Sales and Use Taxes Today Presented by Michelle Mann JPMS Cox, PLLC December 5, 2013 Shopping in Stores (Point of Sale) Catalogue Shopping over Phone (Mail Order) 1
Shopping over World Wide Web (Electronic Commerce) Today s Agenda Overview of Sales and Use Taxes Evolution with Electronic Commerce Recent Legislation Arkansas Specific Tax Details What is Sales Tax? Transaction tax on sale to final end user Resale exemption and other exemptions available Sale of tangible personal property Transfer of title or possession of goods Not sale of real estate Sale of specified services Based on a percent of the sales price Levied by state or local governments Multiple jurisdictional levels within a state Also called excise tax or gross receipts tax Collected at point of sale, remitted by seller 2
What is Use Tax? Complementary to sales tax Usually at same rate Paid directly to government by consumer Paid for use, storage, or consumption in state Due when vendor does not collect sales tax Example, purchase from out-of-state vendor Due if withdraw from inventory for own use (where purchased item as exempt for resale) Value Added Taxes Goods and Services Taxes Consumption tax Used in most countries outside U.S. Assessed on multiple levels of supply chain No resale exemptions Remit tax on outputs minus inputs Example, retailer pays tax on difference between retail and wholesale price What Controls Interstate Commerce? 3
United States Constitution Federal government regulates interstate commerce (movement of goods from one state to another) according to powers spelled out in Article I of the U.S. Constitution. Due Process Clause (business must have minimum connection to the taxing state) Commerce Clause (business must have substantial nexus with taxing state) United States Supreme Court Cases Complete Auto Transit, Inc. Vs. Brady [430 U.S. 274 (1977)] National Bellas Hess, Inc. vs. Department of Revenue, Illinois [386 U.S. 753 (1967)] National Geographic Society vs. California Board of Equalization [430 U.S. 551 (1977)] Quill Corporation vs. North Dakota [504 U.S. 298 (1992)] What is Nexus? Can the state require the seller to collect tax? Minimum level of physical presence within the state that permits the taxing authority to require the seller to register to collect and remit sales or use taxes People or property in state (even temporarily) Affiliate nexus Click-through nexus (Internet link connection) 4
U.S. Supreme Court news this week U.S. Supreme Court 12/2/13 denied a request to review a ruling by the NY Court of Appeals on New York sales tax click-through nexus law Retailer required to collect tax if in-state entity is compensated for referring customers to the retailer through an Internet link, or otherwise, and the gross receipts from within NY exceed $10,000 Overstock.com, LLC v. New York State Department of Taxation and Finance, U.S. Supreme Court, Dkt. 13-252 Amazon.com LLC v. New York State Department of Taxation and Finance, U.S. Supreme Court, Dkt. 13-259 Contrast to Income Tax Nexus Public Law 86-272 Applies only to taxes based on income Applies only to sale of tangible property If soliciting is the only activity in the state, then no income tax is required Offers more protection from income tax than is provided for sales tax collection Internet Tax Freedom Act Federal law passed in 1998, extended three times, most recently in 2007 to 11/1/2014 To promote and preserve the commercial, educational, and informational potential of the Internet Moratorium on any new discriminatory tax on electronic commerce Bars tax on Internet access, unless the tax was grandfathered Bars multiple taxes on electronic commerce Authorized establishment of study commission to study national tax policy with regard to the Internet 5
Advisory Commission Studied the issues in 1999 and 2000 Simplified system for administration and collection for remote commerce Uniform registration, uniform returns, simplified remittance, and simplified administration Examine need for an independent third party collection system Streamlined Sales Tax Project (SSTP) Organized in March 2000 Created by the NGA and NCSL Objective to simplify and modernize sales and use tax collection and administration in the U.S. Voluntary system, to encourage vendors to register to collect and remit tax Because of Quill, only Congress can pass a law to let states require collection of tax from remote sellers Allows remote sellers to charge correct rate and remit tax to the states through a certified service provider Streamlined Sales and Use Tax Agreement (SSUTA) Passed in 2002 and effective in 2005 Dissolved SSTP Simplification, including: State level administration Uniform tax base Simplified tax rates Uniform sales sourcing rules (based on destination) 24 states (including AR) and DC have passed conforming legislation Arkansas conformed effective 1/1/2008 Six companies are designated service providers 6
Marketplace Fairness Act S. 743, passed U.S. Senate May 6, 2013 Has not passed House of Representatives Would extend authority of states to require retailers outside the state to collect taxes Exempts merchants with out-of-state sales of $1 million or less Requires states to adopt minimum simplification requirements States in SSUTA would have automatic authority Only applies to remote sales, not intrastate sales Minimum Simplification Required (Marketplace Fairness Act) Specify taxes to which authority applies Specify products and services subject to tax Single entity within state responsible for administration, return processing, and audits Single audit for all state and local jurisdictions Single sales and use tax return Uniform sales and use tax base Source where product or service is received by the purchaser, and other detailed sourcing rules Provide software free of charge to calculate tax Certification procedures for software vendors Uniform Sourcing - SSUTA Product received by purchaser at business location of seller, source to that business location of seller If not at received at seller s business location, source to location where receipt by purchaser occurs (point of delivery) If above N/A, source to address for purchaser in business records of seller If above N/A, source to location indicated by address for purchaser obtained during consummation of sale If above N/A, use address from which tangible property was shipped or from which service was provided 7
Arkansas Compliance SSUTA 2008 Source to point of delivery or service location Taxability matrix is provided Register with a certified service provider Uniform exemption certificate accepted Local taxes allowed, collected by state Local caps of $2,500 per single transaction no longer apply when retailer collects local tax Local caps still apply to tax on motor vehicles Purchaser may qualify to apply for refund of local business tax on qualified purchases over $2,500 on a single transaction (single invoice, receipt, or statement) Tax Foundation Rate Study 8/2013 Only 5 states do not have statewide sales tax (AK, DE, MT, NH, and OR), but of these, AK and MT allow local sales taxes States with highest average combined rates: TN (9.44%) AR (9.18%) LA (8.89%) WA (8.87%) OK (8.72%) COST and EY Business Tax Study 7/2013 Compares business taxes in detail by state Property tax is the highest local tax overall Sales and use tax is the highest state tax overall Other taxes: Gross Receipts Taxes Corporate Income and Franchise Taxes Unemployment Insurance Pass-through business taxes Other state and local taxes Arkansas results business taxes make up 39.5% of total state and local taxes 8
Arkansas State Budget Facts Per DF&A web site, Gov. Mike Beebe State level only; does not consider local taxes, which include property tax, local sales tax, and business license tax State revenue sources: Individual income tax 49% Sales and use tax 35% Corporate income tax 7% Alcohol / Tobacco 5% Other 3% Arkansas Sales and Use Taxes Sale of tangible personal property (unless exemption applies) Lease of tangible personal property (with exceptions) Specified services State (6.5%), county, and city level taxes Reported on state level return Usually due monthly Use tax is due by consumer if vendor does not charge sales tax Examples of Taxable Services Utilities, cable TV, and telecommunications Lodging of transient guests Installation and repair of specified items Cleaning services and lawn care Admission to places of amusement Dues and memberships to fitness clubs Service contracts, maintenance, warranties Pest control services Pet grooming and kennel services 9
Exemption Examples Sale for resale Partial exemptions Food Utilities used in manufacturing Sales to federal government Sales to certain nonprofits (listed in law) Software electronically downloaded Manufacturing machinery and equipment Medical devices and prescription drugs Media services Annual back-to-school holiday for clothing and supplies Sales by nonprofits if not competing with for-profit Direct Pay Permits Allows purchaser to buy all items under a resale exemption Self impose use tax on all items not for resale Voluntary Disclosure Program Seller failing to collect and remit sales tax Business owner failing to pay use tax on purchases from out of state DF&A must not have contacted taxpayer Work with Nexus and Discovery Unit DF&A Generally agree to payment of tax plus interest for 3 years Waive penalties (except where taxpayer has collected and failed to remit the taxes) 10
Cash vs. Accrual Method of Payment Accrual basis is default Must ask the Commissioner for permission to use the cash basis for payments Bad Debt Deduction If remitted to state under accrual basis within the last 3 years Deduct from report for period during which bad debt is written off as uncollectible on the books and eligible to be deducted for federal income tax purposes Arkansas Incentive Programs Credit for tax paid to other states Trade-in credits AEDC approves projects for exemption Example proposed steel mill project Arkansas Tourism Development Act Invest Arkansas Program Tax Back Program 11