I Serving Clients
Industry-specific rules and exemptions
often exist but may be missed or misunderstood leading to additional audit assessments and
overpayments. A company's general industry classification may not be reflective of the Sales &
Use Tax exemptions it could qualify to receive. Call upon our specialized expertise to navigate and
benefit from the various industry-specific issues. Here are some sample issues from the many
industries we serve:
Hotel / Accommodations
When Is It Taxable? How Do We Prove It's Not?
In most states, advertising design and placement are
considered non-taxable services. However, states often consider components delivered in tangible
form such as on a disk or tape as taxable Tangible Personal Property ("TPP"). The
question becomes one of determining the true object of the product or service. The delivery method
for printed or published materials can also impact their taxability. For example, items such as
brochures and handouts may be exempt from Sales Tax when mailed, but not if hand delivered.
Materials may be taxable if delivered in tangible format but non-taxable if delivered
electronically. Manufacturing exemptions can also apply depending on circumstances such as whether
a designed ad was placed in a free publication or one that is for sale.
Mechanical artwork and printing are
also often taxable. Mechanical artwork sent to a local printer may be taxable even if all of the
printed matter is distributed outside the state. Invoice itemization or lack thereof can be a
benefit or a detriment to the seller and purchaser. Itemizing can change the taxability of portions
of the invoice either qualifying some items as exempt or in other cases making an otherwise exempt
item taxable. Temporary storage is another area to consider. There may be temporary storage
exemptions in the company's home state or where materials are sent for multi-state distribution,
Use Tax may apply in the states where the materials are ultimately distributed.
These and other advertising taxability
issues vary by state. One solution that works in some states is to have everything delivered
electronically, but companies need to be able to document the delivery method. Having such stated
on the invoice is advisable. If you can't document such, auditors may assess tax, penalties and
interest. If you can document it with effort, there is a cost-benefit decision to be made. Is it
worth trying to prove? Affidavits, if obtained, can still be rejected by auditors.
Sellers may find themselves over
collecting Sales Tax and thus be put at a competitive disadvantage. Purchasers suffer if they have
to pay tax that could have otherwise been legitimately avoided or wasn't really owed to begin
Our experienced professionals can help
navigate these issues to ensure advertising agencies and their clients receive the benefits of
available exemptions and are neither overcharging nor overpaying Sales or Use Tax.
Aircraft: Tax Or
No Tax? A Deal's Structure Makes A Difference.
In some cases, we can to help structure a purchase
with limited or no Sales Tax obligation. We will evaluate your situation. If there is a way to
legally reduce or avoid tax based upon the facts we will help implement the necessary changes so
the transaction qualifies. Such opportunities are not available in all states. Even so, there may
still be legal ways in other states to avoid and/or defer the Sales or Use Tax. Please contact us
when first contemplating an aircraft purchase. Read:
How To Avoid Aircraft Sales & Use Taxes
Construction: Is Sales Tax Required? Who Is Responsible?
These are common questions in this complicated area of
Sales & Use Tax. The answers often depend upon a variety of factors such as:
- Is the project considered as a capital improvement
or a repair?
- Are materials separately stated?
- Is there a valid Exemption Certificate?
- Who is the end user?
- Who is the contractor, subcontractor, end
- Is there an agency relationship with government
- Does the project involve demolition, removal, or
State Auditors prefer to pick apart
projects and consider them as taxable repairs. An appropriate, informed "big picture"
look can be an important counter approach to their claim. It's often difficult to go back and
recover Sales Tax when there was a failure to appropriately collect it from others. Our
professionals can help you navigate the relevant law and ensure your business does not unexpectedly
end up paying Sales or Use Tax.
Accommodations: When It Comes To Tax Issues, There's A Full House!
Because of the variety of services, offerings and
purchases purposes, there is a broad range of pitfalls facing those in the hospitality business.
Our professionals are experienced in this industry. Some key areas include:
- Capital Improvements vs. Maintenance /
- Complimentary Accommodations
- Continental Breakfast & Other Included
- Gratuities Related to House Consumption &
- Handling Exemption Certificates & Other Tax
Issues with Guests
- House Consumption
- Internet Access
- Invoice Analysis
- Laundry Transactions
- Length of Stay
- Local and Long Distance Telephone Calls -
Exemptions and Usage Allocation
- Parking Transactions
- Pay-Per-View Transactions
- Promotional Items and Giveaways
- Purchases for Resale
- Sales, Use & Other Tax Rates
- Telecom Equipment Exemptions
- Telecom Tax Returns
Sales: The Myth - Internet Sales Are Not Taxable.
The reality is that Internet Sales are usually taxable
through either seller collected Sales Tax or through a state's compensating Use Tax. Problems arise
when business activities trigger nexus and a requirement to collect Sales Tax for other states.
Whether the obligation is ignored or unknown, Internet Sellers can subject themselves to owing the
tax they should have collected, plus interest and penalties. Though an out of state seller may not
be required to collect Sales Tax, businesses and individuals who purchase tangible personal
property or taxable services via the Internet may find themselves subject to unexpected Use Tax
assessments, plus penalties and interest if not paid on time.
The perception that goods purchased
over the Internet are not subject to Sales & Use Tax commonly stems from a misunderstanding of
the Federal Internet Tax Freedom Act of 1998 (Title XI of P.L. 105-277) moratorium on new taxes
imposed on the Internet ("the Internet Moratorium"). The Internet Moratorium has been
modified and has currently been extended to November 1, 2014. (See P.L. 108-435 , P.L. 107-75, P.L.
108-435, and P.L. 110-108).
It prohibited the imposition of new or
discriminatory taxes on the Internet. However, many of the state's Sales & Use Tax laws are not
new. Such laws, in most instances, were in existence decades before enactment of the Internet
Moratorium. The primary impact of the Internet Moratorium was to effectively prevent most states
(i.e., states that were not already taxing Internet access) from imposing Sales & Use Tax on
Internet Access and to prevent states from trying to differentiate out-of-state Internet sellers
from out-of-state mail order business when asserting nexus. Prior to the Internet Moratorium, some
states were considering whether the in-state accessibility of an out-of-state business's website
could be deemed a nexus creating presence. The Internet Moratorium does not generally prohibit the
imposition of Sales & Use Tax on tangible personal property or taxable services merely because
the Internet was used to solicit the sale, place the order, accept the order, transmit the
deliverable or otherwise used in connection with an otherwise taxable transaction.
Legislation Extends and Revises
Internet Moratorium for Seven Years.
On Oct. 31, 2007 the President signed
into the law a seven year extension of the moratorium. However, there have been some clarifications
and changes with respect to the grandfather clause and taxability of ancillary services.
Under the old versions of the
moratorium a state that had imposed and enforced the imposition of Sales & Use Tax on the sale
of Internet access prior to October 1, 1998 could continue to impose the tax. However, under the
new legislation the grandfather clause will not apply to any state that has repealed its tax on
such services or issued a ruling that it no longer applies such a tax more than 24 months prior to
the enactment of the legislation (i.e. prior to October 31, 2005).
Additionally, the definition of
Internet access has been revised to shield home pages, electronic mail, instant messaging, video
clips, and personal electronic storage capacity from taxation even if provided separately from the
Internet access service. However, voice, audio, video programming or other products and services
using internet protocol, regardless of whether the charge is bundled with charges for Internet
access are not included within the definition and states can impose taxes on such services.
Further, under the old legislation,
states disputed the issue as to whether they could impose a Sales & Use Tax on
telecommunications services purchased and used by a provider of Internet access to connect their
customers to the Internet. The new legislation makes clear that states that have continued to
impose taxes on telecommunication services purchased, used or sold by an Internet access service
provider have until June 30, 2008 to end the taxation on such services. However, this provision
will only apply to states that have either had a public ruling applying the tax prior to July 1,
2007 or such tax is the subject of litigation which began prior to such date. Therefore, some
states could potentially be grandfathered in and be able to continue taxing such services.
Lastly, the new law attempts to
clarify that the moratorium does not apply to general business taxes, such as taxes on gross
receipts that are designed to be a substitute or supplement a state's corporate income tax. This
would mean that states like Michigan, Ohio, Texas and Washington would continue to be able to tax
Internet access under such tax regimes.
Our professionals can help you
navigate this complex and changing area of Sales & Use Tax to protect purchasers from over or
underpaying and to assist businesses in appropriately collecting and remitting.
Mail Order: Is
Similar to Internet sales, nexus is at the heart of
the matter. A state can require an out-of-state seller to collect the state's Sales or Use Tax only
when there is a sufficient nexus between the seller and the taxing state to overcome constitutional
limitations on states expressed in the Commerce Clause of the United States Constitution (Art. I,
68, cl. 3) and the Due Process Clause of the Fourteenth Amendment to the United States
Constitution, Interpretation of the Commerce Clause and the Due Process clauses have most come from
U.S. Supreme Court case law.
Some activities have been found to be
constitutionally sufficient to establish nexus and require an out-of-state corporation to collect
state taxes. Other activities have been held insufficient to establish the necessary nexus to
impose the duty to collect taxes. A proper nexus determination is crucial in determining
whether a business is required to collect Sales Tax for other states.
Another common mail order company
issue involves drop shipment transactions. Mail order companies might order product from a supplier
who is registered to collect Sales & Use Tax in the same state in which the mail order
company's retail customer is located. For convenience, the mail order company might instruct the
supplier to ship the merchandise directly to its retail customer. The mail order company might not
have sufficient nexus to trigger a legal obligation to collect Sales & Use Tax in the retail
customer's home state and accordingly may not be registered for Sales & Use tax purposes. Not
being registered for Sales & Use Tax purposes, the mail order company may be unable to supply a
proper resale certificate to its supplier. States vary in how they address drop shipment
transactions. Some states may require the supplier to charge sales tax unless the mail order
company registers for Sales & Use Tax purposes and issues a valid resale certificate. Other
states might allow the mail order company to issue a resale certificate from its home state, a
multi-jurisdictional resale certificate or a special state prescribed resale certificate for
out-of-state businesses that do not have nexus.
Some states such as Colorado have
sought to impose use tax notification requirements on out-of state vendors. Colorados law H.B
1193 unsuccessfully tried to force remote out-of-state sellers to report their sales to Colorado
and to notify customers concerning use tax obligations. A federal judge struck down Colorados
law as unconstitutional in Direct Marketing Association v. Huber, No.
1:10-CV-01546-REB-CBS (D. Colo. March 30, 2012)
Manufacturing: When Does The Manufacturing Process Start And End? Can We Be
Considered Exempt As A Manufacturer?
There are often manufacturing exemptions for Sales
& Use Tax purposes, but challenges to the scope of these exemptions has opened up new
Traditional and non-traditional
manufacturing entities alike may be missing some of these exemptions. Some companies don't consider
themselves as manufacturers though part of the products or services they provide may
If your business is involved with
manufacturing, processing, generating, assembling, refining, mining, extracting or produces some
type of product for sale you may be considered a manufacturer for Sales & Use Tax purposes. Why
does this matter? Many states have broad exemptions that allow businesses to purchases machinery
and related supplies exempt from Sales & Use Tax. These exemptions could save your Company
tens-of-thousands of dollars.
However, the states never make it
simple to take advantage of these exemptions. Some states have a partial use rule, other states
impose a predominant use rule, and still other states have an exclusive use rule. Similarly, some
states don't require an application in order to qualify for the manufacturing exemption and some
do. Some states grant the exemption permanently and other states only allow the manufacturing
exemption for new businesses or for a few years. The only certain sure thing is that if you qualify
for a manufacturing exemption and don't take advantage of it you have wasted money - money that
would have gone directly to the bottom line.
At Sales Tax Colorado we specialize in
helping Companies understand the manufacturing exemptions that are available in the states where
they do business. We then offer practical and effective advice on how to qualify for, and maximize,
the exemptions that are available.
We'll sit down with you, tour your
facility (if requested), and gain an understanding of your processes. Then we will discuss how the
manufacturing exemption works in your state of operations and how it works in other states where
you do business. Based upon this information you'll have the knowledge to help save your business
We'll show you where the manufacturing
process begins and ends under the Sales & Use Tax law. Furthermore, we'll help you understand
the taxability of the utilities that you use in the manufacturing process. Should you pay tax on
these utilities? Probably not! All manufacturing equipment breaks down from time to time or needs
routine servicing. Did you know that these costs may also qualify for the manufacturing exemption
and be exempt from Sales & Use Tax?
We'll also explain where packaging,
storage, and even shipping fall under your state's exemptions. You might be surprised to learn that
a larger portion of your manufacturing process qualifies for the various exemptions available in
your state. And what about the storage of your "work-in-process" and finished inventory,
there are many states that have exemptions applicable to these items as well.
Did you also know that if you qualify
as a manufacturer, but failed to take advantage of the exemption, that some (but not all) states
will refund you any erroneously paid Sales & Use Taxes? Some states even pay you interest on
this money. But even the most generous states only offer a limited refund window. We will work with
you to identify erroneously paid taxes, document the overpayment and the applicable exemption,
prepare the applicable refund claim and interface with the applicable State Taxing Authority to
help insure that your refund is approved and processed as quickly as possible.
The flip side of the coin is if you
sell to manufacturers. Did you know that you may not have to charge them Sales & Use Tax on
their purchases from you? This lowers the cost to buy from you and makes you more competitive.
Unfortunately, most states require sellers to obtain very specific documentation to prove that your
customers are exempt from tax. Failure to obtain proper documentation from your customer could
result in your business being held liability for that customer's tax responsibility.
Again, STC will work with you so that
you understand what transactions are exempt from tax and what transactions are not exempt. We also
will review your exemption documentation to see if it is valid and we will provide you with
detailed written instructions and sample exemption documentation so that you can insure that all
future documentation received from customers is valid.
If you have any type of manufacturing,
processing, generating, assembling, refining, mining, extracting process, or produce some type of
product for sale you should consult a Sales & Use Tax professional to help insure that you
maximize the exemptions available to your business.
Pharmaceutical: Diagnosis - Exemption Epidemic?
There are a host of issues to consider with
pharmaceuticals. Key to many of them is whether there is an applicable exemption. There are often
exemptions for prescription and non-prescription drugs, as well as prosthetic and orthopedic
devices, though medical supplies are often taxable. Manufacturing and research and development are
often entailed and thus open up additional exemptions.
How an item is used can also impact
whether it is considered as a medical supply. For example, a hospital's purchase of latex gloves
may be taxed as medical supplies for one department while qualifying as exempt for another
department. Companies may routinely miss purchase exemptions or unnecessarily charge their
customers Sales Tax.
Some other common issues arise due to
the nature of the pharmaceutical industry's heavy use of promotional materials, including drug
samples. Taxability can also be determined based upon who purchases the product, i.e., Is it sold
to a doctor or directly to a patient?
The vast array of issues and
opportunities may result in under or overcharging Sales Tax and accruing too much or too little Use
Tax. The resulting money at stake may manifest as ever-increasing hidden liabilities, while the
potential off-setting refund opportunities go unclaimed. Such high stakes warrant our professional
review of the situation.
Materials: Taxable Or Not?
Most states impose Use Tax on promotional materials
which are given away free of charge in their state. Promotional materials might include catalogues,
brochures, pens, calendars, product samples, annual reports or similar items which companies might
distribute to promote their business. Business are typically considered the end user of these
materials since they are given away rather than sold.
In the case of sample products, most
business will have originally purchased these items as resale inventory without payment of Sales
& Use Tax. Companies are generally required to self-assess Use Tax when sample product is taken
out of inventory and given to customers or prospective customers free of charge. In general, Use
Tax will typically be payable to the state where the sample products are distributed. This can
represent a significant exposure for companies that do have a corresponding self-assessment
procedure in place. States vary in how they define the taxable base. Some states require Use Tax to
be paid on the wholesale cost; other states require that Use Tax be paid on the retail selling
In the case of other promotional
materials, companies often pay Sales & Use Tax to the states in which they originally receive
shipment but may be eligible for a refund or credit of such tax to the extent such materials were
purchased for distribution outside the state. The company will often be required to self-assess Use
Tax in the states where the materials are ultimately distributed.
Most states take the position that Use
Tax applies to promotional materials that are shipped from outside the state directly to
prospective customers in the state via U.S. Mail or common carrier. However, we recommend carefully
reviewing how each state statutorily defines taxable "use". State statutes do not always
support imposition of Use Tax on items shipped into the state without any further in-state exercise
of control over such items. Taxpayers have, in some states and under certain circumstances,
successfully challenged state attempts to impose Use Tax on promotional items that were merely
shipped into their state. Some states also have specific exemptions for promotional materials that
meet certain criteria.
States Have Big Tax Revenue Appetites.
Restaurants face two big challenges when dealing with
states on Sales & Use Tax issues. First, states often have different taxability rules for the
prepared food business. That leaves restaurant owners uncertain on how to handle their
transactions. The second issue involves record keeping. Restaurant owners need to know what records
are required to substantiate what they report.
Due to the nature of cash businesses,
states typically audit with a predisposition of skepticism, anticipating underreporting. When state
auditors find inadequate records, they resort to external indices and usually hit the business with
large assessments plus penalties and interest for underreporting.
It is vital for businesses to know
what's fair and what's unfair and to have a professional advocate to handle such situations.
Information Technology ("IT")
Is it: Canned Or Custom? Disk Or Downloaded? Hardware
Or Software? Cloud Computing Software as a Service (Saas) or another Service Model? Support,
Maintenance Or Repairs? Optional Or Mandatory? These are some hot issues in determining taxability as states catch up to
technology and reach farther for tax dollars.
Taxability varies by state. Software and hardware repairs are often taxable while
telephone support usually is not. Maintenance and maintenance contracts are taxable in some states.
Some states that do not normally tax maintenance do tax maintenance contracts if they are a
mandatory part of the underlying software or hardware purchase or license agreement. Maintenance
contracts might also be taxable if they include free upgrades. Other areas to consider include
upgrades, hardware issues, licensing, software development, subcontracting, traveling sales or
service representatives, warranties, web design and web hosted applications.
These various activities may or may
not be taxable or trigger taxability depending on the state(s) in question and upon such factors as
contract inclusions, invoice itemization, and nexus issues. The frequency of visits and
employee or contractor locations can impact your nexus determination and thus trigger a requirement
to collect Sales Tax in other states. Our professionals can help you understand and work through
the issues impacting you and your customers.
Telecommunications: Extra Taxes, Equipment Exemptions, Nexus
The telecom industry has a legacy of transaction taxes
carried over from legislators' prior ease of taxing monopolies. Back then, the taxes were readily
passed to consumers. Today, those taxes, which may include many taxes in addition to Sales Tax, can
add up to nearly 25% of a company's invoices to customers. There are also a host of exemptions and
many other issues facing this industry.
Compliance is often a significant
issue because of the variety of taxes and nexus issues that allow states to require a company to collect
and remit taxes on their behalf. Issues to consider include, leased lines or carrier agreements,
remote service providers through reseller agreements, and the potential for states agencies to deem
remote carriers that do not otherwise have physical presence in their states to have nexus and a
corresponding filing obligation.
As technology advances, states are
scrambling to increase their revenue base by taxing more products and services. Issues of
taxability frequently involve Voice Over Internet, Voice Mail, Caller ID, Prepaid Calling Cards,
and other such offerings. The taxability of these new services isn't always clear and can change as
Sales Tax Statutes haven't necessarily kept up with the technology and new service offerings
Many companies not viewed as
traditional telecommunication companies are caught in the loop and subsequent burdens of compliance
requirements. This often includes entrepreneurs who pursue a niche market and find themselves in
the telecom arena. They then have the associated burden of compliance with the multitude of taxes
across various states and local jurisdictions. Alternatively, manufacturing exemptions for
equipment may apply, though companies may not see themselves as traditional manufacturers. Money
gets left on the table if legitimate exemptions are missed.
Proper Compliance Should Minimize
Direct Tax Costs: Most of the taxes imposed on telecommunications services should be borne by
or passed on to the customer. These taxes can become Company expenses if not collected from or
passed on to customers. Non-compliance with applicable sales and telecommunications tax laws can
result in significant unrecoverable direct tax costs plus penalties and interest. It's often
difficult or impossible to recover previously uncollected taxes from customers after the
Proper Telecommunications Tax
Compliance Need not be "Overly" Costly: Complying with the multistate sales and
telecommunications tax laws can be overwhelming and very costly. Compliance will be especially
costly if all the tax research, systems programming, procedures manuals, etc. are developed from
scratch without the benefit of leverage from prior experience and best practices. To minimize
costs, it is imperative that all outside consultants have experience. It is also important for your
consultants to know their limitations and that they be willing to refer certain aspects of the
project to experienced providers who can perform those functions more efficiently. The three
primary competencies required to cost-effectively bring a telecommunications company into
compliance with the tax laws include: 1) taxability and requirements consulting; 2)
software/systems solutions and 3) tax compliance assistance. Having the right mix of service
providers who do not try to operate outside their competency areas can significantly reduce the
costs required to bring the Company into compliance.
Our professionals can evaluate your
situation and then recommend and help implement solutions. These solutions may include
for over paid tax or exposure resolution if taxes have not been collected or remitted.
Temporary Storage: Exemptions.
Warehousing companies' customers and others who store
items may be able to take advantage of temporary storage exemptions and avoid single or multiple
states charging Sales or Use Tax on the goods.
At Sales Tax Colorado, we serve
businesses that want to keep their competitive edge by successfully navigating the ambiguous,
constantly changing, and highly intricate maze of Sales & Use Tax regulations.
us today for a no-obligation
consultation about your Sales & Use Tax issues.