Articles Posted in Tangible vs. Real Property

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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 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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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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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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