(25)S.
21
Emery Indus. v. Limbach, 539 N.E.2d 608, 613 (Ohio
1989) (‘‘overriding purpose’’ test); See also Hasbro Indus. v.
Norberg, 487 A.2d 124, 126 (R.I. 1985) (‘‘real object’’ of the
transaction); See also Quotron Systems v. Comptroller, 411
A.2d 439, 443 (Md. 1980) (‘‘predominant purpose’’ test); See
also Bullock v. Statistical Tabulating Corp., 549 S.W.2d 166,
167 (Tex. 1977) (‘‘essence-of-the-transaction’’ test); See also
WTAR Radio-TV Corp. v. Commonwealth, 234 S.E.2d 245, 249
(1977) (‘‘true object’’ test).
22
Utah Priv. Ltr. Rul. 05-012 (Nov. 29, 2006) (Microchip de-
signer advised that charges would be deemed taxable if there
was also sale of TPP based on the design).
23
ARIZ. ADMIN. CODE §R15-5-133 (1993); See also Ill. Admin.
Code tit. 86, §130.415 (2000).
24
VA. CODE ANN. §58.1-602 (2006).
25
Tenn. Dept. of Rev. Sales and Use Tax Notice, Computer
Software Services Subject to Sales and Use Tax (publication
date June 1998).
26
http://www.streamlinedsalestax.org (type ‘‘SLAC MATE-
RIALS 2012 Deal of the Day Voucher Survey 2012’’ in website
search bar).
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5. ing a certificate. A retailer may not claim good faith ac-
ceptance of an exemption certificate for items that
clearly do not qualify for the exemption.27
For example,
if you are in the business of selling televisions and a gas
station provides you with a resale certificate, chances
are you are not exercising ‘‘good faith’’ if you accept the
certificate and do not charge sales tax.
s The Government Gotcha – The government Got-
cha can be subdivided into sales to federal and to state
governments.
s Federal Government Exemption – Under the Su-
premacy Clause, you cannot apply sales tax to transac-
tions where the federal government is the buyer.28
Most
states specify that the voucher for payment must be is-
sued directly by the U. S. government. Yet, even with
this iron-clad rule, the tax jurisdictions have found a
Gotcha in the form of the sale. For instance, in New
Mexico the receipts from credit or procurement card
sales to employees or representatives of the federal gov-
ernment are only deductible if that person uses a card
issued by the federal government.29
Any other credit
card sale, even if it is a reimbursed expense by the fed-
eral government, is taxed at the full gross receipts rate.
In Arizona, a reduction of 50 percent is allowed for the
tax on income received from any sale of tangible per-
sonal property made directly to the U.S. government or
its departments or agencies.30
s Federal Government Contractors – Generally,
contractors purchasing tangible personal property or
taxable services pursuant to contracts with the federal
government are the consumers of the property or ser-
vices and must pay the sales and use tax. However, if
the contractor is acting as a purchasing agent and title
passes directly to the federal government from the
seller, the contractor is not subject to the tax.31
s State Government – Most states do not charge
sales tax on sales to the state counties or cities engaged
in public governance. However, the states generally fol-
low the same rule as Colorado whereby the jurisdic-
tions must use the purchase strictly in the performance
of government functions.32
However, some states such
as South Carolina do not exempt sales of tangible per-
sonal property to its state, county and city agencies at
all.33
s The Non-Profit Gotcha – Non-profit exemptions
can be especially tricky especially since the exemptions
range from those states with broad exemptions for most
charitable organizations (e.g., Indiana, Kansas)34
to
those states that do not have broad exemptions, but in-
stead provide specific exemptions to specific charitable
organizations (e.g., Alabama, California and Geor-
gia).35
In Maryland, the exemption certificate must be
applied for and provided by the Comptroller.36
At the
least, most states require that whatever is sold inure to
benefit of the charitable purpose.
2. Free Goods and Samples
Salesmen are always giving away goodies to their
best customers. As long as the company pays tax on the
chotskies and swag, everything is fine. It’s when they
start giving away the inventory as a sample that things
get tricky. Use tax must be assessed on the value of the
item. The Gotcha comes when you have to decide
whether to accrue on the total product cost ( e.g. ,
Ohio)37
or fair market value ( e.g., Georgia) of the
item.38
The Gotcha comes when you have to use two
methods to calculate tax on samples given to a single
sales representative that covers both types of states. In
addition, tracking samples always poses a challenge in
industries with low cost, high volume inventory.
3. Advertising and Printing
Sales of advertising services are generally exempt.
The Gotcha comes along when there is a tangible per-
sonal property component. States such as Tennessee
will assess use tax on all costs associated with advertis-
ing regardless of where the expenses were incurred.
Those costs include costs paid to design and develop
the advertising materials, printing costs, transportation
costs and any other expense paid by the taxpayer to
produce the materials.39
Other states like Vermont use
the ‘‘it’s exempt except when argument to narrowly
construe long-standing exemptions. Advertising cou-
pons placed in newspapers are exempt in Vermont ex-
cept when they take the form of separate circulars or in-
serts. Since the inserts are not indexed by the newspa-
per, do not contain ‘‘news,’’ and did not typically have a
following, the Commissioner concluded they were not
component parts of the newspaper.40
Even Web-based advertising is not immune. A web-
site operator in Texas was liable for sales tax on its
broadcast e-mail services that advertised real estate
events organized by homebuilders and its sales of a
weekly e-mail advertisement that was sent to a data-
base of retailers and customers who registered online to
receive it. Both services were held to be e-mail trans-
missions and thus were taxable as telecommunication
services.41
One Gotcha you rarely see coming is advertising on
local media including cable, radio, print and electronic
advertising where the company has no physical pres-
ence. In the District of Columbia, Missouri, New
Mexico and Rhode Island, advertising with local media
can create sufficient activity for the state to assert
nexus. 42
4. Sales of Services
27
See Letter No. 201209565L, Texas Comptroller of Public
Accounts, September 7, 2012.
28
U.S. CONST. art. VI, cl. 2. See also McCulloch v. Maryland,
17 U.S. (4 Wheat.) 316 (1819) (federal preemption).
29
N.M. CODE R. §3.2.212.21 (Weil 2003).
30
ARIZ. REV. STAT. ANN. §42-5061(K) (2008); See also Ariz.
Dept. of Rev., Transaction Privilege Tax Ruling 99-1 (Jan. 12,
1999).
31
Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110 (1954).
32
Colo. Dept. of Rev. v. City of Aurora, 32 P.3d 590 (Colo.
App. 2001).
33
S.C. CODE ANN. REGS. §117-304 (2004).
34
IND. CODE §6-2-2.5-5.25); See also Kan. Stat. Ann. §79-
3606 (2009).
35
Cal. 2014-SBE-Pub. 18, Nonprofit Organizations; See
also Ala. Admin Code r. 810-6-3-.07.05; See also Ala. Admin
Code r. 810-6-2-.12.05; See also GA. COMP. R. & REGS. 560-12-2-
.22.
36
MD. CODE ANN., TAX §11-204(d) .
37
OHIO REV. CODE ANN. §5741.01(G)(1).
38
GA. COMP. R. & REGS. 560-12-1-.14(6)(d).
39
See Tenn. Rev. Rul. No. 12-31(Nov. 29, 2012).
40
World Publications v. Vermont Dept. of Taxes, 2012 VT
78, ¶ 6 (Vt. 2012).
41
See Hearing No. 105,515, Texas Comptroller of Public
Accounts, Sept. 7, 2012.
42
Bloomberg BNA 2014 Survey of State Tax Departments,
Vol. 21, No. 4, April 25, 2014 pp. 266-269
5
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6. As we move toward a service economy, more states
are taxing services for both businesses and the end con-
sumer. Bundling of goods and services into a single
product which is sold for a single price requires a deter-
mination as to whether we are buying a taxable good
with ancillary exempt services or an exempt service
with ancillary taxable goods. Known as the ‘‘true ob-
ject’’ test, it has long been recognized as the bright line
test to determine taxability of bundled transactions.43
If
there is a tangible component to a service, it is relatively
simple to source the service based on the existence of
the tangible personal property received in a state. Cer-
tain states such as Maryland, Minnesota and Oklahoma
source taxable services as those ‘‘received in the state’’
or ‘‘otherwise attributable to the state’s marketplace.’’44
If the service is performed in the state, the receipts are
sourced to the state. However, more states are now as-
serting nexus on services performed out-of-state if the
benefit of the service is received in the state even if tan-
gible personal property transferred as part of the ser-
vice is used outside the state.
Services involving the maintenance and repair of
tangible personal property are relatively easy to source
and are generally taxable in states that tax services.
However, the Gotchas occur when the service is per-
formed on real property, on exempt manufacturing ma-
chinery, or online. Additionally, the service may be
deemed taxable if it is sold for a lump sum inclusive of
any tangible personal property. Nevertheless, the pre-
ponderance of Gotchas are found in the technology ser-
vices sector.
More and more companies supplement their work-
force with temporary workers. Fees charged by tempo-
rary agencies may be subject to tax in certain states if
the underlying services or tasks associated with the
worker’s position include services deemed taxable by
the tax jurisdiction.45
Under these circumstances, the
sale of the service and the sale of the tangible personal
property (generally software) are made by unaffiliated
entities and the two sales occur separately. However,
one sale is necessary to complete the other so the states
will connect the taxable transaction to the service and
deem both taxable. Given the magnitude of IT services
provided by contractors unaffiliated with the original
software seller, this Gotcha is a sleeping giant.
E. Purchase Practices
Assessing tax compliance on purchases is a constant
exercise in risk management. Unlike sales, which tends
to act in a fairly consistent pattern with standard prod-
ucts and services rendered to demographically similar
customers, purchases come in big and small transac-
tions from one-time and repetitive vendors who are
good and bad at billing and put forth one-line and de-
tailed invoices. Instead of going through a single invoic-
ing system integrated with tax software having built in
tax rules, purchasing systems contain a web of vari-
ables which influence the tax decision. Accounts pay-
able is the common denominator where all the com-
plexities converge. Unless a company has large enter-
prise systems tracking tax status by product code,
purchase transactions often result in expensive Got-
chas. Even then, problems occur when the people enter-
ing the codes do not understand the importance of ac-
curacy and specificity. Some typical Gotchas include:
1. Vendor Nexus
Vendors that do not have nexus for sales tax do not
charge tax. This creates added administration for com-
panies in the form of capturing the transaction, deter-
mining the tax status, accruing the use tax, reporting
the use tax, reconciling the payment of use tax to the
ledger and documenting payment for audit. The states
don’t even give a discount for use tax. Considering the
administrative costs associated with use accrual and tax
software, this can be an expensive operational Gotcha.
2. Electronic Procurement
When buyers order directly from the seller site
rather than issuing a purchase order through the buy-
er’s procurement system, it creates efficiencies for the
Procurement and Accounts Payable departments but
creates headaches for the tax department. The process
generally circumvents any buyer automated use tax ac-
crual systems and two-way/three-way match processes.
Just as P-cards continue to plague tax practitioners un-
der audits, electronic procurement presents ripe oppor-
tunities for double payment Gotchas.
Under standard matching, the purchase order, in-
voice and receiver data should match. If purchase or-
ders are initially created outside the system, it creates
an error in the system. When this happens, a purchase
order is usually created in the buyers procurement sys-
tem after the fact solely for the purpose of matching
and allowing the payment to proceed. As a result, the
after-the-fact purchase order is usually created with the
minimal amount of information required to generate
the match rather than the typical detailed purchase or-
der created through the buyer’s procurement system. In
many instances, all that is needed to pay the invoice is
to match the total invoice amount to the total purchase
order amount. This process wreaks havoc on automated
use tax accrual systems since the single line represent-
ing total purchase amount may be inclusive of below
the subtotal items such as shipping and sales tax.46
If
automated use accrual is performed, it appears as
though tax has not been paid and may result in over-
payment of the tax. It is also a major undertaking to
produce documentation for audits because all the detail
is in the vendor order system.47
3. Construction
Contractors for real and personal property improve-
ments have many Gotchas both in what is considered
taxable and how it is accounted for on the books. It is
important to understand how each state defines a con-
tractor and treats both labor and materials. However,
turnkey contracts which involve not only realty im-
provements, but the purchase and installation of ma-
43
Emery Indus. v. Limbach, 539 N.E.2d 608, 613 (Ohio
1989) (‘‘overriding purpose’’ test); See also Hasbro Indus. v.
Norberg, 487 A.2d 124, 126 (R.I. 1985) (‘‘real object’’ of the
transaction); See also Quotron Systems v. Comptroller, 411
A.2d 439, 443 (Md. 1980) (‘‘predominant purpose’’ test); See
also Bullock v. Statistical Tabulating Corp., 549 S.W.2d 166,
167 (Tex. 1977) (‘‘essence-of-the-transaction ’’ test); See also
WTAR Radio-TV Corp. v. Commonwealth, 234 S.E.2d 245, 249
(1977) (‘‘true object’’ test).
44
MD. CODE REGS. 03.04.03.08; See also Minn. Stat.
§290.191; See also Okla. Admin. Code §710:50-17-71.
45
TSB-A-89(27)S, New York Commissioner of Taxation
and Finance, August 9, 1989.
46
This is especially true if everything goes to a single cost
center and distribution line e.g., IT/Software.
47
Other third parties which need special attention include
Group Purchasing Organizations, Vendor Co-ops and Man-
aged Service Providers.
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7. chinery, fixtures and equipment, must be thoroughly re-
viewed to determine who is liable for the tax. Keep in
mind that exemptions, which may exist for the manu-
facturer, may not exist for the contractor.
In most states, construction contractors are consid-
ered the end consumers of materials they install into re-
alty. Some states such as California consider contrac-
tors to be the consumers of items that lose their distinct
identity when installed ( e.g., bricks), but retailers for
items that do not ( e.g., sinks).48
Other states, such as
Wisconsin, provide lists of what’s considered taxable.49
In Texas, correctly categorizing a construction project
can significantly reduce your sales tax bill.50
The labor
involved with new construction projects is not taxable,
but labor in remodeling work is taxable.
4. Repair/Fabrication
The laws regarding repair and fabrication services
vary widely. Most states define fabrication as the act of
creating new tangible personal property whereas repair
is the act of restoring property to its original condition.
Since fabrication creates new tangible personal prop-
erty which is sold, the states tend to treat the entire
charge including the service component as taxable. The
Gotcha occurs when a single company provides both
types of services but does not distinguish between them
on the invoice. Under these circumstances, you are
guaranteed an audit Gotcha if tax is rightfully not
charged for an exempt repair service since you cannot
prove it upon audit.
Many companies also provide warranties for their
products. Most states will assert nexus over a company
even if the company engages a third party to perform
the repair service.51
5. Capital Purchases
Purchases of large capital expense items generally
require contracts, progress bills and implementation
across multiple accounting periods. Payments are gen-
erally booked to prepayment accounts in equal pay-
ment installments until the item is capitalized. Prepay-
ment accounts are rarely associated with use tax ac-
crual systems necessitating manual review of entries
for potential use tax exposures. Capital purchases fol-
low an inconsistent process toward completion, which
creates a ripe environment for tax Gotchas.
Capital purchases can range from single purchase
orders for a single machine or other tangible personal
property to complex projects over multiple purchase or-
ders to multiple vendors over several accounting peri-
ods. It gets especially complicated in contracts where
multiple vendors work together to deliver a single capi-
tal item. In addition, the workflow for a typical capital
purchase is dispersed over multiple functions and de-
partments. (See Table 6: Capital Purchase- Audit Sup-
port ‘‘Owners’’ - the table illustrates the supporting
data typically required by the taxing jurisdictions and
the ‘‘owner’’ of the document/data.)
There is really no streamlined method available to
automate capital purchases. Why do you think the
states audit 100 percent of capital purchases? Mistakes
are common. To mitigate risk, the tax practitioner
needs to perform a manual review of material capital
purchases because there are too many opportunities
relative to timing of the purchase, bundling of goods
and services and use of the ultimate deliverable that can
create some very expensive Gotchas.
F. Other Corporate Practices and Events
The two most common areas in the corporate world
outside of operations that result in sales tax Gotchas are
corporate acquisitions and incentives.
1. Mergers and Acquisitions
Most of the sales tax Gotchas after the sale are found
in stock sales. Most of the sales tax Gotchas before or
upon the sale are found in asset sales.
In asset sales, it is common for the states to impose
successor liability for unpaid taxes of businesses where
substantially all of the assets of that business are ac-
quired. Some states can seek a lien on the asset or, as
in Florida, seek an injunction against the buyer for the
seller’s unpaid tax. Florida has the authority to deny the
buyer the right to conduct business until all outstanding
tax is paid.52
Another big Gotcha occurs in California
where the acquisition of software developed by the
seller becomes the sale of canned software to the
buyer.53
Tax is due unless the buyer has engaged in a
series of asset sales or is selling assets held or used in
the course of business which requires the seller to hold
a seller’s Permit.54
Casual sales exemptions vary by
state so it is important to know what assets are being
purchased and where.
Many practitioners assume there is a bulk sales ex-
emption in all states. Most states have very particular
requirements regarding bulk sales of assets. Some
states do not provide bulk sales exemptions. (See Table
7: Sample Bulk Sales Rules)
Stock acquisitions assume the sales and use tax li-
abilities of the acquired business. The number one Got-
cha in stock acquisitions is the failure to get transaction
support the instant the deal closes. Waiting on it to be
convenient or, even worse, waiting for an audit notice,
will only result in liability. Generally, escrow accounts
are kept for relatively short periods of time and, as a
practice, taxes assessed under audit are rarely refunded
by the seller after time passes. The best action is pre-
ventative due diligence but, absent that, consolidating
records is a good start in mitigating liability.
Another Gotcha that is often overlooked is relying
upon the tax decisions and exemption certificates of the
seller and integrating them into company operations
without a thorough testing of their technical accuracy.
This is not to say that the seller did not know the proper
tax status of its products and customers (although that
Gotcha does happen). Rather, the business model, legal
structure and/or selling methods may change the tax
decision. It is important to consider the products and
services within the constructs of ongoing business
rather than take the tax decisions of the pre-sale busi-
ness at face value. It is also important to request new
exemption certificates in the proper legal entity name to
ensure compliance and ferret out ‘‘new’’ customers that
may not truly be exempt.48
CAL. CODE REGS. tit. 18, §1521(b)(2)(A).
49
Wis. 2012-Pub. 207, Sales and Use Tax Information for
Contractors (follow: http://static.revenue.wi.gov/pubs/
pb207.pdf).
50
34 TEX. ADMIN. CODE §3.291.
51
Bloomberg BNA 2014 Survey of State Tax Departments,
Vol. 21, No. 4, April 25, 2014, pp. 266-269.
52
FLA. STAT. §213.758(4)(c ).
53
Navistar International Transportation Corp. v. SBE, 884
P.2d 108 (Cal. 1994); See also Conn. Gen. Stat. §12-407(a)(35).
54
CAL. REV. & TAX. CODE §6006.5.
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8. An acquired company whether an asset or stock
transaction can also create nexus for the buyer where
nexus was not an issue previously. It is important to un-
derstand how and where that company will be doing
business to ensure both companies continue to be in
compliance.
2. Credits and Incentives
One of the most common mistakes made when com-
panies are incentivized to locate in a particular jurisdic-
tion is to assume the sale and use exclusions provided
on purchases of tangible property to establish the busi-
ness locations are still in place when those goods need
replacement or replenishment the second time around.
Generally, the first purchase of machinery, equipment
and other tangible personal property is excluded from
tax as part of the deal. However, unless the deal speci-
fies a time frame for the exclusions, the second pur-
chase of machinery and equipment follows the same
tax rules as would apply if the incentive were not in
place. When companies program their automated use
tax accruals to align with the exclusions and fail to re-
set the system when the exclusions no longer apply,
they end up failing to accrue tax on the second set of
purchases and end up with a big Gotcha when the audi-
tors come around.
III. Compliance and Tax Return Gotchas
Former U.S. Speaker of the House Tip O’Neil once
said, ‘‘All politics is local.’’ Sales tax policy encapsu-
lates this notion. Government representatives from all
branches of government must appeal to their constitu-
ents by passing laws that benefit the state (and get them
reelected.) Laws favoring manufacturing in the Mid-
west may not make sense to people on the West Coast
with its services economy. Local politicians are likely to
advocate for their most powerful constituency without
undertaking a comprehensive analysis of the impact
upon the state tax regime, much less the national one.
If challenged, local courts may also favor the local
mindset over the national interest. Hence, the myriad of
different laws and rulings which may make sense on a
local level, have now become impossible to administer
with 100 percent accuracy on a multistate, national
level.
A. Tax Rates
State rates are common across all taxing states ex-
cept Alaska which only has local rates. Separate state
and local rates are common in all but ten states.55
The
amount and type of local rates change frequently de-
pending on the local environment. However, the Gotcha
is brought about when rate caps, reduced rates and ori-
gin based local tax are applied. Below are just a few ex-
amples of the chaos called tax reporting.
s Reduced Rates-Connecticut – Computer and tech-
nology services are taxed at 1 percent if the benefit of
the service is received in Connecticut. However, canned
software is considered tangible personal property and,
even if downloaded, is taxed at the full rate of tax.56
s Origin Sourcing-California – Out-of-state sellers
selling into California can utilize destination based
sourcing. Sellers located in California and selling into
California charge local tax at the point of origin of the
sale.57
s Article Caps-Tennessee (also Florida) – Localities
in Tennessee have a single article cap of $1,600 on the
sale of any single article of TPP. However, if the item
sold does not meet the definition of ‘‘single article,’’ the
entire sales price is subject to the tax.58
It is also impor-
tant to note that the ‘‘single article cap’’ does not apply
to the sale of taxable services.59
While major tax calculation software is programmed
to accommodate these complexities, any business rely-
ing on homegrown systems or tax rate software to cal-
culate the correct tax should consider these Gotchas
and incorporate them into their compliance.
B. State Reciprocity
People like to believe that tax paid in one state will
be fully credited by another state if that state asserts si-
tus over a portion of the sale. Taxpayers that have been
taking credit for taxes paid to one state against taxes
owed in another state are in for a big Gotcha come au-
dit time. Most states, especially those that are members
of the Multistate Tax Compact (‘‘MTC’’) will only credit
like-kind tax with like-kind tax.60
Keep in mind ‘‘like
kind tax’’ means exactly the same in the states’ view.
The states may call a local tax a ‘‘Local Option,’’ a
‘‘Transportation Tax,’’ a ‘‘School Tax’’ and a myriad of
other things. As a result, a ‘‘Local Option’’ is not neces-
sarily the same as a ‘‘Transportation Tax’’ and, there-
fore, is not a like-kind tax. Some states do not allow
taxes benefiting schools to be reciprocal so that portion
of the tax will not be reciprocated even if the other state
has a like-kind education tax. Consequently, getting the
state to give credit for the local taxes as a like-kind tax
can be very difficult in states like Alabama61
, Georgia,62
North Carolina63
and many more.
C. Gross Receipts Tax vs. Sales Tax
While gross receipts taxes act like sales tax, they do
not follow the same rules as sales tax. They are a tax on
the seller for the privilege of selling in a tax jurisdiction
based on the receipts generated from the sale of prod-
ucts or services in that jurisdiction. Washington Busi-
ness and Occupation tax (‘‘B&O’’) is probably the most
commonly cited gross receipts tax. However, Washing-
ton assesses the B&O tax in addition to the sales tax
and two sets of rules apply. New Mexico and Arizona
charge a gross receipts tax instead of a sales tax. It is
important to understand whether the state is charging
gross receipts or sales tax because nexus protections
55
Connecticut, Indiana, Kentucky, Maine, Maryland, Mas-
sachusetts, Michigan, Rhode Island, Virginia, West Virginia.
56
Conn. Dept. of Rev., Policy Statement 2006(8) (March 23,
2007).
57
CAL. REV. & TAX. CODE §6203. See also Missouri, New
Mexico, Ohio, Pennsylvania, Texas, and Utah.
58
TENN. CODE ANN. §67-6-702(d) (2007).
59
See Tenn. Rev. Rul. No. 08-24 (March 12, 2008).
60
Language proposed by the MTC for reciprocity states ‘‘A
credit is allowed against sales or use tax that is due to [INSERT
STATE] and any of its localities for state and local sales or use
taxes which were legally due and paid to another state on tan-
gible personal property bought for use in that state and later
brought into [INSERT STATE], if the other jurisdiction grants
reciprocity; that is, if the other jurisdiction grants a similar
credit for [INSERT STATE] state and local sales and use taxes.
Credits for taxes paid out-of-state are applied against the
[INSERT STATE] state tax first and the remainder against the
local tax.’’
61
ALA. CODE §40-27-1; See also Ala. Admin. Code r. §810-6-
5-.04, .25(3).
62
GA. COMP. R. & REGS. §560-12-1-.32(2).
63
N.C. GEN. STAT. §105-164.6(c).
8
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9. generally afforded to sales tax64
and statutory exemp-
tions based on the type of buyer, 65
in addition to other
general sales tax application rules, may not apply in
states taxing gross receipts.
D. Home Rule Jurisdictions
Home rule jurisdictions are a great big Gotcha for
companies doing business in a state primarily because
of the added administrative burden and the inconsis-
tency with state tax law. ‘‘Home rule’’ in this context re-
fers to jurisdictions whose local tax is administered at
the local level rather than the state level. Locally admin-
istered taxes have separate returns, filing deadlines, au-
dit programs and rules for compliance. However, the lo-
cals can choose not to recognize state exemptions and
exclusions if no specific local ordinance is in place.66
In
this instance, companies that do not charge tax at the
state level be required to charge tax at the local level.
Unless you want a BIG Gotcha, be sure to double check
the local ordinance in home rule states to ensure the
same exemptions apply for both. 67
E. Tax Return Administration
Everybody wants things done their way! Tax return
formats range from a simple one liner – Amount Tax
Owed – to the Nth degree of detail. How companies pay,
when they pay, and what they pay, all have distinct
rules and processes. And if the rules are not followed,
chaos ensues and penalties are assessed.
s Completing the Tax Return – It’s logical to as-
sume that a tax return would consist of one form with
Total Sales/Purchases, Taxable Sales/Purchases, Total
Sales/Use Tax and a schedule of the distribution of tax
across the localities. After all, these data elements are
the basic components of tax reporting and simplify the
process for both the state and the taxpayer. How hard
can it be? Aside from multiple forms in a single state—
most states have separate forms for sales tax, use tax,
sellers use and other excise tax types – this requirement
is manageable. However, completing returns in home
rule states can really add to the compliance burden and
adds to the costs of administration. To further compli-
cate matters, some localities still require paper filings
and others file online. Some have separate online re-
turns and online payment processes; some are per-
formed simultaneously. Suffice it to say, the reason tax
returns warrant a Gotcha has nothing to do with diffi-
culty, it has more to do with the many, many detailed
processes the taxing jurisdictions have devised to reach
the same place – reporting and payment of the tax.
s Due Dates – Woe be the tax practitioner that in-
curs the wrath of a late filing or a late payment. Thank-
fully, most state tax returns are due on the 20th
of every
month. However, some are due as early as the 15th68
and as late as the 30th
.69
Then, of course, there’s some
due in between the 20th
and the 30th
.70
The due date
also depends on what type of return and whether it is
an informational return to true up prepayments71
or a
quarterly return for liabilities over the last three
months.72
Let’s not forget the states that accelerate
their quarterlies to get as much money as possible be-
fore their fiscal year end.73
The, of course, there’s New
York, that does not recognize calendar quarters but in-
stead requires its quarterly returns be filed for the three
month liabilities ending in February, May, August and
November.
s Tax Payments – Funds must be available and in
the states bank account for ACH debits by the due date.
Be sure to look at each state’s rules as to when the ACH
should be initiated especially as it relates to weekends
and holidays. Many a taxpayer has been dinged by a
Texas late payment fee because their ACH was late.
Texas publishes the dates that the ACH must be submit-
ted and they range from the 17th
to the 19th74
of the
month even though the return is due the 20th
.
Any time exception processing is introduced into a
standard process, the likelihood of errors increases.
Paying taxes is a standard process; paying sales taxes
is one big exception process. No wonder it’s a Gotcha!
F. Audit Administration
Audits are where all those operational and technical
Gotchas converge and become evident. Every tax prac-
titioner has a war story about an audit that didn’t turn
out as planned. It’s outside the scope of this paper to go
into all the many technical issues that can become ma-
jor Gotchas. However, certain administrative and op-
erational aspects inherent in the administration of au-
dits can become a minefield of Gotchas.
s Lack of Documentation – If it cannot be proven, it
might as well not have happened. Documentation goes
missing when tax practitioners fail to convey its impor-
tance to those who generate the documentation in their
daily work. ‘‘Not my job to file Account Payable’s pa-
perwork’’ is rarely a sufficient excuse when an explana-
tion is required for large assessments. It’s always a
good idea to take ownership and provide guidance even
if it is ‘‘not your job’’ since the measure of success of a
tax practitioner often depends on low tax assessments.
s Missed Deadlines - Sometimes missed deadlines
for audit waivers work in your favor.75
Unfortunately,
that favorable shift goes the other way after the assess-
ment is issued. There are very rigid timelines to protest
which differ from as little as 30 days 76
to 90 days77
from the final assessment to the protest. Once a dead-
line passes, the taxpayer may forfeit rights to appeal.
s Jeopardy Assessments – Tax jurisdictions gener-
ally issue jeopardy assessments to get a company’s at-
tention. The company has either been uncooperative or
has been unable to produce data from which a reason-
64
E.g., PL. No. 86-272.
65
E.g., Federal Preemption exclusion.
66
LA. REV. STAT. ANN. §47:337.10(I) promulgates that exclu-
sions apply for local sales and use taxes purposes only if the
political subdivision has adopted them by ordinance. . . .. . .’’
the ordinance imposing said tax shall be adopted by the gov-
erning body only after the question of the imposition of such a
tax shall have been submitted to the qualified electors of the
municipality at an election to be con ducted in accordance with
the general election laws of the state of Louisiana, and the ma-
jority of those voting in said election shall have voted in favor
of the adoption of such ordinance. See La. Rev. Stat. Ann.
§47:338. as renumbered from La. Rev. Stat. Ann. §33:2712 by
H.B. 248, Reg. Sess. (Ala. 2011).
67
What’s even more difficult is finding a copy of the ordi-
nance so you can comply!!!!
68
E.g., Maine.
69
E.g., Connecticut.
70
E.g., Ohio, Washington.
71
E.g., California.
72
E.g., Indiana.
73
E.g., New York May returns.
74
See Texas Form 00-843 (Rev. 8-11/25).
75
It can work against you if you have refunds pending.
76
Mississippi, Wyoming.
77
New York, New Jersey.
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10. able assessment can be determined. Either way, the
company assumes a defensive position of its own mak-
ing that is significantly harder to mitigate than a regu-
lar assessment. Inviting this type of assessment is gen-
erally not a good audit defense strategy.
s Appeals Process – There is substantial variation
by state as to the appeals process. The taxpayer must
exhaust all administrative remedies in most states be-
fore they can formally request judicial redress. The ap-
peal process resides in the Department of Revenue for
about half of the states.78
Needless to say, people have
asserted that the Department of Revenues may exercise
a bit of favoritism toward its own department. The other
half of the states rely on independent or judicial bodies
to administer the appeals process which gives a percep-
tion of greater independence.
s Pay-to-Play – There is significant controversy sur-
rounding so-called ‘‘Pay-to-Play’’ requirements that
taxpayers either pay the assessment or post a security
bond in order to have their case heard by the courts.79
The Vermont Supreme Court recently upheld the dis-
missal of an appeal for a sales and use tax assessment
because the taxpayer failed to post a security to be
heard.80
IV. Conclusion Sales and Use tax application is a
complex system that exemplifies Chaos Theory.81
Chaos theory is based upon the study of systems which
are greatly sensitive to changes in initial conditions. By
introducing small changes into the initial state, out-
comes become more difficult to predict over time. For
example, an initial tax rate of 8.499 percent will round
to an 8 percent tax rate. If a transaction is $1,000,000,
the tax computed will be $80,000 when it should actu-
ally be $84,999. This represents a 6 percent error which
occurs simply by changing the tax rate which, when
rounded, does not appear to be in error.
The Gotchas in this paper represent those little
changes each of the states have introduced into a sys-
tem, which began simply as a tax on consumption. The
tax rate example is a mathematical illustration of how
the small changes can skew the final outcome. In the
tax world, the small changes are both mathematical and
conditional but result in substantial differences in the fi-
nal outcome, which is the tax payment.
Software is a good example of the conditional
changes applied to sales tax compliance. In the 1970s
and 1980s, software was characterized for tax purposes
as an intangible and therefore, was not subject to sales
tax. In the 1990s, the states realized that software pur-
chases were substantially increasing and sought to tax
software by justifying its taxation based on the tangible
nature of the media upon which it was delivered.
Floppy disks were tangible personal property, therefore
software became tangible personal property. Once soft-
ware was delivered electronically, this argument could
not be sustained. The states diverged in its treatment
and created a spectrum of criteria upon which it could
be taxed. The initial nature of software has not
changed. Software continues to serve the same function
and can still be characterized as software regardless of
mode of delivery. As could be expected under chaos
theory, all those minor changes to tax law to justify its
taxation had the predictable effect of creating multiple
taxing scenarios over time. These various scenarios are
often too complicated and divergent to consistently ad-
minister. The result is non-compliance.
By identifying the Gotchas, at least the taxpayer can
create processes to mitigate exposure and increase
compliance. Unfortunately, those small changes and
exception processes only perpetuate the chaos. When
conceived, these minor changes seem like an inconse-
quential tweaking of the rules for administration of the
tax or a minor change in a business system. But, it is the
‘‘tweaking’’ of the initial rules by the companies, the
law makers and the tax administrators which create the
Gotchas and thus the chaos in the first place. There is
no simple ‘‘fix’’ or solution to the chaos. However, the
application of simple, consistent and sustainable rules
at a macro level with an eye to the future application of
those rules to multistate sales tax compliance go a long
way toward reducing the chaos.
78
CNBC.com: Nanette Byrnes, ‘‘Heard in more states: See
you in tax court!’’ (May 25, 2012) (Currently, at least twenty-
one states do not have independent tax courts including Cali-
fornia, Texas and Florida).
79
Alabama, Arkansas, Colorado, Illinois, Indiana, Nevada,
New Mexico, Rhode Island, South Dakota, Tennessee, Texas,
Utah, Washington –
Source: The Best and Worst of State Tax Administration:
COST Scorecard on Tax Appeals & Procedural Requirements
by Douglas L. Lindholm and Frederick J. Nicely (2010).
80
Vermont Golf Ass’n v. Dept. of Taxes No. 2011-220 (Vt.
2012).
81
Chaos, with reference to chaostheory, refers to an appar-
ent lack of order in a system that nevertheless obeys particular
laws or rules; this understanding of chaos is synonymous with
the mathematical term dynamical instability. See also Stephen
H. Kellert, In the Wake of Chaos: Unpredictable Order in Dy-
namical Systems 32 (University of Chicago Press 1993). Ed-
ward Norton Lorenz (May 23, 1917 – April 16, 2008) is consid-
ered the foremost expert in chaos theory.
10
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11. Table 1: Enacted ‘‘Click Through’’ Nexus Statutes
State Effective Date Affiliate Threshold
AR 10/24/2011 > $10,000
CA 9/15/2012 > $10,000 Tax; > $1MM Sales
CT 7/1/2011 > $2,000
GA 10/1/2012 > $50,000
lL 7/1/2011 > $10,000
KS 7/1/2013 > $10,000
ME 10/9/2013 > $10,000
MN 7/1/2013 > $10,000
MO 8/28/2013 > $10,000
NJ 6/30/2014 > $10,000
NY 6/1/2008 > $10,000
NC 8/7/2009 > $10,000
PA 9/1/2012 None specified
RI 7/1/2009 > $5,000
VT When adopted in 15 other states > $10,000
Table 2: Nexus Creating Activities – Use of Third Party Servers in a State
STATE Lease Space on 3rd
Party Network of Servers In
State
Creates Nexus if Web Hosting Provider
has Server in State
AZ NEXUS CREATED
AR NEXUS CREATED
CA NEXUS CREATED
CO NEXUS CREATED
DC NEXUS CREATED NEXUS CREATED
HI NEXUS CREATED NEXUS CREATED
ID NEXUS CREATED
IN NEXUS CREATED
IA NEXUS CREATED NEXUS CREATED
KS NEXUS CREATED
KY NEXUS CREATED
LA NEXUS CREATED
MD NEXUS CREATED
MN NEXUS CREATED
MO NEXUS CREATED NEXUS CREATED
NM NEXUS CREATED NEXUS CREATED
NY NEXUS CREATED
NV NEXUS CREATED
NC NEXUS CREATED
OH NEXUS CREATED
PA NEXUS CREATED
RI NEXUS CREATED NEXUS CREATED
SD NEXUS CREATED
TN NEXUS CREATED NEXUS CREATED
UT NEXUS CREATED
WV NEXUS CREATED NEXUS CREATED
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12. Table 3: Nexus Creating Activities – Services Performed Outside the State
STATE Taxable Service Performed Out-of-State with
no Transfer of TPP to In-State Customer
Taxable Service Performed Out-of-State with
Electronic Transfer of Document Incident to
the Service
AZ NEXUS CREATED NEXUS CREATED
CO NEXUS CREATED NEXUS CREATED
DC NEXUS CREATED
IA NEXUS CREATED NEXUS CREATED
KY NEXUS CREATED NEXUS CREATED
MA NEXUS CREATED
MO NEXUS CREATED NEXUS CREATED
NM NEXUS CREATED
OH NEXUS CREATED
RI NEXUS CREATED
WV NEXUS CREATED NEXUS CREATED
Table 4: Sourcing Software Accessed Remotely
STATE Where Software Used Where Server Located Purchaser Address
AZ YES
AR YES
CO YES
CT YES
DC YES
HI YES
ID YES
IN YES
IA YES
MA YES
MI YES
NE YES
NM YES
NY YES
ND YES
OH YES
PA YES
RI YES
SD YES
TN YES
UT YES
VT YES
WA YES
WV YES
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9-12-14 Copyright ஽ 2014 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

13. Table 5: Sales Tax Policies – Sales Price of Social Media Coupons
STATE Full Value Discounted Value
AL YES
AZ YES
AR YES
CA YES
CO YES
DC YES (No Explanation by DC for Conflicting
answers)
YES (No Explanation by DC for Conflicting
answers)
FL YES
HI YES
IA YES
KS YES
KY YES
ME YES
MD YES
MA YES
MI YES
MO YES
NE YES
NV YES
NJ YES
NM YES
NY YES
NC YES
OH YES
PA YES
RI YES
SD YES
TN YES
UT YES
VT YES
WI YES
WY YES
Table 6: Capital Purchase – Audit Support ‘‘Owners’’
Capital Purchase
Documents
Tax Decision Support
Required As Audit
Support
Buyer Procurement FA
Accounting
General
Accounting
Accounts
Payable
Capital
Requisition
Description of Item
and its use
X
Purchase Order Description of Item,
price, terms, vendor
information, FOB,
ancillary services
X
Invoice Payment Invoice due for
payment, tax
charged or not
charged, description
of purchase
X
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14. Table 6: Capital Purchase – Audit Support ‘‘Owners’’ − Continued
Capitalized Asset Amounts transferred
from prepaid account
to capital,
accounting for
associated services,
assignment of asset
ID, begin
depreciation
X X
Table 7: Sample Bulk Sales Rules
STATE Taxability of M&A Cite
MD Generally imposes state sales tax on the sale of an
ongoing business. Transactions involving the sale of
an ongoing business fall within the definition of a
taxable sale unless the transaction meets certain
requirements to be exempt from sales tax as a casual
and isolated sale.
Md. Code Ann. Tax-Gen.
§11-209(a). . [See A CF
Industries, Inc. v. Comptroller
of the Treasury, 263 A.2d
574 (Md. 1970).
NY Does not provide an exemption from sales or use tax
for bulk sales of business assets. Thus, unless a
particular exemption applies to all or a portion of the
business assets sold in a bulk sale, all business
assets transferred in a bulk sale are subject to tax.
N.Y. Comp. Codes R. &
Regs. tit. 20, §537.0(g)
OH The sale of a business is likely not exempt as a
casual sale. Casual sales only include sales of
tangible personal property initially obtained by its
seller for personal use.
Ohio Rev. Code Ann.
§5739.02(B)(8); Ohio Rev.
Code Ann. §5739.01(L)
OK No exemptions for the sale of a business; therefore
the gross receipts of such sales are subject to sales
tax to the extent that the sales price is attributable
to sales of tangible personal property.
Magnolia Petroleum Co. v.
Okla. Tax Comn., 326 P.2d
821 (Okla. 1958).
WV No exemptions from sales or use tax for bulk sales of
business assets.
W. Va. Code §11-15-6
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9-12-14 Copyright ஽ 2014 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550