California Board Equalization clarifies title transfer location tax

In California, all sales and use taxes are administered at the state level by an agency known as the Board of Equalization. Counties and cities may impose their own sales and use taxes, but the board handles all collection and distribution. The sales tax is assessed on retailers for the privilege of selling tangible goods within California, while the use tax is assessed on purchasers who use or store goods in California without paying any prior sales tax.

The distinction between sales and use taxes matters a great deal to local governments in California. The board allocates sales tax revenues directly to the city where the sale is completed. In contrast, the Board distributes use tax proceeds to a “countywide pool,” which is shared by all the cities and local governments within a particular county.

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In 2012, a California Superior  Court judge sided with a group of cities that had sued the board over its distribution policies. Specifically, the cities said the Board improperly classified certain sales taxes as use taxes. Obviously, the cities wanted to maximize the direct distribution of sales taxes to them, as opposed to the indirect distribution of use taxes through the countywide pools.

But in a December 2014 decision, a California appeals court reversed the Superior Court and upheld the board’s policies. The dispute centered on how to classify sales shipped from out-of-state locations to customers in California. Under the board’s rules, sales tax applies when “title transfers to the purchaser in California”; use tax applies in all other cases. The cities argued sales tax should apply “to all transactions negotiated by a retailer in California regardless of where or when title passes.”

The appeals court explained the California legislature failed to define when “title transfers” occur for purposes of classifying a transaction as subject to either sales or use tax. That means the board has the discretion to make that call, provided it does so “in a rational manner” consistent with state tax laws. Here, the board applied theCalifornia Uniform Commercial Code, which states unless a contract provides otherwise, transfer of title occurs at the “time and place at which the seller completes his performance with reference to the physical delivery of the goods.” In other words, title passes when the goods are shipped, not when they are received. So items shipped from out-of-state are therefore subject to use, rather than sales, tax.

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

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Indiana questions sales verses use tax on home improvement contracts

sales verses use taxBusinesses 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 questioned sales verses use tax on home improvement contracts with respect to the well-known chain Lowes.

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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.

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Tennessee assesses use tax on stored property

use tax on stored property such as a 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 tax on stored property 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.

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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.

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Mississippi air business dinged for confusion over sales verses use tax

air charter business runs afoul of use taxMost states assess both a tax on the sale and use of personal property. The use tax applies when no sales tax has previously been paid. State officials frown upon efforts to circumvent the use tax requirements, as an airplane dealer in Mississippi recently learned.

Two men formed a partnership in Tate County, Mississippi, called Johnny Reb, ostensibly to buy and sell airplanes. Johnny Reb paid no tax on the planes it purchased. Therefore Johnny Reb either had to sell the planes – and collect Mississippi’s 3% sales tax – or pay an identical amount in use tax if it used the planes for any other purpose.

According to Mississippi officials, Johnny Reb did neither. Instead, a state audit revealed the partners were using planes for personal use and, in effect, running a charter air service. Indeed, Johnny Reb’s tax returns and website identified it as a “charter” or “airplane leasing” business, not a dealership. Based on this information, the Mississippi Department of Revenue assessed Johnny Reb for unpaid use taxes (plus interest) of more than $160,000.

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Johnny Reb appealed the department’s assessment to the Tate County Chancery Court. The Chancery Court is a trial court that handles certain administrative cases. The chancery judge reversed the department’s decision. He re-examined the facts of the case, including new information presented by Johnny Reb, and determined the company really was a dealership exempt from use tax. And even though there was evidence Johnny Reb used its planes to transport passengers, that was not the company’s “principal business” and it never made a profit from providing charter service.

But in a decision issued on Oct. 14 of this year, the Mississippi Court of Appeals reversed the chancery judge and reinstated the department’s original use-tax assessment. The appeals court said the chancery judge exceeded his authority in questioning the department’s determination of the facts. A chancery court may not reverse a tax decision because he personally disagrees with it; rather, he must find there was no “substantial evidence” supporting it. That was not the case here.

Moreover, the Court of Appeals said the use tax applies to Johnny Reb regardless of its “principal business” or whether it made a profit on charters. The department agreed Johnny Reb was primarily in business to sell planes. The problem was that it wasn’t doing that. It was using the planes, which meant it had to pay a use tax.

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

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Don’t forget the use tax

States scramble to get a cut of online shopping taxes

Preliminary data show that internet sales are keeping pace with local brick-and-mortar sales so far this year. With this much revenue on the line, states are scrambling to inform the cyber-consumer about taxes due on internet purchases.

To date compliance has been, to put it mildly, not good.

Whether or not states have special internet sales legislation on the books, most states require the payment of use tax on any untaxed purchase, including those made over the internet or from out-of-state vendors.

Use tax is due on any taxable tangible product purchased by non-tax-exempt entities when no sales tax was collected at the time of purchase, regardless of where the item was purchased. This includes items purchased over the internet or from out-of-state sources including Amazon, eBay and others.

States have identified unpaid use tax as a significant loss of revenue during a time when budgets are stretched to the breaking limit. An estimate by the Streamlined Sales And Use Tax group claim $20 billion a year is being lost.

Identifying the problem and figuring out what to do about it are two different things. Most states have been at a loss as to a practical remedy. Some have included a self-reporting section on the state income tax return. Other states rely on press releases, news coverage and guilt. None of these methods have so far show much effect on compliance with some sources saying as little as 20% of these taxes are collected.

Federal legislation is being closely examined by both the senate and house to try to come up with a “fair” solution to this uncollected tax problem.

The Main Street Fairness Act, which has failed in previous years, was introduced this year by Sen. Richard Durbin (D-IL) and is currently being reviewed by the Senate Committee on Finance. The bill proposes to promote the simplification, administration and collection of sales and use taxes.

Unfortunately, like most of the issues involved the fiscal cliff miasma, this one seems to have little chance of resolution before year’s end. You can track the bill’s progress at http://www.govtrack.us/congress/bills/112/s1452.

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