Articles Posted in Sales and Use Tax

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A recent Virginia ruling brings up a topic that comes up in our state and local tax practice constantly. If a contractor in State X purchases materials and uses the material in a real property contract in State or Country Y, does the contactor owe use tax on purchases in State X? The answer in most states is yes. Is this fair? Or, even further, is this constitutional?

This scenario was brought to light in a Virginia Letter Ruling, No 12-207, issued on December 13, 2012. In the ruling, the unfortunate requestor was a dealer in Virginia and sold materials to a customer who constructs US embassies overseas. The material purchases are shipped to the dealer’s consolidating receiving point (CRP) in Virginia. The materials are temporarily stored and prepared for overseas shipment.

The ruling started by addressing a Virginia construction company that improves real estate and furnishes tangible personal property to become real estate outside of Virginia. Like most states, Virginia takes the position that, in that scenario, the dealer is the end user of the TPP and owes use tax. However, Virginia has an exemption for contractors who purchase TPP “used solely in another state or in a foreign country.” Specifically, the contractor can obtain a certificate of exemption if certain criteria are met. Further, the Virginia Department of Revenue went out of its way to remind contractors that a resale exemption does not work in this scenario because the contractor is the end user of real property and is not a reseller of TPP.

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In my daily routine of reading state and local tax cases across the country, I recently inquired to the State of Florida for the status of an innovative sales tax case unique to the gasoline and petroleum industry this week. As many of you know, I have had the pleasure of growing up and assisting in my family’s petroleum business that has owned, operated, and distributed petroleum and gasoline in South Florida for over 30 years. Therefore, cases like Gate Fuel Services & Gate Petroleum, catch my attention and I really root for innovative and aggressive taxpayers like the one in these cases.

I brought this concept up to several gas station owners at the 2012 Florida Petroleum Marketers Association (“FPMA”) Fuel Expo and many met my suggestion with criticism or disbelief. It is still difficult for me to understand how a room full of dozens of Florida’s gas station owners, operators, and distributors, would rather discuss the latest developments with their beer vendors over a tall cold one, rather than sit and listen to me rant about Florida sales tax. For all of the naysayers out there, I have recently received word from the State of Florida, that the Gate cases were recently settled.

Many of you may recall, I wrote an article for my law firm’s blog in May 2012, about two companion sales and use tax cases. Both cases Gate Petroleum Co. v. Florida Department of Revenue, Case No. 12-CA-381 (2d Cir. Ct. 2012), andGate Fuel Service v. Florida Department of Revenue, 12-CA-379 (2d Cir. Ct. 2012),were filed in Leon County, home of the Florida Department of Revenue. The Gate cases centered around a refund denial for sales and use tax in the amounts of $160,935 and $ $45,071, respectively. In both cases, the Florida Department of Revenue (“DOR”) admittedly opposed the refund claims based essentially the same innovative theory of recovery.

For the uninformed, the retail gas station taxpayers in the cases alleged that they made certain equipment purchases that were exempt from Florida sales and use tax. Specifically, the Taxpayers argued that fuel storage equipment which holds regular and premium-grade fuel in underground tanks, mixes the two at the dispenser, and creates a mid-grade gasoline for sale at its retail locations. Being that this is the pump system at most modern gas stations, how come every gas station that has purchased taxable equipment in the last three years are not going for the refund? in short, they all should.
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It never ceases to amaze me as to the types of cases and industries that come up in our practice. In late 2012, a Taxpayer, or its representative, inquired to the Missouri Department of Revenue whether certain sales it made to its customers are subject to Missouri sales and use tax. As a state and local tax attorney and the proud recipient of a recent jawbone graft, this particular ruling caught my attention. Specifically, in LR 732, Mo. Dept. of Revenue (August 10, 2012), a dental supply and service distributor sold single patient use medical materials to its customers. The medical materials happened to be used for structural support for bone tissue during jaw bone grafting.

Jawbone Grafting.jpg

Like every one of the 45 states and the District of Colombia that has a sales and use tax regime, Missouri has a medical supply exemption. Medical exemptions are often popular ways for Legislatures to look popular by exempting items such as food and medicine that is necessary for people to survive. States take the position that taxpayers should not be burdened with state taxes for items that are essential.

At issue in LR 732, Mo. Dept. of Revenue (August 10, 2012) was Missouri’s exemption for “orthopedic devices” such as rigid or semi rigid leg, arm, back or neck braces that are used to support weak or deformed body, or restrict or eliminate motion in diseased or injured body parts. Sounds delicious, don’t it? In any event, the Taxpayer was curious if jawbone grafting materials fit within this gruesome sounding exemption.
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Anytime I go out to eat or to a fast food restaurant, my mind automatically thinks in terms of ways a company can save wasteful state tax dollars in its operation. Whether I am at a restaurant that hands out silverware, a fast-food chain that offers plastic silverware, or a restaurant that gives away items, the use tax issues can likely be avoided if the company practiced careful sales and use tax planning techniques.

Over the past few years, a couple of cases in Alabama showcase the ongoing dilemma. The first case involved Logan’s Roadhouse. Many of us have been to a Logan’s across the country and enjoy the ability to eat peanuts and throw the shells all over the floor. But how many of us, aside from me, actually analyze the sales and use tax implications of this practice? Peanut Shells.jpgAre the peanuts being purchased by Logan’s and resold to its customers? Or is Logan’s purchasing the peanuts for its own use as a giveaway to its customers?

In a similar case, Kelly’s Food Concepts (KFC, Popeye’s, and Church’s Chicken) illustrates a common restaurant problem that has been litigated since the creation of the sales tax. Are items purchased by a restaurant such as napkins, utensils, straws, stirrers, trays, kitchen supplies, ketchup, salt and pepper, toilet paper, and other items on the table, for the restaurants use or resold to the customer for its use?

Without immediately diving into the cases, it seems appropriate to explain a common problem faced by the state and local tax professional. Most states (45) have a state sales tax regime. The sales tax attempts to tax consumption by adding a tax to the end-user of tangible personal property (“TPP”). While each state various as to exactly what is and is not taxable, every state that I am aware of has a sale for resale exemption. That means that when a business purchases something it does not pay tax but rather charges tax to its customer when the item is resold. Conversely, the business is the end user on items it purchases for its own use (items not for resale) and it owes a use tax on those items. While it seems obvious whether an item is an exempt sale for resale, as shown by a couple simple examples above, this inquiry can become quite complicated.

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As many of my readers know, I have been a regular author for the FPMA over the past year. I have spent the better part of that period discussing the onslaught of convenience stores by the Florida Department of Revenue. While our firm has been successful in reducing many assessments against dozens of C-stores throughout the state, I found it appropriate to discuss something in a positive light.

Last year in 2012, I discussed a case known as Micjo. In Micjo, the crux of the case was whether the Department could charge tobacco tax on shipping charges and excise taxes. Specifically, Florida Law imposes taxes of about 85% on other tobacco products (“OTP Tax”), based on the so-called “wholesale sales price” as defined in section 210.25, Florida Statutes (“F.S.”). Under Florida Law, the “wholesale sales price” means “the established price for which a manufacturer sells a tobacco product to the distributor.”

While this seems like a fairly straightforward analysis, the Division of Alcohol and Tobacco (“ABT”), believed the “wholesale sales price” was the total amount on the invoice, which included the amount the wholesaler paid for the tobacco, shipping, and federal excise taxes. Like many agencies tend to do, ABT “reminded” the court that the court owed it deference in statutory interpretation. Taking the contrary position, the court agreed with Micjo in that the “wholesale sales price” was clear in that it meant the price of the tobacco only.

While it appeared to be a fairly straightforward opinion, our state and local tax firm has seen in practice over the past year that in many counties (outside of the second district), ABT has “shockingly” ignored the opinion. Can it do this? Of course! It is the all-mighty agency.
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Without getting into a tedious history of a sales tax, the tax was essentially created during the Great Depression in the 1930’s. The first sales tax laws were hastily and poorly drafted. The poorly drafted laws were copied from state to state. The sales tax regime was designed to tax individuals on the price of goods acquired for personal consumption. Conversely, the tax should not apply to the purchases made for business use, or what is known as business inputs.

In the early days, the easiest (not necessarily the correct) way was to tax the retail sale of tangible personal property (“TPP”). It is this primitive ideal which is embedded in the 50-60 year old sales tax laws that has created many of the issues in our much more complex economy of the 2000’s. Even with the changing of the times and the economy, our lawmakers and courts continue to ask the age old question that comes along with the foundation of the sales tax policy and design. Courts and lawmakers continue to struggle with what is “TPP” as opposed to real or intangible property. Why has no one stopped to think whether this should be the question at all? Shouldn’t the question be whether the goods are personally consumed as opposed to a business input? It is this fundamental problem and the state’s unwillingness to ask this question that has led to many of the inconsistent and puzzling rulings. These issues have been in the forefront for several decades and until the states change their way of thinking, these issues will continue to be problematic in effectively administering a state sales tax.

A classic example of the TPP versus intangible conundrum is Washington Times Herald v. District of Columbia, 213 F. 2d 23 (D.C. Cir. 1954). This case involved a newspaper publisher which purchased comic strips from an artist. The comic strips were delivered on mats (TPP). In this case the court was confronted with whether the newspaper was purchasing taxable TPP or nontaxable service contracts. The court decided that the transaction was for nontaxable artistic services because without the art the mats were practically worthless.

In a strikingly similar scenario, the D.C. District Court was faced with the same problem in 1964 in District of Columbia v. Norwood, 336 F. 2d 746. Instead of newspaper mats, Norwood purchased motion pictures. Clearly if a drawing delivered on a mat is for professional services, a motion picture delivered on a film is for services as well, right? Without much analysis the court stated that the sales were clearly of taxable TPP.Movie FIlm.jpg
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Over the past few years many retailers and online companies have turned to shopper’s personal webpages for advertising. In our current online marketplace, individuals can post items, outfits, and recipes to their social media sites. Piggybacking on our growing use of social media in our daily lives, companies have taken advantage of this by paying individuals for tweets, posts, and other social media disseminations that drive customers to a company or online retailer. Using this tactic, social media sites such as Twitter, Facebook, and Pintrest are being transformed into paid promotion generators. Social Media.jpgAn October 2012 article written in the New York Times that can be found here, discusses a Manhattan talent agent. In her free time the shopper posts various fashion items to her social media sites, such as lipsticks on her Pintrest account and her “night life collection” on Beso (which apparently is a shopping website.) If her posts drive customers to the lipstick site or Beso, the companies will reward her by paying her a fee. Some sites, such as Beso pay users around 14 cents for every click the individual sends to Beso. While other retailers, such as Pose, pay only when a product is purchased resulting from the click (usually around 5%). According to the article, the Manhattan talent agent makes about $50/month from promotion fees.

After reading this article, I am sure many readers had the same thought I did – can the fee paid from the retailer to the individual create nexus for sales tax purposes? Actually, I am sure the only people that even thought about this are state and local tax attorneys like me who spend many of their hours reading about sales tax laws. On a serious note, it does present an interesting sales tax law issue as to whether these activities can create nexus to an online retailer who has nothing in the state aside from a shopper who happens to post their products to social media.
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For decades, courts, state agencies, and state legislatures continue to ask the wrong questions in regards to state sales tax. This continuing practice has led to decades of inconsistent decisions in different states with similar laws. At the heart of the issue is the notion that the states have continually asked the wrong questions related to the policy and design of a sales tax regime. How could taxpayers expect correct results when the states continue to ask the wrong questions? However, it is this inconsistency that has allowed multi-state sales and use tax lawyers to continue to thrive in a marketplace growing with technology and complexity.

Without getting into a tedious history of a sales tax, the sales tax was essentially created during the Great Depression in the 1930’s. The first sales and use tax laws were hastily and poorly drafted and were copied from state to state to state. The sales tax regime was designed to tax individuals on the price of goods acquired for personal consumption. Conversely, the tax should not apply to the purchases made for business use, or what is known as “business inputs.”

In the early days, the easiest (not necessarily the correct) technique was to tax the retail sale of tangible personal property (“TPP”). It is this primitive ideal which is embedded in the original sales tax laws that have grown outdated and have created many of the issues in our much more complex economy of the 2000’s. Even with the changing of the times and the economy, our lawmakers and courts continue to ask the age old question that comes along with the foundation of the sales tax policy and design. Courts and lawmakers continue to struggle with what is “TPP” as opposed to real property. Why has no one stopped to think whether this should be the question at all? Shouldn’t the question be whether the goods are personally consumed as opposed to a business input? It is this fundamental problem and the states’ unwillingness to ask the correct question that has led to many of the inconsistent and puzzling rulings each year. This age old question has been and will continue to be problematic in effectively administering a state sales tax. However, the states’ stubbornness to ask the correct question will provide job security for multi-state sales tax attorneys for years to come.

In a recurring classic example, Northeastern Pennsylvania Imaging Center v. Pennsylvania, 35 A. 3d 752 (Pa. 2011), the Supreme Court of Pennsylvania was faced with whether an MRI and PET Scan system purchased for over $2 million was subject to sales tax. The system weighed in excess of 15,000 pounds, took five days to install, could only be moved by crane, was anchored into the concrete beneath the floor, and could only be removed by removing the exterior wall. MRI.jpg
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