EY-sales-and-use-tax-quarterly-october-2014

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exemptions, sellers of qualifying property must obtain an exemption certificate from the purchaser at the time of sale. Any business that plans to make significant equipment purchases or investments in California, or relocate manufacturing or R&D operations to California, or that is considering a merger or acquisition of manufacturing or R&D operations in California needs to be familiar with the new law. Our observation: The partial exemption provisions have created significant confusion with respect to: determining qualification; application of the partial exemption at the entity or establishment level; the effect on businesses that outsource; and the effect on expensing. Though promulgation of the regulations should clarify some of these issues, taxpayers will need to make appropriate adjustments in their internal sales and use tax compliance systems to account for the new law. Other sales and use tax recent developments Nexus Federal: Proposed bill (HR 5252), introduced on 29 July 2014, would prohibit a state from requiring any person to collect from, or remit on behalf of, any other person any state or local tax, fee or surcharge imposed on a purchaser or use with respect to the purchase or use of a product or service within the state, unless there is transactional nexus between the person and the purchaser. Colorado – U.S. Supreme Court: On 9 December 2014, the U.S. Supreme Court will hear arguments in the Direct Marketing Association case. The Court will consider whether the Tax Injunction Act bars federal court jurisdiction over a suit brought by non-taxpayers to enjoin the informational notice and reporting requirements of a state law that neither imposes a tax, nor requires the collection of a tax, but serves only as a secondary aspect of state tax administration. Direct Marketing Association v. Brohl, No. 12-1175 (10th Cir. Ct. App. 20 August 2013), petition for cert. granted, Dkt. No. 13-1032 (U.S. Sup. Ct. 1 July 2014). Illinois: A new law amends the state’s click-through sales and use tax nexus provisions. Under the revised provisions, a retailer that enters into a contract with an Illinois resident who, for commission or other consideration based on the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by providing to the potential customers a promotional code or other mechanism that allows the retailer to track purchases referred by such persons is obligated to collect Illinois sales tax. Examples of such a tracking mechanism include a link on the Illinois resident’s internet website, promotional codes distributed via the resident’s hand-delivered or mailed material or by the person through the radio or other broadcast media. The bill also makes the presumption rebuttable. Ill. Laws 2014, Pub. Act 98-1089 (SB 352), enacted 26 August 2014. New Jersey: The Division of Taxation issued guidance on the new requirement for out-of-state sellers to collect sales tax if soliciting business in New Jersey under the click-through nexus provisions that took effect 1 July 2014. Under the new provisions, a person making sales of tangible personal property, specified digital products or taxable services is presumed to be soliciting business through an independent contractor or other representative (collectively “representative”) if the person making sales enters into an agreement with a representative that has a physical presence in New Jersey and who, for commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the person. These provisions only apply if the cumulative gross receipts from sales to in-state customers who were referred by such representative are in excess of $10,000 during the preceding four quarterly periods. Businesses meeting this new requirement will have to register with New Jersey, and collect and remit the state’s sales tax on charges for taxable items delivered to an in-state location. South Carolina: The Department of Revenue issued a ruling describing nexus creating activities for sales and use tax purposes. The ruling addresses: general activities; property in South Carolina; activities of an employee or third party (e.g., sales representatives, independent contractors, affiliated companies); delivery; transactions with in-state printers; advertising; and other issues. S.C. Dept. of Rev., Rev. Ruling No. 14-4 (10 September 2014). Virginia: A recent letter ruling addresses whether an outof-state company has nexus with Virginia based on various scenarios. An out-of-state company (Company X) is under common ownership with Company Z, which has a retail sales tax nexus in Virginia. Another out-of-state company 2 Ernst & Young LLP Sales and Use Tax Quarterly Update
(Company Y) purchases retail products from Company X and resells the products to its Virginia customers via the internet. Company X retains title and risk of loss of the products until Company Y makes the sale to the Virginia customers. The Virginia Tax Commissioner (Commissioner) determined that Company X does not have affiliate nexus with Virginia because it does not make sales into the state and, therefore, is not a Virginia dealer. The Commissioner noted, however, that under recently enacted affiliate nexus provisions, if Company X sold goods to Virginia customers and Company Z facilitated the delivery of these products, Company X would have nexus with the state. Assuming that Company X had nexus with Virginia, Company X is not required to collect sales tax because the transactions at issue were between Company Y and its Virginia customers. In this instance, payment of use tax rests with the customer as Company Y does not have nexus with the state. Further, Company X is only required to report the sales to Company Y on its Virginia out-ofstate dealer’s use tax return, and is allowed to subtract such sales as exempt sales for resale if supported by valid resale certificates. Va. Dept. of Taxn., Commissioner PD No. 14-139 (12 August 2014). Tax base Florida: Shipping and handling charges billed by a company that sells tangible personal property and uses fulfillment centers leased and operated by affiliated entities to fulfill the orders are not subject to state sales tax because: (1) the charges are separately stated, and (2) the property is shipped F.O.B. origin (i.e., when title of property is transferred to the customer at the shipper’s location). Shipping and handling charges will not be subject to sales tax if the charges are separately stated on an invoice or bill of sale, and the charges can be avoided by a decision or action solely on the part of the purchaser. Fla. Dept. of Rev., TAA 14A-009 (3 April 2014). Missouri: A retailer that partnered with third-party banks to issue private label credit cards were not entitled to a refund of sales tax under the state’s bad debt statute. The Director of Revenue argued, based on out-of-state persuasive authority, that the taxpayer was not eligible for a refund because it is not the entity that incurred the bad debt. An Administrative Law Judge (ALJ) found that the retailer and the bank, acting as a unit, fit the definition of “person” and since the retailer is legally obligated to remit sales tax, the retailer and the bank, acting as a unit, is a person that fits the definition of “retailer.” Thus, the retailer was entitled to a refund of sales tax paid on sales written off as a bad debt. On appeal, the Missouri Supreme Court reversed, finding the retailers did not qualify for a refund of sales tax under the bad debt statute because the retailer (while the entity legally obligated to remit the tax and the entity eligible to apply for a refund) was not the party that suffered a loss. Rather, the bank suffered the loss. The Court reasoned that Missouri statutory law “does not contemplate treating two separate corporations in a contractual relationship as a single tax entity for the limited purpose of obtaining a sales tax refund.” Circuit City Stores, Inc. v. Director of Revenue, No. SC93687 (Mo. Sup. Ct. 29 July 2014); Dillard’s Inc. v. Director of Revenue, No. SC93711 (Mo. Sup. Ct. 29 July 2014). New York: The entire charge on a medical supply company’s invoice that bundles taxable and exempt tangible personal property into a single line-item is subject to sales tax. Further, the company’s use of a single lineitem charge does not transform its customers’ purchases of taxable tangible personal property into a sale of an “inventory replenishment” service. Lastly, the company cannot prorate the bundled charge according to the taxability of each product. N.Y. Dept. of Taxn. and Fin., TSB-A-14(30)S (22 August 2014). Virginia: A hotel correctly collected sales tax on the charge for untimely cancelling a reservation for room and meals, because the charge was contracted for, and not an unrelated cancellation fee or penalty. Va. Dept. of Taxn., Commissioner PD No. 14-140 (12 August 2014). Wisconsin: Customer convenience charges and handling fees charged by a third-party ticket vendor as part of the ticket price are subject to the state’s sales and use tax because these charges and fees are part of the gross receipts from the sale of admissions. In addition, the Wisconsin Circuit Court held that the music theater owner is subject to sales tax on its sales as well as those of the third-party ticket vendor. Neja Group, LLC v. Wisconsin Dept. of Revenue, No. 2014-CV-0131 (Wis. Cir. Ct., Walworth County, 22 August 2014). Sales and use tax exemptions and refunds Alabama: On 9 December 2014, the U.S. Supreme Court will hear arguments in CSX Transportation. In this case, the Court is being asked to consider whether a state discriminates against a rail carrier in violation of the federal 4-R Act when the state generally requires commercial and industrial businesses, including rail carriers, to pay sales and use tax, but grants exemptions from the tax to the railroad’s competitors. CSX Transportation, Inc. v. Alabama Department of Revenue, et al., No. 12-14611 (11th Cir. Ct. App. 1 July 2013), October 2014 — Issue 4 3
Page 1: Issue No. 2014-4 October 2014 Ernst
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