Articles Posted in Multi-state sales tax

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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.

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It is difficult to change the channel without hearing some development this week in the Boston Marathon explosion. This week in April, 2013 has been mostly a dark one. However, as we tend to in the face of crisis, our nation has shown its resolve and unity. While it can never replace the loss of life and the feeling of fear that stemmed from the incident, there have been some rays of sunshine. Among the acts of good faith to those struck by this horrible event are the IRS and the Massachusetts Department of Revenue. Each has shown some leniency for its respective filing deadlines.

With tax day marked as April 15, 2013, the IRS allowed for an extension as a result of the tragedy. Specifically, the IRS has allowed for a three-month filing and payment extension to Bostonians and others affected by the explosions. Consequently, no filings or payments will be due if completed by July 15, 2013. The three-month leniency applies to all individuals who are residents of Suffolk County, Massachusetts, including the City of Boston. The IRS also allowed an extension for victims and their families, first responders, and those who had preparers that were adversely affected.

Piggybacking on this idea was the Massachusetts Department of Revenue for state and local tax filings. Massachusetts announced that state and local tax payers have another week to file their returns. That means any person or business that has personal, business, or corporate income tax returns has at least until April 23, 2013 to file their returns.

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It is no secret that states generate high amounts of tax revenue from excise tax. For public policy and political reason, alcohol and tobacco seem ripe for state governments to extort money from its citizens. As a result of high tax rates, businesses that buy and sell large quantities of alcohol and tobacco products find it worthwhile to fight rogue state agencies, such as the various Departments that regulate alcohol and tobacco tax. In a recent Louisiana case, McLane lost against the Department of Revenue in its challenge of the state’s tobacco tax.

Like many states, Louisiana levies a 20% excise tax on the distribution of smokeless tobacco in its state. Louisiana takes the position that the first person to distribute tobacco in Louisiana is liable for the tobacco tax. Specifically, the Louisiana law says that tax is due on 20% of the “invoice price” — an “invoice price” being the “manufacturer’s net invoiced price as invoiced to the tobacco dealer by the manufacturer.” Clear enough? In this particular case, McLane purchased its smokeless tobacco from US Smokeless Tobacco Brands, which is a subsidiary of UST Manufacturing. McLane then sells its tobacco to customers in Louisiana.

At its core, McLane had a simple and straightforward argument that it should not be liable for the tax. McLane argued that it was not a manufacturer so how could Louisiana tax them at the “manufacturers net invoice” price because it buy tobacco from UST Brands, which is not a manufacturer. Even if it was liable for the tax shouldn’t the tax be at the invoice price charged from the Manufacturer to its sales arm?
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As many of you are aware, I have been closely following the Gate Fuel Services & Gate Petroleum in Florida. Those cases involved settled refund claims for gas stations that had purchased equipment for pollution control and were used in the manufacturing process. In January of 2013, a Virginia company took advantage of a creative similar sales tax planning strategy.

Specifically, the Virginia taxpayer operated an oil and natural gas well drilling operation. As the result of a sales tax audit, the Department of Taxation issued an assessment for use of equipment and supplies in the taxpayer’s business. The equipment and supplies at issue were pit liners and storage tanks.

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The taxpayer believed that the pit liners and storage tanks qualified for the “pollution control” exemption because the equipment was used “primarily for the purpose of abating or preventing pollution of the atmosphere or waters” of Virginia. Conversely, the Department asserted that the equipment was not exempt because the Department only recognized pollution control equipment certified by the Virginia Department of Mines, Minerals, and Energy (DMME) for periods through 2006.

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Due to the rising cost and high taxes of cigarettes throughout the country, individuals and businesses are coming up with creative ways to avoid the tax on cigarettes and tobacco. From clubs, to specialty stores, and even peoples’ homes, establishments that allow smokers to make their own cigarettes are on the rise. Companies such as RYO have installed thousands of machines throughout the nation in an effort to combat the rising costs of cigarettes, which are over $66 per carton in some states. The machines can reduce costs to as low as $20 per carton in some states, which has resulted in an industry that has quadrupled in size over the past few years. What is often overlooked by many of these do-it-yourself stores is whether allowing customers to partake in cigarette making morphs them into a cigarette manufacturer. In most states, becoming a cigarette manufacturer can impose strict and expensive license requirements as well as burdensome state taxes.

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For example, in January, 2013, a nonprofit club in Michigan acquired a cigarette making machine. The club purchased the machine as a convenience for its members in a non-commercial setting. Concerned as to whether this practice turned the company into a “manufacturer” of tobacco products under Michigan law, the company requested a Letter Ruling, specifically LR 2013-1, Michigan Department of Treasury, January 31, 2013. The club took it a step further and asked whether the club member operating the cigarette machine would also be a manufacturer.

Under Michigan law, MCL 205422(m)(ii), any person who operates or allows another to operate a “cigarette making machine” for the purpose of generating a cigarette is a “manufacturer.” The defined “cigarette making machine,” means a machine or device that 1) is capable of being loaded with tobacco, cigarette papers or tubes, or any other component related to a cigarette, 2) is designed to produce a cigarette, 3) is commercial grade, and 4) is powered by something other than human power. Applying this nice narrow and concise definition, the state determined that the machines used were the dreaded “cigarette making machine.”

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In my daily routine of reading state and local tax cases across the country, I recently inquired to the State of Florida for the status of an innovative sales tax case unique to the gasoline and petroleum industry this week. As many of you know, I have had the pleasure of growing up and assisting in my family’s petroleum business that has owned, operated, and distributed petroleum and gasoline in South Florida for over 30 years. Therefore, cases like Gate Fuel Services & Gate Petroleum, catch my attention and I really root for innovative and aggressive taxpayers like the one in these cases.

I brought this concept up to several gas station owners at the 2012 Florida Petroleum Marketers Association (“FPMA”) Fuel Expo and many met my suggestion with criticism or disbelief. It is still difficult for me to understand how a room full of dozens of Florida’s gas station owners, operators, and distributors, would rather discuss the latest developments with their beer vendors over a tall cold one, rather than sit and listen to me rant about Florida sales tax. For all of the naysayers out there, I have recently received word from the State of Florida, that the Gate cases were recently settled.

Many of you may recall, I wrote an article for my law firm’s blog in May 2012, about two companion sales and use tax cases. Both cases Gate Petroleum Co. v. Florida Department of Revenue, Case No. 12-CA-381 (2d Cir. Ct. 2012), andGate Fuel Service v. Florida Department of Revenue, 12-CA-379 (2d Cir. Ct. 2012),were filed in Leon County, home of the Florida Department of Revenue. The Gate cases centered around a refund denial for sales and use tax in the amounts of $160,935 and $ $45,071, respectively. In both cases, the Florida Department of Revenue (“DOR”) admittedly opposed the refund claims based essentially the same innovative theory of recovery.

For the uninformed, the retail gas station taxpayers in the cases alleged that they made certain equipment purchases that were exempt from Florida sales and use tax. Specifically, the Taxpayers argued that fuel storage equipment which holds regular and premium-grade fuel in underground tanks, mixes the two at the dispenser, and creates a mid-grade gasoline for sale at its retail locations. Being that this is the pump system at most modern gas stations, how come every gas station that has purchased taxable equipment in the last three years are not going for the refund? in short, they all should.
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It never ceases to amaze me as to the types of cases and industries that come up in our practice. In late 2012, a Taxpayer, or its representative, inquired to the Missouri Department of Revenue whether certain sales it made to its customers are subject to Missouri sales and use tax. As a state and local tax attorney and the proud recipient of a recent jawbone graft, this particular ruling caught my attention. Specifically, in LR 732, Mo. Dept. of Revenue (August 10, 2012), a dental supply and service distributor sold single patient use medical materials to its customers. The medical materials happened to be used for structural support for bone tissue during jaw bone grafting.

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Like every one of the 45 states and the District of Colombia that has a sales and use tax regime, Missouri has a medical supply exemption. Medical exemptions are often popular ways for Legislatures to look popular by exempting items such as food and medicine that is necessary for people to survive. States take the position that taxpayers should not be burdened with state taxes for items that are essential.

At issue in LR 732, Mo. Dept. of Revenue (August 10, 2012) was Missouri’s exemption for “orthopedic devices” such as rigid or semi rigid leg, arm, back or neck braces that are used to support weak or deformed body, or restrict or eliminate motion in diseased or injured body parts. Sounds delicious, don’t it? In any event, the Taxpayer was curious if jawbone grafting materials fit within this gruesome sounding exemption.
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Everyone has seen the clever IPhone commercials, which promote its applications (“Apps”) and states the famous phrase “there’s an app for that!” Some sources even boast that as of the end of 2012, there were some 750,000 apps available on the Iphone App Store. From useful apps like ESPN, Shazam, and Urbanspoon, to useless apps like Have2P Restroom Locator, Can I Drive Yet, and How to Text A Girl, there truly might be an app for everyone. There are even Apps like Bargain Bin which locates apps that are on sale.

App.jpgAttempting to cash in, many people and businesses have attempted to create their own apps to eventually sell to Apple. While most just think about hitting it big, the state and local tax attorney in me wonders where the sale of an app is taking place and if this type of transaction is subject to sales tax. Continue reading

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McDonalds.jpgAs many of you are aware, today, February 18, 2013, is President’s Day. For many that means banks are closed and, more importantly, work is closed. For many others, like me, President’s Day really just feels like another day. However, this President’s Day is special thanks to McDonald’s.

Like most of the country, on my drive into work this morning, I heard about McDonald’s special President’s Day promotion. Specifically, if a customer purchases a Big Mac or Quarter Pounder, a second delicious sandwich can be purchased for a penny. Why did McDonald’s charge a penny, rather than just giving it away for free? Perhaps, the corporate executives at McDonald have read my riveting state and local tax blog last week.

For the few of you that did not read my blog I did last week, I wrote about the power of the sale for resale exemption offered by most states in their sales and use tax regime. In a nutshell, this means that when a business purchases something it does not pay tax but rather charges tax to its customer when the item is resold.

The policy behind the sale for resale exemption is that sales and use tax attempts to tax consumption by adding a tax to purchases made by the end consumer of a good or service. While each state varies as to exactly what is and is not taxable, every state that I am aware of has a sale for resale exemption. Conversely, if the business is the end user on items it purchases it owes a use tax on those items. The sale for resale exemption can be a very powerful multi-state sales tax technique if used correctly.
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Anytime I go out to eat or to a fast food restaurant, my mind automatically thinks in terms of ways a company can save wasteful state tax dollars in its operation. Whether I am at a restaurant that hands out silverware, a fast-food chain that offers plastic silverware, or a restaurant that gives away items, the use tax issues can likely be avoided if the company practiced careful sales and use tax planning techniques.

Over the past few years, a couple of cases in Alabama showcase the ongoing dilemma. The first case involved Logan’s Roadhouse. Many of us have been to a Logan’s across the country and enjoy the ability to eat peanuts and throw the shells all over the floor. But how many of us, aside from me, actually analyze the sales and use tax implications of this practice? Peanut Shells.jpgAre the peanuts being purchased by Logan’s and resold to its customers? Or is Logan’s purchasing the peanuts for its own use as a giveaway to its customers?

In a similar case, Kelly’s Food Concepts (KFC, Popeye’s, and Church’s Chicken) illustrates a common restaurant problem that has been litigated since the creation of the sales tax. Are items purchased by a restaurant such as napkins, utensils, straws, stirrers, trays, kitchen supplies, ketchup, salt and pepper, toilet paper, and other items on the table, for the restaurants use or resold to the customer for its use?

Without immediately diving into the cases, it seems appropriate to explain a common problem faced by the state and local tax professional. Most states (45) have a state sales tax regime. The sales tax attempts to tax consumption by adding a tax to the end-user of tangible personal property (“TPP”). While each state various as to exactly what is and is not taxable, every state that I am aware of has a sale for resale exemption. That means that when a business purchases something it does not pay tax but rather charges tax to its customer when the item is resold. Conversely, the business is the end user on items it purchases for its own use (items not for resale) and it owes a use tax on those items. While it seems obvious whether an item is an exempt sale for resale, as shown by a couple simple examples above, this inquiry can become quite complicated.

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