Presented by: Douglas A. Joseph, CPA Tony Switajewski, CPA

Transcription

1 Presented by: Douglas A. Joseph, CPA Tony Switajewski, CPA 1

2 Requirement to Collect Sales Tax (Nexus) Basics of Sales and Use Taxation Taxation of Services and Sourcing Listing of Taxable Services (not all inclusive) Specific Services Discussed Advertising Business and Human Resource Management Computer and Data Processing Personnel Real Property Key Points to Keep in Mind Action Steps 2

3 Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service or State Tax Authorities, (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to market or promote any transaction or matter addressed herein without the express and written consent of Blum Shapiro & Company, P.C., (3) Blum Shapiro & Company, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (4) any fees otherwise payable to Blum Shapiro & Company, P.C. in connection with this written tax advice are not refundable or contingent on your realization of tax benefits from the advice contained herein. This presentation is intended to provide general information and no tax advice is intended to be given. 3

4 Nexus for service providers: Generally, physical presence in a state t by a service provider is required: Property in a state (e.g., office, inventory) Sales personnel or independent representatives visit customers Performing services within a state Attribution nexus (e.g., click-through nexus) Once a business has nexus in a state for sales or use tax collection responsibilities, it is likely subject to other state taxation (e.g., employee withholding taxes, income taxation, net worth taxation, gross receipts taxation). 4

5 The Basics of CT Sales Taxation on Services Only listed taxable services are taxable ( enumerated services ) Sales tax is legally ll imposed on the retailer (seller) Retailer is to collect the tax from the consumer and it is a debt from the consumer to the retailer when added to the sales price. Seller must pay sales tax to CT whether or not it collected the tax from its customer. What happens when you should have charged sales tax but didn t can you go after your customer for the tax? 5

6 Accrual basis general rule (when services are rendered) Cash basis exception for sellers of services filing Federal income tax returns on cash basis. Handling bad debts 6

7 Use tax is imposed on taxable purchases of services where sales tax was not collected applies to both out-of-state and in-state purchases of services. Services that are not subject to Connecticut sales tax are also not subject to the use tax. Form OS-114, Sales and Use Tax Return 7

8 Services to Identically Owned Affiliates Applies to any types of business organizations (was once only applicable to corporations) Services Rendered to Qualifying Exempt Organizations State of Connecticut and municipalities U.S. Government 501(c)(3) or (13) Organizations Nonprofit Charitable Hospitals Resell Services Buying a taxable service that you will resell - must be an integral and inseparable component part of a service to be resold to an end consumer (often seen in the construction industry). 8

9 Sourcing of services: Sourcing is very important t because CT taxes many services not taxed by other states CT DRS position has always been where the benefit of the service is enjoyed is where the service is taxable Easy when service is to real property, e.g., because it is stationary (service to CT real estate is taxable in CT) Difficulty is when services cross state lines or service benefit is received outside CT and brought back to CT Multiple points of use 9

10 Enumerated services are listed in C.G.S. Section (a)(37)(A) through h (FF) Services are not subject to tax unless specifically enumerated as taxable (i.e., not all services are taxable) Department of Revenue Services Link to Services Subject to Sales Tax Services Subject to Sales Tax Web Site #40952 IP 2006(11) 10

11 Computer and data processing Credit information and reporting Employment agencies and personnel services Private investigation, protection, patrol work, watchman, armored car Painting and lettering Photographic studio Telephone answering Stenographic Services to industrial, commercial or income-producing real property Business analysis, management, management consulting Public relations Piped-in music 11

12 Furniture reupholstering and repair Repair to any electrical or electronic device Lobbying or consulting services Broker services relating to tangible personal property Locksmith Advertising Landscaping and horticulture Window cleaning Maintenance and janitorial i Flight instruction and chartering Motor vehicle repair Motor vehicle parking Radio or television repair 12

13 Exterminating Swimming gpool cleaning Miscellaneous personal services Repair and maintenance service to tangible personal property Patient care services Health and athletic clubs Producing, fabricating, processing, printing or imprinting of TPP Telecommunication Community Antenna television i Furnishing of storage or mooring Prepaid telephone calling Furnishing, preparing, or serving of food, meals or drinks 13

14 NOT RELATED TO THE DEVELOPMENT OF MEDIA ADVERTISING What Advertising is taxable? Non-media advertising Creation, preparation, production, dissemination Consulting and advice Layout, art direction, graphic design, mechanical preparation, production supervision Does not include marketing Does not include cooperative direct mail advertising 14

15 What is Media Advertising? Sale of time or space In or on pre-existing medium For broadcast or dissemination to all or segment of public Examples of media: Newspapers, including advertising inserts and coupon inserts distributed inside newspapers Magazines Radio, TV, Cable TV Billboards, Buses, Taxis Trade or Campus Directories Restaurant Placemats Cash Register Tapes Does not include ads devoted to a specific target: Catalogs Flyers Brochures Posters 15

16 Includes: Business Analysis Examination of data, making of recommendations Business Management Provision of general or specialized day-to-day management Business Management Consulting Furnishing of advice or assistance on matters pertaining to management Business Public Relations Preparation of materials designed to influence the general public or other groups by promoting interests of service recipient 16

17 It s not what the services are called that determines whether or not taxable Reg. Sec (2)(i)(J)-1(c)(1) Look at nature of services rendered Message Center Management, Inc. v. Commissioner, affirmed by CT Supreme Court 6/19/07 The word Management was in the service provider s name plus service provider entered into management agreements with clients, but services were held nontaxable because they were not really business management services 17

18 Must be rendered to service recipient s Core business activities iti OR Human resources management activities 18

19 Core business activities: Activities directly related to service recipient s lines of business, capital structure, budgeting and strategic planning Non-Core Business Activities Administration of: Payroll Employee insurance claims Pension funds Food service operations Employee health services Mailroom delivery functions Plants & grounds maintenance Insurance claims against service recipient in capacity as insurer Self-insured claims Investment advice Marketing Particular interests of service recipient s members, shareholders or partners 19

20 Human Resource Management Activities Hiringi Development Job-related training Compensation Personnel management Employee relations Design & implementation of employee benefit plans 20

21 Exclusions: Professional Service Providers: Business consulting services are not taxable when rendered by a person acting in such person s professional capacity and that are commonly associated with the profession: Examples: Medical Legal Engineering Accounting 21

22 Exclusions Separately stated t compensation, fringe benefits, workers compensation and payroll taxes paid to or on behalf of employees of service provider who has contracted to manage a service recipient s property or business premise Employees must perform services solely at recipient s premises See Renaissance Management Affirmed by Connecticut Supreme Court 12/30/03. Must be solely for one service recipient at a single location 22

23 Exclusions (cont.) General Partner Services Rendered d To ALimited it Partnership (LP): Provides that services are only taxable when general partner (or affiliate) if: Compensation is other than via distributive share of partnership profits General partner (of affiliate) offers such management services to others, including any other partnership Presumably, otherwise, general partner management services for LP s are nontaxable Caveat: does not necessarily apply ppy to LLCs 23

24 Unbundle Taxable and Non-Taxable Services Contracts t One Contract: Identifying taxable and non-taxable services and fee associated with each Two Contracts: Taxable service contract and non-taxable service contract Keep track of time spent on taxable and non-taxable services Unbundle Invoice Taxable vs. non-taxable services separately stated 24

25 Job-related training Topics must be directly related to employee s job skills General courses are excluded Higher education is excluded DRS longstanding position has been that services are sourced to where employee is based rather than where training occurs 25

26 Computer-related services and sales of tangible personal property Computer Data Processing (CDP) Includes: Programming, code writing and modification of existing programs Implementation of software in connection with development, creation, production of canned or custom software or license of custom software Providing computer time, storing and filing information, retrieving or providing access to information Data scanning, creating custom software, computer training and online access to information 26

27 Computer-related services and sales of tangible personal property (cont.) Taxed permanently at 1% Hardware and other tangible personal property p is taxed at 6% Separately state or unbundle computer service from property. Otherwise everything is taxed at 6% Separately stated hardware installation is exempt (unless hardware is leased rather than sold/purchased) Repair and maintenance of hardware taxed at 6% Canned software is tangible personal property taxed at 6% (unless delivered electronically taxed as CDP at1%) 27

28 Custom Software For particular needs of a customer Taxed as CDP service at 1% License fees for mere use and possession of custom software (as an intangible ibl asset) are not taxed if separately stated t 28

29 Software installation, maintenance, support and upgrades are taxable Regardless of whether canned or custom Software maintenance and warranty contracts are CDP whether canned or custom Upgrades of canned software Sale of tangible personal property 6% Delivered electronically CDP service 1% Maintenance and warranty contracts providing for phone support and tangible personal property upgrades are taxable at 6% unless charges separately stated 29

30 Computer Training If job-related, taxable at 6% If not job-related, taxable as CDP service at 1% Computer personnel services taxable at 6% 30

31 Personnel agencies furnish temporary or part-time ti help Personnel agency is employer Any business can be considered a Personnel Agency, even a related entity Doesn t have to be in business of furnishing help Service recipient controls work of agency s employee Similar to employee independent contractor analysis Degree of prearrangement of services by agency is key If no prearrangement, will be personnel service All gross receipts are taxable at 6%, not just agency s commission (unless leased employees or PEO) 31

32 Leased Employees Exception Defined by IRC Section 414 Employee works substantially full-time for service recipient for at least one year Must be agreement between service provider and service recipient Services must be of type historically performed by employees If 75% of agency employees under contract meet definition at commencement, all employees under contract qualify for exclusion, including those that are subsequently added to workforce Exclusion is for all compensation and employment-related expenses of leased employees 32

33 A contractor s labor (or service) is subject to tax when the service is to: Existing commercial real property Existing industrial real property Existing income-producing real property Who is a contractor vs. a manufacturer Example) Gross Receipts Test Useful DRS Publication i on Sales Tax Applied to Contractors: 33

34 A contractor s labor (or service) is not subject to tax when the service is to: New construction; Owner occupied residential property; Charitable or religious i organizations; Qualifying government agencies or their agents; Real property owned by federally recognized Indian tribes when the service is performed in federally recognized ed Indian da country; Low and moderate income housing; Contracts performed out of state; Hospitals and certain other exempt entities; Industrial, commercial, or income producing real property when the service is for the voluntary evaluation, prevention, treatment, containment or removal of hazardous waste or other contaminants of air, water or soil; Real property located within a public right of way. 34

35 Contractors are the consumers of materials and supplies used in fulfilling their construction contracts Contractor pays tax on purchases of physically incorporated materials Generally, a resale certificate cannot be used when contractor purchases materials 35

36 A contractor s service (labor) charge is determined by subtracting the cost of materials (including tax paid on materials) from the total contract price. In other words, every cent above the contractor s cost of materials that is physically incorporated into the real property AND already-taxed subcontractor services, plus the tax paid on those materials and services, is considered the service charge. Invoicing: Materials and labor (with associated sales tax on service portion) Lump sum ( sales tax included on services ) 36

37 BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS Nonresident contractors or persons doing business with nonresident contractors may use one of two options to satisfy the requirements for posting security to ensure a nonresident contractor pays all Connecticut taxes: Nonresident contractors may furnish DRS a guarantee or cash bond for 5% of the total contract price; or Persons doing business with nonresident contractors must withhold 5% of the total contract price and deposit it with DRS. 37

38 BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS Nonresident contractor means a contractor who does not maintain a regular place of business in Connecticut. Person doing business with a nonresident contractor means any person who enters into a contract with a nonresident contractor t and includes but is not limited it to, property owners, government, charitable or religious entities and resident or nonresident general contractors or subcontractors. 38

39 BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS The nonresident contractor s tax liability includes sales and use taxes, withholding tax, personal income tax, corporation business tax, motor fuels tax, business entity tax and any other applicable Connecticut taxes arising from the project for which the deposit was made. 39

40 Not all services are taxable in CT, and within each type of taxable service there may be exemptions or exclusions (consider exemption certificate requirement). It is the nature of the service and not what it is called that determines its taxability. Sales tax is generally due to the state on the accrual basis (when the service is rendered) d) and not when the tax is collected from the customer. Service contracts should address sales taxability and indemnification. 40

41 Consider unbundling taxable services from non-taxable services on the invoice as well as in service contracts. Taxation of services occurs in CT if the benefit of the service is enjoyed in CT. When dealing with a non-resident contractor, obtain a Certificate of Compliance. Consider whether you have nexus in states that would require you to register for use tax collection on taxable services that you render for a customer in that state. 41

42 Review Your Nexus Footprint CT and other states (registration and compliance requirement) Review Significant Service Contracts Not what is the service named but what is the service? Is sales tax specifically addressed in the contract? Review Significant Invoices from Service Providers Is sales tax being gproperly p charged (use tax being remitted)? Are non-taxable services separately stated from taxable services on the invoice? Determine Sales and Use Tax Exposure Consider voluntary disclosure agreements Determine Sales and Use Tax Overpayments Consider claiming i refunds 42

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44 Please contact us with additional questions: Doug Joseph, CPA, Partner BlumShapiro Tony Switajewski, CPA, Principal i BlumShapiro tswitajewski@blumshapiro.com