Sales & Use Tax Changes for December 2016

Only one sales and/or use tax rate change in Zip2Tax products since last month. 

In Alabama, tax rates changed for East Brewton.

There were 6 states with ZIP code changes…

……in Indiana, New York, Oklahoma, Pennsylvania, Puerto Rico and Texas. 

That’s it for December!  Watch for a bigger list next month as we head into the new year.

Regards,

B.D. French, Researcher

B.D. French, Researcher

 

Rules For Taxing the Cloud Are Cloudy

cloudCloud computing is causing confusion to tax departments, small and large. Are cloud transactions subject to sales and use tax? Subject to income tax? How do you describe the cloud and what does it offer to companies?

What is the cloud really?

Before you can begin to answer any questions about taxing cloud transactions, you need to understand: what is the cloud?

Cloud computing essentially relies on shared computing resources versus local servers or personal devices for operating applications. “Cloud” is a metaphor for “the Internet” implying Internet-based computing. However, the cloud can provide much more than just application services. It offers data processing, information services, hardware lease/rental, telecommunication services, and software applications and systems, to name a few. Businesses are able to use cloud services to maintain a sophisticated infrastructure without the financial and employee resources local infrastructures require.

After understanding the principles of cloud transactions and characteristics, then you need to find how those offerings fit into state tax categories. Very few states have actually addressed cloud transaction tax categories and how they should be taxed. The IRS is being asked how cloud transactions should be characterized – provisions of services, rental income, royalty income, or what?

What are the characteristics of cloud transactions?

It is already common knowledge that finding and categorizing state tax regulations into neat, easily understood types is next to impossible. Each state maintains their own classifications, tangible/non-tangible definitions, taxable services and much, much more. The first step in determining a reasonable basis for cloud computing taxation begins with some basic state taxation questions:

What are the characteristics being provided by cloud computing for tax categorization?

  1. What are the sourcing issues? Destination-based (end user) or Origin-based (location of cloud data center)?
  2. What are the nexus considerations?
  3. Are services provided only; or is there a right to use tangible personal property?
  4. If tangible personal property involved, does the state tax all software or only canned software?
  5. Is there a right to access technology or just the use of technology?
  6. Is Internet access included?

Determining the use of your cloud computing will aid in answering many of these questions. If you are using only the cloud as an application server, then most likely the characteristics resemble those of software and software services. With that said, you still need to determine what your state regulations are for these characterizations. Some states tax canned software, but not custom software. Defining custom software is essential since there are different definitions of what is custom software. There is also much differentiation between states on software licensing and services; it would be recommended to check each state taxing authority to begin your research.

Some states determine that where the cloud computing center is located is the tax situs; others take the end-user location as the taxing situs. The latter could cause issues and complications for multi-state companies using one cloud computing center for multiple state locations. This may require allocation of usage to each state and company location.

Do Some Due Diligence

With so much at stake and states taking more interest in taxing cloud computing offerings, companies (large and small) would benefit from performing due diligence in what is or is not subject to taxation. Check the Streamline Sales Tax Governing Board, Inc. website for more information; however, any mainstream progress is slow to getting a common characterization and definition of cloud taxability. At a minimum, check the State Tax Matrices for your applicable states and determine if cloud computing is addressed in the matrix.

The take away is to ensure the tax department knows about any cloud computing usage in companies; don’t leave the research to the IT department. No offense to IT departments, but they are not the tax experts. Too many times tax departments are the last to know and then the tax consequences are already set in motion. Better to stay ahead and prepared and not have to fix the issue after-the-fact.

What’s Next?

The next major concern is the application of nexus rules and how they are affecting remote retailers and service providers. Does cloud computing create nexus? My next blog will cover some of the various nexus definitions and how they affect how business is run today.

Laura Hoffman

Laura Hoffman

 

Laura Hoffman is an Indirect Tax Specialist living in Las Vegas, Nevada. Laura retired from a multi-state natural gas distribution company after specializing in sales & use taxes, franchise fees, business licensing, property taxes, excise and utility taxes for over 15 years. 

Sales and Use Tax Changes for November

Sales and/or use tax rates have changed in Zip2Tax products since the October updates.

In Alabama, tax rates changed for the cities of Coffeeville and York.  

  • The Coffeeville official notice can be found here.
  • The York official notice can be found here.

In Arizona, tax rates changed for the City of Globe.

  • The Mayor and Council of the City of Globe passed Ordinance No. 834. which amended the City Tax Code to increase the tax rate on retail sales from two percent (2%) to two and three-tenths percent (2.3%).  More details here AZ DOR.

zip-codes-picture

 

There were 16 states with ZIP code changes…

……in Arizona, California, Connecticut, DC, Florida, Georgia, Indiana, Minnesota, North Carolina, Nebraska, New Mexico, New York, Oregon, Puerto Rico, Texas, and Wisconsin.

 

Until next month, best regards!

B.D. French, Researcher

B.D. French, Tax Researcher

Sales And Use Tax Changes For October 2016

Sales and/or use tax rates have changed in 12 states in Zip2Tax products since September 2016.

In Alaska, tax rates changed for Sitka, Skagway, Seldovia and Whittier.
In Arkansas, tax rates changed for Bald Knob, Hartford, Wilson and Yell County.
In California, tax rates changed for Compton, Corning, Isleton, Marysville and San Jose.
In Georgia, tax rates changed for the counties of Hancock, Pulaski and Towns.
In Kansas, tax rates changed for Arkansas City and Salina.
In Missouri, tax rates changed for Audrain County, Cedar County, Crawford County, Bourbon, Jasper County, Knox County, Macon County, Ripley County, Cameron, Bernie, Country Club Hills, Ferguson, Fulton, Goodman, Louisiana, Malden, Marceline, Maryville, Oak Grove, Osborn, Paris, Richmond, Seymour, Steele, Trenton, Verona, Winona, Clark County, Union, and Stoddard County.
In North Carolina, tax rates changed for Cherokee County and Jackson County.
In Ohio, tax rates changed for Clinton County.
In Oklahoma, tax rates changed for Holdenville, Medicine Park, Webbers Falls, Sayre, Mooreland, Shattuck, West Siloam Springs, Blackwell, Kay County, Kansas, and Colcord.
In Texas, tax rates changed for Brownwood, Early, Buffalo Gap, Crystal City, Skellytown, Burton, Cranfills Gap, Double Oak, Follett, Hallsville, Jacinto City, Pattison, Three Rivers, Vega, Waskom, Danbury, Elmendorf, Krum, Millsap, Moulton, and Hardin.
In Vermont, tax rates changed for Brandon.
In Washington, tax rates changed for Ellensburg, Mattawa and Othello.

ZIP code changes too….

There were 13 states with ZIP code changes effective after September 2016 including D.C., Florida, Georgia, Idaho, Indiana, Kansas, Massachusetts, Michigan, Nebraska, New Mexico, Oregon, Pennsylvania, and Texas.
 Until next month…..
bd-french

B.D. French, Z2T Researcher

 

 

Minimize Your Risk of a Sales Tax Audit

audit-calculatorStates and cities are increasing sales tax audits as a source to help fund budget shortfalls.

Transactional tax bases are expanding and more items and services are becoming taxable.  Eventually, you will come under audit at some point in your business cycle. Audits may cover periods of three or more years back. Most states will use “triggers” for sales tax audit targets, yet still systematically select businesses for audit by random statistics.

Being prepared before the audit is initiated is the best defense for a good audit outcome. Here are some things to remember throughout the year to help minimize audit exposure.

In most states, all sales transactions are taxable, unless specifically exempted. This has to be the one of the most common oversights in determining taxability. Some states, such as Arizona, Texas and Washington, have taxable classifications, each with its’ own set of rules for rates, taxability and exemptions. Some exemptions are by statute; others require documentation such as a certificate or letter. Also, some exemptions need to be renewed or are set for a defined time period. Others are until the business is discontinued. When operating a business in multiple states, these classifications and rules can become very complicated and difficult to monitor. Analyzing these classifications and collections internally will aid in preparing for an audit.

Common sales tax audit pitfalls include:

  • Charging the wrong rate due to missed rate changes
  • Use tax accruals and reporting
  • Exemptions and resale certificates
  • Unique rules and regulations
  • Internet sales
  • Location of sale
  • Nexus applicability
  • Sales tax liability record keeping

Common proactive tips prior to a sales tax audit:

  • Good documentation of processes and procedures
  • Run a preliminary internal audit to determine possible weakness areas
  • Review tax classifications and their relevance to your business
  • Keep up with nexus rules and regulations
  • Documentation of exemption and resale certificates
  • Consistency in processes

Auditors look to see what processes a company uses to remain current and compliant. Consistency in timely filing, paying and reporting returns and reports help to establish a compliance pattern. Provide proof to an auditor of tax research tools used to keep current on new events. Keep documentation in an orderly manner so the auditor can follow and understand the process. All of these details can help mitigate any audit findings. Just because you come under audit does not necessarily mean you will be paying lots of dollars; you just have to spend time and resources in proving that you are doing everything right and in compliance.

Laura Hoffman

Laura Hoffman

 

Laura Hoffman is an Indirect Tax Specialist living in Las Vegas, Nevada. Laura retired from a multi-state natural gas distribution company after specializing in sales & use taxes, franchise fees, business licensing, property taxes, excise and utility taxes for over 15 years. 

Sales tax change frequency by state

Zip2Tax compares the sales tax change frequency of the states. Ever wonder how your state measures up?

It’s generally accepted that there are around 11,000 sales tax jurisdictions across this great and diverse country of ours. This fact alone would seem to be a fairly reasonable argument for the outsourcing of sales and use tax rates from a company such as Zip2Tax. As the head of marketing for Zip2Tax I am always trying to understand our customer’s needs better. I found myself wondering about the sales tax change frequency for all these jurisdictions. I mean, 11,000 rows in a document might be manageable if they only changed their rates every few years or so, right?

So I sat down and with my trusty Excel spread sheet and a large cup of strong coffee and started going back through our research documentation counting the number of months that there had been any sales tax changes in each state. I wanted to determine which states had the highest sales tax change frequency. I sampled a three-year period from December 2015 going back through January 2013.

… fully one-third of the time that these states CAN make sales or use tax rate changes, they DO.

When the numbers were crunched I had some surprises in store, to be sure. For one, the states that provide Zip2Tax with the most new customers have no obvious correlation with which states had the highest sales tax change frequency. In fact, California and New York were only slightly above average.

The standout in this sample was Alabama which turned out to be far and away the leader with changes in 30 out of the 36 months – that’s 83% of the time. This also helped to dash my hopes of discovering a hotbed of customer need for our product since Alabama has so far not proven to be a great source of new business.
sales tax change frequency

Arizona came in second with 14 changes over that same period. Georgia, Louisiana, Oklahoma and Texas all tie for third place with 13 sales tax rate changes over 36 months. That translates to mean that fully one-third of the time that these states CAN make sales or use tax rate changes, they DO. Not to overstate the obvious, but that is more frequently than quarterly updates.

… more than two-thirds, updated that tax a minimum of once a year, and by the end of 3 years, 86% of the states had made changes…

In fact, 68% of the states that collect a sales tax, that’s more than two-thirds, updated that tax a minimum of once a year, and by the end of 3 years, 86% of the states had made changes.

So as I drained the last of my cold coffee I felt some gratification in that even though sales tax will remain an extremely complex moving target in nearly all 50 states, at least it should mean a steady supply of customers for sales tax rate providers like Zip2Tax for the foreseeable future.

Fill in the sign up form below this blog to receive our monthly newsletter and get alerted when one of these states makes a sales or use tax change or other important tax-related information.

 

Incorrect sales tax charge leads to seemingly avaricious lawsuit

$3.10 in incorrect sales tax leads to $158k in attorney’s fees

Retailers need to be careful when implementing any automated system for calculating sales tax. Even minor errors can lead to a lawsuit if a customer is charged the incorrect sales taxincorrect sales tax amount. Indeed, there are a number of class action law firms and “professional plaintiffs” who prey upon such mistakes. And even when the amount sought is just a few dollars, any judgment may be accompanied by a substantial bill to pay the successful plaintiff’s attorney fees.

A recent Illinois case illustrates this problem perfectly. The retailer in this case was Sears, one of the country’s best known department stores. The plaintiff was a customer who claimed he paid $3.10 too much in sales tax when he purchased a digital television converter box from Sears.

Converter boxes are a device used to allow older televisions to receive digital broadcast signals. In 2008 and 2009, the National Telecommunications and Information Administration, a federal agency, distributed $40 “coupons” to subsidize individual purchases of converter boxes. In July 2008, the Illinois Department of Revenue advised retailers in that state they should deduct the coupon before assessing sales tax. In other words, the sales tax only applied on the net price paid by the customer.

In this case, the plaintiff presented a NTIA coupon when he purchased his converted box at Sears, which reduced the net price paid from $59.99 to $19.99. The sales associate, however, added the sales tax to the higher price before applying the coupon. As a result, the plaintiff paid an incorrect sales tax of $4.65 when he only should have paid $1.55, a difference of $3.10.

A law firm later sued Sears, purportedly on behalf of the plaintiff and anyone else who was similarly overcharged. While the law firm eventually abandoned its quest for class action status, a judge agreed the plaintiff was entitled to $3.10 in damages because Sears violated the Illinois Consumer Fraud Act. The court rejected Sears’ argument that this was a case of predatory lawyers “shopping for a lawsuit,” even though the same plaintiff had reportedly filed “23 class action complaints in the past eight years, using the same attorneys that represent him in this action.”

The judge also awarded the plaintiff’s law firm approximately $158,000 in attorney’s fees. Sears appealed the decision. In December 2015, an Illinois appeals court upheld the $3.10 judgment in favor of the plaintiff but threw out the award of attorney’s fees. It turned out the law firm did not submit proper billing records to the trial court. As the appeals court explained, the attorneys prepared written time sheets detailing their work, entered that information into a computer system, then threw the time slips out and only gave the printouts from the computer system to the court. The appeals court said the trial judge erred in admitting these printouts as evidence in lieu of the original time sheets. While the attorneys are still entitled to compensation, the appeals court said, the trial judge must reconsider the matter using only admissible evidence.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

New Year’s sales tax updates effective January 1, 2016

Sales tax updates: 19 states have sales and use tax rates which have changed in Zip2Tax products since December 2015. 

There are sales tax updates in Alabama, Arkansas, Arizona, Colorado, Florida, Georgia, Illinois, Kansas, Louisiana, Minnesota, Missouri, North Dakota, New Mexico, Nevada, Ohio, Oklahoma, South Dakota, Texas and Utah effective Jan. 1st.

In Alabama, tax rates changed for Rockford, Luverne and Waterloo.

In Arkansas, tax rates changed for Bald Knob, Brinkley, Gillham, Harrisburg, Viola and Crittenden County.

In Arizona, tax rates changed for Apache Junction, Phoenix and Prescott Valley.

In Colorado, tax rates changed for Bayfield, Bennett, Fraser, Lyons, Ouray, the Counties of Alamosa and Chaffee, Gunnison Valley RTA, Montezuma County Hospital District, Colorado Springs, Crested Butte and Greeley.

In Florida, tax rates changed for the Counties of Jackson, Walton, Hernando and Saint Johns.

In Georgia, tax rates changed for Hancock County.

In Illinois, tax rates changed for Morton Grove, Posen, Stickney, Bellwood, Bloomington, Herrin, Hopkins Park, Matteson, Shorewood and Cook County.

In Kansas, tax rates changed for Shawnee.

In Louisiana, tax rates changed for Folsom, Lake Charles and Merryville.

In Minnesota, tax rates changed for Rochester and the Counties of Otter Tail and Freeborn.

In Missouri, tax rates changed for Carthage, New Madrid County, Chillicothe, Holt County, Saline County and Aurora.

In North Dakota, tax rates changed for Alexander and Center.

In New Mexico, tax rates changed for Maxwell, Springer, De Baca County, Eddy County, Vaughn, Lincoln County, Mora County, Otero County, Jemez Springs, Farmington and Kirtland.

In Nevada, tax rates changed for Clark County.

In Ohio, tax rates changed for Portage County.

In Oklahoma, tax rates changed for Bartlesville, Gore, Hollis, Norman, Del City, Marshall County and Pittsburg County.

In South Dakota, tax rates changed for Astoria.

In Texas, tax rates changed for Corral City and Goliad.

In Utah, tax rates changed for Dutch John.

There were 13 states with ZIP code changes effective after December 2015 including California, Connecticut, Florida, Iowa, Indiana, Massachusetts, Michigan, Missouri, Montana, New Jersey, Oklahoma, Texas and West Virginia. A PDF document enumerating ZIP code additions and deletions can be made available upon request.

Angel Downs, Zip2Tax's ead tax researcher

Angel Downs, Zip2Tax’s lead tax researcher

Federal income tax deduction for state sales and use taxes reinstated

Your federal tax deduction for state sales and use taxes could be larger than your income tax deduction depending upon your circumstances

On December 18, President Obama signed a massive federal spending bill into law. Among other things, the law reinstates a federal income tax deduction for state sales and use taxes paid by individuals. This deduction officially expired at the start of 2015, but the new spending bill retroactively abolished the expiration date, thereby making the deduction “permanent” according to its legislative supporters.federal income tax deduction for state sales and use taxes paid by individuals.

What is the sales tax deduction?

Taxpayers who itemize deductions on their federal income tax return (Form 1040, Schedule A) are no doubt aware they can claim any state and local income taxes paid as a deduction. But a taxpayer may elect to deduct state and local sales taxes paid. This is in lieu of the income tax deduction. In other words, you may deduct either your state income tax paid or state sales tax paid, but not both. This election only applies for the current tax year, however, so if you take the income tax deduction on your 2015 return, you could still take the sales tax deduction on your 2016 return.

Why is there a deduction for sales and use tax?

Although most states assess some form of personal income tax, seven states do not, while two others only assess dividend and interest income but not wages or salary. This creates a disparity with respect to the federal income tax, as residents of states with no income tax, like Florida, are at a disadvantage compared to residents of states like California that charge a high income tax. The sales tax deduction is designed to remedy this imbalance.

Keep in mind, you can elect to take the sales tax deduction regardless of the state you reside in. While it is generally a good idea to take the income tax deduction in a state that has one, there may be situations where the sales tax deduction would be more favorable to you in a particular tax year.

How do I calculate my sales tax deduction?

As a basic rule, an individual can deduct the actual sales taxes he or she paid in a given tax year. This means you must actually keep the receipts of your purchases showing the sales tax paid. Alternatively, the IRS publishes tables of predetermined deduction amounts based on your state and locality. The IRS also provides an online calculator to help determine your deduction under this alternate method. You are free to choose either method.

 What sales taxes cannot be deducted?

You may not deduct any business expenses on Schedule A, which includes sales tax paid on items used for your trade or business. There may also be limits on how much sales tax you can deduct on an individual purchase. For example, if you pay more than the “general sales tax” rate for a motor vehicle, you may only deduct the amount equal to the general sales tax. Additionally, if you receive any refund for sales tax paid in a given tax year, you must reduce your deduction by an equal amount.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

Tennessee rules for sales tax on vacation rentals

While budgeting for travel, plan on paying sales tax on vacation rentals through companies like Airbnb

tax on rentals

Many people have turned to their spare bedrooms as source of additional income but sales tax on vacation rentals is a new fly in the ointment that renters in several states may have to deal with. Websites like Airbnb and VRBO allow anyone to list their properties for short-term rental. Travelers then book rooms through the website, which in turn deducts its fees from the money paid to the renter.

But as these services have become more popular, officials in a number of states have questioned whether sales tax should apply to these transactions. About a half dozen states currently require Airbnb and its competitors to collect local sales and hotel occupancy taxes. Just recently, Tennessee’s top law enforcement official said the Volunteer State should be one of them.

Earlier this year, a member of the Tennessee legislature asked state Attorney General Herbert H. Slatery III for an official advisory opinion to answer three questions. The first was whether Tennessee sales tax was due on “short-term rentals of homes, apartments, and rooms” arranged through websites. The second question was whether such rentals qualified as “hotels” subject to additional state and local tax on occupancy. And finally, assuming such taxes are due, who is responsible for collecting them?

On December 1, Slatery issued his opinion. Under Tennessee law, sales tax is assessed on any “sale, rental or charges” for any “accommodations” furnished to a person for less than 90 continuous days. The attorney general said the types of services offered through Airbnb and VRBO fit that description. However, Slatery also said only those “individuals who regularly or frequently rent their homes on a short-term basis” were liable for collecting sales tax. Individuals who only rent rooms through a website “infrequently or irregularly” are not subject to tax.

Slatery further determined individuals who regularly rent out rooms in their homes are effectively operating “hotels,” which are subject to varying levels of occupancy tax depending on the specific Tennessee county. By law it is the homeowners, not the third party websites, who are liable for collecting the tax since they are the “operators” of the hotel. And unlike the general sales tax, occupancy taxes must be collected even on “occasional” or “isolated” short-term rentals.

But as the attorney general noted, Airbnb and similar websites allow individual renters “to set the price of the rental and to specify any taxes that are due from guests.” Therefore he did not expect compliance with Tennessee sales and occupancy tax laws to be “overly burdensome” for people who rent rooms.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

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