sales and use tax

Article Dean Dorton

Did you say 35 new services will be subject to sales and use tax? Yes. Additionally, an exemption from sales tax was expanded, a de minimis threshold was enacted for the new services, and there is a new reporting requirement for organizers of festivals.

Expand the base, expand the base, expand the base!

Numerous tax reform commissions and paid tax consultants have advised the General Assembly for decades to “modernize” Kentucky’s sales tax statutes by “expanding the tax base.” “Expanding the base” can be done in different ways, such as by repealing exemptions from sales and use tax or by imposing tax on products or services not subject to tax. The Legislature started down the path of expanding the base in 2018 by adding ten services to the tax base and increasing the types of admissions subject to tax.

Effective January 1, 2023, 35 more services will be subject to sales and use tax. Here’s the list:

  • Photography and photo finishing services
  • Marketing services
  • Telemarketing services
  • Public opinion and research polling services
  • Lobbying services
  • Executive employee recruitment services
  • Web site design and development services
  • Web site hosting services
  • Facsimile transmission services
  • Private mailroom services, including presorting mail and packages by postal code; address barcoding; tracking; delivery to postal service; and private mailbox rentals
  • Bodyguard services
  • Residential and nonresidential security system monitoring services
  • Private investigation services
  • Process server services
  • Repossession of tangible personal property services
  • Personal background check services
  • Parking services, including valet services and the use of parking lots and parking structures, but excluding any parking services at an educational institution
  • Road and travel services provided by automobile clubs
  • Condominium time-share exchange services
  • Rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events
  • Social event planning and coordination services
  • Leisure, recreational, and athletic instructional services
  • Recreational camp tuition and fees
  • Personal fitness training services
  • Massage services, except when medically necessary
  • Cosmetic surgery services
  • Body modification services including tattooing, piercing, scarification, branding, tongue splitting, transdermal and subdermal implants, ear pointing, teeth pointing, and any other modifications that are not necessary for medical or dental health
  • Testing services, except testing for medical, educational, or veterinary reasons
  • Interior decorating and design services
  • Household moving services
  • Specialized design services including the design of clothing, costumes, fashion, furs, jewelry, shoes, textiles, and lighting
  • Lapidary services, including cutting, polishing, and engraving precious stones
  • Labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold in that transaction including service calls and trip charges
  • Labor to repair or alter apparel, footwear, watches, or jewelry when no tangible personal property is sold in that transaction
  • Prewritten computer software access services

While examples of the types of things to be taxed is included as part of the language of a few of the services, such as body modification and specialized design services, only five of the 35 are defined:

  • Cosmetic surgery services
    • Modifications to all areas of the head, neck, and body to enhance appearance through surgical and medical techniques, excluding reconstruction of facial and body defects due to birth disorders, trauma, burns, or disease;
  • Photography and photo finishing services
    • (1) The taking, developing, or printing of an original photograph, or (2) Image editing including shadow removal, tone adjustments, vertical and horizontal alignment and cropping, composite image creation, formatting, watermarking printing, and delivery of an original photograph in the form of tangible personal property, digital property, or other media, excluding photography services necessary for medical or dental health;
  • Marketing services
    • Developing marketing objectives and policies, sales forecasting, new product developing and pricing, licensing, and franchise planning;
  • Telemarketing services
    • Services provided via telephone, facsimile, electronic mail, or other modes of communications to another person, which are unsolicited by that person, for the purposes of: (a)(1) promoting products or services; (2) taking orders; or (3) providing information or assistance regarding the products or services; or (b) soliciting contributions; and
  • Prewritten computer software access services
    • The right of access to prewritten computer software where the object of the transaction is to use the prewritten computer software while possession of the prewritten computer software is maintained by the seller or a third party, wherever located, regardless of whether the charge for the access or use is on a per use, per user, per license, subscription, or some other basis.

The Department of Revenue is working to develop guidance for taxpayers as to the meaning and breadth of many of the new services. Two other changes were made to expand the reach of sales and use taxes.

Broaden the definition of “extended warranties”

First, the definition of “extended warranties” is amended to impose tax on extended warranties on real property. The phrase “extended warranties” is a bit of a misnomer. The phrase includes an agreement such as an extended warranty on your car, but it also includes what are commonly referred to as maintenance or service contracts. Thus, maintenance or service contracts for real property, such as parking lot cleaning, exterior maintenance of apartment buildings, and heating and air conditioning maintenance, will be subject to sales tax. (Snow removal is already taxable as a “landscaping” service.)

Limit the exemption for residential utilities

Second, the exemption from sales tax on residential utilities, such as sewer services, water, electricity, and natural gas, will be limited to services “purchased and declared by the resident as used in his or her place of domicile.” “Place of domicile” is defined as “the place where an individual has his or her legal, true, fixed, and permanent home and principal establishment, and to which, whenever the individual is absent, the individual has the intention of returning.” Many questions are popping up around this change, including: How does a resident “declare” their place of domicile? Will there be a form? Will there be a different form for every type of utility – water, gas, electric, etc.? What if you own rental property and you pay the utilities? The rental property is not your place of domicile, but it is someone’s place of domicile.

Add exemptions?

What is the opposite of “expanding the base?” The tax base is narrowed or constricted when existing exemptions are broadened or new exemptions are added. The General Assembly significantly expanded the current exemption for prescription drugs, which has applied only to drugs to treat humans. Effective January 1, 2023, both prescription and over the counter drugs used in the farming and treatment of cattle, sheep, goats, swine, poultry, ratite birds, llamas, alpacas, buffalo, aquatic organisms, or cervids also will be exempt from sales and use tax. (Note that the exemption does not extend to horses.)

Two other exemptions added by the General Assembly are specifically related to the new services subject to sales and use tax. The first provides that the provision of services related to lump sum, fixed-price, or similar contracts executed on or before February 25, 2022 are to be exempt from the additional taxable services imposed. (February 25, 2022 is the date on which House Bill 8 was introduced in the General Assembly.) That date now having passed, any businesses entering multi-year fixed price or lump sum contracts need to factor in the additional taxable services when quoting or bidding on jobs.

Second, there is a partial exemption for the newly taxed services if the gross receipts from the provision of the services were less than $6,000 during calendar year 2021. However, once gross receipts exceed $6,000 in 2022 or a subsequent year, all additional receipts are subject to tax. If a business that will provide one of the new taxable services has no doubt but that it will exceed the $6,000 de minimis threshold, we recommend collecting the tax beginning on January 1, 2023 on all receipts to eliminate the administrative burdens associated with keeping track of when $6,000 is reached and rushed actions to register for sales tax and revised accounting and other activities the day after the $6,000 is met.

Miscellaneous

The final sales tax change of note is aimed at increasing compliance in the state by vendors at events. Beginning July 14, 2022, coordinators of festivals or similar events must provide the Department of Revenue a list of vendors selling at the event. While a precise definition of “festivals or similar events” has not yet been provided, it is possible the reporting requirement could apply to everything from a city or county’s annual spring, summer, or fall festival to large events such as The Kentucky Derby and The Breeder’s Cup.

Article Dean Dorton

Repost from Avalara

With the myriad responsibilities involved in running a successful business, it should come as no surprise that preparing for a sales and use tax audit is not exactly a high priority or favorite topic of conversation among business owners. There are only so many hours in a day, and many companies choose to put examining their compliance process on the back burner; at worst, the idea is ignored entirely. Even business owners who are ready and willing to tackle the issue rarely know where to begin. But sales and use tax audits don’t have to be a specter that looms in the mind of every well-intentioned businessperson. Instead, in the same way we are told the benefits of “knowing thy enemy,” knowing one’s compliance process as it relates to industry-specific audit risk can make all the difference in the world.

First, an important clarification: Auditors are not the enemy in this scenario, audit risk is. The current tax system is, for many, extremely complex and difficult to navigate, but auditors are simply those tasked with ensuring that business owners — with all the tools at their disposal — are honoring what’s owed to the state. Every year, it seems there are fewer states not suffering from a budget deficit, and as a result, states are finding more ways to maximize the amount of sales and use tax revenue, including significantly increasing the audit workforce across the country. In short, auditing is easy money. Furthermore, not only are states adding to their audit divisions, but many of those newly hired auditors are setting up shop outside of their home state and auditing out-of-state businesses. With nexus legislation and use tax reporting requirements proving difficult to pass or enforce, it’s no wonder states turn to their audit professionals to save the day.

So, what do you do if you’re a remote auditor charged with bringing home the bacon? Easy: You target companies with an obligation to collect and remit your state’s tax, and you focus on the industries most prone to error when it comes to compliance. That list is shorter than you might think. According to a study Avalara conducted with Peisner Johnson & Company, nearly 60 percent of state audits are spread among just four or five industries: retail, manufacturing, construction, wholesale/distribution, and food service. This reality is the basis of the newest Avalara whitepaper, Sales and Use Tax Audits Uncovered: Who Gets Audited, Why They Get Audited, and the Impact on Companies.

As the whitepaper reveals, certain industries get targeted by auditors due to the nature of how they operate, like how food service companies are frequently audited because they’re cash-based and known to leave cash unreported. Beyond that, the primary reason these industries are targeted is that they historically fail to adhere to state and local sales and use tax regulations. In fact, according to the California Board of Equalization, the number one most frequent error of noncompliance made by businesses typically involves untaxed purchases from out-of-state vendors. Consequently, the data suggests that the bulk of audit assessments resulting from these errors came from use tax not being paid. And these are no small assessments: Avalara’s joint study also found that the average cost of an audit is approximately $114,000 including penalties, fees, and professional counsel. That’s quite a price to pay for something so avoidable.
Ultimately, when it comes to sales and use tax audits, the best offense is a solid defense. In the whitepaper, Sales and Use Tax Audits Uncovered, you’ll learn the most common audit triggers for each key industry, as well as how best to prepare and support yourself before or during an audit. Sales and use tax compliance may be tricky, but with the wealth of tools and information available today, business owners have never been in a better position to eliminate risk and safeguard themselves against a costly audit.

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Article Dean Dorton

Repost from Avalara

Auditors are on the move. While most businesses expect (i.e., dread) to be audited by their home department of revenue, it often comes as a surprise to learn that state tax authorities routinely send auditors to, or hire auditors from, other states to capture unreported sales and use tax revenue. Some states go so far as to have remote offices.

For example, the Texas Comptroller has audit offices in Los Angeles, New York City, and Tulsa, Oklahoma. California has field audit offices in Chicago, New York, and Houston. There are Missouri Department of Revenue offices near Chicago, Dallas, and New York, while the Florida Department of Revenue has offices in Atlanta, Chicago, Dallas, Houston, Los Angeles, New York, and Pittsburg. The Utah State Tax Commission doesn’t specify where all it has sales and use tax auditors but notes that they “spend a majority of their time at taxpayers’ offices looking at detailed sales and purchase transactions” and “travel to locations all over the United States to perform their work.”

Field auditors employed by the Washington State Department of Revenue may audit businesses in multiple states. The Department divides the country into several sections: an Out-of-State North District (Eastern Iowa, Illinois, Indiana, Michigan, Minnesota, Ohio, Western Pennsylvania, and Wisconsin), an Out-of-State South District, and so on. Field audit offices develop and implement audit programs to optimize accurate tax reporting and payment by businesses located throughout the target area.

What do auditors in other states do?

Auditors frequently examine sales by companies that are headquartered in other states but have nexus (a connection strong enough to trigger a tax collection obligation) in the auditor’s home state. Yet a company doesn’t have to be registered with a state to be targeted by that state’s audit division. While many audits are selected by a random sampling of registered businesses, auditors knock on the doors of unregistered businesses whenever evidence suggests that they may owe the state tax revenue. This is true both in-state and out.

Many states have increased audits since the Great Recession, hiring new auditors as needed. New Mexico’s Audit and Compliance Division has added approximately 62 FTE employees since economy plummeted. And in 2015, the Wisconsin Department of Revenue announced that it needed 102 additional auditors and 11 additional agents to help uncover what was estimated to be approximately $80 million in unpaid tax revenue. Many of the new hires are focusing on businesses based in other states.

States work together

In addition to sending auditors to other states, state tax administrators frequently work together. Regional information-sharing agreements between states, such as the following, can greatly help facilitate audits:

  • NESTOA, North Eastern States Tax Officials Association (Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont)
  • SEATA, Southeastern Association of Tax Administrators (Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia)
  • MSATA, Midwestern States Association of Tax Administrators (Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Wisconsin)
  • WSATA, Western States Association of Tax Administrators (Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming)

There are other sorts of information-sharing agreements as well. New Mexico shares information with — and receives information from — three tribal governments. And the Multistate Tax Commission Joint Audit Program for member states “provides obvious economies of scale to the states” and “relieves the taxpayer of the burden on multiple ongoing audits.”

Oklahoma to base auditors in other states

Oklahoma doesn’t currently base auditors in other states. Like Utah, it sends auditors to various out-of-state locations as needed, and between 2014 and 2017, it conducted more than 460 audits of remotely based businesses. But a recently enacted law will soon enable the Tax Commission to develop a stronger presence out of state.

HB 1427 authorizes the Oklahoma Tax Commission to create and maintain an Out-of-State Tax Collections Enforcement Division. It enables the Commission to “employ full-time, unclassified, out-of-state tax auditors or full-time-equivalent contracted auditors” to enhance the following:

  • “Sales and use tax collections related to sales or transactions involving residents of Oklahoma and out-of-state vendors with a nexus to the State of Oklahoma”
  • “Collections of any other unpaid taxes owed the State of Oklahoma by out-of-state individuals, firms, and corporations”

The Tax Commission may audit any individual or business it believes may owe tax revenue to Oklahoma. The law takes effect November 1, 2017.

How would your business fare during an audit?

Get your free copy of the Sales and Use Tax Audits Uncovered report to learn more about audit triggers, how to avoid them, and how to protect your business against unnecessary tax compliance risk.

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Article Dean Dorton

Growth isn’t a one-size-fits-all approach. In fact, companies expend a great deal of energy and resources deciding which pursuits will move the needle the furthest toward achieving specific goals, and where to prioritize their time and investment.

Oftentimes sales and use tax gets left out of this equation, especially when it doesn’t appear to directly correlate to the task at hand. Certain growth activities, like adding new locations, products, or sales channels, instinctively signal a need to alter sales and use tax compliance practices. With others like financing rounds, acquisitions, or technology platform changes, tax implications aren’t as obvious and therefore are more likely to be overlooked. Yet these are often the situations where compliance strategies can have the greatest and most lasting impact.

Below is a brief glimpse of how sales and use tax compliance can come into play for 3 business growth activities that can be life (and tax) changing: financing events, M&A, and technology platform integration projects.  Here’s what you should be aware of when going through these processes.

Financing events

For any financing event, public or private, investors look closely not only at how you plan to grow the business, but also how you are managing it now. Poor sales tax management practices or unfavorable audit outcomes can impact valuation, jeopardize funding, or even nullify deals. High visibility events like funding rounds and IPOs can also bring your business to the attention of state auditors looking to draw in more tax dollars.

Mergers and acquisitions

The meshing together of people, assets, systems, and processes is no simple feat. So, it’s not surprising that business integration issues following M&A transactions are one of the biggest things keeping company execs up at night.  Between due diligence, integration, accounting/financial reporting, and post-acquisition compliance, who has time for the minutia of sales tax? It can be easy to overlook tax obligations or liabilities, which can raise red flags with investors early in the process, or with auditors later.

Technology platform changes, consolidations or upgrades

During change events, it’s good practice to evaluate your financial systems and fill any gaps with new solutions or functionality that can advance your growth objectives. For example, tax automation software that unites critical transaction data from disparate systems and processes can alleviate compliance issues during post-merger integrations, reducing audit risk and avoiding delays in closing the books.

Download the complete whitepaper for further insights from leading industry leaders.

Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

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Article Dean Dorton

In 2017, when it comes to sales tax, states are taking stances on everything from soda to streaming content, tobacco to tampons. The New Year will also bring renewed efforts by states to implement internet sales taxes and continue the legal battle to overturn existing legislation.

Here is a summary of 2017’s most newsworthy federal and state sales and use tax changes:

The great nexus debate

The push by states for online sales tax revenue will likely continue in 2017. Oklahoma created new reporting obligations for remote sellers starting in November of this year and Tennessee implemented a new economic nexus policy that takes effect on July 1, 2017. A new use tax notification requirement for remote sellers is also set to take effect on July 1, 2017 in Louisiana.

States are also busy challenging existing precedent. Attorneys general in 11 states called for the U.S. Supreme Court to overturn Quill Corp. v. North Dakota — the 1992 decision that established that states cannot impose a tax collection obligation on businesses lacking a substantial physical presence in the state.

And four pieces of online sales tax legislation continue to languish on Capitol Hill; three look to impose tax on remote sellers: The Marketplace Fairness Act, the Remote Transactions Parity Act, the Online Sales Simplification Act, and one, the No Regulation without Representation Act, aims to prevent it.

Product and services tax changes

Soda tax

Several states, cities and counties and the Navajo Nation impose higher taxes on sugary drinks like soda, which have “minimal-to-no-nutritional value food.” Philadelphia joins the ranks on January 1, followed by Boulder, Colorado, Oakland, California, and Cook County, Illinois on July 1.

‘Tampon tax’ exemptions

A number of states enacted so-called “tampon tax” exemptions in 2016. More are likely to follow suit starting with Illinois where the exemption for feminine hygiene products takes effect on January 1, 2017. Connecticut’s exemption doesn’t take effect until July 2018.

Streaming services

Streaming services such as those provided by Netflix, Hulu, and HBO Go will be subject to sales tax in Pasadena, California beginning January 1. Other cities in California may follow suit. Chicago, Illinois imposes a similar tax.

Tobacco, e-cigarettes and vaping

California is extending cigarette and tobacco taxes to e-cigarettes and similar vaping products starting January 1. The tax rate on tobacco products will also increase significantly once Proposition 56 takes effect in early 2017.

State sales and use tax rate changes

California’s sales and use tax rate will drop from 7.5% to 7.25% under Proposition 30 (which temporarily increased the rate by 0.25% through December 1, 2016). The state rate decrease also affects certain partial state tax exemptions.

New Jersey’s sales and use tax rate in New Jersey will decrease from 7% to 6.875% on January 1, 2017 to offset a recent gas tax hike. It will drop further in 2018.

North Carolina use tax will apply to businesses storing tangible personal property or digital property in the state for any period of time. This expansion of use tax is due to the enactment of Senate Bill 729.

Missouri sales and use tax will not be expanded to any currently exempt services in 2017. On November 8, voters approved prohibiting the expansion of sales tax to any services not taxed as of January 1, 2015. It will be interesting to see if Missouri legislators attempt to capture additional sales tax revenue another way.

Tax exemption changes

Ohio will once again exempt investment bullion from sales and use tax beginning January 1.

Maine is expanding the sales tax exemption for products used in certain commercial activities as of January 1. Additional information will soon be available from the Maine Revenue Services.

North Carolina will exempt certain service contracts sold by or on behalf of motor vehicle dealers, in addition to certain sales of food, prepared food, soft drinks, candy, and other items of tangible personal property at school sponsored events. Certain sales of repair, maintenance, and installation services that are part of a real property contract will also be exempt.

Georgia terminated a temporary exemption for tangible personal property used for or in the renovation or expansion of qualifying aquariums in Georgia effective January 1, 2017.

North Carolina will no longer exempt retail sales of tangible personal property, certain digital property, and taxable services by certain nonprofits from sales and use tax as of January 1. Purchases by a manufacturer of fuel or piped natural gas used solely for comfort heating will also no longer be exempt.

Local sales tax changes

Several states have announced local sales and use tax rate changes, effective January 1.

More details on all of these changes, including a state-by-state breakdown, can in Avalara’s newly released

2017 Sales Tax Changes report.

Automation can simplify sales tax

Understanding how these sales tax changes impact your business is important, but can also be overwhelming, especially if you are obligated to register, collect and report tax in several states. Automating sales and use tax compliance in your accounting system, ERP or ecommerce system can alleviate much of this strain. Avalara’s tax management software ensures accurate tax calculation (including current changes), proper management of tax exemptions and streamlines the remittance and filing process for sales tax returns in every U.S. jurisdiction.

Get a free copy of the 2017 Sales Tax Changes report.

Permission to reprint or repost given by Avalara. Some content was previously published at www.avalara.com/blog.

Article Dean Dorton

Mike Harbold, Associate Director of Tax Services, is presenting two topics at the Sales and Use Tax in Kentucky seminar in downtown Louisville, KY on Friday, November 6, 2015. Mike has more than 20 years of experience in providing tax services to Kentuckiana companies.

This basic-to-intermediate level seminar is essential for accountants, attorneys, financial officers, controllers, business and tax advisors, enrolled agents, and business owners who are interested in understanding the impact of sales and use taxes on them or their client’s businesses.

Register online via the National Business Institute.

Course content:

  • Reviewing Recent Developments
  • Clarifying Nexus Confusion
  • Complying with and Enforcing Sales and Use Tax
  • Identifying Tax Exemptions and Exclusions
  • Understanding State Sales and Use Tax
  • Resolving Sales and Use Tax Disputes
  • Answering your Real World Questions – Q&A Session

Feel free to reach out to us if you have questions. To learn more about how our tax team can help you, contact your Dean Dorton advisor or Mike Harbold at mharbold@deandorton.com.

Our services include:

  • Forensic Accounting and Litigation Consulting
  • Business Consulting
  • Business Valuation
  • Financial Statement Audits and Reviews
  • Forensic Accounting and Litigation Consulting
  • Healthcare Consulting
  • Merger and Acquisition Analysis
  • Tax Planning, Returns, and Representation (including Charitable and Wealth & Real Estate)
  • Technology Consulting