Washington B&O Tax Reporting Requirement After Activity Stops

Washington State has changed the length of time a business continues to have reporting obligations for business and occupation (B&O) tax after it stops activity in Washington.

Effective June 1, 2010, there is a change in the length of time a business continues to have reporting obligations for business and occupation (B&O) tax.

A person who stops the business activity that created nexus in Washington now continues to have nexus for the remainder of that calendar year, plus one additional calendar year. (See RCW 82.04.220)

This “trailing” nexus provision applies to all business and occupation (B&O) tax classifications.
 
This legislation only changes trailing nexus for B&O taxes.
 
The trailing nexus period for retail sales tax (RST) is still four years, plus the current year, under WAC 458-20-193 (Rule 193).
 
For more information regarding the change, go to Washington's Special Notice.

Do You Provide Services to Customers in Oklahoma? If So, Read This.

The Oklahoma Tax Commission has amended its Regulations to "clarify" or "change" how they apportion receipts from the performance of services.

According to the amendment, which took effect July 11, 2010,

Receipts from the performance of services shall be included in the numerator of the fraction if the receipts are derived from customers within this state or if the receipts are otherwise attributable to this state's marketplace. [See 68 O.S. § 2358(A)(5)].

A "customer within Oklahoma" means a customer that is engaged in a trade or business and maintains a regular place of business in Oklahoma, or a customer that is not engaged in a trade or business whose billing address is in Oklahoma. A "billing address" means the location indicated in the books and records of the taxpayer as the address of record where the bill relating to the customer's account is mailed.

Questions Remain?

Prior to this amendment, Oklahoma did not provide specific guidance on how to apportion service receipts.  Oklahoma's statute, 68 O.S. Sec. 2358(A)(5)(c)(1), did not previously provide guidance nor does it match the current amendment taking effect on July 11, 2010.  In other words, the statute is "silent."  Therefore, does the Commissioner have the authority to mandate service income to be apportioned using "market based sourcing"?

If this is a "clarification" of a current statute or regulation, and not something new, then does it apply to previous years?

What Now?
 
If your company has nexus or a taxable presence in Oklahoma, and has receipts from the performance of services to customers in Oklahoma, these receipts will now be included in the numerator of your Oklahoma apportionment factor regardless of whether the services are performed in Oklahoma. 

We are currently assuming this applies to tax years ending after July 11, 2010; however, this has not been made clear.  Therefore, you will want to continue to monitor this issue to see if Oklahoma provides any additional guidance or answers to the questions raised.

To view the actual Regulations, go to Regulations 710:50-17-71, page 102.

Inc. Magazine Releases the Inc. 500/5000 List!

Inc. Magazine just released its Inc. 500/5000 list of companies for 2010. Please check it out.

I enjoy reading Inc. Magazine on a regular basis, but I also enjoy helping Inc. 500 companies deal with state and local taxes as they grow and expand across multiple states.

Companies in this space are entrepreneurial and seeking to grow. They are energetic and focused, but don't have the time or resources to keep on top of the complexity and ever-changing state and local tax landscape.

If you are an Inc. 500 company or a growing or expanding company similar to a company in the Inc. 500, please contact me at brian.strahle@bakertilly.com for a FREE consultation.

Pennsylvania Keystone Opportunity Zones Set To Expire 12/31/10!

If your business is currently taking advantage of a Pennsylvania Keystone tax credit, you may be interested in reading a recent bulletin issued by the PA Department of Revenue. 

The Department of Revenue issued Corporation Tax Bulletin 2010-1 on August 25, 2010 to clarify the expiration of tax benefits for Keystone Opportunity Zones (KOZ)/Keystone Opportunity Expansion Zones (KOEZ)/Keystone Opportunity Improvement Zones (KOIZ) and the calculation of the corporation tax credits in the year the benefits expire.

Beginning in 2010, tax benefits for Keystone Opportunity Zones/Keystone Opportunity Expansion Zones/Keystone Opportunity Improvement Zones will begin to expire. The effective date for the expiration of these tax benefits will be December 31st of the year in which they expire.

Tax Year Ending on December 31st

According to the bulletin, a taxpayer with a tax year end of December 31st will be entitled to a credit for the entire year and there is no modification to the calculation of KOZ/KOEZ/KOIZ credit in the year the subzone or expansion subzone expires.

The numerator of the property factor will still be average property owned in the subzone or expansion subzone plus 8 times the rental expense in the subzone or expansion subzone for the entire year. The denominator of the property factor is the property located inside Pennsylvania for the year. The numerator of the payroll factor will be wages paid in the subzone or expansion subzone during the entire year with the denominator being the total wages paid in Pennsylvania for the year.
 
Tax Year Ending on a Date Other than December 31st
 
A taxpayer with a tax year ending on a date other than December 31st will be entitled to a credit based on its activity in the subzone or expansion subzone from the beginning of their tax year to December 31st.
 
In calculating the property factor, the numerator is the daily average of property located in the subzone or expansion subzone from the beginning of the tax year to December 31st plus 8 times the rental expense in the subzone or expansion subzone for the same period. The denominator of the property factor is the property located inside Pennsylvania for the entire year. The numerator of the payroll factor will be the wages paid in the subzone or expansion subzone from the beginning of the tax year to December 31 with the denominator being the total wages paid in Pennsylvania for the year.

For more information on Pennsylvania's KOZ program, please check out their website. 

For more information on Corporation Tax Bulletin 2010-1, check out this link.

If you have any questions regarding your business' use of the PA KOZ credits or how to plan for the expiration of the KOZ benefits, please contact me at brian.strahle@bakertilly.com.

Medical Device Companies and Sales Tax: What's the Risk?

Regardless of whether your medical device company is a start-up, or has been in business for several years, the question remains: have you addressed the sales taxation of your device?

To learn more, and obtain 2 free reports on Nexus, click on THIS LINK.

Thank you.

LeverageMotivation

I enjoy reading business and motivational books. I also love inspirational quotes. Therefore, over the years, I have not only read quotes, but I have created some of my own to remind myself of what's important and keep myself focused and on-track.

One of my daily "mantras" I created is: "One day at a time. Be You. Expect Success."

This quote addresses several of the fears that I believe we all feel at some point.

1. The fear of the future or trying to plan it out. Once you realize we all live one day at a time and only have enough strength for today, I can let go and truly focus on today.
2. The fear of comparison and not being good enough. When we compare ourselves to other people we not only try to be like them, but we may lose confidence in who we are and what we bring to the table. Comparison really is the root of all evil.
3. The fear of failure. We should live our daily lives focused on what we can do or control that will lead to success. We should do all that we can, trusting that it will lead to success. Expecting success takes a lot less energy than expecting failure. It also helps you focus on the actions that will lead to success.

What do you think?

Do you have any quotes that you live by?

Sales and Use Tax: Deceptively Simple. Endlessly Complicated.

The following represents some of the basic foundation of sales and use tax that seems simple, but quickly leads to complexity and complications.

Sales Tax is an occupational tax on sellers for the “privilege” of doing business in a state. It is imposed on the gross receipts from retail sales of tangible personal property or taxable services. Retailers are liable for sales tax whether they collect it or not.

Use Tax is a critical area of compliance and exposure for many businesses! It is imposed on the storage, use, or consumption of tangible personal property or taxable services in the state of situs. Use tax is not applicable if sales tax has already been imposed.

Examples of occasions where Use taxes may be imposed:

• Ordering merchandise from a catalog or Internet from out-of-state seller
• Importing goods for consumption
• Resale property that is consumed or used instead of sold
• Creation and use of self-constructed assets
• Transfers or sales of property between divisions or subsidiaries
• Transfer of used equipment from a location in a different state
• Renting equipment from an out-of-state supplier
• Storing equipment in a state different than the state in which it was purchased or in which it will be used
• Removing product from finished goods inventory to use instead of selling it

Compliance Issues and Opportunities?

• Defining the tax base - Tangible personal property (TPP), digital product, service, or intangible?
• TPP is taxable unless specifically exempted
• Real property is generally nontaxable with a few exceptions
• Some services are taxable (varies by state)
• Intangibles – generally, not taxable
• Taxable situs of the transaction (sourcing can be complex)
• Do exemptions apply? (i.e., resale, manufacturing, exempt org, temporary storage, packaging, etc.)
• Local taxes

Transactions That Create Complexity

• Software
• Digital goods
• Cloud Computing
• Leasing
• Internet transactions
• Inter-company transactions (related parties)
• Disregarded entities
• Mixed transactions (taxable and nontaxable components)
• Bundled transactions (i.e., TPP and service)
• Drop shipments

If you have specific questions on any of the above topics or issues, please contact me at brian.strahle@bakertilly.com.

Sellers May Charge Separate Fee to Recover Franchise Tax Paid

According to Texas's recent Tax Policy News and STAR document 201008847L, a company may charge customers a separately stated fee as a way to recover Texas franchise tax imposed on the company (seller).

Background

The Texas franchise tax is imposed on most companies that are chartered or organized in Texas or that are doing business in this state. Taxes, like other business expenses such as payroll and insurance, are part of a company's overhead cost of doing business. Many companies incorporate this cost into the prices they charge for their services or goods. A company may, however, choose to charge customers a separately stated fee as a way to recover this cost.

STAR document 201008847L addresses such a charge made by a phone company on billing invoices sent to customers. The Comptroller determined that such a charge, referred to as a "Recovery Charge," is permissible as long as certain parameters are maintained.

A company choosing to bill customers a Recovery Charge may explain to its customers that the charge is made in order to recoup money paid by the company for taxes imposed on it. The company may not, however, represent the charge as a tax imposed directly on the customer. To this end, the Recovery Charge must not appear in the "Government Fees and Taxes" (or similar section) of the customer's bill, invoice or contract. Further, the company should disclose that the Recovery Charge is not a tax the company is required to collect from its customers by law.

If a company collects amounts that are represented to the customer as being a tax on the customer, then those amounts must generally be paid to the state. See Texas Tax Code Section 111.016(a) which provides that, "any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected."

The company may use the term "State Cost-Recovery Fee" to describe any charge it assesses to recoup costs of the Texas franchise tax.

It should avoid using any of the following terms (or variations of them) to describe its Recovery Charge:

1. Reimbursement;
2. Texas Margin Fee Reimbursement;
3. Texas State Margin Fee Reimbursement;
4. Gross Receipts;
5. Franchise Tax;
6. Margin Fee; or
7. Texas Margin Fee.

Although the matter is not addressed in the STAR letter mentioned above, the Recovery Charge is part of the total sales price of a taxable item sold by the company. Therefore, it is subject to sales tax in the same manner as the item sold.

If you have any questions regarding this issue, please contact me at brian.strahle@bakertilly.com.

Are Your Independent Contractors Really Employees?

The IRS and the states are aggressively attacking this area. They believe this area provides a great opportunity for them to reduce the tax gap.

Certain industries with a history of misclassification are being targeted: trucking, construction, restaurants, grocery stores, janitorial, business services, child care, poultry and meat processing, landscaping and home healthcare. But any company that issues a large number of 1099s or has a relatively large percentage of independent contractors versus employees has higher potential for audit.

If you are contacted by the IRS or any state for this type of audit, please contact me at brian.strahle@bakertilly.com for assistance.

Where Are the Taxpayer Advocates?

Are you feeling pushed around? "Bullied" by a taxing authority? Whether it is a notice, nexus questionnaire, audit, appeals process, collections, tax liens, etc., does it feel like states are NOT behaving in a fair manner? I think so.

I know this is nothing new, but it seems to be getting worse since states are hurting for money.

If you are having this problem, please let me know. I would love to hear about your "nightmare." Maybe we can collectively do something about it (who knows).

Please send me an e-mail at brian.strahle@bakertilly.com with your story, or leave a comment on this post.

Thank you.

"Bulk Sale" - Notification Requirements and Exemptions?

In a recent New York State Tax Appeals Tribunal case (Llargo of Lockport, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 821974, August 23, 2010), the Petitioner, Llargo of Lockport, Inc., and the Division of Taxation each filed an exception to the determination of the Administrative Law Judge issued on July 9, 2009.

Issue

Whether petitioner’s use of property, including tables, chairs, bar stools, and tableware, left behind on the premises of its restaurant, as well as its conduct of business under the same restaurant name as its predecessor, with the same menu and cooking staff, constituted the transfer bulk of business assets under Tax Law § 1141(c) so that petitioner, as the transferee, became liable for sales tax determined due from the predecessor restaurant.

Administrative Law Judge Decision

The Administrative Law Judge determined that there was a bulk sale and that petitioner, as purchaser of the business, is responsible for the sales tax obligations of the seller when, as occurred here, timely notice had not been filed (see, Tax Law § 1141[c]).

The Administrative Law Judge determined that the seller received $150,000.00 for transferring her interest in the real property in which the business is located, which was worth $100,000.00, and that $50,000.00 should be attributed to the value of goodwill received by the purchaser and that petitioner’s obligation is limited to the $50,000.00 thus paid to the seller (see, 20 NYCRR 537.4[c]).

The Administrative Law Judge refers to the definition of goodwill as an intangible asset that attaches to a business due to such factors as location, reputation and managerial skill.

New York Tax Appeals Tribunal Decision

The Tribunal affirmed the determination of the Administrative Law Judge. The Tribunal found that the Administrative Law Judge correctly and completely addressed all of the issues raised by the parties.

So What?

If your company or client is involved in any purchase of assets of another business, you need to be aware that some states have "bulk sale notice" requirements (i.e., notice is required to be made to the state of such sale 15 days prior to the date of sale). Compliance with these requirements will protect your company or client. NOTE: Each state will have its own requirements.

On the flip side, several states have "bulk sale" exemptions which would exclude the sale from sales tax. Again, each state is different and may not have an exemption.

Please contact me at brian.strahle@bakertilly.com if your company or client needs assistance in determining its sales tax or bulk sale notification requirements related to any asset purchase. NOTE: This analysis needs to be done prior to the sale becoming final.

Illinois Provides Additional Info on Tax Amnesty Program!

Illinois has updated its website to provide some frequently asked questions (and answers) related to its new Tax Amnesty Program.

The program runs from October 1 to November 8, 2010.

See an earlier post for all of the details.

Tax Seminars: Are We Having Fun Yet?

Fun and taxes. Can taxes be fun? We all know death and taxes are often quoted in the same sentence. It doesn't mean being a tax professional has to be a dreaded exercise performed day after day, or does it? Some tax seminars make me think it does.

Therefore, today's post is a personal one in which I ask for your feedback and input (NOTE: I always want your feedback and input on my posts, but especially this one). I have a general comment that applies to all tax presentations (seminars, webinars, etc.) - Why do they have to be boring?

Why do we continue to follow the same format for all tax presentations? "Droning" on and on with code, regs, etc. Can't we find a more interesting way to communicate the rules, law changes, court cases, decision tools, method of analysis, etc.?

How about pictures? Diagrams? Something more interactive than just polling questions; perhaps through the use of social media?

It should be a discussion, not a lecture. It should be something other than what I could do if I just read a book myself. Granted, this is not an easy endeavor when dealing with tax law; but I think it is worth a shot, don't you?

What do you think? Am I crazy?

Do accountants and lawyers really like the way seminars are conducted and tax law is currently communicated? Am I expecting too much?

Please comment below or send me an e-mail at brian.strahle@bakertilly.com with your feedback.

Thank you.

Ohio Commercial Activities Tax (CAT): The "Bright-Line Presence Test"

As a follow-up to yesterday's post, I thought I would provide some background on the Ohio Commercial Activities Tax (CAT) for your convenience.

Background on Ohio CAT

Beginning with the tax period that commences July 1, 2005, a commercial activity tax (CAT) is levied on each person with taxable gross receipts for the privilege of doing business in Ohio. For this tax, "doing business" means engaging in any activity, whether legal or illegal, that is conducted for, or results in, gain, profit, or income, at any time during the calendar year. Persons on which the CAT is levied include, but are not limited to, persons with substantial nexus with Ohio. The CAT is not a transactional tax and is not subject to the federal Interstate Income Tax Law (P.L. 86-272). (Sec. 5751.02(A), Ohio R.C.)

A person has "substantial nexus" with Ohio if any of the following applies. The person (Sec. 5751.01(H), Ohio R.C.):

1. owns or uses a part or all of its capital in Ohio;
2. holds a certificate of compliance with the laws of Ohio authorizing the person to do business in Ohio;
3. has bright-line presence in Ohio; or
4. otherwise has nexus with Ohio to an extent that the person may be required to remit the CAT under the U.S. Constitution.

A person has "bright-line presence" in Ohio for a reporting period and for the remaining portion of the calendar year if any of the following applies. The person (Sec. 5751.01(I), Ohio R.C.):

1. has at any time during the calendar year property in Ohio with an aggregate value of at least $50,000;
2. has during the calendar year payroll in Ohio of at least $50,000;
3. has during the calendar year taxable gross receipts of at least $500,000;
4. has at any time during the calendar year within Ohio at least 25% of the person's total property, total payroll, or total gross receipts; or
5. is domiciled in Ohio as an individual or for corporate, commercial, or other business purposes.

For purposes of the property factor above, owned property is valued at original cost and rented property is valued at eight times the net annual rental charge.

For purposes of the payroll factor above, payroll in Ohio includes all of the following: (1) any amount subject to withholding by the person; (2) any other amount the person pays as compensation to an individual under the supervision or control of the person for work done in Ohio; and (3) any amount the person pays for services performed in Ohio on its behalf by another. (Sec. 5751.01(I)(2), Ohio R.C.)

CONCLUSION:

If a taxpayer meets the "bright-line presence" test, it has nexus in Ohio for the CAT tax (unless of course a taxpayer like L.L. Bean challenges the constitutionality of the test and wins).

Ohio and L.L. Bean: CAT and Nexus?

In a recent determination (No. 0000000198, 8/10/2010), the Ohio Tax Commissioner held that L.L. Bean's ("Bean") continuous, systematic, and significant solicitation and exploitation of the economic marketplace in Ohio is sufficient to satisfy the "substantial nexus" requirement of the Commerce Clause.

Bean continually sends thousands of catalogs to Ohio residents by mail, and engages in numerous other forms of advertising in Ohio in various media, including print and television.

The determination states, "the depth of Bean's success in penetrating the economic marketplace in Ohio is demonstrated by their level of gross receipts from Ohio sales of tangible personal property, which for the periods assessed (7/1/05 to 3/31/08) exceeded $100,000,000 in the aggregate." According to the Commissioner, this level of activity is "substantial."

Bean argues that its activity in Ohio does not reach the level of "substantial nexus" and therefore, Ohio's imposition of its Commercial Activities Tax (CAT) is not constitutional.

Bean also argues that the physical presence standard set in Quill Corp. v. North Dakota (1992), 504 U.S. 298 should apply to the commercial activity tax. The Ohio Commissioner rebuts that argument with the fact that the Ohio Supreme Court recently ruled that the CAT is not the functional equivalent of a sales tax (Ohio Grocers Ass'n v. Levin (2009)).

So What?

Bean is likely to appeal the Tax Commission's determination to the Ohio Board of Tax Appeals. If Bean does appeal, and eventually wins, many other companies in similar situations may be eligible for refunds.

This could be the battle for determining the constitutionality of "bright line presence" standards that impose taxes (regardless of tax type) on out of state companies that lack physical presence.

Stay tuned.