State

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State Local Taxation

• Chapter FourSales and Use Taxes

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Introduction

• Sales taxes first came into being in the U.S.
  around the time of the Great Depression to
  overcome shortfall in revenues from income and
  property taxes.
• Municipalities and other local subdivisions
  impose sales taxes and these taxes are being used
  to supplement revenues from property taxes.

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Introduction

• Local sales taxes are integrated with the state
  sales tax so that collection is consolidated at
  one point, the state then distributes the local
  governments share of the tax for a fee.

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Types of Sales Taxes

• Sales taxes imposed by state and local
  governments could be grouped by who bears the
  legal liability for the tax, who bears the
  ultimate incidence of the tax, or the type of
  transactions on which it is imposed.

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Types of Sales Taxes

• The three major types of sales taxes that
  currently are employed by various states are the
  retail and consumer tax, the seller privilege
  tax, and the gross receipt tax.
• Retail sales tax is the most prevalent of these
  taxes.

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Retail Sales Tax

• A use tax is the equivalent of a sales tax
  imposed on retail sales of out-of-state vendors.
• The tax is imposed by the state where the
  consumer resides or uses the product.
• The sales tax applies to retail sales by vendors
  to customers within the same state.

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Retail Sales Tax

• The most common form of sales tax, as well as the
  most significant in revenue terms, is the retail
  sales tax.
• This tax is imposed on the sale of tangible
  personal property at retail to the final consumer.

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Retail Sales Tax

• Tangible property is property that has physical
  form and substance and is not intangible it may
  either be real or personal.
• Retail sales taxes have been imposed on tangible
  property.

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Retail Sales Tax

• Planning
• If there is any doubt to sales tax liability, it
  is advised to collect tax.
• Avoid interest and penalties if liable.
• Sale of Intangible Property
• If property is intangible, sales tax is not
  imposed.
• Sale of Computer Software
• District of Columbia v. Universal Computer
  Associates, Inc. held that software was
  intangible.
• Later found that software is tangible property
  for the purpose of sales, use, and property tax.

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Retail Sales Tax

• What is a Retail Sale?
• Sale is the act of selling specifically
  transfer of ownership of and title to property
  from one person to another for a price.
• Retail sales tax should apply to sales made at
  retail, which usually mean sales made to the
  final consumer.

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Retail Sales Tax Base

• First step in determining sales tax liability of
  a taxpayer is ascertaining the base on which the
  tax is to be imposed.
• For retail sales tax, process can be divided into
  two steps
• Identify transactions that are exempt from sales
  tax
• For taxable transactions, identify the amounts
  that must be included in the retail sales amount.

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Retail Sales Tax Base

• Exemptions from Retail Sales Tax
• Sale-for-resale exemption
• Tangible that will be resold should not be
  included in sales tax base.
• Problems in determining if a sale is for resale
• Purchases for business needs to be evaluated if
  it qualifies for resale exempt. I.e.. Purchase of
  disposable cups, utensils, etc in fast food
  restaurants.

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Retail Sales Tax Base

• Planning
• Businesses routinely overpay sales and use taxes
  on their purchases by not notifying vendors of
  their exemptions.
• Perform reverse sales tax audit by applying for
  a refund of sales/use taxes paid.

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Retail Sales Tax Base

• Occasional or Casual Sales Exemption
• Most states provide an exemption for this.
• Provided for administrative convenience and to
  eliminate overwhelming task of enforcing the
  sales tax statutes for persons who are not
  engaged in making taxable sales of a regular
  bases.

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Retail Sales Tax Base

• Business Asset Transfers
• State statutes concerning the casual or
  occasional sales exemption are written such that
  sales or transfers of business assets qualify
  under the exempt.
• States require the following
• Entire operating assets of the business be sold
• Sale be made in a single transaction
• Sale be made to a single purchaser

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Retail Sales Tax Base

• Business Asset Transfers
• Planning
• Determine if the seller has any unpaid sales tax
• Obtain Good standing letters
• Manufacturing, Processing, and Fabricating
  Exemption
• All states imposing a sales tax provide an
  exemption for purchases of materials used in
  manufacturing, processing, or fabricating of
  tangible personal property for sale.

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Retail Sales Tax Base

• Machinery or Equipment Exemption
• Most states provide an exemption for machinery or
  equipment purchased to be used in the
  manufacture, production, or processing of
  tangible personal property that is to be sold.
• Leasing instead of purchasing equipment can be a
  method used to postpone sales/use tax on
  equipment.

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Retail Sales Tax Base

• Status Exemptions or Exempt Organizations
• Charitable organization
• Educational organization
• Religious organization
• Youth athletic organization
• Organizations which qualify for exempt from
  Federal Income Tax

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Measure of the Sales and Use Tax

• Measure or base of sales and use taxes generally
  is the consideration paid for goods and services
  or the gross proceeds for which the taxable item
  is sold, leased, or rented.

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Constitutional Issues Imposing Sales and Use Taxes

• Transactions must take place within the states
  border to collect sales tax.
• U.S. Constitution plays an overarching role in
  limiting the power of states to impose this tax.
• Multiple cases by U.S. Supreme Court guard
  against multiple taxation.

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Constitutional Issues Imposing Sales and Use Taxes

• Key U.S. Supreme Court Decisions
• McLeod v. J.E. Dilworth Co.
• Decision states could not impose a tax on
  interstate sales because such a tax would amount
  to a tax on, and thus a regulation of, interstate
  commerce that only Congress was authorized to do.
• Miller Brothers Company v. Maryland
• Decision Maryland could not impose its sales tax
  on the sales made by Miller Brothers Co. because
  the sales were made in Delaware to customers in
  Maryland.

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Constitutional Issues Imposing Sales and Use Taxes

• Key U.S. Supreme Court Decisions
• Scripto Inc. v. Carson
• Case An independent contractor in state of
  Georgia, employed wholesalers in Florida to
  solicit sales on its behalf in Florida.
• Decision Even independent contractors and not
  employees of the seller, the representatives gave
  the seller enough presence in the state to
  require it to collect use taxes.

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Constitutional Issues Imposing Sales and Use Taxes

• Key U.S. Supreme Court Decisions
• National Bellas Hess, Inc. v. Department of
  Revenue
• Case Could Illinois impose a use tax on an
  out-of-state mail order seller that had no
  physical presence in the state and communicated
  with customers through mail or common carrier.
• Decision Commerce Clause and Due Process Clause
  precluded Illinois from making such an imposition.

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Constitutional Issues Imposing Sales and Use Taxes

• Key U.S. Supreme Court Decisions
• Quill Corp v. North Dakota
• Reaffirmed decision in Bellas Hess.
• Nexus standards under Due Process Clause and the
  Commerce Clause are different and that Bella Hess
  is valid under nexus requirements of the Commerce
  Clause, it is not valid under the minimum
  connection requirement of the Due Process Clause.

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Constitutional Issues Imposing Sales and Use Taxes

• States Responses to Court Decisions
• Legislation introduced in Congress to authorize
  states to collect use tax on mail-order sales,
  however specifics were never agreed upon and the
  bill was never enacted into law.
• Planning
• Business may want to avoid use tax by severing
  nexus with a state. Have sales force and offices
  out of the state of sale.

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Administration of Sales and Use Taxes

• Reporting Obligations
• Retailers have a responsibility to collect and
  remit sales and use taxes.
• Registration
• States with sales and use taxes require retailers
  engaged in the business of selling a taxable item
  to register their business with the state in
  which they conduct business.

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Administration of Sales and Use Taxes

• Returns
• Once register, taxpayer is required to file a
  sales and tax return each period.
• Rates
• See Table 4.1
• Record Keeping
• Proper documentation is important to be able to
  support their sales and use tax liabilities

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Administration of Sales and Use Taxes

• Audits
• Primary mechanism available for state tax
  agencies to evaluate the extent to which
  taxpayers are complying with the tax laws.
• Sampling techniques are used to minimize cost and
  management.
• Block Samples
• Auditor picks a block of time, then examines all
  transactions for compliance accuracy.
• Auditor then extrapolates to the entire
  population.
• Drawback is that sample selected may not reflect
  normal operations of the taxpayer for the
  remainder of the year.

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Administration of Sales and Use Taxes

• Random or Statistical Samples
• Random sample results in unbiased interferences
  about the population
• Simple random sample may not be appropriate
  instead may need a stratified random sample where
  transactions are classified into strata or groups
  based on characteristic of the business. Then
  transactions are chosen at some rate from each
  stratum.

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Administration of Sales and Use Taxes

• Statute of Limitation
• Most states provide a 3-year statute of
  limitation within which the audit must be
  performed or the claim for refund be filed.
• If the taxpayer does not file a return or the
  return is falsified, then the audit can be
  performed up to an indefinite time.