Services – The New Sales Tax Target

services

services target

The new year comes with new attempts to expand the sales tax base. Services are on the dart board!

Cities, counties, and states need funds to maintain and enhance their infrastructures and provide much needed services to their citizens. One area that has been a hotbed over the past years is the inclusion of services to sales tax bases. Traditionally, services have not been subject to sales tax since no tangible personal property is provided. However, our business model has changed from a production model to a service provider model. Today, more and more business is in the service sector and the possible sales tax revenues from those businesses are appealing to taxing authorities to increase revenues.

Some states have already included many services into their sales taxability matrices. Hawaii, New Mexico, West Virginia and South Dakota tax most, if not all, services. Still some states have tried to pass legislation to tax various services, only to receive backlash so harsh, they had to repeal or remove the attempts.

2017 will most likely see more attempts to expand the definition of services, as well as inclusion into taxability matrices.

Services generally fall into five main categories. How a state defines each category can determine how that state determines taxing or trying to tax that category. The five main service categories are Services to Tangible Personal Property, Services to Real Property, Business/Professional Services, Personal Services, and Bundled Services. Each definition within these categories can affect if the services provided could become subject to sales tax or not.

Services to Tangible Personal Property:

These include services to tangible personal property (“TPP”), which include repairs, installation, maintenance, inspection and upkeep of TPP. Generally, most states will not tax these services if separately stated on the invoice. The TPP is taxable therefore the theory could be that the service provided is secondary to the purchase of the TPP.

Services to Real Property:

This category becomes trickier. These are the trade services such as electrical, plumbing, heating and air conditioning, painting, brickwork and roofing. Most of the time, these services will fall under a construction tax category and depending on the state and how the invoice is presented will determine the taxability or who is liable for the tax. Many states tax the materials and not the actual “service/labor”, others will tax the prime contractor or the subcontractor. This is a category that is subject to taxability expansion over the year(s). Arizona is currently trying to figure out its new construction tax classification by expanding the tax base through new definitions of prime and sub contractors.

Business/Professional Services:

Accounting, advertising, consulting, computer, security, medical, engineering, data processing and staffing services are some of the components in this category. Many states already tax many business/professional services: Connecticut, Washington DC, Hawaii, Iowa, New Mexico, New York, Ohio, South Dakota, Texas and West Virginia. Some states differentiate business service from professional service by requiring specific educational, licensing or certification designations. In today’s world, these can be done remotely creating a problem for sourcing the actual taxable service. The consumer rarely receives any type of substantial TPP of material value.

Personal Services:

The services comprising this category generally are based on personal consumption to an individual and not a business. Services included here include photography, hair salons and barber shops, tanning, cleaning, landscaping, hunting and fishing guides, bookkeeping and dance lessons. Personal services seem to attract attempts at taxation, yet have managed to keep out of the taxable base in almost all states. States receive major push back when attempts are made to inclusion into the tax base; although, some states such as Iowa taxes many personal service businesses.

Bundled Services:

This category includes contracts or invoices that include taxable and nontaxable items together at a single price, sometimes called lump sum contracts. Most common are warranty and maintenance contracts. There is no distinction between retail and labor or service on the invoice. Generally, this becomes 100% taxable since it is all-inclusive, although some states will only charge partial tax to the bundled/lump sum to account for tax previously paid on materials by the contractor.

yoga servicesSome of the new and broader based services getting subject to sales taxes are interesting. With the popularity of fitness and wellness services comes inclusion into sales tax base. A hot debate has been around for Yoga instruction. Depending on where the instruction is held, the purpose of instruction, and the state may determine whether or not it is taxable. Fitness and health facilities generally are subject to sales tax in many states. That may explain why membership fees are high.

On-line travel services are another hot bed under scrutiny for inclusion into sales tax bases. Many states are going after on-line travel service companies to subject booking service fees to sales tax. Montana won its battle in charging sales tax on hotel and car rental booking fees to on-line travel companies. The real issue is the difference between the rate charged by the on-line travel service and the commercial rate by the hotel or car agency. The difference is the amount currently not subject to sales tax by most states, but that may be changing very soon.

The bottom line: Most think services are considered a labor endeavor and therefore not subject to sales tax. That is no longer true. With the amount of on-line and remote business transactions today, it is logical that tax authorities want to tax those services as their revenues from manufacturing and tangible products deteriorate.

Stay tuned and alert to see the changes. The cost of that next hair cut could be increased to include sales tax.

For further information check out this article.

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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. 

Excise Taxes Vary from State to State

Excise Taxes Vary from State to State

Excise Taxes Vary from State to State

Excise taxes are another form of generating revenue for federal and state governments.

more-taxesExcise taxes differ from sales and use taxes in that specific goods are generally subject to excise tax and also tend to be a specific amount versus a percentage of the sales price. Sellers report and remit excise taxes; however, the tax is usually either built into the sales price or a separate line item to pass through to the purchaser.

The most common goods subject to excise taxes are gasoline, alcohol and cigarettes. Reasoning for these items are to pass through the expense of maintaining roads and additional health issues contributed from alcohol and cigarette usage, also known as a Sin Taxes. Tire excise taxes are also common to assist in environmental issues associated with tire rubber.  Many states subject excise tax to many different goods, for various reasons, and many purchasers may not even realize they are paying the additional tax on top of sales taxes. A difference being if the seller does not collect sales tax, the purchaser owes use tax; if excise tax is not collected from the purchaser, the seller is still liable for the amount.

Some of the more unusual excise taxes charged include:

Maine – the official state fruit, blueberries, are subject to $0.15/per pound.

Alabama – decks of cards subject retailers to $2.00/pack sold. The last state to consider decks of cards a vice.

Washington – has a fish excise tax on various fish at various rates.

California – has a Lumber Products Assessment.

Nevada – recently implemented an excise tax of 3% on Transportation Network Companies (think Uber and Lyft).

Many states now have a Medical Marijuana excise tax, or are considering implementing.

 

bike-co-springsThe excise tax that amuses me is the Bicycle Tax in the City of Colorado Springs, Colorado. The excise tax is an attempt to have bicyclists share costs in road maintenance and bike infrastructures. Other states have attempted or are attempting to create a bicycle tax to ease road cost burdens, since bicyclists generally share the roads with automobiles. Colorado Springs implemented the excise tax in 1998 and is considered to be successful in generating funds to improve the bicycle riding experience. Colorado Springs is also the only city in the nation to have such a tax. Let’s take a look.

Source: Zip2Tax Spot-On™ Lookup

Source: Zip2Tax Spot-On™ Lookup

In addition to the above, depending on where in El Paso County and in Colorado Springs, a Regional Transit District Tax of 1.00% may apply.

For bicycle vendors, there is an excise tax of $4.00/new bicycle sold. This excise tax would most likely be passed through to the purchaser, either as a flat fee or built into the selling price of each new bicycle. The tax has been a success in Colorado Springs in that over the years, generating funds to create new and better bike trails and services.

Excise taxes generally are created to assist in the funding of specific projects or programs by way of cost sharing. Most consumers are unaware of excise taxes as they are generally rolled into one line item of “Taxes” on invoices or built into the sales price.

Sellers have the responsibility of reporting and remitting the excise taxes, usually on separate forms from sales and use tax-reporting forms. The best bet to find out if your goods are subject to excise taxes is to visit the state taxing authority and review their Excise Tax section.

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. 

Nexus in Today’s Technology Marketplace

Nexus

Nexus

nexus-workplace
Since 1992 and the Quill Corp. v. North Dakota [504 U.S. 298 (1992)] (“Quill”) ruling establishing physical presence in a state before a seller is required to collect sales or use tax, technology has redefined the marketplace. Remote sellers have enjoyed not charging tax on sales in states where they did not have a brick and mortar physical presence. The states realized the large amounts of tax dollars not collected from remote sales and have been trying to figure out how to impose taxes on these out-of-state sales. 
Amazon Laws
The Streamlined Sales Tax Governing Board and Agreement were formed in 2000 with a goal of overturning the Quill ruling and require remote sellers to charge tax. The purpose of the Agreement was the reduction of compliance burdens, especially to small remote businesses. Then a number of states began legislation known as “Amazon Laws”;  the multiple introductions of the Marketplace Fairness Act in the Senate in 2011, 2013 and 2015, and many more online sales simplification acts have made their way through local, state and federal legislation.  Before looking at current legislation and status of remote sales tax compliance, let’s take a look at the expanded definitions of what determines nexus.
Nexus

Merriam-Webster Dictionary defines nexus as a connection.

Substantial Nexus
Substantial nexus is established through the Commerce Clause requiring sufficient presence in a state prior to requiring collection of sales and use taxes. Substantial nexus was determined by physical presence (including employees) in the jurisdiction to require registration and collection of sales and use taxes. Many court cases have refined the definition of substantial nexus, the most notable case being Quill ruling. After time and significant technological advances in how business is transacted, substantial nexus and the Quill rulings have been under scrutiny and additional confusion.
Affiliate Nexus
Affiliate nexus is an evolution of the business world and the increase of online retailing. A business with an affiliate in a state, in which the business does not have any brick and mortar presence, becomes subject to sales and use tax registration and collection. Affiliation with Company A (in State C) to sell services or products with Affiliate B (in State D) who has a website in which they sell Company A products for a commission creates affiliate nexus for Company A and they are subject to sales and use tax registration and collection.
Acting as a representative for Company A creates affiliate nexus for Affiliate B in many states. The most notable case for affiliate nexus is the Borders Online v. State Bd. Of Equalization, (Cal. App. 1st Dist. 2005) which determined the acceptance of returns of purchases on-line in the brick and mortar stores created representation and therefore affiliation.
Click-Through Nexus
Click-through nexus is an extension of affiliate nexus for the growth of Internet marketing. Technology and Internet retailers are continuously improving and growing methods to increase their customer bases. Many states have implemented or are looking to implement Click-Though Nexus to keep up with the new technology. These laws presume an out-of-state retailer to have nexus in their states when a person in their state is referred to an out-of-state vendor’s website. If the referral results in a sale, nexus is created and the in-state retailer is required to collect sales & report use tax. These referrals are inclusive of the advertisement links one sees on Facebook pages.  Click ecommerceon one, purchase something, and a click-though nexus is created for the in-state retailer.
Economic Nexus
Economic nexus is the newest fight for states to impose sales and use tax on retailers not falling under other nexus definitions. Many on-line retailers (Amazon) have terminated affiliate agreements to not create affiliate nexus and subject to sales and use tax regulations. Enter economic nexus.
Economic nexus creates economic thresholds to create nexus and subject to sales and use tax regulations for nonresident retailers with no physical presence. States adopting economic nexus are creating various formulas to get a bright-line test for revenues received from the state during the tax year. Considerations for bright-line tests include analysis of the frequency, quantity, and the systematic nature of economic contacts with the state.
Notice and Reporting Requirements
A different approach to states collecting online retail use tax from in-state customers is Colorado’s Notice and Reporting Requirements. The law requires out-of-state retailers, not collecting sales tax from Colorado sales, to report transactions to state tax authorities and notify customers of the self-reporting and payment of the use tax obligation. Since there is no collection or remittance of sales or use tax required, the U.S. District Court of Appeals has held there is no violation to the Commerce Clause or the Quill ruling.
Sourcing Rules
The question of where the tax base is and who is owed tax arises through the nexus and simplification process. 
  • Destination-Based Sourcing – The tax base and rate is at the location of the consumer. 
  • Origin-Based Sourcing – The tax base and rate is at the location of the retailer. 
  • Hybrid Sourcing – The tax base and rate is at the location of the retailer, if the state is party to a distribution agreement.

The remote sale and collection of tax is a fluid world right now. Constant changes in state and federal legislation, technology and business models keep retailers and buyers on their toes. Technology moves much faster than legislation, so the legislative process may always be playing a game of “catch-up”.

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.  

Rules For Taxing the Cloud Are Cloudy

Taxing Cloud

Taxing Cloud

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. 

Minimize Your Risk of a Sales Tax Audit

Sales Tax Audit

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.

Visit this page to see tax changes that have taken effect as of January 2016.

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. 

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