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For the last three years, our firm has been relentless writing and warning any business that sells beer, liquor, and/or cigarettes, that the Florida Department of Revenue was coming. The onslaught of the industry all stemmed from a law change in 2011. With little support, a new law went into effect in Florida that required all wholesalers, manufacturers, and distributors of alcohol and tobacco to provide annual sales information the Florida DOR. Shockingly, some ABT retailers were purchasing multiples of gross sales of alcohol and tobacco alone. For example, the average Florida C-store purchased about $50,000 a month in ABT items alone but only reported gross sales of $20,000 for sales tax purposes. As predicted, we were told that approximately 200 audit notices were going out every three months (DR-846 – “desk audits” & DR-840 – “full audit notices”) and each of the state’s some 500 auditors was assigned at least 1 ABT case. That was exactly what happened.

Starting in 2012, our law firm has been inundated with calls from the alcohol and tobacco retail industries. The Florida DOR relied on a flawed formula to complete hundreds of sales and use tax audits assessing sales tax, penalties and interest greatly in excess of what the businesses owed. Since 2012, our firm has been defending these alcohol and tobacco retailers. Contrary to guidance from our friends in Tallahassee, the audits are often defendable to a degree. Specifically, the Florida DOR relies on industry averages and the reality is that each store has its unique story. In addition, the purchase information relied upon by the Department is often times inaccurate or incomplete.

It would be a severe understatement to say this ABT audit program has been profitable to the state. According to the program’s statistics the Florida DOR has assessed tax penalty and interest about $102,124,022 (about $74,000,000 in tax) as of March 2014. Assuming a 6% tax rate, this equates to $1.1 billion, with a “b,” of alleged unreported sales.

It is difficult these days to read an article about sales tax without coming across issues with online companies such as Amazon. For those of you that do not spend most of your day hunting down interesting sales tax articles, please just take my word for it. In fact, before Congress right now is an attempt to nationalize sales tax collection by passing a law known as the Marketplace Fairness Act. This law would essentially cause most online retailers, like Amazon, to collect tax in every jurisdiction to which they sell. Not surprisingly, and despite the literally thousands of articles discussing the MFA and online sales tax collection, most consumers and many commentators still are not understanding how a sales tax works.

By way of background and for review for many of you, a sales and use tax work complimentary to each other. If a company has nexus, a connection, with a state, then it is supposed to charge, collect, and remit a sales tax on sales made into a particular jurisdiction. Conversely, if a consumer uses an item in which tax has not been paid, then the consumer owes a use tax to the state on that item. In the online marketplace, that means that if you buy an item online and the online seller does not charge tax, then it is your responsibility as the consumer to file a use tax return and pay the tax directly to the state. However, I regularly bring up this concept during my speaking engagements in Florida, and my audience just laughs when I ask them who has filed their use tax return (DR-15 MO) for the clothes and shoes they bought on Amazon over the last year.

In my recent readings, I came across a Forbes article entitled 3 Ways to Still Avoid Sales Tax Online by Robert Wood. In his article, Mr. Wood points out that aside from the states that do not have a sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon if you are interested), online shoppers have been charged sales tax in more and more states each year. Each year states try to enlarge their nexus statutes to require more online retailers to collect. In addition, Amazon is collecting in at least 20 states.

On a regular basis, our firm receives questions from taxpayers and their CPA’s alike regarding businesses that provide both services and tangible personal property. In most states, tangible personal property is subject to sales tax while the sales of services is not. Alternatively, a similar question comes in with real property improvement contractors that sell some tangible personal property, some installation, and some real property contracts with installation. The question is even more pressing in the case in which the taxpayer is a real property improvement company that has significant sales to tax-exempt or governmental entities. The issue remains the same, how does the taxpayer exempt the service or minimize the sales tax ramifications in their business?

In a simple example, consider an interior design company. In most states the sale of the interior design services are not taxable. Conversely, the sale of furniture (TPP), is subject to sales tax. What about the scenario in which both are sold? In most jurisdictions the answer turns on whether the purchase of TPP is optional. Other states look to what is the “true object of the transaction,” services or TPP. In either scenario taxpayers are often left with an uphill battle on audit. If the taxpayer takes the position that only the TPP is taxable, it risks having to come out of pocket and pay tax on professional service transactions it never charged tax on.

In the real property world, taxpayers face a similar conundrum. In most states real property improvement contractors are considered the end user of tangible personal property. Therefore, they are required to pay a use tax on their material costs. In turn, they do not charge customers tax on their sales. Consider, however, they are installing items of TPP. In that case, suddenly the sale of TPP plus any labor charges may become subject to sales tax in many states. More commonly, the real property contractor incorrectly does not pay tax on its materials and then attempts to exempt the sale by accepting an exemption certificate from its tax-exempt customer. Unfortunately, in most states, an exemption certificate only works to exempt the sale of tangible personal property, not real property. Therefore, if the real property improvement contractor did not pay tax on its materials and did not charge tax, it could get slammed with a hefty sales tax bill.

So what can be done?
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In mid-January 2014, I stumbled across an article in the Wall Street Journal discussing shopping trends over the holiday season. According to the Journal’s article, As Shoppers Skip the Mall, Stores Search for Fresh Lures, the shift to online shopping and away from the traditional brick-and-mortar was heavily price driven. Of course, other factors contributed such as convenience of shopping online and having a more defined mission when going to the store due to online research. However, the article suggested a “permanent” shift away from store showrooms and more to that of an online marketplace. Is it possible that a perceived sales tax savings is also contributing?

Irrespective of the rationale, the results of this year’s shopping trends analysis was staggering. Courtesy of ShopperTrak, a data firm, stores can monitor foot traffic by the use of a network of 60,000 devices. The devices can measure the foot traffic at malls and retail space in the top 54 largest markets for the United States. According to the article, the foot traffic plummeted some 28% in 2011, 16% in 2012, and another 15% in 2013. In total, the tracking network estimates that the foot traffic was down to about 17.6 billion from over 30 billion just three years ago. Further, the data also concluded that an average shopper visited 5 shops per mall visit in 2007 and only 3 this past season.

Another staggering statistic was observed by a study conducted by the CoStar Group. CoStar measured the amount of new retail space opened annually by square footage in the recent years. In the same 54 largest US markets, only 44 million square feet of new retail space opened in 2013. While it sounds like a lot in 2006 some 325 million square feet opened in the markets. This 87% decline also affirms that retailers are aware of the shift in shoppers’ habits.

Most Florida tobacco distributors are familiar with Micjo which was decided on February 1, 2012. Micjo would change the alcohol and beverage tax world in Florida forever. At issue was whether the taxpayer had to pay Florida tobacco tax on all of the invoice components, including shipping charges and federal excise tax or if the tax should only apply to the tobacco product itself, not the federal excise tax and transportation charges. For example, Micjo (or any tobacco distributor) gets an invoice from its supplier that says tobacco $100, federal excise tax $60, transportation charges $40, total invoice $200. Should the tobacco tax apply to the $200 or the $100? Of course, Florida’s Division of Alcoholic Beverages and Tobacco of the Florida Department of Business and Professional Regulation (“AB&T”) believed it was the $200 and Micjo believed it was the $100.

To AB&T’s disbelief, Micjo had the nerve to challenge AB&T. Perhaps even more surprising to AB&T, Micjo had the better argument and won the case. The Second District Court of Appeals looked to the statute at issue and determined that the tax should apply ONLY to the tobacco product itself. Since the case was decided, many tobacco distributors and manufacturers have been claiming refunds and getting them back. Well, until recently….

Recently, over the past several months, our firm has been receiving an increased number of calls from Florida tobacco distributors and manufacturers saying that AB&T has stopped issuing refunds on this issue. To my knowledge, there has been no change in the law and no new cases since Micjo. Rather the almighty AB&T simply believes the court in Micjo was wrong and has been denying refunds. That’s correct, despite an appellate court ruling clearing establishing how the law should be interpreted, AB&T has been completely ignoring the appellate decision.

As many know, Amazon has been clashing with many states whether it should be required to charge, collect, and remit sales tax. Many states have taken position that Amazon’s affiliates and distribution centers created the dreaded “nexus.” If an online retailer (or any company) has so-called “nexus” it is required to charge, collect, and remit tax in that state. With millions of dollars at stake, Amazon threatened to pull its affiliate programs in those states which, in turn, would cut tens of thousands of jobs. Fearful of huge job cuts in a struggling economy, many states allowed Amazon a grace period, permitting the company to continue its program and not collect sales tax for x number of years in the future. Once the grace period expired, then Amazon would have to charge, collect, and remit tax. In return, the state would keep its jobs as well as get more tax revenue going forward. It appeared to be a win-win for all parties involved.

It was recently announced that Amazon will collect tax in North Carolina. Based on projections, North Carolina is licking its chops at the increase of an additional $20-30 million in state revenue it will receive. North Carolina’s fiscal research division estimated that city and county governments would benefit to the tune of about $10-$13 million. The revenue should begin flowing for the state as soon as February 1, 2014 and it would be an understatement to say this will be a huge benefit for the state’s economy.

Taking a national view, each year that grace period is expiring in at least three more states. In states like Indiana, Nevada, and Tennessee online shoppers will be charged sales tax by Amazon. Overall, this brings the total to 19 states in which Amazon will charge, collect, and remit sales tax. Even more eye opening, those 19 states represent about 180 million or over half of the population in the United States. The addition of the three latest states will also generate more than $50 million a year in state tax revenue.

Going back to the basics of a sales tax regime, sales tax is generally due on the sale of tangible personal property at retail in a state. Here, a newspaper is tangible property and as long as it is sold at retail within the state’s borders, then it is generally taxable. While it may seem counter intuitive, many states adhere to this general view and impose a sales tax newspaper. A few states, for public policy reasons, have determined that newspapers should be exempt, therefore, make an exception to the general rule and statutorily take newspapers out of the sales tax rule. Maine imposed a reduced sales tax of 5% on the sales of newspapers until recently.

In a recent, somewhat comical (comical from a state and local tax attorney’s perspective) piece, Businessweek reported that Maine will begin taxing newspapers at the higher rate of 5.5% beginning in October, 2013. Although usually anti-tax, Gov. Paul LePage thought it was in the state’s best interest to lift the exemption on newspapers and magazines from 5 to 5.5%.

The tax will certainly raise revenue for the state but one can only wonder the governor’s true motive in increasing taxes. The Republican governor has been on record joking about blowing up the headquarters of the Portland Press Herald, Maine’s largest newspaper. When asked if this was a direct shot at newspapers, the governor responded that buying a newspaper is “like paying somebody to tell you lies.”

I have been writing ad nauseum for the past few years on the Online Travel Company (“OTC”) debate. Being that my home state of Florida relies so heavily on the tourism industry, this has been a pressing issue for some time. It was reported this week by the Washington Post and BNA Tax that the debate has drawn national attention. Specifically, an influential task force known as the National Conference of State Legislatures (“NCSL”) examined the issue in an attempt to achieve national uniformity.

For those of you who have not been following the debate, the issue can most easily be explained by using a simple example. Consider you are going on a vacation and you find a room at a hotel, using Expedia, Orbitz, or Travelocity, for $100 online. Mechanically, how this works, is that you, the customer, purchases a room for $100. In the background, the OTC (Expedia, Orbitz, etc) has contracted with the hotel to purchase the room for $80. To keep numbers simple, let’s suppose that there is a 10% bed-tax on the room. In this simple scenario, how much should the state get? Some believe the state should get $10, the tax on the full $100 and the $10 balance is the OTC’s profit. Others believe the state should only get $8 and the OTC makes $12 profit instead of $10. The OTC’s argue that they are merely the middleman and not actually renting the room. This small discrepancy results in hundreds of millions of dollars for state and local governments, especially in high tourism states like Florida and California. Further, with slightly different statutory frameworks, states have interpreted this issue very differently.

Recently in Atlanta, the NCSL determined that the preferred method was in the states’ favor and pushed for tax on the higher price. This method has also allegedly been backed by the hotel industry. Conversely, the travel companies still maintain that this change will not only hurt them but it will also penalize the offline travel agents.

A host of problems have been created from a state and local tax perspective over the last few decades relating to sales tax on technology. Aside from the Amazon issue most are aware of, there has been a multi-state tax debate as to whether certain software charges are subject to sales tax. Under the traditional sales tax view, sales of tangible personal property are subject to sales tax. However, how is software, which may or may not be delivered in tangible form, taxed? Is it tangible personal property or tax exempt intangible information? Many states have adopted laws to capture software in the taxable base while other states depend on certain aspects of the software. Recently, Minnesota and Massachusetts have tackled different aspects of sales tax on technology.

On September 24, 2013, SAP Retail Inc. v. Comm’n of Revenue was decided. In the case, the software company not only provided taxable software products but also provided implementation services. The court was asked to address whether the consulting and implementation services were separate from the sale of the software itself, or if the services were so closely connected to the software sale that they were also taxable. Despite creative arguments on the side of the state, the court determined that the services were not fabrication services because the company did not furnish the items used to create the software. Moreover, the court determined that the consulting services were an independent and unrelated transaction because one could buy the software without the service of visa versa. Therefore, at least for the moment, consulting and implementation software services do not appear to be taxable in Minnesota.

It was also reported this week that Massachusetts voted to veto a technology tax on computer and software services. Specifically, the House voted 156-1 to repeal the tax, which estimated revenue generation of about $161 million. Massachusetts apparently did not want to send a message and discourage innovators from setting up shop in Massachusetts.

Many states, including my home state of Florida, have been unbundling the online travel company mess from a tax perspective over the last few years. Like many state and local tax issues, states have been all over the map when it comes to the taxation of new technology-type transactions. In the online travel industry, companies like Orbitz, Expedia, and Hotels.com (“OTCs”) purchase rooms at a low rate and facilitate a deal with customers to rent them from the hotel. Like many businesses tend to do, the online travel company turns a profit in this transaction. The problem that has arisen is whether the state and its counties should collect tax on the price charged from the hotel to the OTC or the higher price charged from the OTC to the customer.

One of the few states that seem to have a final determination is Georgia. Georgia is one of the few states that had the issue go up the judicial ladder to its Supreme Court. Ultimately in City of Atlanta v. Hotels.com, 710 SE 2d 766 (Ga 2011), the court ruled in favor of the city and determined that the bed tax applied to the higher amount. As an aside, many states have ruled exactly the opposite and it is worth pointing out that the counties, not the states, have been the aggressors in these cases.

After remaining dormant for a few years, the Georgia Supreme Court ruled that the case was still not closed. Apparently, in the opinion, the Georgia Supreme Court ruled in a footnote that the trial court did not rule on the city’s conversion claim, so it could not rule on the claim on appeal. The case went back to the trial level court on this issue, and the city amended its complaint to add other counts against the OTCs.