The Accounts Payable & Procure-To-Pay Conference & Expo is produced by: 6/1/2016

What AP Needs to Know

about Sales & Use Tax

IOFM Conference

Orlando, Florida

The Accounts Payable & Procure-To-Pay Conference & Expo is produced by: 2 6/1/2016

Presenter

B.J. Pritchett, CMI - President

Pritchett Sales & Use Tax Consulting

Arkansas Sales & Use Tax School

(501) 623-4700

b.pritchett@sbcglobal.net

www.salesusetax.com

Sales/Use Taxes is a Big Picture Issue!

• The “Big Picture” is what management of any company tries to envision.

• The Entire Company effects the Bottom Line Profit including Purchasing, Marketing, Engineers, Managers in all departments and Accounting/Tax

• Accounts Payable doesn’t just pay the bills – Accounts Payable is a Profit Center!

• A Profit Center is generally thought of generating income for the company; however, if the department is saving taxes from being paid on items or services that are non-taxable or exempt, then the department is a profit center.

Sales/Use Taxes is a Big Picture Issue!

• All Purchases - Initiated by Purchasers/Buyers and handled by the AP department

• The Key – AP is charged with identifying the transactions as taxable or exempt/nontaxable; however, without enough information – it becomes a guessing came

• Management’s Understanding - AP’s importance to the

profit of the company is critical

• Participation by all Departments - AP needs the entire company’s participation by providing specific information to identify a transaction

“Every dollar of tax paid is one less dollar of profit made”

Who Imposes Sales/Use Taxes?

• 45 states and the District of Columbia impose a sales tax

• Approximately 30 states allow localities to impose a

sales tax in addition to the state tax • Only New Hampshire, Oregon, Montana, Alaska*, and

Delaware ** (NOMAD) do not impose a state sales tax • Quirks in NOMAD states *Some Alaska municipalities impose a sales tax ** Delaware imposes a rental and service tax

Who Imposes Sales/Use Taxes?

• State taxes are different than local taxes in some states

• Approximately 30 states allow local taxes

• There are over 60,000 taxing jurisdictions with standard and non-standard local taxes

• What is taxable at the State level may not be taxable at the Local level

Who Imposes Sales/Use Taxes?

• State Administered: Local taxes follow state law and are administered

and collected by the state

• Home Rule Authorities: – Some local taxes follow state law, but are

administered and collected by locality

– Other local taxes do not follow state law and are administered and collected by locality

• Vendor or Seller Privilege Tax

• Vendee or Consumer Excise Tax

• Transaction Tax

• Gross Receipts Tax

Four Types of Sales Taxes

9

There shall be imposed, upon each person for the privilege of engaging in the business of selling tangible personal property and taxable services at retail, a tax measured by the gross proceeds (receipts) there from.

Types of Sales Taxes Vendor or Seller Privilege Tax

10

• Imposed on seller • Seller must pay whether or not tax is

collected (or collectable) • Tax is generally imposed on privilege of

doing business in state • Separation of tax on invoice generally not

required • Arizona, California, Illinois

Types of Sales Taxes Vendor or Seller Privilege Tax

11

There shall be imposed, upon each sale at retail at the rate of X% of the sales price, a Tax collected by the retailer from the consumer.

Types of Sales Taxes Vendee or Consumer Excise Tax

12

• Imposed on buyer

• Seller must pay whether collected or not, but has easier claim for recovery if not paid by buyer

• Tax is generally imposed on privilege of use or consumption of products or services

• Tax must be separately stated on the invoice

• New York, Ohio, Pennsylvania

Types of Sales Taxes Vendee or Consumer Excise Tax

A tax shall be imposed upon each transaction at retail at the rate of X% of the sales price that shall be collected by retailer from the purchaser.

Types of Sales Taxes Transaction Tax

• Tax is imposed on the sale or purchase transaction itself

• Buyer and seller are equally liable for payment of tax (audit implications)

• Tax must be separately stated on the invoice

• Florida, Indiana, Virginia, Texas and Puerto Rico

Types of Sales Taxes Transaction Tax

• Imposed on Seller

• Similar to Seller Privilege Tax but fewer exemptions

• A majority of services are specifically taxed

• No requirement on invoice for separation of sales tax on separate line

• Arkansas, New Mexico, Hawaii

Types of Sales Taxes Gross Receipts Tax

Sales Tax Collection

• Accounts Payable rarely has to deal with Accounts Receivable actions; HOWEVER,

AP should know sales tax is fairly easy

• Either:

Tax is Collected on the Transaction

• Or:

Exemption Certificate is Collected

• All states started with a Sales Tax position

• Taxpayers are smart and figured out a way to avoid the sales tax

• Vendors and government devised a way to keep customers while generating tax collections – USE TAX

Use Tax Basics What is this Use Tax Stuff?

• Provides states the ability to tax interstate sales

• Protects in-state businesses from a competitive disadvantage with out-of-state businesses

• Use tax is a purchaser’s liability

Use Tax Basics Why Have a Use Tax?

Use Tax Basics Two Types of Use Tax

• Use Tax is reported in two forms depending on different factors: – Consumer Use Tax:

• Self-Reporting Tax

– Vendor Use Tax:

• Vendor has a tax connection with the taxing

jurisdiction and is subjected to that taxing

jurisdictions laws

• Use Tax is a Purchaser’s issue even when the out-of-state vendor charged the vendor use tax

Use Tax Basics Why is Vendor Use Tax not the end of tax issue?

• Vendor Use Tax is reported by out-of-state vendors

• However, who is still in the taxing jurisdiction? The Purchaser!

• The purchaser MUST recalculate the tax to ensure the proper tax was collected

• The purchaser is liable for any use tax that was not collected (and will have to back into the taxable figure to fit the state/local return)

Use Tax Basics Who is the watchdog for Use Tax?

• AP handles the recalculations and examines the tax due

• AP also ensures the proper amount of tax is paid to the taxing jurisdiction

• In calculating the tax due even when the vendor has placed tax on the transaction – NEVER ADD TAX TO AN INVOICE AND PAY THE VENDOR

• Intrastate Commerce – Sales which originate and end within the borders of one state.

• Intrastate Sales - Sales within the state are a Sales Tax Issue not a Use Tax issue

• Seller and Customer (where item is shipped) are located in the same state is a Sales Tax transaction

Intrastate & Interstate Commerce Sales Tax

• Interstate Commerce – Sales in which product crosses from originating state into another state’s boundaries

• Purchaser’s Liability – Interstate Commerce sales are the purchaser’s liability as the item is shipped from out-of-state but consumed, used, stored (and sometimes distributed) within a state.

Intrastate & Interstate Commerce Use Tax

• It Depends - this is probably the only time using the terminology of “it depends” will provide AP with comfort

• Each State is Different – each state has its own state and local tax laws

• Each State defines the liable party – could be the customer or it could be the vendor

• Each State has Different - definitions for the same terminology

• Never Use – another state’s laws to impose all state laws

Who is Liable for Sales or Use Tax?

• Item or service is purchased from out-of-state vendor (not registered in state of ship to)

• Item is transferred from one state to

another

• Some out-of-state vendors are registered with states to collect Use Tax; however, the purchaser is liable if it is not the correct state/local tax to be remitted

Use Tax Basics When is Use Tax Due?

• Every state defines what is subject to taxation

• Definitions are the key to determining if the item/service is subject to tax

• Accounts Payable has the hardest job in controlling the flow of business operations as not all the information to make a tax determination has been provided by other departments

• Key is to get every department to provide the appropriate information on the front end of the transaction

Sales and Use Tax Basics Definitions

• Definitions are the key to taxation

• Some states use different terminology

• Terminology turns the tax screw

• “Cheat Sheets” are recommended – no longer is it a crime to have a handy dandy cheat sheet for reference

• Keep “cheat sheets” up-to-date

Sales and Use Tax Basics Definitions

• Tangible personal property (TPP) – Property which can be seen, weighed, measured, felt or is perceptible to the senses, but is not real property

• Tax generally imposed upon sale, lease and rental of TPP

• Sale of TPP generally presumed to be taxable unless specifically exempt

• Generally does not apply to real property or intangible property

• Not always a bright line between services and TPP

Sales and Use Tax Basics Tangible Personal Property

• Services are generally not taxable unless specifically enumerated in statute

• Many states include certain services in tax base

• Services commonly taxed:

– Installation of TPP

– Repair and maintenance of TPP

– Public utilities and telecommunications

– Transient lodging

– Data processing and other information services

Sales and Use Tax Basics Services

30

• Distinction between TPP and service is not always clear, for example – Engineering services vs. blueprints –Training services vs. training manuals

• Some states apply a “true object” test – "the true object test is based on

whether the buyer's purpose is to obtain services or tangible personal property"

– "incidental to services" test

Sales and Use Tax Basics TPP or Services?

31

• Period of time a taxpayer remains legally liable for a state tax obligation

• Also limits the period of time in which a taxpayer can file a refund claim

• Generally is 3 to 4 years from the date the tax is due and payable (Florida is 5 year rule)

• If no return is filed and the taxpayer had nexus, no limitation of time under the statute of limitations

Statute of Limitations

32

• States offer certain exemptions from sales and use taxes depending on the nature of the:

– Seller (sales by the U.S. Government may be exempt)

– Buyer (Exempt organizations buying an item)

– Item being sold (medicine, food)

– Use of the item (manufacturing equipment, pollution control, agricultural or sale for resale)

– Transactions (occasional or isolated sale)

Exemptions

Services

• Laws are very specific as to taxation of

services

• Certain states tax more services than

other states

• Certain states tax a portion of services

that contain tangible personal property

• Majority of the taxable services allow

materials used in the service to be

purchase tax-free as sale for resale -

BUT ALWAYS check the tax laws

34

• Retailer – Sells Tangible Personal Property (TPP) • Construction Contractor – Real Property • Fabricator – Creates TPP • Repairman – Repairs TPP and Constructs Real

Property (See Construction Contractor) • What is the contractor working on when they

visit you as the customer? Real Property or TPP

Contractors – Multiple Hats

TAX TIPS TO HELP YOU STAY SANE

• Be proactive in all of your accounts

payable activities

• Being reactive doesn’t keep you

motivated

• Proactive research can save you and

your company time and money

• Admit you are human and still a work in

progress

• There is no way that you can know it all!

ONE LAST SET OF TAX TIPS

• Never meet the auditor with a shotgun!

• Always be professional and courteous!

• Remember it is okay to agree to disagree

and still have your say

• Write down the reason you take

exemptions directly on the invoice

• Who knows where you’ll be in five years!

The Accounts Payable & Procure-To-Pay Conference & Expo is produced by: 37 6/1/2016 37

Questions THANK YOU FOR YOUR PARTICIPATION!

B.J. Pritchett, CMI