Jan 212015

Missouri’s highest court recently issued three decisions regarding the application of sales and use taxes to materials used in construction.Road construction

Fred Weber, Inc. v. Director of Revenue

In the first case, Fred Weber, Inc. v. Director of Revenue, a manufacturer argued it was entitled to a refund of nearly $140,000 in sales taxes paid on asphalt and rock base that it sold to road-paving companies. Missouri law exempts from sales tax “any materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product.” Here, the manufacturer argued its materials were used in the process of paving roads and therefore qualified for this exemption.

Although a state administrative tribunal sided with the manufacturer, the Missouri Supreme Court unanimously reversed and reinstated the Missouri Director of Revenue’s initial decision denying the sales tax refund. The Supreme Court said the exemption only applied to “industrial-type activities” such as heavy manufacturing, not construction or maintenance of roads. The court pointed to other tax exemptions that specifically mention construction activities and held that because similar language was not used here, Missouri’s legislature did not intend to apply this exemption so broadly.


Ben Hur Steel Work, LLC v. Director of Revenue

The second case, Ben Hur Steel Work, LLC v. Director of Revenue, deals with the same sales tax exemption. Here, a construction subcontractor sought a refund of nearly $200,000 in sales taxes paid on the purchase of steel beams. Again, the Supreme Court said the exemption only applies to materials used in “large-scale industrial activities” and not construction. Additionally, the court said it was “well settled” under Missouri law that a subcontractor is considered the “consumer of materials used and purchased in the fulfillment of a construction contract,” and therefore responsible for paying all applicable sales taxes.


Alberici Constructors, Inc. v. Director of Revenue

Alberici Constructors, Inc. v. Director of Revenue, the final case, involves approximately $18,000 in use taxes paid on the rental and delivery of several cranes and a welder rented to facilitate the construction of a cement manufacturing plant. Missouri exempts from sales and use tax any “materials and supplies solely required for the installation or construction of such machinery and equipment” as is necessary to complete such a manufacturing facility.

Unlike the prior two cases, the question here was not whether the cranes and welder were being used for an exempt purpose — they were — but rather whether they constituted “materials” used in the plant’s construction. The Supreme Court agreed with the Director of Revenue, who said the rented cranes and welder were not “materials” as defined by the Missouri legislature. Even if machinery may fall within the strict dictionary definition of “materials,” the court said the fact the legislature expressly used the word “machinery” separately in the same statute indicates they must be treated as distinct categories.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Jan 132015
record keeping

Courts don’t listen to excuses when it comes to sloppy sales tax record keeping.

All businesses responsible for collecting sales tax must keep proper records. Tax authorities will not accept incomplete or inaccurate accounts. And judges will not listen to excuses.

These things are usually taken as a given, but sometimes we see a reminder of just how dearly it can cost a company if proper record keeping isn’t a priority.

Here is a recent example from New Jersey. This case involves a one-man company that went out of business in 2006. The proprietor remodeled residential bathrooms and kitchens. By his own admission, he “was not an excellent bookkeeper” and failed to keep complete business records.

This proved problematic when, in 2005, an auditor from the New Jersey Division of Taxation informed the proprietor she would audit his books to review, among other things, whether he properly collected and remitted sales taxes to the state. (The proprietor had not filed any sales tax returns from 2001 to 2005.) The proprietor referred the auditor to his accountant. But she subsequently learned the accountant had no business records for the proprietor’s company. Indeed, the accountant had made several unsuccessful attempts to obtain basic financial information from the proprietor, to no avail.

Aside from “some bank statements,” the proprietor was unable to provide any documentation of his business to the auditor. The auditor therefore issued an “arbitrary assessment” to determine the proprietor’s unpaid sales tax liability. The proprietor filed a protest.

In New Jersey, a Division official known as a “conferee” hears tax protests. Here, because of the lack of complete records, the conferee decided to take the quarter with the most available information and use that as a baseline to reconstruct the proprietor’s sales for the other quarters. In other words, the sample period invoices showed about 87% of the proprietor’s sales were subject to sales tax; the conferee therefore applied that same percentage to the other quarters’ sales. This resulted in a sales tax liability of about $76,000.

The proprietor appealed that determination to New Jersey’s Tax Court. But in a decision dated Dec. 23, 2014, Judge Joshua D. Novin upheld the assessment. Novin said a tax assessment is presumed correct unless the taxpayer can show the methodology was “plainly unreasonable.” That requires a taxpayer to “present detailed source records in order to refute” the conferee’s conclusions.

Obviously the proprietor could not do that in this case. Instead he challenged the conferee’s decision to use the sample period as a basis for assessing liability. But Novin said the conferee’s approach “was logical, sound and reasonable in light of the [proprietor’s] failure to maintain adequate records.”

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Dec 312014

Sales and/or use tax rates have changed in twenty states in Zip2Tax products since December 2014. There were changes in Alabama, Arkansas, Arizona, Colorado, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Minnesota, Missouri, North Dakota, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, Washington and Wyoming.

In Alabama, tax rates changed for Semmes, Cordova, Pine Hill, Piedmont, Florala and Hillsboro.

In Arkansas, tax rates changed for Farmington, Gassville, Harrison, Jonesboro and Quitman.

In Arizona, tax rates changed for Coconino County.

In Colorado, tax rates changed for Denver, Brush, Idaho Springs, La Veta, Boulder County and City, Larimer County, and Windsor.

In Florida, tax rates changed for Brevard, Charlotte, De Soto, Escambia, Hernando, Highlands, Leon, Monroe, Orange, Seminole and Volusia Counties.

In Georgia, tax rates changed for Brooks, Chattahoochee, Clinch, Muscogee, Seminole, Spalding and Twiggs Counties.

In Idaho, tax rates changed for Ketchum.

In Illinois, tax rates changed for Gurnee, New Baden, Skokie, Trenton, Vernon Hills, Waukegan, and Wilmette.

In Kansas, tax rates changed for Cherokee, Edwardsville, Goddard, Herington, Leon, Luray, Randolph, Smith Center, Utica and Chase County.

In Louisiana, tax rates changed for Doyline and Homer.

In Minnesota, tax rates changed for Todd and Fillmore Counties.

In Missouri, tax rates changed for Ralls and Webster Counties, Hazelwood, Jennings, St. Ann, Sparta and Warson Woods.

In North Dakota, tax rates changed for Beulah, Fredonia, Harvey, Hazelton, Lignite, and Velva.

In Nebraska, tax rates changed for Battle Creek and David City.

In New Mexico, tax rates changed for Colfax, Curry, Grant, Harding, Quay, San Juan, San Miguel, Sierra and Valencia Counties, and Vaughn and Lovington.

In Oklahoma, tax rates changed for Comanche, Leflore, Logan, and Mayes Counties, and Bridgeport, Bethel Acres and Glencoe.

In South Dakota, tax rates changed for Veblen.

In Texas, tax rates changed for China Grove and Maypearl.

In Washington, tax rates changed for Benton County, Ephrata, and Monroe.

In Wyoming, tax rates changed for Washakie County.

There were 13 states with ZIP code changes effective after December 2014 including Arkansas, California, DC, Illinois, Kentucky, Maine, North Carolina, New Jersey, New York, Ohio, Oregon, Tennessee and Texas.

Download the full ZIP code change documentation.

Angel Sauer

Dec 302014

telecom signalsSavvy businesses often look for loopholes they can exploit to (legally) avoid paying sales taxes. But state revenue departments and courts tend to frown on creative interpretations of the law. A group of telecommunications companies in Michigan recently learned this lesson.

Like many states, Michigan tries to avoid double taxation by clearly distinguishing wholesale and manufacturing operations from retail sales. Michigan exempts from sales tax any purchase of tangible goods used in the manufacturing of other tangible goods intended for sale. This industrial processing exemption means, for example, a company that produces the proverbial widget does not have to pay sales tax on the machinery necessary to produce the widget.

In this case, a group of telecommunications companies claimed the industrial processing exemption applied to their purchases of electricity. Normally, Michigan imposes a sales tax on electricity. The companies argued since they converted that electricity into telecommunications signals – which is really just another form of electricity – they were engaged in manufacturing.

Not surprisingly, the Michigan Department of Treasury did not see it that way. And in a decision issued on Dec. 4, neither did the Michigan Court of Appeals. Judge Henry William Saad, writing for the court, agreed with the Department and a lower court that the industrial process exemption did not apply here.

The basic flaw in the telecommunications companies’ arguments, Saad said, was that while electricity is a form of “tangible personal property” under Michigan sales tax law, telecommunications signals are not legally considered a form of electricity. Indeed, Saad concluded telecommunications signals are not even “tangible personal property,” a basic requirement for invoking the industrial process exemption in the first place.

As written, Michigan law defines tangible personal property to include “electricity, water, gas, [and] steam.” Saad pointed to the Michigan legislature’s specific enumeration of water and steam, which are both forms of water. In contrast, the legislature did not specifically enumerate “telecommunications signals,” and it would therefore be improper for the courts to construe the term “electricity” to include such signals.

Furthermore, Saad noted, telecommunications signals do not fall within the broader definition of tangible personal property, which includes anything that “can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.” Obviously, a wireless telephone or Internet signal cannot be seen or perceived by human senses. Nor can they be weighed or measured in any conventional sense.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Dec 292014

contractor wholesale suppliesBusinesses must often decide whether they are liable for sales or use tax on certain property. Sales tax applies to goods purchased for resale to the final consumer, while use tax is assessed when the business uses the property to provide another service. An Indiana court recently examined this distinction with respect to the well-known home improvement chain Lowes.

Lowes sells building supplies to retail customers. It also performs home improvement services as a general contractor. Lowes paid use taxes on the wholesale price of the building supplies used in its contractor jobs. The Indiana Department of State Revenue claimed Lowes should have paid sales tax on the higher retail price of those supplies.

The Indiana Department of State Revenue argued Lowes’ Home Improvement contracts only covered “time and installation” of materials; customers were therefore still liable for sales tax on the retail price of the materials themselves. Lowes replied its contracts charged a “lump sum” for all materials and labor, and under Indiana law, it was therefore only liable for use tax on the former.

A judge agreed with Lowes. In a Dec. 19 decision, Judge Martha Wentworth of the Indiana Tax Court said the department was attempting to manufacture “an artificial distinction between time and material contracts and lump sum contracts in its regulations to convert a contractor’s use tax liability … into a sales tax liability on the materials’ higher retail price.” Wentworth said Lowes’ construction contracts were clearly understood by it and its customers to be “lump sum” agreements. Customers paid a “singularly stated price” upon signing a contract. More to the point, customers were not separately billed for materials, and in fact, any “surplus” materials leftover following construction were returned to Lowes, not retained by the customer.

The department may appeal Wentworth’s decision to the Indiana Court of Appeals.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Dec 112014

motor homeSometimes just storing valuable personal property can raise tax issues. A businessman in Tennessee recently learned this lesson when the state assessed more than $100,000 in use taxes against him for keeping a motor home within the state’s borders. Although a lower court previously ruled in the businessman’s favor, a state court of appeals sided with the state’s tax collectors.

Ralph McCurry owns a one-member limited liability company that buys and sells “recreational parks and other real property.” Although McCurry organized his business in Montana, he maintained a residence in Tennessee. He purchased a motor home to serve as his mobile office. He did not pay any sales tax on the nearly $1 million purchase.

McCurry used the motor home between 2007 and 2012 to conduct business trips outside of Tennessee, but he spent at least six months out of the year at home. The Tennessee Department of Revenue argued this made McCurry liable for use tax on the motor home. The Department assessed McCurry approximately $103,000 in use taxes less a credit of about $27,000 for taxes previously paid to the State of Alabama on the same motor home.

McCurry sued the Department in Tennessee state court to overturn the assessment. A trial judge ruled against the Department, holding it could not assess use taxes against McCurry for a vehicle he used exclusively for business outside of Tennessee. The court said there were insufficient “minimum contacts” between Tennessee and McCurry to justify the tax assessment.

But in a decision issued on Nov. 14 of this year, a three-judge panel of the Tennessee Court of Appeals reversed the trial judge and upheld the Department’s assessment. Presiding Judge J. Steven Stafford, writing for the panel,     said the trial court should have gone beyond the “minimum contacts” test and determined whether there was a “substantial nexus” between Tennessee and McCurry’s business. The United States Supreme Court has previously held a state cannot assess sales or use taxes without first establishing a substantial nexus exists.

Here, even though McCurry did not conduct business within Tennessee, he established a “physical presence” by storing the motor home there. He also “used” the motor home within Tennessee by traveling to and from his home. Stafford stated that this was enough to establish a substantial nexus in Tennessee, especially since McCurry previously agreed to pay use taxes to Alabama when he stored the same motor home in that state.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Dec 092014
American Business wins state sales tax

Florida was rebuffed in its efforts to impose state sales tax on an in-state business which was acting as an online portal for web purchases for out-of-state florists delivering to out-of-state purchasers.

As Congress holds off on extending Internet sales taxes, state courts continue to deal with how to apply local tax laws to online sales. Recently a Florida appeals court rebuffed the state’s effort to collect sales tax from an Internet-based small business that sells flowers, gift baskets and prepaid calling cards to customers in Latin America. The court held such non-Florida business activities were beyond the reach of state tax collectors.

Florida’s Department of Revenue initially assessed three years of unpaid sales taxes against American Business USA Corp., a Florida-based corporation that operates a Spanish-language website targeting customers in Florida, Spain and Latin America. The company merely served as an online sales portal; it did not maintain any inventory. So, for example, if a customer in Latin America purchased flowers through the website, the company arranged for a local florist to fulfill the order.

American Business paid Florida’s sales tax  on sales to customers within the state but it did not pay tax on orders to customers outside of Florida. The Department of Revenue said this violated state law. Specifically, Florida imposes tax on all sales of “flowers, wreaths, bouquets, [and] potted plants.” This extends to sales where a Florida-based florist “gives telegraphic instructions to a second florist located outside Florida for delivery of flowers to a point outside Florida.”

On appeal from the department’s assessment, American Business argued the state’s policy was preempted by the United States Constitution. A three-judge panel of Florida District Court of Appeal agreed. In a decision issued on Nov. 12, the court said requiring collection of sales tax on out-of-state deliveries violated the Commerce Clause of the Constitution. This clause gives Congress exclusive authority to regulate interstate and international commerce. Since the 19th century, courts have also read this clause to prohibit “certain state actions that interfere with interstate commerce.”

Here, the court said Florida’s tax interfered with interstate commerce because there was no “substantial nexus” to commercial activity within the state. In other words, aside from the fact American Business incorporated in Florida and operated a website from the state, there was nothing to connect the out-of-state flower deliveries with the state. American Business had no Florida inventory and shipped nothing itself. The orders were carried out by companies with no connection to Florida whatsoever. Accordingly, without more of a “substantial nexus,” Florida could not collect sales taxes on these “exclusively interstate” transactions.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Nov 252014

Sales and/or use tax rates have changed in three states in Zip2Tax products since November 2014. There were changes in Alabama, Alaska, and Arizona.

In Alabama, tax rates changed for Adamsville.

In Alaska, tax rates changed for Anaktuvuk Pass, Clark’s Point, Hoonah, Hydaburg, Kobuk, Nunapitchuk, Seldovia and Yakutat.

In Arizona, tax rates changed for South Tucson.

There were 9 states with ZIP code changes effective after November 2014 including California, Florida, Georgia, Kentucky, Missouri, Ohio, Virginia, West Virginia and Wyoming.

Download the full ZIP code change documentation.

Angel Sauer

Nov 252014

A recent Windows update seems to be incompatible with oldeWidget crash fixr versions of the Zip2Tax widget and is causing it to crash when users attempt to perform lookups. Luckily this is easy to fix by simply upgrading to the newest version of the widget which is available now.

First you must uninstall the old widget by going to your computer’s Control Panel, find the “Uninstall a program” section and find “Zip2tax Widget”. Click uninstall. If you have any questions, follow Windows Help directions.

Next, use any browser to go to http://www.zip2tax.com/Website/pagesTaxRates/z2t_widget.asp and click the “download” button. You will note the newest version of the widget is version 1.2.2. This version was released in July of 2013 and it includes improvements that you may find agreeable.

desktop widget 1.2.2

You will know you have the latest version of the desktop widget if it looks like this after you’ve logged in and it looks like this after you’ve made a ZIP code lookup and clicked the “Get Detail” button.

Installation instructions are included on the web page, or contact customer support if you have any questions or need help remembering your login credentials. 1-866-492-8494,  info@zip2tax.com or click on any Live Chat button.

We are sorry for this inconvenience, but Microsoft didn’t consult with us before they released this update so we are doing our best to cover for their rushed release.

Nov 182014

Marketplace Fairness Act Header

Long live internet sales tax!

Speaker John Boehner (R-Ohio) made it clear that the bill containing the current version of the Marketplace Fairness Act won’t come up for a vote in the House this session.

“The speaker has made clear in the past he has significant concerns about the bill, and it won’t move forward this year,” said spokesman Kevin Smith. “The Judiciary Committee continues to examine the measure and the broader issue. In the meantime, the House and Senate should work together to extend the moratorium on internet taxation without further delay.”

No sooner had the press release hit the air when backers claimed they’d get the bill attached to another piece of must-pass legislation and keep trying for the remainder of the lame-duck congressional session.

The fight is far from over,” claims Stephen Schatz of the National Retail Federation, a supporter of the MFA. The bill has widespread support amidst brick and mortar retailers who say online retailers have an unfair advantage because they do not have to collect sales taxes.

The bill has the unsurprising, mostly partisan support of the democrats and the Obama administration and the opposition of Republicans, conservatives, and anti-tax groups.

Stay tuned for more internet sales tax hijinks and updates as they become available.