Articles Tagged with SALT

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Part 2 Common Pitfalls

There are several issues that often surface during the audit. Many of the issues that surface are that the client does not have records, the client does not have a complete or updated QuickBooks or accounting software file, or the client has collected and remitted the incorrect amount of tax.

The most common issue we face is the situation in which the Florida taxpayer does not have adequate records to do a complete audit. Based on many of our clients, Florida is an extremely dangerous place to live. Until I became a Florida sales and use tax attorney, I was not aware of the high number of floods, fires, earthquakes, tsunamis and other natural disasters that destroy all of a business’s records. On a serious note, many taxpayers believe that not having any records is the best way to escape tax liability. However, generally the opposite is true. The more records that are available, generally, the more we can do to explain discrepancies that arise during the audit. Therefore, we recommend that a Taxpayer does its very best to salvage as many records as possible for review even if they are extremely damaged due to mother nature.

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It’s a grim and nerve-racking day for many when they receive the infamous DR-840, Notice of Intent to Audit Books and Records, from our friends at the Florida Department of Revenue. Many Florida taxpayers often ask themselves, “Why me?” Or, “What did my company do wrong in order to receive this notice?” The answer to both of these questions is obtainable from the Florida sales and use tax auditor by simply asking them. In many situations, the company is audited because its exempt sales ratio is out of the average range for similar companies in its industry. Other companies are flagged for audit because the sales reported on their 12 monthly sales and use tax returns do not correspond to the gross sales reported on their federal income tax return. Many other companies are flagged purely at random.

While the reason may be for a variety of reasons, once the notice is received, the reason for its reception is virtually irrelevant. The more relevant inquiry should be, what should we do next? Ideally, it makes sense for many Florida businesses to hire a law firm or a CPA firm versed in Florida sales and use taxes. This is true even if the company has immaculate records and nothing to hide in connection with a Florida sales and use tax audit. Hiring a professional that is experienced in handling a Florida Sales and Use tax audit is an excellent way to walk you or your client through the audit process. In addition, having a Florida sales and use tax professional is invaluable in helping your company or your client’s company organize the information in a presentable manner that will help keep a sales tax assessment to a minimum.

Florida law and the verbiage on the DR-840 clearly states that the FL DOR cannot start the audit for 60 days and it must start the audit within 120 days. The 60 days is waive-able and the auditor will push for a waiver in order to get the audit moving. We generally recommend that the 60 days not be waived, but instead be used as a period in which to get all of your information organized for presentation. We call this the homework period in which the Taxpayer, if they elect to hire us, is given a checklist of homework to complete within the 60 day period.

The obvious next question is, what should I be organizing?
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As many are aware, I have been writing a number of blogs and articles recently discussing the Department of Business and Professional Regulation here in Florida and its potentially unfair audit tactics. Many of you have seen cigar wrappers, or the more scientifically described “blunt wraps”, at convenience stores and gas stations throughout the state and country. Are those items tobacco products subject to Florida’s other tobacco products tax? On the surface it seems questionable, but after digging into the law and writing about this issue for some time now, the law seems to make it clear.

This was exactly the issue in a recent case,New Image Global Inc – Complaint.pdf. In short, the case was filed by New Image Global for a massive other tobacco tax assessment. The tax, penalty, and interest amounted to $1,082,494 at the time of the Complaint. The Assessment has since been reduced, but the argument still remains the same. The case addresses whether or not cigar wrappers, or their more informal title, blunt wraps, are subject to Florida’s other tobacco tax (“OTP”).
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Part 3 – Is the Item Taxable?

This article is a follow up to a previous article I wrote in dealing with tobacco tax audits. In addition to looking at the applicable statute of limitations and whether excise tax and shipping charges are included in the tax base any experienced Florida tobacco and beverage tax attorney should closely examine the taxable base to which the tax is being applied. As stated in other parts of the article, Chapter 210 Florida Statutes applies a surcharge and an excise tax on tobacco products. Part I of Chapter 210, F.S. works the same way for the tax on cigarettes. It is also noteworthy that the Florida beverage tax is applied in the same manner. It is simple math; the tax rate times the tax base equals the tax due. Being that the tax rate cannot be changed, a careful examination of the tax base must be undertaken to ensure the smallest amount of tax liability for the Florida taxpayer.

Although, the DBPR takes the position that many items are subject to the beverage and tobacco tax. However, as experienced tobacco and beverage attorneys we have learned that the almighty Florida DBPR often includes items that are not included in the taxing statute. Remember, the item has to be within the four corners of taxing statute to be taxable, and any ambiguities are to be resolved against the agency and in favor of the taxpayer. With that in mind, section 210.01, F.S., defines a cigarette to mean:

any roll for smoking, except one of which the tobacco is fully naturally fermented, without regard to the kind of tobacco or other substances used in the inner roll or the nature or composition of the material in which the roll is wrapped, which is made wholly or in part of tobacco irrespective of size or shape and whether such tobacco is flavored, adulterated or mixed with any other ingredient.

Similarly, section 201.25, F.S., defines a tobacco product as

loose tobacco suitable for smoking; snuff; snuff flour; cavendish; plug and twist tobacco; fine cuts and other chewing tobaccos; shorts; refuse scraps; clippings, cuttings, and sweepings of tobacco, and other kinds and forms of tobacco prepared in such manner as to be suitable for chewing; but “tobacco products” does not include cigarettes, as defined by s. 210.01(1), or cigars.

Is the item in which the DBPR is trying to assess you or your client included in those definitions? We have found that the DBPR often assesses items that are arguably outside of Chapter 210 and the 560’s (for beverage tax). Are items like cigar wrappers subject to the tax? What items have you encountered that may not be a tobacco product for chapter 210, F.S., purposes?
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Part 2 – Is the Tax on The Correct Taxable Base?

This article is a follow up to a previous article I wrote in dealing with tobacco tax audits. In addition to looking at the applicable statute of limitations, any experienced Florida tobacco tax attorney should closely examine the taxable base to which the tax is being applied. Chapter 210 Florida Statutes applies a surcharge and an excise tax on tobacco products. Part I of Chapter 210, F.S. works the same way for the tax on cigarettes. It is simple math; the tax rate times the tax base equals the tax due. Being that the tax rate cannot be changed, a careful examination of the tax base must be undertaken to ensure the smallest amount of tax liability for the Florida taxpayer.

Section 210.01, F.S., defines a cigarette to mean:

any roll for smoking, except one of which the tobacco is fully naturally fermented, without regard to the kind of tobacco or other substances used in the inner roll or the nature or composition of the material in which the roll is wrapped, which is made wholly or in part of tobacco irrespective of size or shape and whether such tobacco is flavored, adulterated or mixed with any other ingredient.

Similarly, section 201.25, F.S., defines a tobacco product as

loose tobacco suitable for smoking; snuff; snuff flour; cavendish; plug and twist tobacco; fine cuts and other chewing tobaccos; shorts; refuse scraps; clippings, cuttings, and sweepings of tobacco, and other kinds and forms of tobacco prepared in such manner as to be suitable for chewing; but “tobacco products” does not include cigarettes, as defined by s. 210.01(1), or cigars.

Should this tax base include shipping or federal excise tax charges because those amounts are included on the invoice?
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Over the past year, we have been involved in more and more Florida Tobacco Tax Audits. With the volume of audits we deal with on a regular basis, we see trends within the state. We also have seen audit after audit in Florida in which the Department of Business and Professional Regulation does not play by the rules. Unlike the Department of Revenue, which has detailed rules and procedures, the Department of Business and Professional Regulation (“DBPR”) does not. As a Florida state and local tax attorney who also focuses on Florida alcoholic beverage, cigarette, and tobacco tax, this conundrum can be attributed to the insufficient rules that exist at DBPR and the lack of taxpayer challenges to the audits.
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On its website, DBPR, Division of Alcoholic Beverages and Tobacco (“FL ABT”) proudly proclaims that there are about 75,000 ABT license holders, and the audit division generates over $1.9 billion in license fees, taxes, and fines in Florida. Despite the huge number of license holders in Florida, there are very few audit challenges with the Department of Professional Regulation and even less litigation. But, are the audits done correctly? Is FL DBPR just that good that it never makes a mistake?
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In many states Amazon does not have any physical locations or employees, therefore, Amazon is not required to charge and collect sales tax in many states. States have taken aggressive tactics by arguing that Amazon has affiliates in their state or servers in their state which constitute nexus and require the online retailer to charge and collect tax. Unfortunately, for the states that get pushy with Amazon, Amazon in turn threatens to cancel its affiliate programs which would leave many state residents jobless. What ends up happening is the state gives Amazon immunity from tax collection for a few years and Amazon concedes to nexus after the period. In addition, Amazon also agrees to build a facility that will bring jobs to a state.

On May 16, 2013, the Daily Business Review reported that Governor Rick Scott of Florida rejected a deal to bring Amazon to Florida. The moved shocked many Florida state and local tax professionals as many other states have accepted similar deals to bring Amazon to their state. Further, Amazon did not charge sales tax to Florida residents. While Florida residents are required to pay use tax on online purchases, close to no one remits use tax.

On June 14, 2013, my hometown newspaper, the Palm Beach Post reported the Governor changed his mind. Specifically, between now and 2016, Amazon will move to Florida which will bring thousands of jobs to the state. The project will cost an estimated $300 million. From a state and local tax attorney’s perspective this also means that Amazon will have to start charging tax on its online sales to Floridians. While it was undisclosed one can assume that Amazon will be getting incentives for the construction project. It will be interesting to see where the locations of the new Amazon facilities will be.

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Aside from the Marketplace Fairness Act, cloud computing has dominated the sales tax world in 2013. With more and more companies using software as a service (SaaS), platform as a service (“PaaS“), and infrastructure as a service (“IaaS“), more and more uncertainty has arisen in the sales tax world.

Cloud.jpgCloud computing is a service that allows users or members of a business to access software from a remote server. It allows businesses to access the same integrated software without the expensive hardware costs because the software is internet based rather than physically based in an office.

Most states with a sales tax, tax software to some extent. Many states tax the purchase of canned software. Canned software is software produced by a manufacturer and not changed or altered for a specific company. If the software is altered, it is not canned software and not subject to sales tax in many states. Still, other states look to whether the customer receives something tangible like a disk with their purchase to determine whether software is taxable or not. But, how does this work if the canned software is accessed in the “cloud”? Is it a sale of tangible personal property? Is it the sale of canned software? A number of problems have been created by this fairly recent innovation, and states are struggling to keep pace.
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In an attempt to quit smoking, many Americans purchase a piece of equipment for about $50 and e-juice for about $15. When heated by the equipment, the e-juice, nicotine laced liquid, becomes an inhalable vapor that can be used as a cigarette replacement for many nicotine addicts. The electronic cigarette, or e-cigarette, first became widely available in Europe in the early 2000’s. From there, the industry grew to several thousand users in 2006, and now some analysts estimate that this has become roughly a two billion dollar industry in 2013. Are these battery-powered devices safe? What are the long term effects of inhaling nicotine through an e-cigarette?

The Food and Drug Administration’s (“FDA”) current stance appears to be that it does not know the answer to either of these questions. However, unlike medications and patches, the e-cigarettes have not been approved by the FDA. Many officials, such as tobacco policy analyst with the National Conference of State Legislatures, Karmen Hanson, seem to think so. Hanson went so far as to believe that the e-cigarettes are a “prominent public issue,” and “it’s up to the states” to deal with. Others, such as Rep. Paul Ray (Utah), strongly believe the e-cigarettes to be “terrible stuff,” and that “the industry . . . kills their clientele” by “peddling stuff that they know will absolutely kill people.”

On the other side of the coin are proponents of the product, like Stauffer of West Point, Utah. He has claimed that the e-cigarette eliminated smoking from his life. He does not believe vilifying the product is warranted because “[q]uitting smoking has never been easier.” He truly believes the e-cigarette is less harmful for his body and if Utah “is serious about helping [the people] make healthy choices, then [e-cigarettes] should be encouraged.”

So what do states do when they believe that a particular practice is against public policy, they are unsure about a product, or they want to influence certain behavior?
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On May 6, 2013, Senate passed the Marketplace Fairness Act . It was announced that the bill passed with a vote of 69 to 27. The bill provides for an exception for businesses with sales of less than $1 million annually. States which are members to the Streamlined Sales and Use Tax Agreement are automatically granted the authority and the remaining states are required to grant the authority. The legislation will now make its way to the House of Representatives, where anything can happen.

The Act is an attempt to provide clarity and certainty in a grey area of the law. While many proponents of the bill seem to think it puts all Internet retailers on a equal playing field, it is really just an enforcement tactic of existing tax law. Those not in favor of the law point to the administrative burdens placed on small taxpayers. It is true that software exists to calculate the tax rates in the countries 45 states with sales tax and some 9,600 jurisdictions, it may becomes extremely burdensome and expensive to determine what is and is not taxable.

I look forward to informing everyone about more developments in this evolving area of the law. I also welcome any comments on the issue.