SOURCING IPT ANNUAL CONFERENCE ORIGIN VERSUS DESTINATION VERSUS.

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1 SOURCING IPT ANNUAL CONFERENCE ORIGIN VERSUS DESTINATION VERSUS. Rich Hofrichter James G. Busby, Jr. Partner, SALT Services Senior Member Grant Thornton LLP The Cavanagh Law Firm Charlotte, North Carolina Phoenix, Arizona

2 LEARNING OBJECTIVES To understand the different methods in which transactions are sitused for local sales tax purposes. To know which states use which method(s) for situsing. To allow for tax planning and compliance process improvement around situsing.

3 AGENDA Overview of situs determination. Review the different situsing methods for intrastate transactions. Goods versus services. Review which method(s) are employed by each state. Specific examples Alabama, Arizona, California, Illinois, Ohio, Texas.

4 OVERVIEW OF SITUS DETERMINATION Situs determination is set by each state and dictates which local tax rates and rules apply for a given transaction. Applicable to intrastate transactions. Interstate transactions are typically destination based when shipped from outside a state. Situsing rules generally apply to sales transactions, but sometimes to purchases.

5 SITUSING METHODS - ORIGIN Based on the point of origin for the sale, not the destination. Point of origin can be defined differently, but generally: Point at which the order is accepted by the seller Order Acceptance. Point from which merchandise is shipped Ship-From. Point at which the order is placed, like a retail store Order Origin.

6 SITUSING METHODS - DESTINATION Based on the point of delivery of the sale, where the purchaser takes ultimate possession of the goods. Generally the delivery address. FOB points can affect the situs determination. Transportation must be arranged by the seller.

7 SITUSING METHODS - HYBRID Two states take a hybrid approach and combine aspects of Origin and Destination sourcing. California County and city taxes are due based on Ship From/Order Origin, but District taxes are based on Destination. Texas Initial local tax is based on Order Origin, but if the local cap (2%) is not yet reached, the Destination tax starts to apply (based on authority level).

8 SITUSING METHODS - SERVICES Services generally follow the same situs rules as goods on a state-by-state basis, but situs points typically are based on service delivery. Situsing is typically based on Destination for non-electronic services, like consulting and construction. Destination is typically where the services are actually performed.

9 SITUS METHODS BY STATE WA CANADA - Destination CA OR NV ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI OH IN KY WV PA VA NY ME CT NJ DE MD DC MA RI NH VT AZ NM TX OK AR LA MS TN AL GA SC NC LEGEND: No Sales Taxes HI FL No Local Taxes AK PR - Destination Destination Origin Modified Origin/Hybrid IPT 2014 ANNUAL CONFERENCE

10 SITUS EXAMPLE - ALABAMA Alabama is a Destination state, but has local nexus rules since it has home-rule localities. Local nexus will be key in truly determining if local tax should be charged, but determining WHICH locality should be evaluated is the purpose of situsing rules. In this case, the delivery address of the goods is the determining factor for which local tax rates may apply, based on nexus in that locality: Seller located in Mobile, Mobile County, delivers to Birmingham, in Jefferson County. Local sales tax is due in Birmingham City and Jefferson County if no nexus, charge state level tax only.

11 SITUS EXAMPLE - ARIZONA Arizona is an Origin state, with local nexus similar to Alabama since it's a home-rule state as well. In this case, the city and county taxes are based on the shipfrom address of the goods: Seller located in Phoenix, Maricopa County, delivers to Tucson, in Pima County. County and city sales tax is due in Phoenix City and Maricopa County.

12 SITUS EXAMPLE - CALIFORNIA California is a Modified Origin state, with local nexus based on being "engaged in business." In California, the city and county taxes are based on the ship-from address of the goods, while district taxes are based on the delivery address: Seller located in San Diego, San Diego County, delivers to Los Angeles, in Los Angeles County. County and city sales tax is due in San Diego City and San Diego County, but the district taxes applicable in Los Angeles apply (.5% Los Angeles County Transactions (LAMT) and 1% Los Angeles County Transportation Commission (LATC)).

13 SITUS EXAMPLE - ILLINOIS Illinois is an Origin state, with local nexus based on nexus in the state. But, in Illinois, the city and county taxes are based on an analysis of the preponderance of activity around making the sale, looking at order acceptance, place of negotiation, and ship-from address of the goods: Seller located in Chicago, Cook County, delivers to Schaumburg, in DuPage County. County and city sales tax is due in Chicago City and Cook County.

14 SITUS EXAMPLE - OHIO Ohio is an Origin state, with local nexus based on nexus in the state. In this case, the city and county taxes are based on the place the order was received: Seller located in Cleveland, Cuyahoga County, delivers to Cincinnati, in Hamilton County. County and regional transit authority sales tax is due in Cleveland RTA and Cuyahoga County.

15 SITUS EXAMPLE - TEXAS Texas is a Modified Origin state, with local nexus based on being "engaged in business." In this case, the county, city, and district taxes are based on the ship-from address of the goods, but if the local cap (2%) isn't reached, the destination rates apply in this order: City, County, Special Purpose Districts, Transportation Districts as use taxes but only at the authority level that didn't apply for sales taxes from a city and county perspective: Seller located Outside of Dripping Springs, Hays County, delivers to Houston, in Harris County. Hays County.5% tax and.25% Dripping Springs Library Tax (SPD) apply. Since the 2% cap isn't reached, the 1% Houston City tax applies, now to 8%. The 1% Houston Transit Tax (TD) does not apply since it would exceed the cap. County tax would not be duplicated since Hays County tax applied as a sales tax.

16 QUESTIONS AND DISCUSSION IPT 2014 ANNUAL CONFERENCE