Minimum Documentation Requirements

A recent Virginia ruling (P.D. 11-112) reinforced the state's long-standing policy that the sale of prewritten software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to sales and use taxation.  The ruling also emphasizes the burden to prove that the software was delivered solely electronically and no tangible property was transferred rests upon the taxpayer. 

To fall within the exclusion from Virginia sales taxation, the taxpayer must meet minimum documentation requirements.  These minimum documentation requirements can be fulfilled in various ways, but the main position the documentation must support is that the software was solely delivered electronically.  The documentation cannot allow for other modes of delivery.

Samples of documentation that should support that the software was solely delivered electronically are:

1. Purchase requisition and/or Purchase Agreement
2. Terms and Conditions of Sale (must not allow for ground transportation or tangible property to be transferred)
3. E-mails
4. Affidavits (if necessary)

"Back-Up CD" = Tangible Personal Property

According to the Virginia Ruling, transfer of a CD of the software for "back-up" purposes still constituted a transfer of tangible personal property that made the sale taxable.

Virginia Based Companies

If you are a Virginia based company, you should review your purchase agreements, contracts and terms and conditions for your purchases of prewritten software to ensure they meet the requirements stated above.

Companies Based Outside Virginia

Even though the ruling discussed in this post is specific to Virginia, companies based outside Virginia should be aware that other states in many cases (other than purchases of prewritten software) put the burden on the taxpayer to rebut the presumption of taxability.  Therefore, each company should take the necessary steps to ensure all documentation related to a transaction supports the tax result the company is expecting or trying to achieve. 

Other states may not have the same requirements in regards to prewritten software, but they may have the same requirements regarding some other item.

Form over substance?  Substance over form?  Form AND substance? 

Minimum documentation requirements.

Ernst & Young, LLP / Richmond, VA: The Next Chapter

"The enemy of great, is good." 

I read that quote in a book somewhere, can't remember which one.  In any case, that quote was an inspiration or motivation for my family and I to decide to make a move across the country (from MN to VA) over the next couple of weeks (the weather was also a major motivator).

Our move is a result of accepting a position with Ernst &Young, LLP to lead the Richmond, Virginia office State and Local Tax practice.  This is my last week at Baker Tilly Virchow Krause, LLP. 

This was a very tough decision for my family and I, but we believe it will be a great move for us. 

I would like to publicly thank everyone at Baker Tilly Virchow Krause, LLP for making my time at the firm a fulfilling and successful one.  I wish everyone the best!

To those of you at Ernst & Young, LLP, I look forward to working with you.

To those of you who follow my blog, I want to thank you for your continued support and comments.  I will continue to publish this blog and work to build relationships with you and others across the country.  The blog will most likely change from a Minnesota "slant" to a Virginia "slant."  However, I will continue to write about major national state and local tax developments that affect a variety of industries and states.

I will publish my new contact information (e-mail and phone) once I have it (should be next week).

Again, thank you for your support and I look forward to the next chapter. 

May your next chapter be GREAT, not just good!

Accountant Humor: Does it Really Exist?

I came across this blog post on Verasage and thought you might find it a little funny. 

Check it out and let me know what you think!!

Practical Tips for Navigating the Sales Tax "Minefield" of "Cloud Computing"

If you are in business, then most likely, you are a buyer or seller of software/services that is considered "cloud computing."

If you are impacted by "cloud computing," you may be interested in learning what practical steps or strategy you can follow to help you navigate the sales tax "minefield" of "cloud computing." The following is a list of questions or items that you should take into consideration when buying or selling "cloud computing" services/software.

1. What state is the buyer located?
2. What state is the seller located?
3. What state is the server located? 
4. Does the seller have nexus in the state where the customer is located? Where the server is located?
5. Does the customer receive a copy or have access to the software? 
6. Who is "using" the software? (i.e., is the seller using the software to provide a service OR is the seller licensing software to the purchaser for the purchaser's use?) 
7. Pay careful attention to the language in the sales contract. This will help determine or control if the sale is a license of software or a service agreement. 
8. Be careful how the product/service is marketed. 
9. Are you selling/purchasing software or expertise? (i.e., what is the primary purpose or objective of the transaction?) 
10. Is it possible to source the transaction to a nontaxable jurisdiction? 
11. How is the service or software taxed in the states where the buyer, seller and server are located? 
12. Does it help or hurt to bundle the service and software pieces of the sale?

Most states still don't know how they are going to tax cloud computing.  But one thing is certain, they are going to definitely try.

Are You Happy with Your SALT Consultant?

Are you happy with your state and local tax (SALT) consultant? 

Do you like the firm?  What would you change if you could? 

Do they provide timely and responsive service? 

Do they deliver what you need and what they promise?

Do you like being served by a Big 4 firm, mid-sized firm or small firm? 

Does your SALT consultant act like a "sales person" or a "trusted advisor"?

Are they technically savvy, but not good at building a strong relationship with you (or vice versa)?

Whether your company is a small business, middle market business or Fortune 500 business, I am interested in learning if you are getting what you need from your external SALT consultant and/or firm.

Please leave a comment on this post.  Don't be afraid.

Thank you.

Do You Need A State Tax "Playbook"?

I was reading the article about Plaxico Burress in the Wall Street Journal this morning.  Plaxico just recently got of prison and is wanting to play football for just about any NFL team that will give him a chance.  In the article, he says, "just give me a playbook."

State Tax Playbook?

Well, as a business (small, mid-sized or Fortune 500 company) operating in the United States, do you sometimes say, I wish I had a "playbook" to figure out how to get in compliance or stay in compliance with state and local tax laws?  How about a playbook to prepare for audits, manage audits, and know when to appeal, etc.?  How about a playbook of applicable state and local tax planning ideas or credits and incentives?

No Uniformity Among States

Unfortunately, in the state and local tax world where there isn't much uniformity, it is difficult to create such a playbook.  Each state is slightly similar, yet extremely different in its taxing scheme.  The truth is, the diversity of each state's economy and demographics can shape and mold a state's taxing policy, leading to the lack of uniformity among each state. 

Most, if not all, states have encountered budget deficits over the past few years and have sought to plug the budget gaps in different ways, such as raising taxes, creating new credits and incentives, widening the tax base, and believe it or not, lowering taxes. 

Each Business is Unique

Now, on the business side, each business is different and obviously has different interests and desires when it comes to a state's taxing scheme or policy.  Hence, the desire of each business can create complexity and diversity in a state's taxing scheme. 

Both Sides of "Tax Fence"

Therefore, both sides of the "tax fence" (states and taxpayers) can take the blame for the difficulty in creating a uniform "playbook."  The Multistate Tax Commission and the Streamlined Sales Tax groups have tried to create uniformity.  Some uniformity has been obtained, but the ultimate goal appears to be out of reach.  The Federal government has also tried or atleast legislation has been proposed several times, but none of it has gained traction.

So What Can You Do?

Well, each business is different and each state is different, kind of like NFL teams.  Therefore, each business should create a "custom" playbook for their business or "team."  That playbook, like NFL playbooks, should contain multiple plays or strategies that can legally be used to comply and minimize state and local taxes at the same time.  Also, like NFL teams, the playbook would need to be continually updated and maintained. 

I am not talking about tax shelters or tax avoidance transactions.  I am talking about "run of the mill" compliance and taking advantage of all applicable credits and incentives.  I am also talking about taking advantage of appropriate planning ideas and positions that coincide with the company's business purpose and goals.

What is your "playbook"?  Do you have one? 

Colorado Enacts Tax Amnesty Program!

The Colorado Governor has signed legislation (SB 11-184) creating a Tax Amnesty Program to run from October 1, 2011 to November 15, 2011.

The Amnesty program applies to the following types of taxes for which a return was required to be filed before December 31, 2010:

1. Income taxes
2. Estate taxes
3. Inheritance taxes
4. Gift taxes
5. Sales and use taxes
6. Gasoline and special fuel taxes
7. Cigarette taxes
8. Taxes on tobacco products
9. Severance taxes imposed
10. Waste tire fees collected by the department
11. County or municipal sales taxes collected by the executive director
12. Local marketing and promotion taxes collected by the department pursuant
13. County lodging taxes collected by the department
14. County rental taxes collected by the department
15. Local improvement district sales taxes collected by the department
16. Regional transportation district sales and use taxes
17. Denver metropolitan scientific and cultural facilities district sales and use taxes
18. Denver metropolitan major league baseball stadium district sales and use taxes
19. Metropolitan football stadium district sales and use taxes
20. Regional transportation authority sales and use taxes collected by the department

For more information, go to COLORADO AMNESTY LEGISLATION.

Sales Tax: Repair Labor or Installation Labor? Why You Need to Know the Difference!

Do you know the difference between "installation labor" and "repair labor" for state sales and use tax purposes?  I know, I know, it depends on the state, right?

Well, let's just talk about one state for now.

Minnesota Rules - Repair Labor

According to Minnesota Revenue Notice #06-11, repair labor means labor to mend or restore an item that was broken, worn, damaged, defective, or malfunctioning, to working order or operating condition so that it can be used for its original purpose. Repair labor includes maintenance labor that sustains or supports safe, efficient, continuous operations; or to keep something in good working order by preventing decline, failure, lapse, or deterioration.

Repair labor is generally exempt from sales tax in Minnesota if the repair charges are separately stated from taxable repair parts or other taxable items on the bill to the customer.  A charge to replace a malfunctioning component part of an item with a comparable part is considered nontaxable repair labor.  However, when the new part is significantly different from the original component part, or is an upgrade, the replacement labor is considered taxable installation labor.

Minnesota Rules - Installation Labor

In Minnesota, installation labor is taxable.

Installation labor means labor to set an item into position or to connect, adjust or program it for use, or to add something new or different to an item. Installation labor is taxable whether provided by the seller of the item or by a third party, if the installation would be taxable if provided by the seller of the item. As stated earlier, installation labor includes replacement of a component part when the new part is an upgrade of the old part, or when the new part is significantly different from the original component part, regardless of whether the old part malfunctions or not. Installation labor does not include the removal or replacement of a defective part. Installation labor does not include labor resulting in an alteration, repair or improvement to real property.

Repair Service with Transfer of Insignificant Property

According to Minnesota Statutes 8130.0200.4, a transaction involving performance of a nontaxable repair service, and incident thereto, a transfer of tangible personal property to the purchaser is not considered a sale for sales and use tax purposes if the value of the property transferred is insignificant as compared to the total consideration; and no separate charge is made for such property.

In such cases, the repairman is regarded as rendering a nontaxable service. However, if a separate charge is made for the property transferred, a sale within the meaning of the Sales and Use Tax Law is deemed to have occurred.

Example. A jeweler uses a spring costing him 25 cents to repair a watch. He bills the customer $6 for repair services. Since the cost of the spring is insignificant in relation to the charge for repair services, no sale of the spring is considered to have been made.

The jeweler is required to pay a use tax on the spring if he did not pay a sales tax at the time of purchase. However, if the jeweler bills separately for the spring, he must collect a sales tax from the customer.

So What?

Transactions that involve repair labor and repair parts could easily be mistreated for sales and use tax purposes.  Your repair labor may be considered installation labor or vice versa.  Therefore, if you are involved in any of these types of transactions, I would recommend reviewing your facts (contracts, invoices, etc.) and current tax treatment to see if it is accurate or if any changes should be made.  If you act now to determine your position, you may be better able to defend it when the auditor arrives.

Questions to Consider

Are you repairing real property or tangible personal property?

Are you charging your customers a lump-sum for your repair services (labor and parts)?

Are you separately stating your charges for labor and parts on your invoices? 

Is the part you are installing an upgrade or different part? 

Is the cost of the part you are installing "insignificant" when compared to the total charge to your customer?

Are you replacing a part that is malfunctioning or is the old part simply consumed in the production process and needs replaced on a regular basis? 

Are your repairing property or simply installing new parts?

Is your labor, repair labor or installation labor?