Washington REMINDER: Out-of-State Companies to Pay More Tax Starting June 1, 2010!

As mentioned in earlier posts, Washington has enacted economic nexus standards and single sales factor apportionment for its Business and Occupation Tax (B&O Tax) beginning June 1, 2010.
Economic Nexus Standard

Under the new standard, a nonresident individual or business is deemed to have "substantial nexus" if it has more than $50,000 of property in the state, more than $50,000 of payroll in the state, and more than $250,000 of receipts from the state, OR at least 25% of the person's total property, total payroll or total receipts is in the state

Single Sales Factor Apportionment

The numerator of the receipts factor is the total gross income of the business of the taxpayer attributable to Washington during the calendar year from engaging in an apportionable activity.

The denominator of the receipts factor is the total gross income of the business of the taxpayer from engaging in an apportionable activity everywhere in the world during the tax year, less amounts that are attributed to states where the taxpayer is not taxable and at least some of the activity is performed in Washington. This last line is known as a throwout rule" and could cause some confusion or conflict.

Example #1 - Facts: XYZ Corp. is a Washington business, has no property or payroll outside of Washington, and performs all of its services inside this state. XYZ Corp. has gross income from apportionable activities as follows: Washington $500,000; Idaho $200,000; Oregon $100,000; and California $300,000. XYZ Corp. is subject to Oregon corporate income tax, but does not owe any California or Idaho business activities taxes.

Example #1 - Conclusion: The $200,000 that would be attributed to Idaho is excluded from the denominator because XYZ Corp. performs the services in Washington, and it is not subject to actual Idaho business activities taxes and does not have substantial nexus with Idaho under Washington thresholds. Although California does not impose a business activities tax on XYZ Corp., XYZ Corp. does have substantial nexus with California using Washington thresholds (more than $250,000 in receipts). Therefore, the California attributed income is not excluded from the denominator. The Oregon receipts remain in the denominator because XYZ Corp. is subject to Oregon corporate income taxes. The receipts factor is 500,000/900,000 or 55.56%.

Example #2 - The same facts as Example #1, except all of XYZ’s property and payroll are located in Oregon, and XYZ Corp. performs no activities in Washington related to the $200,000 attributed to Idaho. In this situation, the $200,000 is not excluded from the denominator. The receipts factor is 500,000/1,100,000 or 45.45%.

Sales of Services - Benefit Derived

Under the single sales factor, sales of services are NOW apportioned based on where the customer receives the benefit. The location of the benefit of the service or services is determined on an activity by activity basis. A taxpayer receives the benefit of a service in Washington when:

1. The service relates to real property that is located in Washington;
2. An apportionable service relates to tangible personal property that is located in Washington at the time the service is received; or
3. The service does not relate to real or tangible personal property, and:
4. The service is provided to a person not engaged in business who is physically present in Washington at the time the service is received; or
5. The service is provided to a person engaged in business in Washington, and the service relates to the person’s business activities in Washington.

Example #1: Director serves on the board of directors of DEF, Inc. DEF, Inc. is commercially domiciled in State Z. DEF, Inc. is Director’s customer. DEF is engaged in business in State Z, and the director’s services relate to the management of DEF, Inc. Therefore, DEF, Inc. receives the benefit of Director’s services in State Z.
Example #2: ABC is headquartered outside of Washington and provides retail services to customers in Washington, Oregon, and Idaho. When those customers fail to pay ABC for its services, ABC contracts with Debt Collector located outside of Washington to collect the debt. ABC pays Debt Collector a percentage of the amount collected. ABC is engaged in business in Washington and the activities of Debt Collector relate to that business, therefore the benefit of the service is received by ABC in Washington when Debt Collector obtains payment from debtors located in Washington.
If the customer received the benefit of the service in more than one state, gross income of the business must be attributed to the state in which the benefit of the service was primarily received.
SO WHAT?
The bottom line result of these changes is that most out of state taxpayers will pay more Washington B&O tax.
Out of state companies and board of directors will obtain economic nexus very easily; thus, creating new B&O tax liabilities.
Service companies who perform services outside Washington, but have a large number of Washington customers will now be apportioning those sales to Washington; thus, increasing the amount of Washington tax they pay.
For more details, go to Washington's site and New Rules.

Washington REMINDER: Board of Director Compensation Subject to B&O Tax July 1, 2010!

As stated in earlier posts, Washington has enacted several changes recently. One of those changes or clarifications is the taxation of board of director compensation.

Sec. 701 of SB 6143 clarifies that amounts received by an individual from a corporation as compensation for serving as a member of the corporation's board of directors are subject to B&O tax under the services classification.

Employee Exemption Does Not Apply to Independent Contractors

One of the major business and occupation tax exemptions is provided in RCW 82.04.360 for income earned as an employee or servant as distinguished from income earned as an independent contractor. The legislature's intent in providing this exemption was to exempt employee wages from the business and occupation tax, but not to exempt income earned as an independent contractor. The legislature finds that corporate directors are not employees or servants of the corporation whose board they serve on, and therefore, are not entitled to a business and occupation tax exemption under RCW 82.04.360.

Tax on Director, NOT Company

Therefore, beginning July 1, 2010, compensation paid to board of directors will be subject to the Washington Business and Occupation (B&O) Tax. The tax is imposed on the board of director and not the company or payor.

Director Subject to Economic Nexus Standard

Board of directors will be subject to the new economic nexus standards enacted on June 1, 2010. Therefore, the director will be deemed to have "substantial nexus" if it has more than $50,000 of property in the state, more than $50,000 of payroll in the state, and more than $250,000 of receipts from the state, OR at least 25% of the person's total property, total payroll or total receipts is in the state.
Sourcing Based on Where Benefit Derived

The sourcing of the compensation will be under the new sourcing rules for services which hold that the income should be sourced to where the benefit of the service is derived. Sourcing is always an issue of debate, however, it is most likely that the benefit will be determined to be primarily received by the corporation's headquarters, not where the board of directors hold their meetings.

For more information, go to Washington Director Fees Special Notice.

Illinois Manufacturer's Purchase Credit: Action Required by June 30th!

If you operate manufacturing plants in Illinois, then you need to be aware that June 30th is the deadline for filing the proper forms to obtain the Illinois Manufacturer’s Purchase Credit (MPC) for calendar year 2009. There is NO filing extension available—June 30th is THE deadline. On the positive side, a blank form with zeros can be filed by June 30th and then amended later with the actual figures.

Background on Illinois MPC

Beginning September 1, 2004, qualifying manufacturers may earn a Manufacturer's Purchase Credit (MPC). The MPC is earned when a manufacturer purchases manufacturing or graphic arts machinery and equipment that qualifies for the existing sales/use tax exemptions. MPC may be used to pay state sales or use tax on future purchases of qualifying production-related tangible personal property.

All unused MPC expires the last day of the second calendar year following the year in which the original tax-exempt purchase was made. MPC may not be transferred to another party.

The MPC is equal to half of the 6.25% state tax that would have been owed if the purchase was not otherwise exempt.

Goto ILLINOIS MPC to access the forms and statutes.

Using the Internet to Deliver or Facilitate the Delivery of Your Service?

Are you a service company that uses the Internet to provide your service?

Do you provide clients with access to a client portal via the Internet?

If you answered yes to any of these questions, you may have sales tax exposure and not know it.

The issue is whether your service company is treated as selling services; OR as selling software via the Internet which may be taxable for sales tax purposes. Examples of businesses that may be operating this way are: marketing agencies, portfolio management services, insurance services, payroll processing services, logistics management support services, retail management services, mortgage related services, and any other service provider.

Oklahoma Enacts Changes to Sales Tax Nexus Rules, Notification Requirements, Amnesty Rules, Etc.

The Governor signed legislation (HB 2359) becoming effective June 9, 2010 which made several changes to its sales tax laws regarding the presumption of nexus, notification requirements for retailers not required to collect sales tax, and provisions for a future amnesty program for internet retailers, retailers and consumers.

Nexus Changes - Substantial Ownership Interest

A retailer shall be deemed to be engaged in the business of selling tangible personal property for use in Oklahoma if:

1. the retailer holds a substantial ownership interest in, or is owned in whole or in substantial part by, a retailer maintaining a place of business within this state, and
2. the retailer sells the same or a substantially similar line of products as the related Oklahoma retailer and does so under the same or a substantially similar business name, or the Oklahoma facilities or Oklahoma employees of the related Oklahoma retailer are used to advertise, promote or facilitate sales by the retailer to consumers, or
3. the retailer holds a substantial ownership interest in, or is owned in whole or in substantial part by, a business that maintains a distribution house, sales house, warehouse or similar place of business in Oklahoma that delivers property sold by the retailer to consumers.

"Substantial ownership interest” means an interest in an entity that is not less than the degree of ownership of equity interest in an entity that is specified by Section 78p of Title 15 of the United States Code, or any successor to that statute, with respect to a person other than a director or officer.

"Ownership” means and includes both direct ownership and indirect ownership through a parent, subsidiary or affiliate.

Nexus Changes - Component Member of Controlled Group

Any retailer that is part of a controlled group of corporations, and that controlled group of corporations has a component member that is a retailer engaged in business in this state shall be presumed to be a retailer engaged in business in this state. This presumption may be rebutted by evidence that during the calendar year at issue the component member that is a retailer engaged in business in this state did not engage in any of the activities described in this subparagraph on behalf of the retailer.

“Controlled group of corporations” means “controlled group of corporations” as defined in Section 1563(a) of the Internal Revenue Code, and “component member” means “component member” as defined in Section 1563(b) of the Internal Revenue Code.

Nexus Changes - Contractual Relationship with In-State Third-Party

Any retailer making sales of tangible personal property to purchasers in this state by mail, telephone, the Internet or other media which has a contractual relationship with an entity to provide and perform installation or maintenance services for the retailer’s purchasers within this state shall be included within the definition of “retailer.”

The phrase "maintaining a place of business within the state" includes any person having or maintaining in the state, directly or by subsidiary, an office, distribution house, sales house, warehouse, or other place of business. It also includes any person having agents operating in the state under authority of the retailer or subsidiary, whether the place of business or agent is within the state permanently or temporarily, or whether the person or subsidiary is authorized to do business within the state is immaterial.

Out of State Internet, Catalog and Mail Order Retailers Must Provide Notice

Retailers making sales of tangible personal property from a place of business outside Oklahoma for use in Oklahoma that are not required to collect use tax, must provide notice on their retail Internet Web site or retail catalog, and invoices provided to customers that use tax is imposed and must be paid by the purchaser (unless an exemption applies) on the storage, use, or other consumption of the property in Oklahoma.

The notice must be easily visible. In addition, retailers are prohibited from advertising on their retail Internet Web sites or in their retail catalogs that there is no tax due on purchases for use in Oklahoma.

These notice provisions do not take effect until a corresponding emergency or permanent administrative rule takes effect.

Retailer Compliance Initiative

For the purpose of encouraging the voluntary registration, collection, and remittance of use taxes, the Oklahoma Tax Commission is authorized and directed to establish a Retailer Compliance Initiative for out-of-state retailers.

The Tax Commission shall not seek payment of uncollected use taxes from an out-of-state retailer who registers to collect and remit applicable use taxes on sales made to purchasers in this state prior to registration under the Retailer Compliance Initiative, provided that the retailer was not registered in this state in the twelve-month period preceding the effective date of this section.

The provisions of this subsection will preclude assessment for uncollected use taxes together with penalty or interest for sales made during the period the retailer was not registered in this state, provided registration occurs prior to July 1, 2011.

The relief provided shall not be available to a retailer with respect to any matter or matters for which the retailer received notice of the commencement of an audit and which audit is not yet finally resolved including any related administrative and judicial processes.

Relief is also not available for use taxes already paid or remitted to the state or taxes collected, but not remitted, by the retailer.

The relief provided is fully effective, absent the retailer’s fraud or intentional misrepresentation of a material fact, as long as the retailer continues registration and continues collection and remittance of applicable use taxes for a period of at least thirty-six (36) months. The statute of limitations applicable to asserting a tax liability during this thirty-six-month period shall be tolled.

The relief provided is applicable only to use taxes due from a retailer in its capacity as a retailer and not to use taxes due from a retailer in its capacity as a buyer.

The registration by an out-of-state retailer for the collection of use taxes under the Retailer Compliance Initiative shall not be used as a factor in determining whether the retailer has nexus with this state for any other taxes, including income taxes, at any time.

The Tax Commission shall promulgate rules detailing the terms and other conditions of this program.

Internet Retailers Outreach Program

In an effort to improve compliance by Internet retailers for the collection of use tax on their sales to Oklahoma residents, the Oklahoma Tax Commission shall implement an outreach program to Internet retailers.

The program shall include contacting Internet retailers for a review of their business activities to determine if such activities may require the registration and collection of Oklahoma use taxes and the providing of information to the out-of-state retailers about the Retailer Compliance Initiative to encourage registration in this state.

Consumer Compliance Initiative

For the purpose of encouraging the voluntary disclosure and payment of use taxes owed to this state, the Oklahoma Tax Commission is authorized and directed to establish a Consumer Compliance Initiative for consumers liable for payment of use taxes.

A taxpayer shall be entitled to a waiver of penalty, interest and other collection fees due if the taxpayer voluntarily files delinquent tax returns and pays the taxes due during the initiative.

The Tax Commission shall promulgate rules detailing the terms and other conditions of this program.

Need Help?

Contact me at brian.strahle@bakertilly.com for assistance in applying these new rules to your business.

"Amazon.com" Nexus: Can You Rebut the Presumption?

As you may already know, New York has taken one of the boldest steps, challenging Quill in the enactment of new sales tax rules affecting internet retailers.

Under its so called “Amazon.com” rules, an out-of-state retailer that has a commission arrangement with a company for sales through its website is required to collect state sales tax if the website company has New York nexus. While certain safe harbors apply, New York is imposing its sales tax collection responsibilities on businesses with no in-state physical presence. The most significant consequence of these developments for a multistate business is that it might find itself subject to income and sales tax in states with which it has few contacts and little or no tangible presence.

Rhode Island and North Carolina followed in New York’s footsteps and adopted “Amazon.com” type nexus rules as well. Other states such as Connecticut, Florida, Illinois, Maryland, Minnesota, Tennessee and Virginia have either proposed similar laws or discussed the possibility.

The nexus presumption standard in all three states is similar and contains the following rules:

1. The seller must enter into an agreement with an in-state resident;
2. A commission or other consideration must be paid to the in-state resident;
3. The in-state resident directly or indirectly refers potential customers to the seller by link on a website or otherwise; AND
4. The total gross receipts from sales by the seller to customers within the state as a result of referrals to the seller by all of the seller’s in-state representatives under the type of contract or agreement described above total more than $10,000 for New York and North Carolina ($5,000 for RI) during the preceding four quarterly sales tax periods.

All of the nexus presumption standards of New York, North Carolina and Rhode Island are rebuttable. The seller must establish that the only activity of its in-state representative is a link provided on the representative’s website to the seller’s website and none of the in-state representatives engage in any solicitation activity in the state targeted at potential in-state customers on behalf of the seller.

This is the criteria a company must meet to rebut the nexus presumption standards:

1. Establish that the only activity of in-state affiliates is a link on the affiliate’s website that directly or indirectly sends customers to your company's site.
2. The in-state affiliates do not engage in any solicitation activity in the state targeted at potential in-state customers on behalf your company.

If your company is involved in an affiliate program, please contact me for an analysis of your company's relationships with your affiliates to determine if you have "Amazon.com" nexus or are able to rebut the presumption. I can be reached at brian.strahle@bakertilly.com or 612.876.4824.

Tennessee: Nexus Presumption Law Fails to Pass

HB 1947 and SB 1741 in Tennessee failed to pass through committee in late May 2010.

The two bills essentially would have provided that effective July 1, 2009 a person would be deemed to be engaged in a taxable privilege for the purposes of sales and use tax, whether or not the person has a place of business in this state, if the person delivers tangible personal property in this state, if the delivery is made to a consumer in this state or to another person, for redelivery to a consumer in this state pursuant to a retail sale made by the person to the consumer.

In addition, a person making taxable sales of tangible personal property or services as described above would be presumed to be soliciting business through an independent contractor if the person enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, refers potential customers to the person. This provision only applies if the cumulative gross receipts from sales by the person to customers in the state who are referred to the person with this type of an agreement is in excess of $2,000 during the preceding four quarterly periods ending on the last day of February, May, August and November.

This presumption may be rebutted by proof that the resident did not engage in any solicitation in the state on behalf of the person during the four quarterly periods in question. This bill specifies that it does not narrow the scope of the terms "independent contractor" or "other representative" for purposes of this present law regarding sales and use taxes.

So What?

Again, these bills did not pass, but they are reflective of how states are attempting, or considering passing nexus presumption standards similar to those passed and in effect by New York, Rhode Island and North Carolina.

If your company utilizes affiliates located in New York, Rhode Island or North Carolina, please contact me at brian.strahle@bakertilly.com to determine if those affiliates are creating a taxable presence for your company.

State Tax Amnesty Update

Are you looking for a good resource to find out the current status of state tax amnesty programs? Well, of course you could always ask me, but if you want another resource, here it is.

COST, or the "Council on State Taxation" has a good spreadsheet on state tax amnesty programs.

Click on the following link and you will find another link to the spreadsheet along with other articles and reports.

http://www.cost.org/StateTaxLibrary.aspx?id=17768

As always, if you need assistance with any of these amnesty programs, please contact me at brian.strahle@bakertilly.com.

Medical Device Companies: Is Your Device Exempt from Sales Tax?

When conducting research regarding the sales taxation of medical devices, the process generally entails reviewing state statutes, regulations, and applicable letter rulings and/or court cases to obtain clarity and reasonable assurance that the medical device falls under some type of exemption.

Medical devices can be taxable or nontaxable depending on the function of the device, the permanence of the device, whether the device is implanted in a patient, who prescribes the device, who buys the device, etc.

In addition, companies that sell medical devices to hospitals, specifically nonprofit hospitals, may escape taxation of their medical device because the hospital qualifies as an exempt charitable organization. If your company sells to nonprofit hospitals, it is highly recommended that you obtain exemption certificates from those hospitals to protect yourself upon audit.

Most states (not all) describe a "prosthetic device" as:

a replacement, corrective, or supportive device, including repair and replacement parts for the device, worn on or in the human body to artificially replace a missing portion of the body, prevent or correct physical deformity or malfunction, or support a weak or deformed portion of the body.

Some states also add:

To qualify for exemption, these items must either completely or partially replace a missing body part or the function of a permanently inoperative or permanently malfunctioning body part and must be primarily and customarily used for such purposes. In addition, to be exempt, these items must not be generally useful in the absence of illness, injury, or physical incapacity.

You will find that some states directly address your device or something similar. In other cases, you may not find anything directly on point. In those cases, what do you do?

Well, if you can obtain exemption certificates from the hospitals you sell to, that would cover it. If that is not an option, then you could also request a private letter ruling with the state.

A private letter ruling allows you to spell out your facts and obtain a determination from the state on how they would tax your device.

The other option is to assume your device is taxable, register, and start collecting and remitting sales tax.

If you need assistance in determining the taxability of your device in any state or requesting a private letter ruling, please contact me at brian.strahle@bakertilly.com.

Telecommuting Employees Creating Nexus Problem?

Does your company allow employees to work remotely or telecommute? If so, those telecommuting employees may be creating a taxable presence (nexus) in a state for your company for income tax purposes. As always, it depends on the state and your company's facts.

For example, the New Jersey Tax Court in Telebright Corporation, Inc. v. Director, Division of Taxation (New Jersey Tax Court, No. 011066-2008, March 24, 2010), recently held the telecommuting employee was enough to create nexus for the corporation in New Jersey. However, in the case, the taxpayer's telecommuting employee worked in New Jersey every day and never went to the corporate headquarters in Maryland. In addition, the corporation owned the laptop that the employee used in New Jersey.

The Tax Court stated that the consistent contact (telecommuting employee working in New Jersey every day) with New Jersey was not sporadic, occasional, or intermittent. While it is true that the taxpayer never maintained an office in New Jersey, nor solicited business in New Jersey, its daily contact with the State through its employee is sufficient to trigger application of the Corporation Business Tax Act.

Whether a foreign corporation is doing business in New Jersey is determined by the facts in each case. Consideration is given to such factors as:
1. The nature and extent of the activities of the corporation in New Jersey;

2. The location of its offices and other places of business;

3. The continuity, frequency and regularity of the activities of the corporation in New Jersey;

4. The employment in New Jersey of agents, officers and employees;

5. The location of the actual seat of management or control of the corporation.

[N.J.A.C. 18:7-1.9(b).]

“There is no one, single controlling factor nor is there a bright line standard that determines whether a foreign corporation's in-state activities meet the Director's regulatory requirements for doing business. Rather, it is only by close scrutiny of all the facts of the case, taken as a whole, that a final determination can be made.”

"It is commonly understood that a corporation is “doing business” at the place where its employees are expected to report for work, where they are regularly receiving and carrying out their assignments, where those employees are supervised, where they begin and end their work day, and where they deliver to their employer and customers a finished work product."
In this case, all of these functions were performed by the telecommuting employee in New Jersey.

Applicability to Your Company?

According to the case above, your company's telecommuting employees in New Jersey could create income tax nexus for your company. However, a position could be taken that telecommuting employees do not create nexus for your company if your company's facts are closer to the following:

1. Telecommuting employees do not work in NJ every day; therefore, the contact with NJ is sporadic, occasional and intermittent.
2. Your company does not own property in NJ,
3. Your company does not solicit sales within NJ, and
4. Your company's activities in NJ taken as a whole are de minimis.

Again, these are just some sample arguments that may be made if your company's facts are in alignment. As always, please consult your state tax professional or contact me to assess your company's specific facts before reaching any conclusions.

Also, if you have questions regarding telecommuting employees creating nexus in other states, please contact me.

REMINDER: Pennsylvania Amnesty Ends June 18th

Just a reminder, Pennsylvania's tax amnesty program ends June 18, 2010.

According to the Pennsylvania Department of Revenue, the PA Tax Amnesty program received 28,394 completed, or in-process, applications disclosing $50.9 million in previously unpaid Pennsylvania back taxes. The single largest payment to date was $1.2 million for corporate taxes.

For all of the details on the program, please see my earlier post.

If you need assistance in applying for the program or assessing whether you should, please contact me at brian.strahle@bakertilly.com.

Florida Enacts Amnesty Program: Begins July 1, 2010

The Governor of Florida signed H5801 into law on May 28, 2010 which created an Amnesty Program.

The amnesty program runs from July 1, 2010 to September 30, 2010. Under the program, eligible taxpayers may satisfy their state tax liabilities and avoid criminal prosecution and penalties. In addition, interest may be decreased up to 50% in certain cases.

Eligible Taxes

The taxes eligible under the program are: sales tax, fuel tax, corporate income tax, communications services tax, gross receipts tax, and Florida intangible tax.

Taxpayers Under Audit

Taxpayers who are currently under audit or have been contacted for audit, may still apply for amnesty; however, taxpayers will be required to pay the tax and 75% of the interest due.

Taxpayers Who Have Not Been Contacted

Taxpayers who have not been contacted by the state of Florida and come forward during the amnesty period, will be required to pay the tax and 50% of the interest due.

Ineligible Taxpayers

Taxpayers who have entered into settlement agreements prior to July 1, 2010, are not eligible for the amnesty program.

Details? Assistance?

For all of the details, please read the Bill H5801.

If you need assistance in taking advantage of this program, or assessing whether you should take advantage of this program, please contact me at brian.strahle@bakertilly.com.

Minnesota Governor Approves Omnibus Tax Bill w/Line Item Veto

Minnesota Governor Tim Pawlenty signed the Omnibus Tax Bill with Line-Item Veto on May 27, 2010.

I am not going to go into all of the details (at least yet), but the bill does make changes to the corporate franchise tax, individual income tax, sales and use tax, cigarette sales, property tax, estate tax, insurance tax, and MinnesotaCare taxes.

Please review the bill for all of the details and contact me at brian.strahle@bakertilly.com if you need assistance in applying the changes to your business.

I may discuss specific changes in future posts.