Multi-State Sales and Use Tax Attorneys
Multi-State Sales and Use Tax Attorneys
Multi-State Sales and Use Tax Attorneys
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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.

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Texas is one of many states beginning to tax software as a service. Known as SaaS, these new impositions of tax are still struggling with practical application. Software as a service typically includes a situation in which a software company develops software to be accessed via the internet. The software company then operates or hosts the website through which the software is accessed by customers online. It is important to note that customers do not possess or own the software; rather they pay for access to it online.

To understand the difference, let’s use the example of a video game. A user can purchase a game and access it remotely online. That would be considered software as a service. However, is the game allows users to download the program, that is not software as a service because the customer ultimately has possession of the software on his or her computer. The distinguishing feature of SaaS is that the user does not own or possess the software.

The type of SaaS addressed by Texas in a a recent letter ruling is one in which a customer uses a web-based dashboard application to receive and process data, translate and store messages, and create analytic reports for the customer’s use. The Taxpayer describes and markets their business as “a better, faster way to communicate with today’s customers.” By using a dashboard application, subscribing businesses communicate and interact with their customers via text and other types of mobile messaging channels. Customers are able to text questions, orders, etc. to the business directly. The Taxpayer reconfigures the incoming message from the customer and so that it can be displayed in English on the business’s dashboard application. Following that, custom or canned replies, or both, are reconfigured and sent back to the customer. Meanwhile the analytic services provided include the generation of reports on the number of requests per day, the categories of requests, and the average response times.

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Over the past several decades nexus has been at the forefront of the state and local tax world.  Since the Quill ruling in 1992, states have aggressively created ways in which a company can have a sufficient connection to their state.  Once the connection, or “nexus,” is made, a state can require a company to charge collect and remit sales tax to it.  As the economy has changed more to an online model, states continue to play catchup to get their fair share of the taxes.

Perhaps the most popular issue on a national multi-state tax level is whether a company has nexus with a state if they use the Fulfillment by Amazon (FBA) services.  In short, if Amazon houses a company’s inventory in a distribution center, does that inventory create nexus – ie – an obligation for that company to collect and remit taxes to that particular state.  That question has been affirmatively answered in most jurisdictions and companies have been blindsided by huge tax obligations often spanning many years.

For those companies that have been living in fear of large tax assessments, a Multi-State Tax Amnesty was recently released by the Multi-State Tax Commission (MTC).  Effective August 17, 2017 through October 17, 2017, several states will allowed companies who used FBA programs to come forward and comply.  Under the program, if a company complies, the state will forgive back taxes, interest and penalties in exchange for several requirements on a go forward basis.   To date, the participating states are:

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Tennessee has issued a notice stating that tours fall under the definition of “amusement” and are subject to sales and use tax. While amusements typically appear as places of amusement, such as amusement parks, concerts, and other shows, Tennessee also includes tours under that definition.

The first category of tours includes tours by vehicle. Included in this category are trolley tours, river cruises, and bus tours. Pub crawl tours on group bicycles probably fall under this category as well. Meanwhile, the second category of tours that are included under the definition of “amusement” are ghost tours, plant tours, pub crawls, etc.

This clarification is important for a state with a substantial amount of tourism. As the country music capital of the world, Nashville attracts many visitors who participate in these tours. However, the Department acknowledged that it is important to remember that exemptions exists to this rule. For example, tours conducted by a nonprofit, government agency, or for a Tennessee historic property are exempt from tax.

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As it turns out, Colorado really was just the beginning. As of January 1, 2018, Washington will begin requiring remote sellers to either remit sales and use tax or comply with reporting and notice requirements similar to those in Direct Mktg. Ass’n v. Brohl (DMA IV), 814 F.3d 1129 (10th Cir. 2016). Who is subjected to this burden in the land of Nirvana and the Space Needle? Remote sellers with gross receipts in the current or preceding year of at least $10,000 are, which makes Washington state another to skirt around Quill, the SCOTUS case that requires actual, physical presence for a state to have nexus with a taxpayer, with a reporting requirement.

But the legislative change goes further. Not only are retailers who make income from sales within the state required to follow this, but referrers who receive income from referral services within the state are subject to it as well if the total gross income from that is at least $267,000.

With 33 states facing revenue shortfalls in fiscal years 2017 and 2018, there is no doubt a need to increase taxes. However, states can go about this in a wide variety of legal ways. They can expand the tax base by taxing services or currently nontaxable technology. They can even increase the tax rate if they want to. Instead, Washington is imposing these reporting requirements to reach companies with whom they fail to meet the nexus standard to impose collecting and remitting requirements.  This overreaching of the states will likely be challenged. The question is: by whom?

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The United States Constitution expressly forbids ex post facto laws with respect to both the federal and state governments.[i] An ex post facto law is one that retroactively changes the legal status and consequences of a particular action. The easiest way to understand it is in the criminal realm. Today, I ate a yogurt. Two years from now, the government passes a law saying it is a third-degree felony to eat yogurt and makes the law retroactive for a 5-year period. While eating my yogurt today was not against the law, I am still, two years later, guilty of a felony and can be punished accordingly. Fortunately, the government is not too interested in yogurt. Unfortunately, the government is very interested in tax.

In 2014, Michigan passed 2014 PA 282, a retroactive tax law replacing the elective three-factor apportionment formula from the Multistate Tax Compact to which Michigan adhered with a new single-factor apportionment formula. This may have been just another disappointment to Taxpayers, who are regularly disappointed by the creative and nefarious ways in which states try to drum up revenue. But with a retroactive application to 2008, it was just plain devastating.

It is no surprise that the state supreme court upheld the state’s interest in collecting more tax. The case challenging this law was in fact 50 consolidated cases in Gillette Commercial Operations North America & Subsidiaries et al. v. Dep’t of Treasury, No. 325258 (Mich. Ct. App. Sept. 29, 2015). The question now is: will the Supreme Court hear the case? The Department of treasury argues that the Supreme Court can’t. Rather than a retroactive law, the state argues that 2014 PA 282 is simply a clarification of the preexisting law. Therefore, under the state statutory-construction law, the Michigan state court had adequate and independent state law ground to uphold 2014 PA 282 and the Supreme Court of the United States does not have the jurisdiction to overturn it.

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What is a worker classification issue?  When the Internal Revenue Service (“IRS”) believes that a taxpayer (i.e. employer or service recipient) is improperly treating workers as independent contractors instead of employees it will pursue the taxpayer by initiating an examination, more commonly known as an audit, where the taxpayer will likely receive a Letter 3850 (Rev 3-2006) in the mail providing them notice of the inquiry.  A worker classification issue will usually start with an analysis of whether the worker should have been classified as an independent contractor or an employee.  If it is determined that the workers should have been treated as employees, then a calculation must be prepared to determine how much the taxpayer (employer) owes the IRS.

Often, a taxpayer will resolve the tax liability generated from the worker classification audit through one of the IRS settlement programs (known as CSP or Classification Settlement Program) or through Section 530 of the Revenue Act of 1978.  Also, a taxpayer who fails to withhold the required tax may be entitled to relief, under §§ 3402(d), 3102(f)(3), 1463 or Regulations § 1.1474-4, but they must show that the worker reported the payments and paid the corresponding tax.  More simply stated, an independent contractor does not have any of its taxes withheld from a check it receives.  However, if the independent contractor should have been classified as an employee, then the employer would be entitled to offset some of the tax liability it owes the IRS by proving that the misclassified worker still paid his or her taxes that should have been withheld.

In a recent Tax Court case, the Mescalero Apache Tribe (“Tribe”) won on a motion to compel discovery against the IRS.  The Tribe was in the middle of a worker classification case.  In dispute, was the reclassification of hundreds of workers as employees instead of independent contractor.    The taxpayer, Tribe, has the burden of proof to show its worker paid income tax to reduce the amount it would owe the IRS.  (Mescalero Apache Tribe v. Commissioner, 148 T.C. No. 11)

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