Working with BDO SALT Best Opportunities to Serve your Clients
Tom Smith Partner – State and Local Tax
[email protected] 918-640-4306 (Mobile) [email protected]
Client name - Event - Presentation title Page 1 Thomas A. Smith, CPA
• 24 years of SALT Experience • Texas Sales and Use Tax Auditor • Coopers & Lybrand, Tulsa • Ernst & Young (Memphis and Atlanta) • KPMG, LLP (Tulsa and Dallas) • HoganTaylor LLP • BDO USA, LLP
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Page 4 State and Local Tax (SALT)
Escheat Property Tax (unclaimed property) Sales and Use Tax
Income /Franchise Tax Credits & Incentives
Page 5 Page 5 Local Property Tax Updates
Washington County reappraisal – an example • Court ordered reappraisal • Tax Equalization Division indicated too many properties were under and over assessed. • Last reappraisal was early effective in 1981 • 121,000 parcels reappraised • Likely significant increases and potential over-assessments.
Page 6 Local Property Tax Updates
Interesting proposal in Pittsburgh • They’ve had 3 reappraisals in 15 years • Value appeals by city is common after sale – resolution would limit this ability until two years after sale. • Limits city to appealing value to once every three years. • Generate list of properties with assessments 50% over market value and city would appeal values downward. City traditionally defended values. • City could be fighting reappraisals against school districts and municipalities on behalf of property owner. • The proposal was pushed into committee – likely too many obstacles for implementation
City of Baltimore has recently become more engaged in tracking sales and appealing assessments for value increases.
Page 7 Property Tax – Value In Use Vs Value In Exchange
• “Dark Store” theory for big box retailers (successful lawsuits in mid-west spreading to other states) - properties are unique and few alternatives if the space goes vacant. Therefore current use value is not actual market value (value in exchange). • Recent Harley Davidson case in York County has brought this issue recently to Pennsylvania. Other issues with pollution stigma muddies the water. • A property is to be assessed at its actual value. 53 Pa.C.S. § 8842. Actual value means a parcel's fair market value, which is the price which a purchaser, willing but not obliged to buy, would pay an owner, willing but not obliged to sell, taking into consideration all uses to which the property is adapted and might in reason be applied. In that regard, a parcel's market value is distinct from its value as it is currently being used; the Commonwealth Court of Pennsylvania has reasoned that a property's use and its resulting value-in-use, value unique to a particular owner, is not to be considered in assessing the fair market value of property for tax assessment purposes.
Page 8 Property Tax - Department Stores
• It’s estimated about 800 stores, or about 1/5 of mall anchor space, would need to close to return market to 2006 levels of sales per square foot.
• Competition from online retailers (Amazon) and discount retailers ( Walmart) are hurting Sears, JC Penney, and Macy’s. Department stores were expanding fairly rapidly before recession.
• Average mall in America generated $165 in sales per square foot last year (24% decline over last decade). There were an estimated 35 million visits to malls in 2010. The number of visits are estimated at 17 million in 2013.
• Problem of decreasing mall values is a problem for pensions and other large investors. They have to invest billions of dollars and reach targeted returns for their members. A commercial real estate bubble is brewing.
Page 9 Unclaimed Property
• Generally intangible personal property for which there has been no owner activity for a specified period of time (“dormancy period”).
• Examples of unclaimed property:
• Uncashed payroll or commission checks
• Uncashed payable/vendor checks
• Gift certificates/gift cards
• Customer merchandise credits, layaways, deposits, refunds or rebates
• Overpayments/unidentified remittances
• Unused/outstanding benefits (non-ERISA)
• Miscellaneous income/bad debt expense accounts
Page 10 Unclaimed Property
• All 50 states and the District of Columbia have enacted unclaimed property laws.
• The purpose of unclaimed property laws is to ensure the protection of abandoned property until the rightful owner is located. Moreover, states use any derivative funds earned on such property for the public good.
• The Supreme Court of the United States in Texas v. New Jersey, established the following unclaimed property sourcing rule:
• First, to the state of the rightful owner’s last known address, if known, or
• Second, to the state of the holder’s incorporation (commercial domicile for unincorporated entities).
• Dormancy Periods
Page 11 Unclaimed Property
• Temple-Inland, Inc. v. Cook • Temple-Inland, Inc., a Delaware incorporated entity, was audited by Kelmar Associates on behalf of the State of Delaware beginning in 2008, and subsequently filed an administrative appeal regarding Kelmar’s “Report of Examination.” • On June 28, 2016 The Court entered summary judgement in favor of Temple-Inland on the substantive due process claims. There was no suggested remedy published at the time. • The case was settled out of court on August 5, 2016.
• DE SOS update to VDA Program • In late August the DE SOS issued a letter for all companies in the DE VDA program. The highlights are as follows: • The Court’s ruling in Temple-Inland is limited to the specific facts and circumstances of the unclaimed property audit issue in the case. • DE SOS VDA program is different than Audit at issue in Temple-Inland. • Extrapolation formula requires “reasonable estimation” and bright line test (expected to remain as “gross approach method” and avoids multiple state extrapolations in their view); • Extrapolation method is same or substantially similar method used by other states; • DE VDA 2 Release Form - state agrees to indemnify the holder for all future claims by another state on the estimated unclaimed property that was reported (application of this must be made clear as part of the settlement, with additional language by legal counsel where warranted); • Reduced look-back to 10 years plus 5 year dormancy period = 15 years from date of enrollment
• Legislature will convene in January 2017 and is expected to make certain statutory changes to unclaimed property law.
Page 12 In most organizations, tax is a reaction to events that have already occurred.
I’m usually called to find a solution during an unexpected audit, that could have went much better had a simple strategy been in place.
Page 13 Page 13 The Result Is: Limited opportunities for improvement Limited opportunities to manage risk
Page 14 Page 14 Companies have all sorts of marketing plans but very rarely have a state tax plan or strategy.
Page 15 Page 15 Not talking about the tax tail wagging the dog.
Tax Tail
Page 16 Page 16 But proactively managing the tax destiny by design
Instead of allowing a client’s tax destiny to be created by default
Page 17 Page 17 Identify Key Triggers
Establish clear triggers that will cause the company to establish itself in a state.
Know the questions you need answered.
For Example: - Employee Living in a State - Sales Person Entering a State - Preforming a Service in a State - Sales Level or Volume within a State
PageClient 18 name - Event - Presentation title Page 18 Type of Taxes
• Sales Tax • Transaction Taxes imposed on transfers of tangible personal property and taxable services
• Use tax • Tax imposed on “USE” of property in State
Page 19 Type of Taxes
• Intrastate Sales • Transactions completed in the SAME state • If Seller and Purchaser are in same state and the sale is consummated in same state, sales tax generally applies
• Interstate Sales • Transaction involving multiple states, use tax generally applies
Page 20 Type of Taxes
Page 21 Responsibility for Tax
• Seller • Fiduciary responsibility to collect and remit tax legally due to state • Technically, not seller’s tax
• Buyer • Legally obligated to pay sales tax
Page 22 Responsibility for Tax
If the Seller is making a taxable sale in the state, they must charge tax or obtain the proper documentation to support a tax-free sale.
What is the proper documentation to be maintained by the seller?
Page 23 Responsibility for Tax
• Resale and Exemption Certificates • States differ on what is acceptable • Generally, must have the following to be valid • Name and address of Purchaser • Purchaser’s Retail Permit Number • Purchaser’s Statement • Reseller of item purchased • Items are purchased for resale • Signature of Purchaser
Page 24 Responsibility for Tax
• Multi-state Tax Commission • Created Uniform Sales and Use Tax Certificate • For use in Multiple Jurisdictions • 37 states and the District of Columbia accept the Multijurisdictional Resale Certificate • Each retailer is responsible for determining the validity of a purchaser’s claim for exemption
Page 25 Responsibility for Tax
Multijurisdictional: Uniform Sales and Use Tax Certificate
Page 26 Responsibility for Tax
• Good Faith Acceptance of Resale Certificates • Latitude for taxpayers • May use as a defense • However, Seller must ask questions! • Seller with actual knowledge that Purchaser is unlikely to resell MUST ask questions to ascertain facts to support Resale Certificate
Page 27 Responsibility for Tax
• Retailers • Fiduciary duty to collect and remit tax • Must register with state, timely collect, self-assess and remit tax • Proper documentation • Invoices, purchase orders, contracts, bills of lading, credit and bad debt write-offs, past returns, exemption and resale certificates
Page 28 Who Should Pay Sales Tax?
Is there an exemption certificate on file?
No Yes
if yes if yes if yes if yes
Is the Do the names on the Is it a valid Is it Was it signed Valid The state and local certificate invoice and on the type of completely by an officer? Certificate tax rates charged are valid? certificate match? certificate? filled out? based on the product destination. if no if no if no Invalid certificate Resale Exemption Invalid Tax is Certificate Certificate certificate exempt
Issued by dealers who Issued by entities purchase merchandise which are statutorily for resale exempt
if no if no Invalid certificate
Page 29 Imposition of Tax
• Sale • Transaction resulting in passage of title or possession or both of tangible personal property from the seller to buyer, or which results in the provision of a service, in exchange for consideration
Page 30 Imposition of Tax
• Service • Task performed by one person for another – can be professional or personal • Generally exempt unless specifically designated as taxable
Page 31 Imposition of Tax
• Tangible Personal Property (“TPP”) • Property, other than real property, that can be • Held • Smelled • Touched • Seen • Tasted • Otherwise perceptible to the human senses • Typically subject to tax unless specifically exempted or excluded by statute
Page 32 Imposition of Tax
• Lease of Tangible Personal Property • Taxability of leases may vary • Type of lease: Operational, Capital or Financing • State’s definition of Taxable Lease • Tax Base of Lease • Lease Period • Bargain Purchase Options • Right to Ownership at End of Lease Term
Page 33 Imposition of Tax
• Lease of Tangible Personal Property with Operator • Depends on whether the lessee has possession or control over the tangible personal property • For tax to be due, the lessee must have possession or use of the tangible personal property • Person must legally be able to exercise dominion over the property
Page 34 Why didn’t that vendor charge tax?
Page 35 Nexus
• Vendor didn’t charge tax because vendor may not have nexus • DO NOT ADD TAX TO INVOICE • Vendor likely has no way to remit that tax to the State • Adding tax to invoice will not hold up under audit
Page 36 Nexus
• Nexus is defined as the minimum contact an entity must have in order for a state to impose a tax.
• Nexus requires sufficient contact between the state and the business it wants to tax.
• Nexus standards vary depending on the type of tax involved, therefore it is possible to have nexus for one tax and not another.
Quill Corp. v. N.D., 504 U.S. 298 (1992).
Page 37 Nexus – Constitutional Influences
• Commerce Clause – Art. 1, § 8, cl. 3 • Promote national economy free from imposition by the states • Balances state interests against unified national economy • Substantial connection between the state and the activity it seeks to tax • Due Process Clause – 14th Amendment • Person may not be illegally deprived of his/her rights or property • Challenged laws MUST be reasonable, constant and even-handed • Must be minimum contacts with the forum state
Page 38 Nexus
• Mail Order – Quill • Online and catalog retailers only need to collect sales and use taxes on remote sales for states where they have nexus • Due Process Clause and Commerce Clause definitions of nexus are NOT the same • Minimum Contacts – Due Process • Same as contact that gives company personal jurisdiction • Substantial Nexus – Commerce • Requires physical presence
Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
Page 39 Nexus – Developments
• Affiliate Nexus • Applies generally to any out-of-state person, typically a vendor or subsidiary, under the control of a dealer or corporation • Applies unitary approach to the entire group of companies
Page 40 Affiliate Nexus
Page 41 Why Out of State Auditors?
Page 42 Nexus Developments
• Click-Through Nexus • Originated in New York : Law enacted on April 23, 2008, that requires out-of-state sellers to collect sales tax if they enter into an agreement with a NY resident for website referrals/links and pay a commission based on sales generated there from (i.e. click-thru nexus) N.Y. Tax Law § 1101(b)(8)(vi). • Presumption – A seller that makes taxable sales of TPP or services in a state has nexus when a state resident’s website clicks through potential customers to the seller. • Rationale – Link on the website in New York creates a physical presence for the seller when the owner of the website is a resident of New York and acts as a sales agent for the seller. • Amazon and Overstock.com challenged the constitutionality of NY’s vendor nexus law. • Does not violate the U.S. Constitution: Overstock.com, Inc. v. New York State Department of Taxation and Finance, New York State Court of Appeals, Nos. 33 and 34, March 28, 2013. • Court reasoned that following the Quill case, physical presence in the state itself does not need to be substantial, but must be more than a “slightest presence” that solicitation in a state that produces a significant amount of revenue qualifies as more than a “slightest presence” in the state.
Page 43 The Marketplace Fairness Act
• Proposed legislation in the United State Congress that would enable state governments to collect sales taxes and use taxes from remote retailers with no physical presence in their state
• Legislative history • Bill was originally passed by the Senate in 2013, but never made it out of the House of Representatives • The Act was introduced again in 2015, but is still in limbo
• Supported by a large number of people • 90 members of Congress (30 Senators and 67 Representatives) • 26 Governors (13 Republican, 12 Democrat, and 1 Independent) • 80 National Trade Associations • 122 State and Local Trade Associations
Page 44 Streamlined Sales Tax
• 23 full member states
• Local tax sourced based on destination
• Texas is not a member, due to the fact they will not change their sourcing rules
Page 45 Page 45 Streamlined Sales Tax • Uniform definitions within tax laws - Not what is taxable or exempt - Unified definitions in tax base
• Rate simplification - Allowed one primary state tax rate • Also a second rate for limited circumstances - Local jurisdictions allowed one local rate • For example, cannot choose to tax one item at a different rate from all others - States will provide online rate database
Page 46 Page 46 Page 47 Page 47 Nexus
• Nexus Questionnaire • “Nexus Units” • Sole purpose is to find non-filers • Often send questionnaire
Page 48 Nexus
Page 49 Nexus
Page 50 Disregarded Entities
Disregarded entities are not disregarded for purposes of state property taxes and sales and use taxes.
They are subject to reporting, payment and penalty provisions at the entity level just like any other business entity. Thus, sales between disregarded entities and their owners, while disregarded for federal income tax purposes, can be subject to sales or use tax.
Page 51 Page 51 FAS 5 Considerations
•FAS 5 states that an estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:
- Information indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements; and,
- The amount of loss can be reasonably estimated.
- Accrue the best estimate in a range or lowest amount in the range.
Page 52 Page 52 FAS 5 Reserve: Definitions Strength
When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to remote.
• Probable - The future event or events are likely to occur
• Reasonably Possible - The chance of the future event or events occurring is more than remote but less than likely
• Remote - The chance of the future event or events occurring is slight
PagePage 53 53 Taxability
Page 54 Exemptions and Exclusions
• Exemption • Transaction that is within the general scope of the statutes imposing tax, but is the subject of special provisions removing it from taxation • Exclusion • Transaction that is outside the general scope of the statutes imposing the sales and use tax • Real estate, stocks, bonds • Amount that is not included in the measure of sales and use taxes • Freight, discounts, etc.
Institute for Professionals in Taxation, Sales Tax School I (Ga. 2013). Page 55 Exemptions and Exclusions
University is purchasing polo shirts in bulk from a local vendor. The majority of these shirts are being sold through the University’s bookstore. However, a small percentage of the shirts are being given to the bookstore staff to wear as their uniforms on game days to promote school spirit.
Must the University pay sales tax or tax on any or all of the shirts?
Page 56 Exemptions and Exclusions
• “Status” Exemptions from Tax • Free from tax because purchaser is exempt • Government agencies • Charitable organization • Not-for-profits • Educational institutions • Sales made by these organizations are NOT generally exempt
Page 57 Exemptions and Exclusions
• “Transactional” Exemptions from Tax • Free from tax because item being purchased is exempt • Focuses on what purchaser intends to do with property or service purchased • Sales for resale • Material and component parts of finished product • Manufacturing and processing machinery and equipment
Page 58 Exemptions and Exclusions
• Service Exemption • Most states specifically enumerate taxable services • If service is not enumerated, it is not taxable • Generally, service providers must pay tax when purchasing property to be consumed while performing nontaxable service • Several states have provision for providers to purchase services for resale
Page 59 Exemptions and Exclusions
Natural Foods Store purchases fruits and vegetables in bulk with a resale certificate. Natural Foods also conducts cooking demonstrations for free for its customers. During these demonstrations, Natural Foods employees remove fruits and vegetables from the store shelves and use them as ingredients in the dishes.
Is there an issue here? If so, what is the issue and how is it remedied?
Page 60 Manufacturing Exemptions
• Raw material/resale • Materials acquired to be incorporated into manufactured product • Machinery and equipment used in manufacturing process • Direct use vs. integrated plant theory • Exemption or resale certificates required • Exemption – used for purchasers made by an exemption entity • Resale – used for purchases bought to be resold
Page 61 Manufacturing Exemptions
G.T. Manufacturing, LLC has a problem. G.T. purchases paint thinner for multiple uses within the manufacturing process, however, some uses are not for manufacturing purposes. G.T. comes to you under the impression that because paint thinner is used to thin paints, which become part of the finished product, all of their purchases of paint thinner are exempt, regardless of use. G.T. has not been identifying the paint thinners use as it is consumed.
How would you advise them?
Page 62 Real Property Construction
• Generally, construction contractor is ultimate user or consumer of all materials purchased for use in project and incorporated into realty • Liable for tax to material vendor • Type of construction contract matters • Custom building or speculative building • Materials are permanent or consumable • Contractor is prime or subcontractor • New construction or remodel • Lump sum or separately stated
Page 63 Computer Hardware, Software and Service Agreements
• Hardware – Taxable as TPP • Canned (prewritten) vs. Custom Software • Load and Leave vs. Electronic Download • Mandatory vs. Optional Agreements
Page 64 Computer Hardware, Software and Service Agreements You recently expanded your practice into an area that your current software suite does not cover. After much research, you have decided to purchase a new system from Virus, Inc. Virus is located in California and will deliver the software to you via tangible media and electronic download. The tangible media being delivered is completely custom and the electronically downloaded software is canned.
Do you owe tax on any of the software? If yes, which items?
Page 65 Bundled Transactions
• Retail sale of two or more product where products are otherwise distinct and identifiable, and the products are sold for one non-itemized price • Typically subject to sales tax without any deduction for the value of the nontaxable products or service • Predominant use
Page 66 Freight Charges
• Typically separately stated delivery charges are not taxable • Typically delivery charges included in selling price of TPP are taxable • Third Party Common Carriers • USPS, FedEx, UPS, etc. • F.O.B. - Free on Board • Origin • Destination
Page 67 Drop Shipments
• A Third Party Sale involving the purchaser, the retailer, and the wholesale distributor • Purchaser submits a PO to a retailer, who then submits its own PO to the wholesale distributor • The retailer instructs the wholesale distributer to ship the purchased product directly to the purchaser – in effect “dropping” the shipment on behalf of the retailer
Page 68 Sales Tax Compliance
Page 69 Sales and Use Tax Research
• Case Law • Court of last resort that interprets or declares law unconstitutional has highest authority • Statutes • Highest authority of statutory law • Rules and Regulations • State agency’s interpretation of statutes • Letter Rulings • Written by taxing agency in response to requests for guidance • Newsletter, Tax Advisories, News Releases, Other Publications
Page 70 Local Taxes
• Many states allow the imposition of sales and use tax by counties and cities parallel to the state sales and use tax • Local tax rates may vary from jurisdiction to jurisdiction • Items exempt from state tax are typically exempt from local tax
Page 71 Basic Compliance
• Tax Decision Matrix (TDM) • Tool that indicates taxability for multiple products • Generally for several jurisdictions • Can be integrates into billing system or use tax accrual system • Should be updated periodically
Page 72 Basic Compliance
• Tax Decision Matrix (TDM) • Needs to be industry specific • Healthcare • Energy • Manufacturing • Needs to be a reference as to what supports the answer • Different version for different users • AP should be on a single frame • Color • Laminated • Does not need all the support
Page 73 Basic Compliance Example:
Page 74 Basic Compliance
• Tax Decision Matrix (TDM) • Different version for different users • Decision Maker Copy • Tabbed by state • All sources included • Three ring binder
Page 75 Basic Compliance
• Benefits of Training • Use of the matrix as part of training process • After any training, questions always arise as to taxability of items • Matrix may be used as part of training as a “cheat sheet”
Page 76 Basic Compliance
• Spreadsheets and Databases • Build simple database to help accrue tax • Often occurs when AP staff is resistant to training • Makes more sense to outsourced or do within tax department • Tax decisions may be too complex
Page 77 Basic Compliance Example:
Page 78 Basic Compliance
• Using a Database • Trapped all of the AP data in a database • Sorted by Vendor in groups • Always Taxable • Sometimes Taxable • New Vendors • Vendors issued a direct pay permit • Allowed us to focus time on the vendors that required attention • Allowed us to review approximately 10,000 invoices in less than 40 hours
Page 79 Basic Compliance
• Manual Accruals • If AP can handle the task… • Most AP systems have an option to accrue tax within the AP screen • Write a “hard line of accrual” into the tax payable account • Pull out the questionable invoices for a decision maker to review • Use a spreadsheet • Use a database • Make copies or scans of invoices
Page 80 Sales Tax Automation
• Electronic Data Interchange • Electronic transmission of standard business information between two companies in machine readable format • Automated Accrual System • Automate taxability determinations and eliminate errors that are often problem in manual systems
Page 81 Sales Tax Planning
• Single State v. Multistate • Do not be reactive, BE PROACTIVE • Identify key nexus triggers • Employee living in a state • Sales person entering a state • Sales level or volume within a state • Different types of taxes have different nexus requirements • Sales Tax v. Income Tax
Page 82 Sales Tax Planning
• Risk/Exposure • Quantify amount of what is present by failure to take action • How much risk are you willing to take? • What is your threshold of pain? • Once trigger occurs, next steps: • Certificate of Authority • Register for applicable taxes
Page 83 Requirements
• Registration • Must do if you have nexus • Permits • Every state where you have nexus • Sales and Use Permits • Reporting Requirements • Monthly, quarterly, bi-annually, annually • Often depends on amount of tax remitted to state
Page 84 Direct Pay Permits
• Allows purchasers to pay tax directly to state • Oil & gas companies • Healthcare • Some manufacturing companies • Allows use of TDM’s
Pros and Cons?
Page 85 Liability for Deficiency
Page 86 Audits and Assessments
• State and Local Audits • Audit Period • Statute of Limitations • Generally 3-4 years • Waiver/Extension
What is the Audit Period if Company Never Registered for Sales and Use Tax Permits?
Page 87 Audits and Assessments
• Records Retention • Records and books of all sales and all purchases of TPP • Must maintain complete books and records covering receipts from all sales and distinguishing taxable from nontaxable receipts • Notice • Initial notification of audit from the State • Confirmation Letter • Documents requested from auditor • Official audit period
Page 88 Audits and Assessments
• Big Issues in Audits • Transactions within a corporate group • Items brought in from out-of-state • Hardware/software maintenance • Contractor issues
Page 89 Audits and Assessments
Your audit is completed and you STRONGLY disagree with the assessment against your company.
Where do you go from here?
Page 90 Audits and Assessments
• Taxpayer Relief • Usually will write a timely “petition for review” or submit a similar request • Typically a conference is scheduled if requested by the taxpayer or deemed necessary by the state • Appeal to an outside court
Page 91 Sampling Techniques
There are seven basic steps involved in an audit: 1. Determine the objectives of the test 2. Define the deviation conditions 3. Define the population 4. Determine the method of sample selection 5. Determine the sample size 6. Perform the sampling plan 7. Evaluate the sample results
Page 92 Sampling Techniques
• Sampling Methods • Random Sampling • Systematic Sampling • Block or Cluster Sampling • Judgmental • Stratified • Sample Evaluation • Variance • Ratio Analysis • Mean Estimation
Page 93 Liability Issues
• Common Issues Resulting from Audits • Successor Liability • Any person who directly or indirectly purchases, acquires, or succeeds to the business or the stock of goods of any person quitting, selling, or otherwise disposing of a business or stock of goods. • Officer and Director Liability • Any person required to collect sales tax as a trustee for the state will be held personally liable for the sales tax due. In the case of a corporation each "principal" officer will be held personally liable for the sales tax due.
Page 94 Taxpayer Bill of Rights
Page 95 Taxpayer Bill of Rights
Page 96 Voluntary Disclosure Agreements
• Contract between Taxpayer and State • Taxpayer makes Voluntary Disclosure through Third Party • State may waive penalty and/or interest • Usually initiated when deficiency is discovered • Cannot be made if Taxpayer is under audit Pros and Cons?
Page 97 What happens when you have overpaid tax?
Is it lost forever?
Page 98 Reverse Audits (Refunds)
• Recovering tax that was not legally due • Statute of Limitations – Generally 3-4 years
• The State must grant or deny all petitions for refund within a certain amount of time from the date of submission (generally the deadline can be extended)
Page 99 Reverse Audits (Refunds)
• Reverse Audit Techniques • Gather Documentation • Invoices • Proof of Payment • Use Tax Accruals • Correspondence with State • Correspondence with Vendors • Review Documentation • Purchase Transactions • Corporate Structure • Audit History
Page 100 Reverse Audits (Refunds)
• Reverse Audit Techniques • Determine Taxability • Overpayments • Exposure • Data Entry • Access or Excel Spreadsheet • Submit to State • Correspondence • Citations (justification for refund) • Refund Schedule • Invoices • Supporting Documentation
Page 101 Reverse Audits (Refunds)
• If refund is denied, the taxpayer can appeal the denial • Must be within a prescribed time from the date of petition was denied • Typically refunds are appealed to an outside court
Page 102 Reverse Audits (Refunds)
You have been making purchases or years from ABC, Corp. After completing an internal audit, you discovered that you paid sales tax on certain purchases that was not legally due. You file for a refund with the state, only to learn that ABC, Corp. has not remitted your paid sales tax to the state.
What now?
Page 103 Advanced Topics
• Mergers, Acquisitions & Corporate Reorganizations • Intercompany Transactions • Bulk Sales • Occasional Sales • Purchasing Cards • Simplification • Cost Reduction • Improved Efficiency
Page 104 Participant Questions
Client name - Event - Presentation title Page 105Page 105 Thank You!
Tom Smith, Partner
918-640-4306 (Mobile) 918-281-4081 (Fax) [email protected]
BDO 8908 South Yale Avenue, Suite 450 Tulsa, OK 74137-3557 UNITED STATES 918-281-4080 www.bdo.com
Stay Connected with BDO USA, LLP
PagePage 106 106 STATE AND LOCAL TAXATION – SALES AND USE TAXES
Relevant Issue: Companies don’t collect tax on the correct items or at the correct rate. Planning Idea: Provide Taxability Studies on the products and services sold into the jurisdictions where the company has a reporting responsibility. What is it: Taxability / Nexus Studies Who needs it: Companies selling into multiple states or seeing growth outside their home state. When do they need it: What is the sales pitch: Sales taxes vary by state, have you researched your transactions to see if you charge tax properly. Who is the buyer: CFO / Controller / VP Tax Questions you might ask: Do your customers ever tell you your taxability on your invoices is incorrect? How do you make certain your taxability is correct? How do you update your tax rates in your invoicing system? Do you file sales tax returns in all the jurisdictions where you have sales people traveling? Do you expect to go through due diligence in the next couple years?
Page 107 107 BDO Specialized Tax Services @BDO_USA_Tax STATE AND LOCAL TAXATION – SALES AND USE TAX
Relevant Issue: Companies overpay sales tax all the time. Planning Idea: Sales and use tax refund study. What is it: We basically come in and review the companies transactions for overpayments of sales tax, if we find them we take the necessary steps to secure the refund with the states. Who needs it: Manufacturing companies, for-profit hospitals, E&P Companies (in Texas). When do they need it: Every three years at least. What is the sales pitch: You don’t pay us unless we find you savings. Who is the buyer: CFO / VP Tax / Controller Questions you might ask: Has anyone ever looked to see if you are overpaying sales tax? How confident are you in your accounts payable department to catch errors on sales tax?
Page 108 108 BDO Specialized Tax Services @BDO_USA_Tax STATE AND LOCAL TAXATION – SALES AND USE TAXES
Relevant Issue: Companies routinely get audited by the states. Planning Idea: Provide audit management services. What is it: We basically run the audit, handle all the questions from the auditor and help get records. Who needs it: When do they need it: What is the sales pitch: • We are former auditors, who better to deal with the state then someone from the state. • Your staff is already stressed, how can they do their job and deal with an auditor. • Auditors find a lot of information just hanging out at a company. • Sometimes the best answer is “I don’t know, let me find out”.
Who is the buyer: CFO / Controller / VP Tax Questions you might ask: • Do you have any sales tax audits going on? • When was the last time you were audited? How did it go?
Page 109 109 BDO Specialized Tax Services @BDO_USA_Tax