Apr 152014

In order to preserve the status of its only investment grade bond and reduce its outstanding debt, Puerto Rico has increased its sales tax rate and stepped up tax enforcement. Tax is a logical place to begin repairing the territory’s credit status because taxes can reduce Puerto Rico’s ratio of debt to revenue. Additionally, sales tax is a key to bond sales in Puerto Rico. The only Puerto Rican bond to retain an investment grade rating is the Cofina bond, whose revenue is backed by sales tax.

Recent legislation attempts to fight these problems by increasin

Puerto Rico sales tax increase

Puerto Rico just raised its sales tax to 7 percent.

g the sales tax to 6 percent and stepping up tax enforcement. Effective as of February 1, 2014, a new sales tax limits the authority of municipalities to tax food and food ingredients. The new law keeps the previous overall rate of 7 percent, but imposes a mandatory 1 percent tax on food and food ingredients. Municipal sales and use taxes are reduced from 1.5 percent to 1 percent, effectively reallocating these funds to the territory level. The reallocation is also part of an effort to create a uniform municipal sales tax. This uniformity is intended to ease Puerto Rico’s efforts to tax remote Internet vendors who sell to consumers in the territory.

In addition to increasing the rate, Puerto Rico is also increasing enforcement. Currently, Puerto Rico’s underground economy makes up 27 to 28 percent of gross domestic product. This is significantly higher than the continental United States, which has an underground economy estimated at 19 percent of GDP. In fact, Puerto Rico only collects 56 cents for every dollar of tax due.

Additional enforcement could result in an additional $391 million in tax revenue, which could significantly reduce Puerto Rico’s outstanding debt and thus increase its credit rating. In order to fight sales tax evasion, Puerto Rico has added a new $20,000 fine for each instance of sales tax evasion, and hired an additional 200 tax enforcement investigators. Further, the territory has introduced legislation to require all businesses engaged in sales to certify sales tax payment systems with the Treasury. Such registrations will provide accountability and reduce the financial incentive for business to evade the sales tax.

The changes to Puerto Rico’s sales tax appear centered on increasing enforcement and creating a uniform tax. Businesses operating in Puerto Rico should be aware of the increased focus on tax collection and the potential for additional efforts to tax remote vendors.

Chris Saddock

Chris Saddock

Apr 012014

Sales and/or use tax rates in the states of Alabama, Alaska, Arkansas, California, Georgia, Kansas, Minnesota, Missouri, North Carolina, North Dakota, Nevada, Ohio, Oklahoma, Texas, Utah and Washington  have changed in Zip2Tax products since March 2014.

In Alabamatax rates changed for Lanett.

In Alaska, tax rates changed for Sitka, Skagway and Whittier.

In Arkansas, tax rates changed for Brookland, Cherry Valley, Guy, Keiser, Lepanto, Benton, Barling, Greenwood, Cave City, Forrest City, Clay County, Independence County and Prairie County.

In California, tax rates changed for Antioch, Huron, Larkspur, San Anselmo, San Rafael, Stockton, Scotts Valley, El Monte and Rohnert Park.

In Georgia, tax rates changed for the counties of Floyd, Habersham, Pierce, Rockdale and Twiggs.

In Kansas, tax rates changed for Arkansas City, Holton, Kiowa and Olathe.

In Minnesota, tax rates changed for the counties of Beltrami and Wadena.

In Missouri, tax rates changed for the counties of Buchanan, Montgomery and Ralls and the cities of Steelville, Concordia, Doniphan, Unionville and Urich.

In North Carolina, tax rates changed for Harnett County.

In North Dakota, tax rates changed for Carrington, Ray and Cavalier.

In Nevada, tax rates changed for Nye County.

In Ohio, tax rates changed for the county of Marion.

In Oklahoma, tax rates changed for Locust Grove, Lexington, Antlers, Welch, Picher, Cameron and the counties of McCurtain and Major.

In Texas, tax rates changed for Malone, Palmview, Coupland, Josephine and Kosse.

In Utah, tax rates changed for Lindon and Helper.

In Washington, tax rates changed for Airway Heights, Leavenworth, Roy and the counties of Asotin, Columbia, Grays Harbor and Okanogan.

There were 8 states with ZIP code changes effective after March 2014 including California, Maine, Minnesota, North Dakota, Ohio, Oklahoma, Pennsylvania and Washington.

Download the full ZIP code change documentation.

Angel Sauer

Angel Sauer, sales tax research team leader

Mar 282014

Alabama has proposed a sales tax holiday on guns and shooting supplies the weekend before Independence Day.

While sales tax holidays are frequently criticized for the amount of revenue they cost the state, they often have other compensations. A firearms sales tax break is likely to attract gun shows with their accompanying tourist dollars. Another major benefit to the state is the recently announced plans by the Remington Outdoor Company, a manufacturer of guns and ammunition, to open a 2,000 employee plant in Huntsville.

The Alabama House Public Safety and Homeland Security Committee passed a bill to officially name the sales tax free weekend the Remington Appreciation Sales Tax Holiday.

Read more

Mar 242014


On March 12, the House Judiciary Committee held a hearing to consider alternative proposals to the Marketplace Fairness Act (MFA), which passed the Senate with overwhelming support in May of 2013. The House hearing entitled “Exploring Alternative Solutions on the Internet Sales Tax Issue” focused on potential alternatives the Senate bill. A panel of six sales and use tax experts were questioned about five alternative solutions.

Andrew Moylan, senior fellow at the R Street Institute, proposed an “origin sourcing” model for taxing remote sales. Under this method sales tax is determined by the location of the seller, as opposed to the predominant system where tax is determined by the consumer’s location. The committee examined the flaws of this proposal, finding that origin sourcing was  a drastic change to current tax collection methods and surely would  have unknown pitfalls. It was argued that origin sourcing would likely encourage states to “race to the bottom” for the lowest tax rate.

Finally, origin sourcing was found to risk taxation without representation because it would impose state sales tax laws on out-of-state consumers. As a result, Rep.  Jason Chafetz concluded that the proposal was “dead on arrival.”

Next, the panel considered increasing consumer information reporting and enforcing the use tax more efficiently. Essentially, this solution would shift the burden away from vendors to the consumer via a 1099 style report. States would collect tax by enforcing the individual requirement to track and remit the use tax owed when purchasing from a remote vendor. However, the panel criticized the proposal for its potential to violate consumer’s privacy rights and placing an unnecessary burden on the consumer.

William Moschella, a shareholder at the law firm of Brownstein Hyatt Farber, provided a somewhat radical alternative, suggesting that Congress could use its Commerce Clause power to prohibit the shipment of goods that violate the sales tax laws of the state to which the goods are shipped. This method was later identified as dangerous to commerce and analogized with allowing states to erect fences to protect their taxing power. The proposal received little attention from the committee.

Finally, Joe Crosby, a principal at MultiState Associates, Inc. suggested that the Marketplace Fairness Act was an appealing solution. The software proposed by the MFA would integrate with most software systems, could file all returns, and provided immunity from audits. Further, the software is robust enough to handle differences in state taxing methods. As a result, implementing the MFA is likely to allow continued diversity while limiting the liabilities and burdens of the current system.

In conclusion, Stephen Kranz, partner at McDermott Will & Emery suggested that the only real alternative to the current system is simplification and uniformity through technology. Accordingly, he urged the panel not to focus on alternatives to the MFA, but rather on how to modify the MFA to address concerns about simplify, state sovereignty and software integration with existing systems.

Chris Saddock

Chris Saddock

Mar 242014

While most tangible personal property has sales tax applied when money changes hands between a business and an end user, software sales are taxed or exempted based on less tangible factors.

The taxability of software is treated much differently from state to state. In fact, the type of software has a great deal to do with the final determination of its taxability. Some states tax software sold on CD and exempt software made available as a download. Other states make no such distinction. Many states base a software’s taxablitiy on whether it is off-the-shelf or has been customized for a user.

Below is a map, courtesy of the Tax Foundation, showing the different sales tax treatments of different types of software by state. Orange indicates taxable, blue indicates tax exempt. (1: triangle) pre-made “canned” software purchased in the form of tangible property like a disk or CD; (2: square) canned software downloaded directly onto a computer; (3: circle) custom software purchased on a disk or CD; (4: starburst) custom software downloaded; and (5: star) custom software customized by the user for their use.

State taxability of software by type


Mar 012014

Sales and/or use tax rates in the states of Arizona, Alabama, Mississippi, Louisiana, Nebraska and New York have changed in Zip2Tax products since February 2014.

In Arizona, tax rates changed for Carefree.

In Alabama, tax rates changed for Huntsville.

In Mississippi, tax rates changed for Jackson.

In Louisiana, tax rates changed for Saline.

In Nebraska, tax rates changed for Crete.

In New York, tax rates changed for Ulster County.

There were 9 states with ZIP code changes effective after February 2014 including Alabama, Arizona, California, Iowa, Minnesota, Ohio, Pennsylvania, Texas, and Washington.

Angel Sauer

Angel Sauer, sales tax research team leader

Feb 282014

Minnesota sales and use tax course schedule

State sales and use tax basics signups now available

The Minnesota Department of Revenue will be holding a series of courses designed for accountants, bookkeepers, business owners and purchasing agents to help them meet their tax obligations and improve their knowledge of the state laws.

The courses will cover the basics of sales and use tax for Minnesota and its local taxing jurisdictions, exceptions and exemptions, and resources available to answer tax questions. The courses will also touch on exemption certificate handling, the documentation required for proper record keeping, and how to file a sales and use tax return properly.

Successful completion of these courses may qualify for Continuing Professional Education credits. All courses are free of charge but advance registration is required. The cities of Deluth, Grand Rapids, Mankato, Marshall, Rochester, St. Cloud and St. Paul are among the  current class offerings. Please visit the Minnesota Department of Revenue web site for more information.

Feb 272014

The Marketplace Fairness Act (MFA) will inch ever so slightly closer to debate in the House when a special committee holds its upcoming hearing on Internet sales tax issues.

Representative Jason Chaffetz (R-Utah)

Representative Jason Chaffetz (R-Utah)

Exploring Alternative Solutions on the Internet Sales Tax Issue” is scheduled for the House Judiciary Committee at 10:30 a.m. on March 4, 2014. Jason Chaffetz, a republican representative of Utah, will explore the concepts laid out by House Judiciary Committee Chairman Bob Goodlatte (R-Va.) last September. Chaffetz’s goal for this hearing is to examine Goodlatte’s guidelines and look at ways to refine the MFA legislation’s wording (H.R. 684 and S. 743) to address opponents’ concerns and not to make any changes to the current bill at this time.

Goodlatte outlined seven basic principles that need to be attended to before interstate sales tax becomes practical:

1)      Online retailers should not face new or discriminatory taxes that brick and mortar retailers or not faced with.

2)      The burden of sales tax compliance should be equal – not easier nor more difficult – for online retailers versus brick and mortar retailers.

3)      Out of state retailers should have equal access to protest unfair or discriminatory regulations.

4)      State governments should simplify tax laws so as not to shift an onerous burden onto businesses and make compliance inexpensive and reliable, even for small businesses.

5)      States should keep sales taxes low and compete with one another so as not to disadvantage American retailers to foreign competition.

6)      States should be sovereign and not be subject to federal compliance burdens.

7)      Customer data must be private and protected.

Various factions, both pro and con on the MFA, have responded positively to Goodlatte’s principles.

The MFA seems unlikely to be brought before the House prior to this year’s midterm elections but may gain traction in the next congress if arguments against the legislation can be addressed.

Read more at Bloomberg BNA

Feb 272014

A Kentucky tax proposal that could significantly raise revenue has been sent to the state’s Appropriations and Revenue Committee of the House of Representatives.Kentucky sales tax proposal

It has been suggested that the proposal, known as Kentucky Competes, could raise as much as $210 million more annually for the state. While the proposal includes adjustments to income, corporate and property taxes, the sales tax-specific items include:

  • Change of the existing cost-of-performance based formula for apportioning “sales” of services to destination sourcing;
  • The amount charged for labor or services rendered in installing or applying the tangible personal property, digital property, or service sold;
  • Exemption of certain equine products and pharmaceuticals for food animals;
  • A lowering of the wholesale tax on beer, wine, and distilled spirits while repealing the distilled spirits case tax.
  • An increase on tax to cigarettes and other tobacco products
  • A broadening of the sales tax to selected services including landscaping, janitorial, warranty contracts, launderers and linen suppliers, security system services, pet care, tanning salons, fitness centers, golf and country clubs and marinas, and overnight trailer campgrounds.
  • A new sales tax for online travel companies.

Gov. Beshear will await a committee consensus before introducing formal legislation.

Read more at Stoll, Keenon, Ogden PLLC