Washington: Economic Nexus Effective June 1, 2010

Washington's new legislation created an “economic nexus” standard effective June 1, 2010. It requires some businesses earning apportionable income from Washington customers to be subject to taxes whether or not they maintain offices in the state or have any physical presence.

The nexus standard applies only to “apportionable income,” which includes income from various service activities and royalty income.

The legislation also updated the apportionment method from “cost apportionment,” to single factor sales apportionment and establishes a “trailing nexus” for one year.

For more information, please contact me at brian.strahle@bakertilly.com or visit Washington's website page, Economic Nexus.

Washington has published notices for financial institutions and franchisors to provide some guidance on how economic nexus will be applied.

Minnesota Accelerates Sales Tax Payments / May Delay Refunds!

Minnesota's recent budget bill (HF 3834) made some changes to the timing of sales tax payments. In other words, it accelerated them for some taxpayers.

For a vendor with a sales tax liability of $120,000 or more during a fiscal year ending June 30, 2009 and fiscal years thereafter, the taxes are due and payable on a monthly basis as follows:

1. On or before the 14th day of the month following the month in which the taxable event occurred, the vendor must remit 90% of the estimated liability.
2. On or before the 20th day of the month in which the taxable event occurs, the vendor must remit a prepayment for the month in which the taxable event occurs equal to 67% of the liability for the previous month.
3. On or before the 20th day of the month following the month in which the taxable event occurred, the vendor must pay any additional amount of tax not previously remitted under either (1 or 2 above) or, if the payment made under 1 or 2 above was greater than the vendor's liability for the month in which the taxable event occurred, the vendor may take a credit against the next month's liability.
4. Once the vendor first pays under 1 or 2 above, the vendor is required to continue to make payments in the same manner, as long as the vendor continues having a liability of $120,000 or more during the most recent fiscal year ending June 30.
5. If vendor fails to make payments in the first month that vendor is required to make a payment under either 1 or 2 above, then the vendor is deemed to have elected to pay under 2 above and must make subsequent monthly payments in the manner provided in item 2 above.
6. For vendors making an accelerated payment under item 2 above, for the first month that the vendor is required to make the accelerated payment, on the 20th of that month, the vendor will pay 100% of the liability for the previous month and a prepayment for the first month equal to 67% of the liability for the previous month.

Other Changes:

1. A vendor having a liability of $10,000 or more, but less than $120,000 during a fiscal year ending June 30, 2009, and fiscal years thereafter, must remit by electronic means all liabilities on returns for periods beginning in the subsequent calendar year on or before the 20th day of the month following the month in which the taxable event occurred.
2. Vendors with a liability of $120,000 or more are required to remit by electronic means all liabilities, except for 90% of the estimated June liability which is due two business days before June 30. The remaining amount of the June liability is due on August 20.
3. Penalties apply for not making accelerated payments as required.
4. Commissioner may delay payment of refunds of overpayments of corporate franchise tax and sales tax until the following fiscal year so that $152,000,000 less in refunds is paid in fiscal year 2011 than otherwise would have been paid. This amount is in addition to any amount that is delayed in connection with the unallotment announced in June 2009.

NOTE: All of the above changes are effective for taxes due and payable after September 1, 2010!

If you need assistance in complying with these new rules, please contact me at brian.strahle@bakertilly.com. Also, please consult the budget bill for more details.

Sales Tax and Leasing Transactions: Are You Missing Something?

If you lease tangible personal property to, or from another entity (whether related or not), you are faced with sales tax issues that need to be addressed.

Most states impose sales tax on the leasing of tangible personal property. Some states also impose sales tax on the leasing of real property.

As a primer or helpful guide, I thought I would provide a brief list of issues or opportunities that you need to be aware of regarding the sales taxation of leases:

1. What type of lease is it? Is it a "true" lease?
2. Are you leasing equipment with an operator? If so, is it a service or lease of property?
3. Where is the leased property located?
4. Do any exemptions or exclusions apply?
5. When is the sales tax due? Upfront or over the term of the lease?
6. What state is the tax due to?
7. What is included in the tax base?
8. What is the tax rate?
9. Are the parties (lessor and lessee) related?
10. Is this a "sale/leaseback" transaction?
11. What happens if the lessor "assigns" the lease to another party?
12. How are lease "syndication transactions" handled? Who is responsible for the sales tax?

Some common audit issues are:

1. Record retention - contracts for entire lease term
2. Sampling periods - statistical sampling vs. actual basis
3. Tax Rate changes - may not be "grandfathered" to existing lease contracts
4. Exemption certificates - from lessee; not on file, or acceptance of "good faith" exemption may be questioned.
5. Exemption claimed may not apply to leased property
6. Tax may be imposed on lessor; making the exemption certificate "not applicable"
7. Tax base issues (what charges are included?)
8. Sale of equipment coming off lease (may be taxable)
9. Claiming deduction for bad debts (may not be allowed)
10. Auditors may not care who pays sales tax (lessor or lessee)
11. Assignment of leases (transfer of title or assignment of rental stream?)
12. Leased property may create nexus for lessor
13. Use of property by lessor prior to leasing to lessee (may create use tax liability for lessor)

This is just a brief overview of the potential sales tax issues surrounding leasing transactions.

Please contact me at brian.strahle@bakertilly.com to review the sales taxation of your leasing transactions.

"Reverse Audits" - Ever Paid for One?

If you work at a corporation or at an accounting/consulting firm, then you probably know what I mean by "reverse audit."

Usually an outside accounting/consulting firm would approach a company, and propose to conduct a reverse audit of a company's state income tax or sales tax returns, etc. on a contingency fee basis. Meaning, the firm would review the company's records to identify refunds. If the firm finds refund opportunities and files claims, the consulting firm would get paid a percentage of the refund claims filed. If the firm finds nothing, the firm gets paid nothing.

Do You See A Problem With This?

Well, I recently heard another practitioner state that consulting firms should not only look for refund opportunities, but they should also look for deficiencies. Why? Well, when the company files the refund claims that the firm has identified, most likely the company will get audited. If the company has any major deficiencies, then the deficiencies could reduce or eliminate the refund opportunities the consulting firm identified.

Solution?

The consulting firm should be a true "state and local tax partner" and identify both refund opportunities and deficiencies. The firm's fee should be based (if done on a contingency fee basis) on a percentage of the net refund after audit. Does that make sense?

I am not suggesting that all work or any work should or should not be done on a contingency basis. In some cases, a contingency fee is allowed and appropriate. However, my point is that when firms engage in "reverse audits" where their fee is based on a percentage of the refunds received by the client, the consultant may acquire "tunnel vision" and not provide the client with the best all around advice.

SALT consultants should be their client's "partners" and not "one-hit wonders."

What do you think?

Amazon Fights North Carolina's Audit Request

Amazon is fighting North Carolina's audit request for personal purchaser / customer information. Amazon filed the complaint in U.S. District Court for the Western District of Washington, Case No. 2:10-CV-00664-BAT on April 19, 2010.

Within the complaint, Amazon states it already complied with North Carolina's request by providing detailed information about millions of purchases made by North Carolina customers. Amazon provided responses to all of the data fields specified by the North Carolina Department of Revenue (DOR) which include: order ID number, seller, ship-to city, county, postal code, the non-taxable amount of the purchase, and tax audit record identification.

The NC DOR wants the following additional information: bill to name, bill to address, ship to name, ship to address, product/item code or description.

Amazon states the collection and disclosure will impose a significant burden on Amazon. Amazon also states the disclosure of Customer data will identify to the DOR the identities of customers who purchased certain items that may be subject to government scrutiny if exposed. Yet the identity of any Amazon customer is irrelevant to the DOR's audit of Amazon's tax compliance.

Therefore, Amazon is asserting the privacy and First Amendment rights of itself and of its customers should be protected, and seeks a declaration that the DOR's ongoing demand for information violates the rights of Amazon to sell, and its customers to purchase content free from government intrusion.

Is Amazon's complaint valid? Do they have a point? Maybe.

Other States and Similar Requests

Since I am not involved with the audit, I can't say as to why North Carolina made the request. I can say I have seen other states make similar requests and it is not irregular for those requests to be satisfied.

Most states would make this request in order to be able to identify the customers or purchasers who made taxable purchases, and then to confirm the purchasers filed and paid the appropriate "use tax," if necessary. Therefore, Amazon is probably correct in that the information request is not necessary for NC to audit Amazon. It is however, necessary or helpful to NC to be able to audit purchasers for use tax compliance.

So What?

I know other companies have received similar requests from other states recently. Every state is going after use tax compliance any way they can. Maybe rightfully so, since use tax is due to the states. However, use tax has always been a difficult tax to enforce against "individual" taxpayers. For businesses, use tax is always a source of audit concern and adjustment.

If you receive a similar request, will you provide the information or will you pause, and fight it?

Will Amazon prevail? Only time will tell.

Cloud Computing and Sales Tax Update

A recent article in the New York Times discusses how companies are moving to cloud computing. The article discusses how large "cloud computing" providers like Amazon are getting companies to use their resources and data centers (servers), instead of companies creating their own data centers.

Sales Taxation of Cloud Computing

As stated in earlier posts, states are just beginning to address the sales taxation of cloud computing.

Texas Franchise Tax Returns Due 5/15: Will You Get A Notice This Year?

Texas Franchise Tax returns are due May 15th, just a few days from now. Over the past couple of years, taxpayers have attempted to comply with Texas' new franchise tax laws (the "Margin Tax"), but have unfortunately received numerous notices regarding filing the right forms, filing the correct information reports, and attaching the correct affiliate schedules to extensions and combined returns.

Before filing your return or extension for May 15th, make sure you verify if your entity meets the thresholds to file an "EZ report" or "No Tax Due Report."

If you are filing a combined report, verify which entities actually have nexus with Texas (remember, this can change from year to year).

Also, make sure that you file the correct public information report for each entity that has nexus, and attach the correct affiliate schedule to the extension (there is one form for extension purposes and another for return purposes).

If your company has any entities that qualify as a "passive entity," remember, passive entities are not included in a combined report and are nontaxable for Texas franchise tax purposes.

Here is a link to a recent Texas powerpoint presentation to provide some helpful info.

If you need any assistance in filing your extension or return this year, help in determining if your company has nexus in Texas, or help in determining if an entity qualifies as a "passive entity," please contact me at brian.strahle@bakertilly.com.

California: Out-of-State Internet and Catalogue Retailers Stay Tuned!

As mentioned back in April, California proposed some burdensome notification requirements on out-of-state retailers without nexus in California.

The California Assembly just passed the bill, and it is continuing through the legislative process. With that said, some of the original components were deleted, such as the rebuttable presumption, and burdensome quarterly reporting. See previous post for details.

The item that is left in the bill is a less burdensome notification requirement:

This bill would require each retailer that is not required to collect use tax to provide notification on its retail Internet Web site or catalogue that tax is imposed on the storage, use, or other consumption in this state of the tangible personal property purchased from the retailer that is not exempt, and is required to be paid by the purchaser, as provided.

Go to AB 2078 to review the actual bill.

Pennsylvania Tax Amnesty Program in EFFECT! Are You Scared?

As I mentioned back in December, 2009, Pennsylvania has created a Tax Amnesty program that is currently in effect. It runs from from April 26 to June 18, 2010.

During this limited, 54-day time frame, the Pennsylvania Department of Revenue will waive 100 percent of penalties and half of the interest for anyone who pays his/her delinquent state taxes.

For all of the details, see my previous post.

Also, here is a link to Pennsylvania's "scare tactic" to get taxpayers to come forward. What do you think about that?

If you receive a "come clean" letter or need assistance, please contact me at brian.strahle@bakertilly.com.

Philadelphia Tax Amnesty IN EFFECT!

As I previously mentioned back in March, Philadelphia's Tax Amnesty program started this week (May 3rd.). The Amnesty program runs from May 3rd to June 25th.

To assist taxpayers, Philadelphia has created a new site which provides more information about the program and how to take advantage of it. Please check it out at Philly Tax Amnesty.

Who is Eligible?

Tax Amnesty is available to both individuals and businesses for any taxes that were originally due and payable between February 1, 1986 and June 30, 2009 and meet any one of the following criteria:

1. You did not file the required Philadelphia tax return(s)
2. You underreported income and/or tax due on a previously filed tax return(s)
3. You claimed excessive deductions
4. You did not pay previously assessed taxes, interest, penalties, and/or collection fees

What Taxes Are Eligible?

City of Philadelphia taxes eligible for Amnesty are:

1. Amusement Tax, pursuant to Chapter 19-600
2. Auctioneer Tax, pursuant to Chapter 19-700 (repealed)
3. Bowling Alley Tax, pursuant to chapter 19-800 (repealed)
4. Mechanical Amusement Device Tax, pursuant to chapter 19-900
5. Personal Property Tax, pursuant to Chapter 19-1100
6. Parking Tax, pursuant to Chapter 19-1200
7. Real Estate Tax, pursuant to Chapter 19-1300, Chapter 19-1800 and applicable State law
8. Realty Transfer Tax, pursuant to Chapter 19-1400
9. Wage and Net Profits Tax, pursuant to chapter 19-1500 and Chapter 19-2800
10. Net Income Tax, pursuant to Chapter 19-1800
11. Realty Use and Occupancy Tax, pursuant to Chapter 19-1800
12. Liquor Sales Tax, pursuant to Chapter 19-1800
13. Hotel Room Rental Tax, Tourism and Marketing Tax, and Hospitality Promotion Tax, pursuant to Chapter 19-2400
14. Business Privilege Tax, pursuant to Chapter 19-2600
15. Vending Machine Tax, pursuant to Chapter 19-2800 (repealed)
16. Vehicle Rental Tax, pursuant to Chapter 19-3300
17. Excise tax on outdoor advertising transactions, pursuant to Chapter 19-3400

What Tax Are NOT Eligible?

Sales and Use Tax and Hotel Occupancy Tax imposed pursuant to Section 19-2701. This tax is eligible for amnesty from the Commonwealth of Pennsylvania, which administers this tax. General Acute Care Hospital Assessment and High Volume Medicaid Hospital Assessment imposed pursuant to Section 19-3502.

Benefits of Participating

According to the site, if you are eligible and make payment during the 54 days of Amnesty, you will not be charged any penalties, and you will only owe half the interest.

Need Help?

If you need any assistance in determining if you are eligible or if you should take advantage of this amnesty opportunity, please contact me at brian.strahle@bakertilly.com.

North Carolina Creates Internet Transactions Resolution Program

The North Carolina Department of Revenue is collaborating with e-commerce retailers that have operated affiliate programs in the state to resolve issues of tax liability and to promote equal treatment of all businesses in the State. The Internet Transactions Resolution Program (Program) is the result of cooperative discussions between the Department and a number of e-commerce retailers.

Who is Eligible to Participate?

Any retailer that failed to register for sales and use tax as a result of operating an affiliate program in North Carolina at any time is eligible to participate in the Program. Participants may resolve their prior tax liability by registering for sales and use tax and agreeing to collect and remit those taxes for four years, beginning September 1, 2010.

Benefits of Participating?

The Department of Revenue agrees not to assess tax, penalties or interest for periods prior to September 1, 2010 for retailers that successfully complete the program. For participants in the Program, the Department also agrees to not exercise its authority to obtain consumer information from the retailer to collect a tax liability for the period prior to September 1, 2010.

When Does the Program Begin?

The program began on April 23, 2010.

Deadline to Respond?

Eligible retailers must submit an election to participate in the Program by June 30, 2010. A resolution agreement must be signed by both the retailer and Department by August 31, 2010.

Consequences for Failing to Participate?

For retailers that fail to participate and are subject to nexus filing requirements, the Department will assess all applicable tax, penalties and interest. Applicable penalties will not be waived. There is no statute of limitations for sales tax liability if a retailer has never registered and filed sales tax returns.

Need Help?

If you are a retailer that operates an affiliate program in North Carolina, and did not register for sales and use tax, please contact me at brian.strahle@bakertilly.com to determine if, and how you should take advantage of this program.

For all of the details on the program, go to North Carolina's website.