Articles Posted in Sales and Use Tax

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The Alabama Tax Delinquency Amnesty Act of 2018 is effective as of March 6, 2018. Alabama taxpayers will need to act quickly, however, as the amnesty program will be held only for a period of time beginning July 1, 2018, and ending September 30, 2018. While property taxes, motor fuel taxes, and motor vehicle taxes are excluded from the amnesty program, all other taxes do qualify for the program if the taxes: (1) were due prior to January 1, 2017, and (2) were for taxable periods that began before January 1, 2017.

To enter the program, applicants must waive any rights to protest or initiate a proceeding, administrative or judicial, for the taxes that fall under the amnesty program. If approved, the amnesty cannot be applied outside the narrow scope of the agreement. The agreement applies only for the specific tax and the specific period.

How does the Alabama Tax Delinquency Amnesty Act of 2018 work? It contains a three-year look-back period, which is applied separately to each type of tax. Please note, if there is tax collected but not remitted, the look-back period extends back as far as point of collection. It is vital that a company evaluate its records and determine if tax was collected from customers and not remitted to the state before applying for this amnesty.

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As of January 1, 2018, two new taxes are in effect in Illinois on rented merchandise. The enactment of these laws occurred in August 2017, but was not effective until this month. Specifically, two taxes are on (1) transactions in which a consumer rents merchandise, and (2) a consumer’s use of rented merchandise. These complimentary taxes are imposed on those engaged in the business of renting merchandise under “rental purchase agreements.” Rental purchase agreements must meet two requirements. First, they must (1) note that the consumer will use the merchandise for personal, family, or household purposes; and (2) have an initial period of 4 months or less that is automatically renewable after the initial period with each payment made.

While businesses are liable for the new rental sales and rental use taxes, if use tax is not paid by the customer to the business, then it is the customer who is liable for the tax. Business owners must provide evidence when purchasing their merchandise, which is exempt from sales and use tax, that they are registered with the Department of Revenue as renters of merchandise. To be registered, rental sales tax must be reported on mytax.illinois.gov and paid electronically using Form ST-201, Rental Purchase Agreement Occupation Tax Return.

In December 2017, the Illinois Department of Revenue issued an Informational Bulletin to clarify the new taxes before they went into effect. The guidance was specifically for rent-to-own businesses and customers. Purchases made by these businesses, which are subject to the new rental sales and rental use taxes, are exempt as of January 1, 2018, from Illinois sales and use tax. However, the Department was clear that businesses are required to collect and remit tax on rent paid under rental purchase agreements entered into before January 1, 2018. Consequently, the Illinois Department of Revenue is also offering a one-time credit for taxes paid on purchases of rent-to-own merchandise during the latter half of 2017.

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As of January 1, 2018, candy and soft drinks are subject to the full rate of sales tax in Arkansas. The Arkansas Legislature previously had included these items in the definition of “food” and “food ingredients” to have candy and soft drinks be subject to a reduced rate of sales tax.

Candy is defined as a “preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces.” However, the Legislature has specifically excluded from the definition of candy any “preparation containing flour and shall require no refrigeration.” Soft drink is statutorily defined to mean a “nonalcoholic beverage that contains natural or artificial sweeteners.” Soft drinks do not include beverages containing “milk or milk products, soy, rice, or similar milk substitutes, or that is greater than fifty percent (50%) of vegetable or fruit juice by volume.”

The Department of Finance and Administration (“Department”) has provided examples of what does and does not constitute candy or soft drinks.

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OHIO OFFERS TAX AMNESTY

Ohio is offering a TAX AMNESTY for taxpayers.  The types of Ohio taxes available for the program are: (1) Individual Income Tax; (2) Individual School District Income Tax; (3) Employer Withholding Tax; (4) Employer Withholding School District Income Tax; (5) Pass-Through Entity Tax; (6) Sales Tax; (7) Use Tax; (8) Commercial Activity Tax; (9) Financial Institutions Tax; (10) Cigarette or Other Tobacco Products Tax; and (11) Alcoholic Beverage Taxes.  These taxes must have been unpaid and due as of May 1, 2017.

The amnesty program will begin on January 1, 2018, and go through February 15, 2018.  For those coming forward voluntarily, the state will waive all penalties and one-half of the interest owed.  Additionally, and perhaps the best part, is the state will not pursue any civil or criminal actions.  The key here, though, is that if you have received any contact from the Ohio Department of Revenue concerning being assessed or about a pending audit, then this disqualifies you from the program.

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The Multistate Tax Commission (“MTC”) recently spearheaded a campaign with two dozen states to allow for businesses using Amazon’s FBA services a chance to come clean. The opportunity for these businesses was to register with the states and collect tax on a prospective basis. The states would then generally forgive any back taxes owed by the business.

The response to the MTC’s program by taxpayers has been overwhelming. The MTC has been flooded with applications for amnesty. As of November 21, the MTC still had not concluded counting the number of applications received. The expected count of amnesty applications may be somewhere in the thousands.

If you did not take advantage of the amnesty program, there is still hope. Our firm discussed the possibility of another amnesty program with the MTC. The MTC is going to evaluate whether another amnesty program could be offered, especially once they have calmed down from the backlog of the current program. The most recent offering appears to have been a large success based on the initial response rate.  It would make sense for the MTC to spearhead another amnesty offering.

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Our practice has recently seen an increase in criminal investigations of automobile dealers across the state for sales tax collected but not remitted to the Department of Revenue. The reason for this is unclear. However, it is vital for auto dealers to educate themselves on sales tax laws and the difference between a sales tax audit and a sales tax investigation.

A sales tax audit is a traditional audit in which the Department searches through Taxpayer records for compliance. Any noncompliance will result in a monetary assessment. Typically, the Department of Revenue looks at Federal Returns, Sales Tax Returns, and DMV Records in formulating an assessment. Often relying on formulas that produce estimations of additional tax due, these assessments are often grossly exaggerated. In addition, the Department often fails to properly account for repossessed vehicles when Taxpayers erroneously reduce these losses from their taxable sales and report the net amount on their returns. These assessments can be challenged both during audit and after a “proposed assessment” has been issued. However, the window to challenge these assessments is small. It is advisable to seek counsel immediately upon contact of the Department of Revenue to ensure that you preserve your right to challenge any assessment.

Alternatively, auto dealers can be contacted by the Department of Revenue for an investigation. These are the cases that our firm has seen an increase of in recent months. It is important to ask upon first contact by the Department whether they are initiating an audit or an investigation. An investigation is criminal in nature. Yes, a Taxpayer can go to prison for sales tax. Whether it was maliciously stealing tax money or simply keeping poor records and making errors over a period of time, the Department will often approach the investigation in the same way. How bad of a crime is “Willful Intent to Defraud the State?” Like most legal questions, that depends. In these cases, it depends on how much money the Department believes has been taken from the state. The breakdown of severity is as follows:

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You have a business that sells goods to your customers in other states. Recently, you heard that you should have collected sales tax on certain transactions or that the money you collected as sales tax should have been remitted to that state. You suspect that if you contact the state directly about your issue, the state may decide to audit you or bring you to jail for not remitting the taxes you collected. What do you do? What can give you peace of mind?

In comes the Voluntary Disclosure Program. With the Voluntary Disclosure Program, you pay the state its tax and interest, have most or all penalties waived, and most importantly, you avoid going to jail. At the end of the day, the Voluntary Disclosure Program truly is the best solution to some of the worst tax problems. But what is the Voluntary Disclosure Program and how do you qualify?

The Voluntary Disclosure Program is the process of initiating contact with a state to come clean on potential tax liabilities. To qualify for the Voluntary Disclosure Program, you cannot have been contacted by the state. If you have been contacted by the state before you apply for the program, most states recognize this contact as disqualifying you from the Voluntary Disclosure Program. However, some states may nevertheless allow you to enter the Voluntary Disclosure Program. The moral here is that as soon as you discover a tax liability that you wish to disclose, you need to enter the Voluntary Disclosure Program immediately.

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Out of the numerous types of transactions that are usually subject to tax, aircraft sales and use tax issues can be ranked among the most complicated and convoluted. First, and putting aside the fact every state views aircraft sales tax issues differently, aircraft have very specific exemption provisions. The exemptions can be monumentally beneficial for saving a good amount of money. However, the slightest misstep can cause the painful realization tax is owed. Second, an aircraft owner can find himself in the tax fight of his life when using the aircraft in multiple states, as each state will want to fully tax the aircraft. These are just two of the potentially numerous problems aircraft owners must navigate. This article will discuss a couple of common exemptions aircraft purchasers have available in Texas.

The general rule is the purchase or use of an aircraft in Texas is subject to sales tax. However, some aircraft purchases can be exempt from tax, pursuant to Tex. Tax. Code Ann. § 151.328.

One exemption available is for aircraft sold, leased, or rented to individuals who are “a certified or licensed carrier” of people or property. Tex. Tax. Code Ann. § 163.001(a) defines “certificated or licensed carrier” as one who has been authorized by the Federal Aviation Administration (“FAA”) to operate an aircraft to transport people or property under Parts 121, 125, 133, or 135 of Title 14 of the Code of Federal Regulations. Think “Uber” of the friendly skies. Thus, if you purchase an aircraft and are engaging in transportation services under any of these Parts, then your purchase can be exempt from Texas sales and use tax!

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Imagine having an online business.  One day, you decide to use Amazon’s Fulfillment By Amazon (“FBA”) services.  Unbeknownst to you, your inventory is stored by Amazon in several states.  One day, you get a letter from the Department of Revenue.  The letter says that because you have nexus with that state, you must collect sales tax on sales to customers of that state.  Your first thoughts are “what is nexus” and “why does that mean I have to collect sales tax, especially when my store is not in that state?”

Many states assert a business has nexus (that is, a connection) with that state merely by having inventory present in the state.  It is irrelevant there are no employees, independent contractors, or office locations in the state.  Rather, you, like many other online sellers, used Amazon’s FBA services.

Amazon’s FBA service stores your inventory across the country.  Consequently, these states declare you, and any other seller with inventory in the state through Amazon’s FBA service, have nexus.  Thus, you must collect sales tax on sales to customers located in the state.  This article discusses nexus and the application to remote sellers that only have inventory stored in these other states by Amazon.  The article goes on to explain the sales tax implications for sellers using Amazon FBA services.

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In the United States, tipping at restaurants is never really optional. While customers are the ones who write in a tip on their bills at their discretion, it is generally expected to leave 15-20%.  Occasionally when large parties visit a restaurant, a mandatory tip is imposed by the restaurant on the bill. This ensures that servers, who may dedicate a large portion of their shift to a particular party, do not leave empty handed.

But when a tip is mandatory, is it really a tip? Or is it actually part of the food price? This was the question addressed by the Idaho Supreme Court. While tips are generally not taxable, restaurant food is taxable. When a tip becomes requisite payment for restaurant food, it becomes no different in substance than the sales price on the menu. As a result, if mandatory tips are, in fact, part of the sales price, then they too are subject to tax. Yes, that means you have to pay tax on the tip.

While the consequence of paying tax on mandatory tips only adds a small amount to the total bill, the cumulative effect can be substantial on the restaurant. This was the experience of an Idaho restaurant, Chandlers’-Boise LLC, that was found liable for sales tax on the amounts it automatically added to customer checks. The restaurant, which added gratuity to parties of six or more, argued in Chandler’s-Boise, LLC v Idaho State Tax Comm’n. 398 P.3d 180 (Idaho 2017), that such tips were exempt under Idaho law.