November 14,

Transcription

1 Texas Sales and Use Taxes for Manufacturers, Retailers, and Distributors November 14,

2 Introduction George W. Rendziperis Senior Manager, state and local tax Rudy Gonzalez Tax Supervising Senior, state and local tax 2

3 Agenda Overview Tax collection and reporting Exemptions State tax controversies Legislative updates 3

4 Overview 4

5 What is Sales Tax vs. Use Tax? Sales tax Sales tax is required to be paid by the purchaser, but remitted by the seller of goods or services, if subject to tax, when purchased. The purchaser and seller must have nexus with the state. Use tax Use tax is required to be paid and remitted by the purchaser of goods or services, if subject to tax, when purchased from a taxpayer (seller) who does not have nexus with the purchaser s state. In general Example: purchases via the internet Sales and use tax is imposed on the sales price of each sale of a taxable item Sales price the amount for which the item is sold, leased or rented without a deduction for any cost 5

6 Personal, Joint and Successor Liability Sales and use taxes are considered trust fund taxes On the sale of a business or equipment, the seller is not released from sales tax liability An officer or director may be personally liable for unpaid sales taxes A sales and use tax assessment follows the asset, therefore, the buyer of an asset may be liable for sales and use taxes on assets it purchases from others Purchase of assets of a business is not a defense As a buyer of assets or equipment, need to have due diligence completed on the seller 6

7 Nexus The tax must be applied to an activity with a substantial nexus to the taxing state Must have some type of physical presence in the state In Quill Corp. v. North Dakota, the Supreme Court ruled that a business must have a physical presence in a state for that state to require it to collect sales taxes. However, the court explicitly stated that Congress can overrule the decision through legislation. Note: Legislation (Market Fairness Act 2013) has passed in the U.S. Senate that would overrule the decision in Quill and allow states to collect sales taxes on remote sales (no physical presence needed); it is awaiting action in the U.S. House of Representatives 7

8 Nexus (Continued) Amazon law States have passed legislation to bypass the physical presence nexus as required by Quill Agency nexus ( click through ) Example: New York The New York law requires many Internet retailers operating affiliate programs in the state to charge sales tax on the retailer s sales to New York residents. These affiliates which can be local bloggers, newspapers, nonprofit organizations, and other types of businesses (i.e., agents) post on their websites links to online retailers and receive a commission when purchases are made through those connections March 28, 2013 New York s highest court recently held that New York s click-through nexus statute that presumes sales tax nexus for certain online retailers does not facially violate the U.S. Constitution 8

9 Nexus (Continued) Affiliate nexus Example: Texas Texas has amended its law regarding sales and use tax nexus effective January 1, 2012, so that an out-of-state seller with substantial ownership in an affiliate doing business in Texas may now create nexus for that seller. Substantial ownership means the seller has 50 percent ownership in the affiliate whether the ownership is direct ownership, common ownership, or indirect ownership through a parent, subsidiary, or affiliate. Substantial ownership in an affiliate with a physical location where business is conducted in Texas will create nexus for a seller in the following situations: The affiliate is selling the same or substantially similar products and sells those products under a business name that is the same or substantially similar to the out-of-state seller; The affiliate has facilities or employees in Texas that advertise, promote, or facilitate sales of the seller s products or help establish or maintain a marketplace in Texas for the seller, including receiving or exchanging returned merchandise; or The affiliate has a distribution center, warehouse, or similar location in Texas and delivers products sold by the seller to consumers. 9

10 Nexus (Continued) Various states have already adopted broader sales tax nexus standards known as clickthrough nexus and affiliate nexus. Click-through nexus New York, North Carolina, Connecticut, District of Columbia, Minnesota, and Pennsylvania Affiliate nexus Alabama, Colorado, Illinois, Oklahoma, Texas, Utah, Virginia, West Virginia, and Wisconsin Click-through and affiliate nexus Arkansas, California, Georgia, Kansas, Maine, Rhode Island, South Dakota, and Vermont The following states have proposed affiliate, click-through or other broad nexus provisions that would be effective in 2013 if enacted, status is as follows as of July 2013: Florida (did not pass [5/3/2013]) Hawaii (did not pass [3/7/2013]) Indiana (no action by house committee, state legislature adjourned 4/27/13) Massachusetts (bills referred to joint committee on oversight) Michigan (waiting action in the house) Missouri (vetoed by Governor, legislature will have a chance to overturn veto in September) New Mexico (pocket veto by Governor) Oklahoma (no action by legislature) 10

11 Taxable Items Tangible personal property ( TPP ) and taxable services TPP is property that can be weighed, measured, felt or touched or that is perceptible to the senses in any other manner, including computer programs, graphic art and designs, and digital products Taxable services These are the services specifically listed as taxable under the statute Essence of the Transaction Test Texas courts look at the buyer's intent to determine whether goods or services are being sold. In some cases, the parties' intent may also bear on whether state law characterizes the item as tangible personal property or real property 11

12 Tax Collection and Reporting 12

13 Collection/Sourcing the Sale Sourcing the Sale Tangible personal property Destination Services Out of state sale In state (TX) sale Place of business vs. Engaged in business Sales tax: Sourced based on the location of the seller s place of business (with some exceptions) Local use taxes: Sourced based on destination, point of delivery Sourced based on where the customer is receivingthe benefit of such service Local sales and use taxes Texas 2% maximum Assess the local use taxes in the following order City, county, special purpose district, transit authority 13

14 Reporting Requirements Local use tax and nexus Local taxing jurisdictions assess local sales and use taxes. Local taxing jurisdictions includecities, counties and special purpose districts. In order to understand the local tax rules, a business must know where it has one or more "places of business." It also must know when its "warehouse, storage yard, and plant" is not a "place of business." Place of Business. This is a store, office or other location, other than an (automated) kiosk, from where taxable items are sold or orders are received at least three or more times a calendar year. Warehouse, Storage Yard, Plant. This is a location where items are manufactured or where inventory is maintained and which does not take three or more orders for taxable items a calendar year. Engaged in Business. A business is "engaged in business" when it has some contact or physical connection with a taxing jurisdiction. In tax parlance, we call this "nexus. If nexus does not exist in a local jurisdiction, the seller is not required to collect the local use tax. However, the buyer still owes it and must accrue it. Once the seller establishes nexus in a local jurisdiction, the seller must collect the applicable local use taxes for the next 12 months in that local jurisdiction. 14

15 Reporting Requirements (Continued) More than One Place of Business New law effective June 19, 2009 If the customer placed an order for an item in person, the seller must collect city/county/spd tax based on the place of business where the customer placed the order. Prior law Texas law generally requires sellers with more than one place of business to collect city/county/spd tax based on the place of business where the customer takes possession of the item (pick-up) or the place of business from where the seller delivers the item to the customer. 15

16 Reporting Requirements (Continued) Maximum Local Tax The maximum local tax that may be assessed on any taxable transaction is 2%. The 2% may be composed of city, county, SPD and Transit Authority, in this order. If the local tax is over 2%, the seller should first assess any local sales taxes. Then, the seller should assess local use taxes up to, but not more than, 2%. Assess the local use taxes in this order: City County Special Purpose District Transit Authority If the destination of the goods is within more than one special purpose district and the total local tax exceeds 2% when the seller assesses tax for all districts, the seller should assess tax for the districts in the order of their creation. Also, the seller should not assess any local use tax if the tax cannot be collected at its full rate without going over the 2% maximum. Example If local taxes of 1% city sales, ½% county sales and 1% Transit Authority use tax are all legally due, only the city sales and county sales taxes may be assessed. The 1% Transit Authority use tax causes the total local tax to go over the 2% maximum, so it should not be assessed at all. 16

17 Local Tax Issues for Manufacturers One place of business (takes orders): San Antonio, TX Manufacturing plant (does not take orders): Schertz, TX Applicable local sales taxes: * 1.25% San Antonio (City) *.50% San Antonio MTA *.25% San Antonio ATD Due to the place of business being located in San Antonio, all sales, even if shipped from manufacturing plant, will be taxed at 8.25% (6.25% state rate plus applicable local sales taxes above), using San Antonio local rates. NOTE: No additional local (use) taxes can be collected because 2 percent cap has been reached. Misconception: Should tax sale using the rates applicable to Schertz, due to product being shipped from plant located in Schertz. Question to be answered: Is manufacturing plant considered a place of business? 17

18 Exemptions 18

19 Categories of Exemptions Exempt items Manufacturing equipment Sale for resale Exempt entities Not-for-profit Note: In Texas, the entity must be exempt for Texas purposes Texas tax-exempt entity search Exemptions required by law Exports/imports 19

20 Claiming the Exemption Burden of proof on the taxpayer Note: presumption that all sales are taxable Sales tax number is insufficient Need exemption certificate Good faith acceptance Seller lacks actual knowledge that the exemption is invalid 60-day rule After an audit, sellers are given 60 days after notification by the Comptroller to obtain and submit exemption certificates. If the certificates are not provided within the 60 days, then such sale is presumed taxable, the exemption does not apply. 20

21 Manufacturing Exemption Purchases of items/goods used in the manufacturing process are exempt from Texas sales and use taxes, therefore, a taxpayer should not pay sales or use taxes on the purchases of items used in manufacturing process. Items include Machinery/equipment (also repair/maintenance of) Component Parts Chemicals or lubricants Support Equipment Quality control equipment Safety clothing Electricity or natural gas 21

22 Manufacturing Exemption (Continued) Items that do not qualify for the manufacturing exemption Indirect equipment Conveyor systems Forklifts or intraplant transportation equipment Administrative supplies and equipment Janitorial supplies Divergent use of exempt items A manufacturer owes tax on an item if divergent use occurs, during the month or during any month before the fourth anniversary of the date of purchase. Can be allocated using hours, Rule offers formulas. 22

23 Manufacturing Exemption (Continued) Electricity or natural gas If used exclusively for manufacturing facility, then it is exempt If used for manufacturing and office building under a single meter, then need to determine predominant use If the predominant use is for the manufacturing portion, then the electricity is totally exempt If the predominant use is for the office building portion (non-exempted purpose), then the electricity is totally taxable Determine predominant use Utility study required Performed by engineer Exemption certificate requirements Manufacturing exemption certificate Must also include the following: A valid and complete study has been performed which shows that % of the electricity is for processing tangible personal property for sale in the regular course of business Need the original seal of the registered engineer who performed the study or a signed statement including the original signatures of the business owner and engineer 23

24 Resale Exemption Generally, a taxable item for resale is exempt from the sales and use taxes Sale for resale A sale of a taxable item for the sole purpose of the purchaser reselling, leasing or renting the item in the normal course of the purchaser s business in the form or condition in which it was purchased The purchaser must intend to resale the taxable item for consideration Services Sale for resale includes sales of taxable services Note: Tangible personal property used to perform a taxable service is NOT considered resold unless care, custody and control of the property is transferred to the purchaser of the service 24

25 Documenting the Exemptions Manufacturing exemption Issue Texas manufacturing exemption to your vendor/supplier Texas form (back) Texas Sales and Use Tax Exemption Certificate Must contain Name and address of purchaser Name and address of seller Description of items being purchased or an attached invoice or purchase order Reason for exemption manufacturing exemption pursuant to section Signed and dated by the purchaser 25

26 Documenting the Exemptions (Continued) Sale for resale exemption Issue Texas resale exemption to the seller Texas form (front) Texas Sales and Use Tax Exemption Certificate Must contain Name and address of purchaser Name and address of seller The purchaser s sales tax permit Description of items being purchased and then resold, leased or rented by the purchaser in the purchaser s regular course of business Signed and dated by the purchaser 26

27 Exemptions Pitfalls As a reseller, not obtaining the certificates; As a manufacturer, provide the certificate to your vendor/seller Signed and dated Description of property 27

28 State Tax Controversy 28

29 Nexus Questionnaire Purposes States determine if you have nexus with the state Casting the big net Precludes a company from the voluntary disclosure process How does a state get a company s name? Through an audit of your customer or vendor Searches on the internet How to proceed if you receive a questionnaire Do not ignore State will assess tax Penalties Signed under the penalty of perjury 29

30 Audit Process Letter from state s Department of Revenue/Treasury Discussion with auditor regarding location and time of audit Keep auditor away from the business premises; attorney office to conduct audit Need to manage audit Prior to audit beginning Review records Reconcile accounts use accountant or Make sure work-papers (trial balance, etc.) tie to tax returns/reports filed with the state Obtain exemption certificates Get organized, determine exposures or refund opportunities Open communication with auditor 30

31 Testing and Samples Generally, sales and use tax audits are broken into four basic exams or homogenous groups/populations. Sales Cost of Goods Sold/Purchases Fixed Assets Expenses (General and Administrative/Indirect) Each exam will have its own generated error rate based on the stratified sampling. Stratified Sampling Example: Create dollar stratums $0- $1,000 $1,001 - $10,000 Items over $10,000 Error rate is against its respective population only. NOTE: This process may vary based on the auditor s accessibility of records. If there are limitations, auditor will produce a reasonable method of auditing that may differ from above. 31

32 Voluntary Disclosure/Amnesty Programs These programs allow taxpayers to become compliant with state tax laws (e.g., income/franchise, sales and use, employment, individual (nonresident) income, unclaimed property). Under a voluntary disclosure program, it is an agreement between the taxpayer and the state where the individual voluntarily comes forward and agrees to submit delinquent returns and tax payments for a specified period of time. Generally, a voluntary disclosure request is made anonymously through a taxpayer s representative and may be negotiated by the taxpayer s representative for preferred terms. Voluntary disclosure programs requirements are generally as follows: Taxpayer must come forth voluntarily; therefore, taxpayer must not have been notified by the state s Department of Revenue or be under audit. Limited look back period (generally 3 to 5 years). Penalties are waived. Interest is not waived. 32

33 Voluntary Disclosure/Amnesty Programs (Continued) Under a tax amnesty program, taxpayers may come forward voluntarily and pay delinquent taxes. Generally, states will waive all penalties and may waive all or a portion of the interest. Tax amnesty programs are approved by the state s legislature and run for a limited time. Furthermore, unlike voluntarily disclosure, tax amnesty programs do not offer a limited look back period or the ability to negotiate preferred terms. 33

34 Legislative Updates 34

35 H.B. 800 House Bill 800 provides either a sales tax exemption or a franchise tax credit to entities performing qualified research and development (R&D) activities in Texas. Texas adopts the federal tax definition of research, and qualified research. Furthermore, the sales tax exemption and the franchise tax credit would only apply to research conducted in Texas. Sales and Use Tax Exemption The sale, storage, or use of depreciable tangible personal property directly used in qualified research is exempted from Texas sales and use taxes if the property is sold, leased, or rented to, or stored or used by, a person who is engaged in qualified research. If a taxpayer claims a sales and use tax exemption for a tax period, then such taxpayer may not claim a credit against franchise tax in the same period. 35

36 H.B. 800 (Continued) Franchise/Margin Tax Credit If a taxpayer does not claim a Texas sales and use tax exemption for R&D, then a taxpayer may claim a R&D credit against its franchise tax liability. The amount of the credit is as follows: the credit for any report equals 5% of the difference between: 1. The qualified research expenses incurred during the period on which the report is based; and 2. 50% of the average amount of qualified research expenses incurred during the three tax periods proceeding the period on which the report is based. If a taxpayer contracts with one or more public or private institutions of higher education for the performance of qualified research and the taxpayer has qualified research expenses incurred in Texas under a contract during the period on which the report is based, the credit equals 6.25% of the difference between: 1. All qualified research expenses incurred during the period on which the report is based; and 2. 50% of the average amount of all qualified research expenses incurred during the three tax periods proceeding the period on which the report is based. 36

37 H.B. 500 Retail Trade Current law: Meets Division G of 1987 Standard Industrial Classification ( SIC ) Manual Apparel Rental activities (SIC codes 5999 or 7299) Additions to current law: Industry group 753 of SIC Manual Auto Repair Shops Rental-Purchase agreement activities regulated by Chapter 92, Business and Commerce Code Activities involving rental/leasing of tools, party and event supplies and furniture SIC code 7359 Equipment Rental and Leasing, Not Elsewhere Classified Heavy Construction Equipment Rental/Leasing SIC code

38 H.B. 500 (Continued) Temporary Permissive Alternate Rates for 2014 May elect 0.975% May elect % (retail/wholesale) Only for 2014 report year (Accounting Period 12/31/2013) Temporary Permissive Alternate Rates for 2015 May elect 0.95% May elect 0.475% (retail/wholesale) Only for 2015 report year (Accounting Period 12/31/2014) Comptroller discretion, budgetary needs need to be met Will provide guidance in

39 H.B. 500 (Continued) Certain Exemptions Insurance organizations exemptions broadened Political subdivision corporation Computations of Margin Lesser of: 70% of total revenue Total revenue minus $1 million Total revenue minus greater of: $1 million; or COGS; or Compensation 39

40 H.B. 500 (Continued) Exclusions from Total Revenue Industry Specific: Pharmacy networks Transporting aggregates Transporting barite Landman services Vaccinations Transporting by waterways Motor carriers 40

41 H.B. 500 (Continued) Deduction of Relocation Costs Relocation of entity s main office or principal place of business after September 1, 2013 Only if the taxpayer did not do business in Texas and is not a member of an affiliated group that includes a member that is doing business in Texas on the date of the relocation 41

42 Conclusion 42

43 Take Away Legal vs. practical approach Taxpayer must determine risk threshold State agencies or departments (units) are sharing information Example Secretary of State and Department of Revenue Withholding unit sharing information with income/franchise units States are sharing information with each other Audits have increased Obtaining information via audits of other taxpayers Budgetary deficits Narrow the gap by Increasing the tax base Tax more services Cast a bigger net via nexus 43

44 Questions 44

45 Contact Information George Rendziperis, J.D. Rudy Gonzalez Padgett, Stratemann & Co., L.L.P. AUSTIN 811 Barton Springs, Suite 550 Austin, Texas SAN ANTONIO 100 NE Loop 410, Suite 1100 San Antonio, Texas