It’s All Fun and Games Until Somebody Goes to Jail

October 4th, 2012 by Andy Johnson

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The Tampa Bay Times just published an article about a restaurant owner in Florida. arrested and charged with a felony for failing to pay sales taxes that he had collected last year. He faces up to 30 years in prison.

We usually don’t talk about felonies and sales tax in the same sentence and we certainly don’t like to bring up the “J” word. Most of the time all you have to worry about when it comes to sales and use tax is whether and how much the penalty and interest will be on audit. And that’s no small worry, because penalty and interest assessed can be astronomical. But when it comes to sales tax collected and not remitted, then you have to also consider criminal penalties as well. In most states, failure to pay in sales tax that was collected potentially could be a felony.

This situation in Florida is only the latest to receive lots of publicity. State tax regulators seem to be targeting convenience store operators and restaurant owners and if they can generate a lot of publicity, then maybe they can scare a lot of others straight.

As we’ve written before, it’s not only state tax auditors looking to find money, it’s contingent fee lawyers as well. Just google the terms “sales tax felony” and you will likely see the ads for attorneys trolling for disgruntled employees to rat out their former employers. If they can find them, the attorneys can file lawsuits under the False Claims Act and try to score a 30 percent contingency fee.

So what are the criminal penalties in your state for failing to remit tax collected? Or  failing to file a return and for “evading” the tax? Well, we have a chart for that. Simply fill out the short form to download your chart.

Pennsylvania Remote Seller Nexus

September 13th, 2012 by Michael Fleming

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The Pennsylvania Department of Revenue (PA DOR) is reminding remote sellers that they should have registered as of September 1, 2012, if they have nexus as outlined in the PA DOR Sales and Use Tax Bulletin 2011-01. One of the nexus creating activities mentioned is commonly referred to as “click-through nexus.” Rather than pass a new “Amazon Law” as some of the other states have done, Pennsylvania opted to issue a bulletin outlining what the Tax Reform Code of 1971 (TRC) defines as “maintaining a place of business in this Commonwealth.” The DOR went on to give seven examples of what it considers are nexus creating activities under the TRC.

The seven examples in the bulletin cast a wide net on a number of activities in addition to click-through relationships. We have listed the seven examples below and suggest strongly that you review your activities in light of these examples. For those of you who drop ship into Pennsylvania from an in-state location, we suggest you look at example six. It looks as though the state is asserting that using a dropshipper located in Pennsylvania is a nexus-creating activity. While we believe the state is pushing the envelope of physical presence on a number of issues, until someone challenges them in court, you need to be aware of your exposure. As they have just reminded everyone of the September first deadline, it stands to reason that they will be stepping up enforcement. For more information you may contact Mike fleming at 972-277-4820 or mfleming@peisnerjohnson.com.

1. A remote seller storing its property or the property of a representative at a distribution or fulfillment center located within the Commonwealth, regardless if the center also stores property of third parties that is distributed from the same location.
2. A remote seller who has a contractual relationship with an entity or individual physically located in Pennsylvania whose website has a link that encourages purchasers to place orders with the remote sellers. The in-state entity or individual receives consideration for the contractual relationship with the remote seller.
3. A remote seller utilizing affiliates, agents and/or independent contractors located in Pennsylvania who will provide repair, delivery or other service relating to tangible personal property sold by the remote seller to Pennsylvania customers.
4. A remote seller’s affiliates, agents and/or independent contractors provide service(s) within the Commonwealth (including, but not limited to storage, delivery, marketing or soliciting sales) that benefit, support and/or complement the remote seller’s business activity.
5. A remote seller’s employee(s) regularly travel(s) to Pennsylvania for any purpose related to the remote seller’s business activity.
6. A remote seller who accepts orders that are directly shipped to Pennsylvania customers from a Pennsylvania facility which is operated by a remote seller’s affiliate, agent or independent contractor.
7. A remote seller who regularly solicits orders from Pennsylvania customers via the website of an entity or individual physically located in Pennsylvania, such as via click-through technology.

Pennsylvania Remote Seller Nexus

September 13th, 2012 by Michael Fleming

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The Pennsylvania Department of Revenue (PA DOR) is reminding remote sellers that they should have registered as of September 1, 2012, if they have nexus as outlined in the PA DOR Sales and Use Tax Bulletin 2011-01. One of the nexus creating activities mentioned is commonly referred to as “click-through nexus.” Rather than pass a new “Amazon Law” as some of the other states have done, Pennsylvania opted to issue a bulletin outlining what the Tax Reform Code of 1971 (TRC) defines as “maintaining a place of business in this Commonwealth.” The DOR went on to give seven examples of what it considers are nexus creating activities under the TRC.

The seven examples in the bulletin cast a wide net on a number of activities in addition to click-through relationships. We have listed the seven examples below and suggest strongly that you review your activities in light of these examples. For those of you who drop ship into Pennsylvania from an in-state location, we suggest you look at example six. It looks as though the state is asserting that using a dropshipper located in Pennsylvania is a nexus-creating activity. While we believe the state is pushing the envelope of physical presence on a number of issues, until someone challenges them in court, you need to be aware of your exposure. As they have just reminded everyone of the September first deadline, it stands to reason that they will be stepping up enforcement. For more information you may contact Mike fleming at 972-277-4820 or mfleming@peisnerjohnson.com.

1. A remote seller storing its property or the property of a representative at a distribution or fulfillment center located within the Commonwealth, regardless if the center also stores property of third parties that is distributed from the same location.
2. A remote seller who has a contractual relationship with an entity or individual physically located in Pennsylvania whose website has a link that encourages purchasers to place orders with the remote sellers. The in-state entity or individual receives consideration for the contractual relationship with the remote seller.
3. A remote seller utilizing affiliates, agents and/or independent contractors located in Pennsylvania who will provide repair, delivery or other service relating to tangible personal property sold by the remote seller to Pennsylvania customers.
4. A remote seller’s affiliates, agents and/or independent contractors provide service(s) within the Commonwealth (including, but not limited to storage, delivery, marketing or soliciting sales) that benefit, support and/or complement the remote seller’s business activity.
5. A remote seller’s employee(s) regularly travel(s) to Pennsylvania for any purpose related to the remote seller’s business activity.
6. A remote seller who accepts orders that are directly shipped to Pennsylvania customers from a Pennsylvania facility which is operated by a remote seller’s affiliate, agent or independent contractor.
7. A remote seller who regularly solicits orders from Pennsylvania customers via the website of an entity or individual physically located in Pennsylvania, such as via click-through technology.

California “Click Through” Nexus

September 10th, 2012 by Michael Fleming

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By Michael J. Fleming

The California Affiliate Nexus statute will take effect on Saturday September 15, 2012. This statute was originally signed into law on July 1, 2011, however after a very short period it was postponed by AB 155 for just short of a year. The year is up, and internet retailers are scrambling to become compliant.

The statute affects internet retailers who have agreements with people in the state who have links steering people to the retailers for a fee and who meet two revenue thresholds. The first threshold is that all sales under “click through” arrangements must exceed $10,000. The second threshold is that the retailer’s total sales into the state must exceed $1,000,000. The second threshold has been increased since the original effective date from $500,000 to $1,000,000. This increased threshold is allowing many smaller retailers to forgo having to register and collect the use tax. These thresholds should be examined closely prior to assuming you have to register. The actual text relating to “click through” nexus is below. If you have any questions you may contact Mike Fleming at 972-277-4820 or mfleming@peisnerjohnon.com.

Regulation 1684. Collection of Use Tax by Retailers.

(3) A retailer is engaged in business in this state as defined in section 6203 of the Revenue and Taxation Code if the retailer enters into an agreement or agreements under which a person or persons in this state, for a consideration that is based upon completed sales of tangible personal property, whether referred to as a commission, fee for advertising services, or otherwise, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet website, or otherwise, provided that:

(A) The total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described above, in the preceding 12 months, is in excess of ten thousand dollars ($10,000); and

(B) The retailer, within the preceding 12 months, has total cumulative sales of tangible personal property to purchasers in California in excess of one million dollars ($1,000,000).

The determination as to whether a retailer has made the requisite amount of sales to purchasers in California during the preceding 12-month period shall be made at the end of each calendar quarter. A retailer is not engaged in business in this state pursuant to this paragraph if the total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described above, in the preceding 12 months, is not in excess of ten thousand dollars ($10,000), or if the retailer’s total cumulative sales of tangible personal property to purchasers in California were not in excess of one million dollars ($1,000,000) in the preceding 12 months.

Construction Contractors Subject to Tax on TPP

September 7th, 2012 by Ashley Blyth

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Based on a CCH survey of state tax departments, 41 states and the District of Columbia impose sales tax on purchases of tangible personal property (TPP) that are incorporated into realty. Three states responded to the survey with additional explanation — California, Nebraska, and Texas. As we pointed out in this article, Are Use Tax Amnesties Useful?, contractors are more prone for state audits because these rules are so complicated, and these survey results support that. This chart is helpful, but there are a few puzzling responses. Let’s check out a few states and see what the survey said.

California’s response to the CCH survey was brief, but still points to the complex nature of contracting rules. “Construction contractors owe tax either as the consumer or seller, depending on the facts.” The survey response gave no other details, but that’s because they’d need several pages to do so. A detailed review of the California regulations is needed to address contractor use tax issues in California.

Texas’ response was a lengthy explanation:

“Construction contractors under lump-sum contracts that do new construction or who do residential real property improvements are consumers. Construction contractors who do new construction and separate the charges for material and labor are retailers and purchase material for resale but must collect tax on the charge for material. Construction contractors that remodel or repair nonresidential real property under either lump-sum or separated contracts are retailers performing taxable services and purchase materials for resale.”

Does that clear it up for you in Texas? If you’re a contractor doing business in Texas, you know that complying with the labyrinth of rules and policies is daunting to say the least.

Nebraska offered the most vague response, “Yes, based on the option selected.” Hmmm…

Four states responded that they do not subject construction contractors to tax on purchases of TPP that are incorporated into the realty of their customers.

We Have a Chart for That

We have prepared a chart of the survey results for your reference. Your situation may very likely involve some particular facts and circumstances that would yield a different result. This chart is a good starting point, but should not be your only research source. Request the chart!

Are Use Tax Amnesties Useful?

September 7th, 2012 by Michael Fleming

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By Michael J. Fleming

State tax amnesties usually fall into two overall categories — general and specific. A general amnesty usually covers all or most of the taxes that an authority administers. These amnesties are usually widely anticipated and well received by a wide audience. A specific amnesty is one that is targeted to a particular tax or taxes. For example, use tax has been a target of specific amnesties lately. Ohio is currently running a use tax amnesty, and Maine will begin offering one soon.

Are use tax-specific amnesties useful and beneficial? In general, we usually prefer voluntary disclosure agreements (VDAs) over all amnesties as we have detailed in previous articles, most notably, “You Missed the Tax Amnesty Express: Don’t Worry. You are probably better off with a VDA anyway!” However, as we point out in the aforementioned article, each state amnesty is different and as such should be reviewed and judged on its own merits. We have done so, but prior to discussing the details of each amnesty; let’s explore the concept of use tax and why compliance is increasingly important in today’s environment.

Sales Tax Vs. Use Tax

In general, the collection of either tax or an exemption certificate is required on every transaction involving a taxable service or transfer of tangible personal property (TPP). When the “ship to” and “ship from” locations are located within the same state, the tax is called a sales tax. The sales tax or exemption certificate is collected from the purchaser by the seller. And although the seller is tasked with the collection of the sales tax, it is usually the purchaser’s ultimate responsibility to pay the tax. When the “ship to” and “ship from” locations are in different states, a tax is still due. However, instead of it being called a sales tax it is called a use tax. By virtue of the interstate commerce clause of the US Constitution, states have been prohibited in the past from taxing interstate sales. To get around that prohibition, state’s enacted a complementary use tax statute to tax items brought into a state and “used” in the state. No tax could be charged by the origin state, but tax could be charged by the destination state. Please note: Remember, this paragraph started with the words “in general” because there are variations in definitions in various states.

Consumers Use Vs. Seller’s Use

Just because a use tax is due, doesn’t mean that the seller if off the hook collection-wise. It depends on nexus. In general, if the seller has nexus with the “ship to” state, then the seller is required to be registered and collect the tax or an exemption certificate from the purchaser. Again, it is important to note that even though the seller is tasked with the collection of the sales tax it is usually the purchaser’s ultimate responsibility to pay the tax. In this scenario, it is not uncommon that the tax is referred to as a seller’s use tax. Two alternative names for this transaction tax are vendor’s use tax and retailer’s use tax.

If the seller does not have nexus and is therefore not required to collect tax, or fails to collect tax for any reason at all, then the purchaser must self-assess, accrue, and remit the use tax. As previously noted, sales and use taxes are always the ultimate responsibility of the purchaser. In this instance, the tax is called a consumer’s use tax.

Consumer’s Use

Most states have some sort of language such as Ohio’s  that states  “Consumer’s use tax must be paid on all taxable purchases of tangible personal property or services used, stored or otherwise consumed in Ohio unless Ohio sales tax has been paid to a vendor or the tax has been properly paid to another state.”  Some common instances where sellers often do not collect tax and consumer’s use comes into play include: purchases completed over the internet, through a catalog, or on the telephone. These transactions are fairly straightforward and most taxpayers realize the need to put processes and systems in place to self-assess and accrue the correct amounts in these situations.  Some transactions are not as straightforward and require additional scrutiny:

• The withdrawal of taxable merchandise from your business’ resale inventory for your personal or business use;
• The provision of promotional materials or catalogs to clients or prospects at no charge;
• The purchase or delivery of a product out of state which is subsequently bought into the state for use, storage, or consumption;
• The provision of free products or services. Some examples could be a restaurant providing a free meal or a hotel giving away stationery; and
• The interstate movement of company equipment, supplies, or other assets to be used in a state on a temporary or permanent basis.

The above examples are not meant to be an exhaustive list and may or may not apply to your particular fact pattern. They are meant to show the complexities involved in figuring out your use tax exposure. To make matters more interesting, a handful of states have different rates for use tax, which make compliance even harder and makes use tax a prime target for state auditors.

Sales and Use Tax Audits

Most people agree that the states have increased the frequency of their audits, and many would agree with our findings that the states are becoming increasingly aggressive in their tactics and the positions they are taking. This is especially true when it comes to use tax. Almost all of the audit assessments we are seeing have a use tax component. Auditors have been scouring purchase invoices looking for instances of no tax paid. Fixed assets, expenses, and services have all proven to be ripe targets. The state of Ohio agrees — their audit statistics show that 96 percent of purchase audits result in taxpayers owing tax.[i]

One area that is especially ripe for auditors is manufacturers who purchase items tax-free that do not fit the state’s definition being used in the manufacturing process. Companies that can be classified as contractors are also ripe for the auditors because many states have complex contracting rules. A third area ripe for audits is those companies that don’t have adequate systems or processes in place to identify where they need to self-assess and correctly accrue. We can go on and on with examples, but I think you get the point. Use tax should be a priority.

Use Tax Exposure Mitigation Options

When most taxpayers realize they have some exposure, they immediately want to become compliant and make things right. They may get registered, file a return, or make a large increase to what they are already filing. Beware though — these may be exactly the wrong steps to take. The first thing to do is see what your past exposure is. Part of this process includes figuring out what is taxable and at what rate. Once you know that, figure out your exposure in terms of dollars. If it’s large enough, you will want to take advantage of an amnesty or VDA program.

Currently Available Amnesty Programs

Maine Use Tax Compliance Program – Maine will be offering a use tax amnesty beginning October, 1 2012, and running through November 30, 2012. This amnesty does not cover any periods after January 1, 2012, or any amounts already reported or accessed. The program allows for the waiver of penalty and interest. The amnesty also allows for a “modified” limited look back. You have to accurately report all your taxable unreported purchases for the six-year period between 2006 and 2011, but you only pay the tax for the three highest years. Some taxpayers will have the possibility of entering into a six-month repayment agreement with the state. [ii]

So should you take advantage of the Maine Use Tax Compliance Program? The answer is: It depends on your circumstances. The biggest question to answer is, do you owe any taxes other than the consumers use tax? If so, then the VDA is likely a better option for you. The VDA covers a wide variety of taxes, has a three-year look-back, and allows for the waiver of penalty. Interest must be paid.

If all you owe is the consumers use tax, then you will want to next examine where your greatest exposure lies. If it is after 2011 or prior to 2009, then you will probably want to again look at the VDA. However, in most circumstances other than those mentioned, the Maine Use Tax Compliance Program is an amnesty worth its SALT and definitely should be considered.

Ohio Consumer Use Tax Amnesty Program – The state of Ohio began offering its current Consumer Use Tax Amnesty Program on October 1, 2011, and will continue running it through May, 1 2013. This amnesty may not be available to you if you have a prior use tax assessment or have submitted a prior amnesty application; however, the VDA program may still be open to you. The program allows for the waiver of penalty and interest for anyone not registered or registered after June 1 2011. For those taxpayers registered prior to June 1, 2011, only the penalty is waived. The amnesty also allows for a limited look back by waiving all consumers use tax liability prior to January 1, 2009, that has not already been assessed. There is also the possibility of entering into an interest free repayment agreement of up to seven years with the state. There are restrictions on who is eligible and the ultimate length of the plan will be determined based upon the amount owed.[iii]

So should you take advantage of the Ohio Consumer Use Tax Amnesty Program? The answer is it depends on your circumstances. The biggest question you should answer is, do you owe any taxes other than the consumers use tax? If so, then the VDA is probably a better option for you. The VDA covers a wide variety of taxes, has a three-year look back, and allows for the waiver of penalty. Interest must be paid.

If all you owe is the consumers use tax, then your options are limited. If you qualify for the amnesty, you are not eligible to participate in a VDA. If you do not qualify for the amnesty, then you may still qualify for the VDA. We believe except for the situations previously mentioned that the Ohio Consumer Use Tax Amnesty Program is an amnesty worth its SALT and should be considered.

Rhode Island General Amnesty – We have previously written about the Rhode Island General Amnesty in an article entitled, “Rhode Island Red: Should You Cross the Road for this Tax Amnesty Program?” In this article, we explain the limited reasons for when we would use this amnesty, and conclude  that the VDA may be preferable.

Streamlined Sales Tax Project Amnesty – We have written about the Streamlined Sales Tax Project (SSTP) amnesty in a number of previous articles including, “Are You For or Against Amnesty?” In these articles we tout its great benefits as well as its drawbacks. One drawback being that this is a very specific amnesty that covers sales and sellers use tax only, which means this option is not available for consumers use tax.

Voluntary Disclosure Agreements – Voluntary disclosure agreements, or as they are sometimes called “ongoing amnesties,” are a great option to mitigate exposure for many taxes. Most states, with the exception of New Mexico, offer these programs. (New Mexico instead offers a managed audit program which is similar to a VDA.) The majority of states offer a limited look back of three or four years, but one notable exception is Hawaii, which has a 10-year look-back. Virtually all the states waive penalty, but only a handful waive some or all of the interest, including Oklahoma and Texas.

One of the biggest drawbacks of a VDA is that most states will not allow you to participate in their VDA program once they have identified you. The VDA programs are offered in order to convince non-compliant taxpayers to step forward so the states don’t have to expend resources to find them. Once the state knows who you are, there is usually little reason to offer you a VDA.

Conclusion

Use tax is a complex issue that many companies are often not aware of or misunderstand. Many other companies fail to grasp the importance of having adequate systems and processes in place to correctly identify, self-assess and accrue the correct amounts of use tax. The states know this and have stepped up their enforcement efforts. Where do you stand? We suggest that all companies review their systems and procedures from time to time. The worst time to find out you have exposure is during an audit. If you find yourself with some use tax exposure, it is best you approach the state before the state approaches you. Maine and Ohio both have excellent amnesty programs to help you become compliant while minimizing your exposure. In all the other states, a VDA may be your best option. If you are unsure of your position, need to minimize your exposure, or implement or upgrade procedures in order to stay compliant, don’t be afraid to ask for help. You are not alone.

Peisner Johnson & Company, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax problems. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories, and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we limit our practice to state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services, or would like to learn how we may be able to help, you may email Michael Fleming or call him at 972-277-4820.

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[i] Ohio Department of Taxation – Use Tax Explanation PDF
[ii] Maine Revenue Services – Sales, Fuel & Special Tax Division General Bulletin No 102 August 16, 2012
[iii] Ohio Department of Taxation – Website

Rhode Island Red: Should You Cross the Road for this Tax Amnesty Program?

August 20th, 2012 by Michael Fleming

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By Michael J. Fleming

On June 15, 2012 Rhode Island Governor Lincoln Chafee signed the 2013 budget bill into law.[i] Included in this bill were provisions for a Tax Amnesty Program. The 75-day program will begin on September 2, 2012, and run through November 15, 2012. During this time it appears the program will be open to all taxpayers who are delinquent on any state taxes. Upon acceptance into the Amnesty Program the Tax Administrator will generally waive all related penalties and reduce the applicable interest by 25 percent. The taxes and the balance of the interest must be paid. In addition there appears that there is a payment plan available for reasons of financial hardship. [ii] The Rhode Island Division of Taxation currently has the following statement on their website, “Details Coming Soon.”

So is the Rhode Island Amnesty one you should cross the road for? The answer, as is so often the case when it comes to state tax is: It depends! It depends on your particular set of circumstances and it depends on the details, once the program is more fully explained. For example, one of the main details we do not currently know is how far back they plan to go. If the program requires you to go back more than 3 years, it may be a bad deal. We’ll discuss this in more detail below, but there are other reasons why this amnesty may not be the best option for you.

In general we prefer voluntary disclosure agreements (VDAs) over amnesties as we detail in two of our previous articles; You Missed the Tax Amnesty Express: Don’t Worry. You are probably better off with a VDA anyway! and Texas Tax Amnesty: Is Fresh Start the Best Start? Let’s take a quick look at Rhode Island’s VDA program and then cover the five situations we believe it would be best to cross the road.

Rhode Island Voluntary Disclosure Program

The Positives

The VDA program covers just about all taxes administered by the Rhode Island Division of Taxation and has some great features and benefits. One of the greatest features of the program is the anonymity it provides for during the application process. The process is usually started by the taxpayer’s representative writing a letter on an anonymous basis with some basic information and the reason for the request. The state will then respond with a letter outlining its position and the conditions for the program. Once the taxpayer knows the state’s position they can decide whether or not to disclose who they are.

Another benefit of the VDA is the limited look back period. When a taxpayer who is required to be registered and file returns has not, there is usually no statute of limitations. In theory, a state can go back to the date the taxpayer started to do business in the state. In reality, most states go back seven to 10 years. For sales tax, Rhode Island can make assessments covering six years.[iii] This is double the Rhode Island VDA look back period of three years.

Some additional benefits include the waiver of penalties, a declination by the state to file criminal charges and the ability to submit spreadsheets rather than back returns on some taxes. Spreadsheets are usually easier and cheaper to prepare than back returns.

The Negatives 

The biggest negative of a VDA program are the limiting factors of acceptance. Each state has different factors. Rhode Island has five limiting factors that may either exclude you from the program altogether or at the very least could exclude you from the limited look back provision. They are:

• Previous contact with the division of taxation;
• Having been registered for the tax in question;
• Headquartered, organized, or incorporated in Rhode Island;
• Registration with the Rhode Island Secretary of State; or
• Collecting but not remitting tax.

While these five limiting factors are considered in any application, they do not automatically exclude you from eligibility. Contact someone with experience in these matters so they can guide you through the process.

Five Reasons to Choose the Rhode Island Tax Amnesty over the VDA

1. The biggest reason we see to choose the amnesty is if the VDA is not available. If you will not be accepted into the VDA, and you have significant exposure, then you should consider taking advantage of the amnesty.
2. If you have been doing business for three years or less then you may want to take advantage of the amnesty for the 25 percent interest reduction as well as the simplified process.
3. Under certain circumstances, you may be eligible for all the benefits of the VDA program, except the limited look back period. In those types of situations you would probably want to take advantage of the amnesty for the 25 percent interest reduction as well as the simplified process.
4. If you require a payment agreement due to financial hardship, than you may want to pursue the amnesty over the VDA.
5. If, when they announce the details of the amnesty, there is a limited look back period equal to, or less than the 3 year look back offered under the VDA, then you will probably want to take advantage of the amnesty for the 25 percent interest reduction, as well as the simplified process. No interest reduction is offered with the VDA program.

Conclusion

If you currently owe back taxes, now is the perfect time to step forward and become compliant. In general, states usually step up enforcement activities after an amnesty ends. If you are contacted prior to stepping forward, you will end up owing all the tax, penalty, and interest. Either the VDA or the amnesty are a better option. As we mentioned earlier, we generally prefer VDAs over amnesties. We see no reason to change our position with Rhode Island unless they announce a limited look back when they release the details of the program. At this point we believe that to be unlikely. However, your particular circumstances may necessitate you to cross the road.

Peisner Johnson & Company, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax problems. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories, and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we limit our practice to state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services or would like to learn how we may be able to help, you may email Michael Fleming or call him at 972-277-4820.

New Chart: Sales Tax on Grocery Foods

Thirty-one states and the District of Columbia exempt grocery foods from sales tax. Three states specify that foods purchased for consumption “at home” are exempt -- Louisiana, Maine, and Wyoming. Maryland and Ohio specify that food purchased for “off-site” consumption is exempt from sales tax. Rhode Island, which recently announced an upcoming sales tax amnesty program and subject of Mike Fleming’s article, Rhode Island Red: Should You Cross the Road for this Amnesty?, does not tax the sale of any grocery foods.

Several states that tax grocery foods do so at a reduced rate, such as Arkansas, Illinois, Missouri, Tennessee, and Virginia. West Virginia had an additional reduction since June 30, 2012, and a conditional termination on the tax on July 1, 2013.

We Have a Chart for That 

We have developed a helpful chart that highlights the states’ treatment of sales on grocery foods for your reference. Your situation may very likely involve some particular facts and circumstances that would yield a different result. This chart is a good starting point, but should not be your only research source. Request the chart!

Rhode Island Red:
Should You Cross the Road for this Tax Amnesty Program?

By Michael J. Fleming

On June 15, 2012 Rhode Island Governor Lincoln Chafee signed the 2013 budget bill into law.[i] Included in this bill were provisions for a Tax Amnesty Program. The 75-day program will begin on September 2, 2012, and run through November 15, 2012. During this time it appears the program will be open to all taxpayers who are delinquent on any state taxes. Upon acceptance into the Amnesty Program the Tax Administrator will generally waive all related penalties and reduce the applicable interest by 25 percent. The taxes and the balance of the interest must be paid. In addition there appears that there is a payment plan available for reasons of financial hardship. [ii] The Rhode Island Division of Taxation currently has the following statement on their website, “Details Coming Soon.”

So is the Rhode Island Amnesty one you should cross the road for? The answer, as is so often the case when it comes to state tax is: It depends! It depends on your particular set of circumstances and it depends on the details, once the program is more fully explained. For example, one of the main details we do not currently know is how far back they plan to go. If the program requires you to go back more than 3 years, it may be a bad deal. We’ll discuss this in more detail below, but there are other reasons why this amnesty may not be the best option for you.

In general we prefer voluntary disclosure agreements (VDAs) over amnesties as we detail in two of our previous articles; You Missed the Tax Amnesty Express: Don’t Worry. You are probably better off with a VDA anyway! and Texas Tax Amnesty: Is Fresh Start the Best Start? Let’s take a quick look at Rhode Island’s VDA program and then cover the five situations we believe it would be best to cross the road.

Rhode Island Voluntary Disclosure Program

The Positives

The VDA program covers just about all taxes administered by the Rhode Island Division of Taxation and has some great features and benefits. One of the greatest features of the program is the anonymity it provides for during the application process. The process is usually started by the taxpayer’s representative writing a letter on an anonymous basis with some basic information and the reason for the request. The state will then respond with a letter outlining its position and the conditions for the program. Once the taxpayer knows the state’s position they can decide whether or not to disclose who they are.

Another benefit of the VDA is the limited look back period. When a taxpayer who is required to be registered and file returns has not, there is usually no statute of limitations. In theory, a state can go back to the date the taxpayer started to do business in the state. In reality, most states go back seven to 10 years. For sales tax, Rhode Island can make assessments covering six years.[iii] This is double the Rhode Island VDA look back period of three years.

Some additional benefits include the waiver of penalties, a declination by the state to file criminal charges and the ability to submit spreadsheets rather than back returns on some taxes. Spreadsheets are usually easier and cheaper to prepare than back returns.

The Negatives

The biggest negative of a VDA program are the limiting factors of acceptance. Each state has different factors. Rhode Island has five limiting factors that may either exclude you from the program altogether or at the very least could exclude you from the limited look back provision. They are:

• Previous contact with the division of taxation;
• Having been registered for the tax in question;
• Headquartered, organized, or incorporated in Rhode Island;
• Registration with the Rhode Island Secretary of State; or
• Collecting but not remitting tax.

While these five limiting factors are considered in any application, they do not automatically exclude you from eligibility. Contact someone with experience in these matters so they can guide you through the process.

Five Reasons to Choose the Rhode Island Tax Amnesty over the VDA

1. The biggest reason we see to choose the amnesty is if the VDA is not available. If you will not be accepted into the VDA, and you have significant exposure, then you should consider taking advantage of the amnesty.
2. If you have been doing business for three years or less then you may want to take advantage of the amnesty for the 25 percent interest reduction as well as the simplified process.
3. Under certain circumstances, you may be eligible for all the benefits of the VDA program, except the limited look back period. In those types of situations you would probably want to take advantage of the amnesty for the 25 percent interest reduction as well as the simplified process.
4. If you require a payment agreement due to financial hardship, than you may want to pursue the amnesty over the VDA.
5. If, when they announce the details of the amnesty, there is a limited look back period equal to, or less than the 3 year look back offered under the VDA, then you will probably want to take advantage of the amnesty for the 25 percent interest reduction, as well as the simplified process. No interest reduction is offered with the VDA program.

Conclusion

If you currently owe back taxes, now is the perfect time to step forward and become compliant. In general, states usually step up enforcement activities after an amnesty ends. If you are contacted prior to stepping forward, you will end up owing all the tax, penalty, and interest. Either the VDA or the amnesty are a better option. As we mentioned earlier, we generally prefer VDAs over amnesties. We see no reason to change our position with Rhode Island unless they announce a limited look back when they release the details of the program. At this point we believe that to be unlikely. However, your particular circumstances may necessitate you to cross the road.

Peisner Johnson & Company, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax problems. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories, and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we limit our practice to state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services or would like to learn how we may be able to help, you may email Michael Fleming or call him at 972-277-4820.

[i] Rhode Island General Assembly Press Releases 6/15/2012
[ii] Summary of Legislative Changes RI Division of Taxation 6/18/2012
[iii] Regulation SU 87-115

Top Ten Nexus Survival Tips

By Michael J. Fleming

1.  Do not underestimate nexus – Not knowing about nexus can have a devastating effect on you and your company. If a state determines you have nexus there is generally not a statute of limitations on how far back they can audit you. In theory, the state can go back to the date you started to do business in the state, although in reality, they usually stay in the seven to 10 year range. But seven to 10 years is still a long time.  Then, not only can you end up paying back taxes but they tack on penalty and interest as well. The dollars can start to add up quickly, especially if the states share information. In some extreme cases criminal penalties may also apply.
2. Educate yourself - Learn about nexus and see how it applies to your company’s operations. Stay abreast of nexus changes as well as changes in your business. There are a number of resources that are available but free webinars are a good place to start. There are also a handful of firms that can help.
3.  Do not assume you are OK – Just because you have not been contacted by a state yet doesn’t mean you are OK.  You may be OK or it may mean that the state just hasn’t found you yet. Some common ways states find you are through audits of your vendors or customers, disgruntled employees reporting you or your competitors turning you in. There are many other ways, but these are three of the big ones.
4. Do not assume that your current CPAs fully understand nexus – CPAs are usually very good at what they do. The problem is that many of them don’t focus on state and local taxes and some of those that do only focus on a handful of states. You may be surprised to learn that their knowledge of multi-state nexus issues is no better than yours. Question your CPA about how much of this type of work do they do. How do they stay on top of the evolving issues in each of the states? You may have a great nexus resource in your CPA -- then again you may not.
5. Do not assume that your employees are keeping you compliant – Ask your employees how they stay abreast of nexus changes. Do they monitor operations and see how changes in the way you do business impacts nexus? How do they educate themselves? Who do they go to for answers or clarifications? Are you giving them the tools that they need?  If you have doubts, consider doing a nexus consultation and analysis; it can be done internally or by a third party.
6. Do not assume that your competitors are approaching nexus correctly – This is a perfect example of something my father told me over and over, “Just because everyone else is doing it doesn’t make it right.” How true this is. Maybe your competitor has it right, but maybe not. Maybe they just haven’t been discovered yet. This may become a case of the blind leading the blind. How do you know that your competitors are not following you? Where are your competitors getting their information? Perhaps the best question to ask is, if the state finds you, will your competitor pay the money you owe? I would say no, therefore, educate yourself.
7. Do not stick your head in the sand – If you have nexus do not wait for the state to find you. The longer you wait, the greater your liabilities grow as there is no statute of limitations. The second reason is that there is a program called a Voluntary Disclosure Agreement (VDA) that states offer to entice you to come forward. The VDA program usually limits the period a state will look back to three to four years as well as waiving penalties and/or all or part of the interest. The drawback is that if the state finds you before you come forward, then you are usually not eligible to participate in the program. 
8. Do not answer a nexus questionnaire without fully understanding your exposure – When a state becomes aware of you, they will usually send out a questionnaire about your activities in the state. Before you answer the questionnaire you should not only understand what your exposure is but what options are available. Once you return that questionnaire, your options may be limited.
9. Do not just get registered if you find out you have nexus – This may seem counter-intuitive, but remember that there is no statute of limitations if you have not filed the monthly returns. Once you come forward and get registered, you’ve lost the one small advantage and leverage you had. The state now knows who you are and the state can go back and audit you for all the past periods. You will definitely want to look at a VDA or amnesty program.
10. Do not panic – If you think you might have nexus or have been contacted by a state, do not panic. There are programs you can take advantage of and a handful of firms that can help. You are not alone and are not unique. You can rest assured that many before you have had the same problems and have been helped. Just remember: Do NOT ignore this issue. Not only does it not go away, it gets worse with time.

Peisner Johnson, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax issues. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we limit our practice to state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services or would like to learn how we may be able to help, we invite you to contact us.

Upcoming Sales Tax Holidays - 2012  

Updated

It’s that time of year for sales tax holidays! Many states plan their sales tax holidays around back-to-school, but a few states are notable exceptions. Alabama, for example, offered tax breaks on severe weather preparedness items earlier this month. One of Louisiana's upcoming sales tax holidays is on non-commercial purchases of firearms, ammunition, and hunting supplies. Although New York has no sales tax holiday, beginning April 1, 2012, items of clothing and footwear sold for less than $110 are exempt from the state's sales and use tax. Through March 31, 2012, such items up to $55 were exempt.

The following states have upcoming sales tax holidays: Alabama, Arkansas, Connecticut, Florida, Georgia, Iowa, Louisiana, Maryland, Missouri, New Mexico, New York, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and Virginia. Update: Massachusetts. Read the full descriptions for each state’s holiday.

Alabama
August 3-5: clothing (not accessories or protective or recreational equipment) with sales price of $100 or less per item; single purchases, with a sales price of $750 or less, of computers, computer software, school computer equipment; non-commercial purchases of school supplies, school art supplies, and school instructional materials with sales price of $50 or less per item; non-commercial book purchases with sales price of $30 or less per book.
Ala. Code Sec. 40-23-210, Ala. Code Sec. 40-23-211

Arkansas
August 4-5: clothing items under $100, clothing accessory or equipment under $50, school art supply, school instructional material, and school supply.
Ark. Code. Ann. §26-52-444, Ark. Reg. 2012-2

Connecticut
August 19-25: clothing and footwear (not accessories or athletic or protective) costing less than $300 per item.
Conn. Gen. Stat. §12-407e, Special Notice 2006(10)

Florida
August 3-5: certain clothing $75 or less; certain school supplies $15 or less. Holiday exemption is not applicable to sales of such items made within a theme park, entertainment complex, public lodging establishment, or airport.
Ch. 32 (H.B. 7087), Laws 2012

Georgia
Aug. 10-11: (1) clothing and footwear with a sales price of $100 or less per article or pair, excluding accessories; (2) single purchases for non-commercial use of $1,000 or less of personal computers and related accessories; and (3) general school supplies priced at up to $20 per item.

Oct. 5-7: energy-efficient and water-efficient products purchased for non-commercial use with a sales price of $1,500 or less per product.
Ga. Code Ann §48-8-3(75),(82)

Iowa
August 3-4: clothing and footwear (not accessories, rentals, athletic or protective) with sales price of less than $100 per item.
Iowa Code §423.3(68), Iowa Admin. Code r. 701-231.15

Louisiana
August 3-4: first $2,500 of sales price of non-commercial purchases (not leases) of items of tangible personal property (not vehicles or meals). Does not apply to local taxes. However, St. Charles Parish will waive its local Louisiana sales tax during the same weekend as the state holiday.
La. Rev. Stat. Ann. §47:305.62

September 7-9: non-commercial purchases of firearms, ammunition, and hunting supplies. Does not include purchases of animals for the use of hunting.
La. Rev. Stat. Ann. §47:337.10(L)

Maryland
August 12-18: Items of clothing (not accessories) and footwear with a taxable price of $100 or less.
Md. Code Ann. §11-226

Massachusetts Gov. Deval Patrick has signed legislation authorizing a sales tax holiday on August 11-12, 2012. On those days sales tax does not apply to nonbusiness sales of tangible personal property with a price of up to $2,500 per item. The tax holiday exemption does not apply to sales of telecommunications, tobacco products, gas, steam, electricity, motor vehicles, motorboats, or meals. H.B. 4352 , Laws 2012, effective August 7, 2012 Missouri August 3-5: non-commercial purchases of clothing (not accessories) with taxable value of $100 or less per item; school supplies up to $50 per purchase; computer software with taxable value of $350 or less; computers and computer peripherals up to $3,500. Localities may opt out. If less than 2% of retailer's merchandise qualifies, retailer must offer a tax refund in lieu of tax holiday. Mo. Rev. Stat. §144.049
New Mexico August 3-5: footwear and clothing (not accessories or athletic or protective clothing) with sales price of less than $100 per item; school supplies with sales price of less than $30 per item; computers with sales price of $1,000 or less per item; computer peripherals with sales price of $500 or less per item; book bags, backpacks, maps and globes with sales price less than $100 per item; and handheld calculators with sales price of less than $200 per item. Retailers are not required to participate. N.M. Stat. Ann. §7-9-95
New York
No sales tax holiday; however, beginning April 1, 2012, items of clothing and footwear sold for less than $110 are exempt from the state's sales and use tax. Through March 31, 2012, such items up to $55 were exempt.
North Carolina
August 3-5: clothing and school supplies with sales price of $100 or less per item; school instructional materials with sales price of $300 of less per item; sport/recreational equipment with sales price of $50 or less per item; computers with sales price of $3,500 or less; computer supplies with sales price of $250 or less per item. The exemption does not apply to clothing accessories, any item sold for use in a trade or business, educational software, furniture, luggage, stereo equipment, DVD players, and similar equipment, and protective equipment. Technical Bulletin 34-24
November 2-4: qualified Energy Star products sold for non-business use, inclulding clothes washers, freezers and refrigerators, central and room air conditioners, air-source heat pumps, ceiling fans, dehumidifiers, and programmable thermostats. N.C. Gen. Stat. §105-164.13C
Oklahoma August 3-5: items of clothing and footwear (not accessories, rentals, athletic, or protective) with sales price of less than $100. Okla. Admin. Code §710:65-13-511
South Carolina August 3-5: clothing (not rentals), clothing accessories, footwear, school supplies, computers, printers, printer supplies, computer software, bath wash clothes, bed linens, pillows, bath towels, shower curtains, bath rugs. S.C. Code Ann. §12-36-2120(57)
Tennessee August 3-5: clothing (not accessories), school supplies, and school art supplies with sales price of $100 or less per item; computers with sales price of $1,500 or less per item. Tenn. Code Ann. §67-6-393
Texas August 17-19: clothing and footwear (not accessories, athletic, protective, or rentals) and school backpacks with sales price of less than $100 per item. Tex. Tax Code Ann. §151.333
Virginia August 3-5: clothing and footwear with selling price of $100 or less per item, and school supplies with selling price of $20 or less per item. Va. Code Ann. §58.1-609.1(18)
October 5-8: non-commercial purchases of Energy Star and WaterSense qualified products with a sales price of $2,500 or less per item. Virginia Department of Taxation website

Updated chart: Sales Tax on Shipping Charges

Sales tax on shipping charges is a tricky issue for tax professionals because states’ treatment of the tax varies widely. In Illinois, this issue was the subject of a class action lawsuit against the retailer Walmart. As we pointed out in our recent article, when the Illinois Supreme Court ruled in favor of Walmart in 2009, a situation was created that sparked many qui tam, or whistleblower, lawsuits over the taxation of shipping charges. 

Where are Shipping Charges Taxable?

Some states tax shipping charges without condition, including New York and Texas, but almost half of the states do not tax shipping charges depending on certain conditions. 

Let’s look at Illinois again. Illinois does not charge sales tax on shipping if charges are separately contracted and stated. That distinction is the crux of the Walmart’s defense in the class action lawsuit.

Other states do not tax shipping charges if additional, and sometimes critical, conditions apply. Massachusetts’ exclusions apply if several conditions are met. Charges: 

1. Reflect the costs of preparing and delivering goods to a location designated by the buyer,
2. Are separately stated on the invoice, and
3. Set in good faith and reasonably reflect the actual costs incurred by the vendor.

In Maine, sales tax on shipping charges are excluded if they are separately stated, the shipment is made direct to the purchaser, and a common carrier is used. 

We Have a Chart for That

We have developed a helpful chart that highlights the states’ treatment of sales and use tax on shipping charges for your reference. Your situation may very likely involve some particular facts and circumstances that would yield a different result. This chart is a good starting point, but should not be your only research source.

Request the chart!