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2014 Sales Tax Update for ERP
The document provides an update on recent developments in sales and use tax, particularly in Ohio and nationally, highlighting changes in tax rates, the introduction of new tax requirements for digital products, and ongoing legislative efforts concerning marketplace fairness and internet tax. Key topics include Ohio's increase in sales tax rates, various states' adoption of click-through nexus laws, and the implications of the Marketplace Fairness Act and Internet Tax Freedom Act. It also mentions the challenges and changes in tax treatment for services and digital products across different states.
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2014 Sales Tax Update for ERP
- 1. ERP 2014 SalesTax Update Brian Berning, SS&G Mike Feizl, SS&G John Sallese, Avalara
- 2. ERP In thissession… • Ohio Updates • Streamlined Sales Tax • Marketplace Fairness Act • Internet Tax Freedom Act • Updates in Other States – Click-thru Affiliate Nexus 2
- 3. ERP Recent Developmentsin Sales & Use Tax – Ohio and Nationally Brian Berning, SS&G Mike Feizl, SS&G John Sallese, Avalara
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- 5. ERP Recent Developmentsin Sales & Use Tax Ohio State sales tax rate increased by 0.25% on 9/1/13 (impacted all counties) Cuyahoga is still the highest with combined state, local and transit rate of 8% Median rate is 7.25% (49 counties currently at that rate) Avg. combined state and local rate is 7.11% (rank #19 in avg. S&L rate) Recent changes in other states as a comparison: Virginia, Arkansas, and Maine have also raised sales tax rates Arizona, Kansas, and D.C. have recently cut sales tax rates The five states with the highest average combined state-local sales tax rates are Tennessee (9.45 percent), Arkansas (9.19 percent), Louisiana (8.89 percent), Washington (8.88 percent), and Oklahoma (8.72 percent) 5
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- 9. ERP Ohio Updatescont. Prepaid wireless calling services are now subject to a wireless 9-1-1 charge (effective 1/1/14) Five tenths of one percent (0.005) on the retail sales price of the prepaid wireless calling service Magazines/magazine subscriptions are no longer exempt Subscriptions now treated similarly as magazines purchased over the counter Newspapers and community newspapers continue to be exempt Electronic Filing of Use Tax Required – OAC Rule 5703-9-61 adopted 2/2013 requiring electronic filing and payment of consumer’s use tax. Returns must be filed and paid via OBG, the Ohio telefile system, or another electronic method approved by the commissioner. ODT Guidance on VDA’s released in 2013 Remain anonymous until signed agreement is returned/Identity is not disclosed to other parties Failure to collect tax or use tax on purchases •No penalty - tax and interest must be paid for 36 month lookback period Tax collected/not remitted •No limitation to lookback period •Subject to 10% penalty 9
- 10. ERP Ohio Updatescont. Other Direct Mail and Advertising and Promotional Direct Mail - guidance released (Sales Tax Info. Release ST 2013-01, ODT, August 16, 2013) "Advertising and promotional direct mail" is printed material meeting the definition of "direct mail" in ORC Section 5739.01(ZZ), the primary purpose of which is to attract public attention to a product, person, business, or organization or to attempt to sell, popularize or secure financial support for a product, person, business, or organization. "Other direct mail" means direct mail that is not advertising or promotional direct mail regardless of whether any advertising or promotional direct mail is included in the same mailing. It includes the following: • transactional direct mail that contains personal information specific to the addressee, such as invoices, bills, and statements of account; • legally required mailings, including privacy notices, tax reports, and stockholder reports; and • other non-promotional direct mail delivered to existing or former shareholders, customers, employees, or agents, including newsletters and informational pieces. 10
- 11. ERP Ohio Updatescont. Direct Mail Sourcing Other direct mail - sourced to purchaser’s location as indicated from vendor’s records. If the purchaser provides a direct pay permit, exemption certificate, or written statement, the seller is relieved from tax collection obligations Advertising and promotional direct mail - sourced to: the address from which it was shipped. If the purchaser provides the vendor with information showing the jurisdictions where the material is to be delivered, the vendor shall source the sale to those jurisdictions and collect and remit the applicable tax. 11
- 12. ERP Ohio Updatescont. Casual Sale Exemption Clarified (ORC Sec. 5739.02(B)(8)) - Schlegel v. Levin, Ohio Board of Tax Appeals, (May 23, 2013) Ohio use tax on an aircraft purchased out of state was upheld, taxpayer failed to provide evidence to support the casual sale exemption. “Casual sale” is a sale of an item of tangible personal property that was obtained by the person making the sale, through purchase or otherwise, for the person's own use and was previously subject to any state's taxing jurisdiction on its sale or use ***.” 12
- 13. ERP Ohio Updatescont. Ohio has recently become a full member of the streamlined sales tax initiative (effective 1/1/14) “Specified digital products” now taxable (effective 1/1/14) specified digital product - electronically transferred digital audiovisual work, digital audio work, or digital book (a SSUTA definition) • From the AICPA’s Tax Advisor: » 457 M ebooks were sold in 2012 – up from 10 M in 2008 » A 2013 music industry report indicated that digital album sales accounted for 43% of all album sales in the first half of 2013 » In addition there were more than 50 Billion audios and videos streamed in the first half of 2013 » In 2013, over $10 B was spent in the App Store according to Apple, with $3 B occurring in December » Netflix generated in excess of $2.7 B in revenue from the domestic streaming business segment in 2013 • Many other states are scrutinizing digital products, SaaS, and other “non-tangible” transactions 13
- 14. ERP Streamlined Salesand Use Tax Agreement Cooperative effort of 44 states, the District of Columbia, local governments and the business community to: Simplify sales and use tax collection and administration by retailers and states Minimize costs and administrative burdens on retailers that collect sales tax, particularly retailers operating in multiple states Encourage "remote sellers" selling over the Internet and by mail order to collect tax on sales to customers living in the Streamlined states Level the playing field between local "brick-and-mortar" stores and remote sellers Ensure that all retailers can conduct their business in a fair, competitive environment 14
- 15. ERP Streamlined Salesand Use Tax Agreement cont. 24 of the 44 states have passed legislation to conform to the Streamlined Sales and Use Tax Agreement: • Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming Represents 33% of the country’s population 15
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- 18. ERP Marketplace FairnessAct Federal bill that would allow states to require sales and use tax collection by out-of-state retailers IF the state adopts specified simplifications for its sales tax system Currently, retailers are only required to collect sales taxes in states where they have nexus (physical presence of property, employee/agent solicitation activities, etc.) One of the specified simplifications in the MFA is to become compliant with the Streamlined Sales and Use Tax Agreement (SSUTA) The Senate passed the MFA in May 2013, but to date the House has only attempted to attach it to several other bills, such as piggybacking on the Internet Tax Freedom Act (“ITFA”) The latest reports from BNA have reported that a legislative compromise has been written in preparation for consideration at the end of 2014 (after mid-term elections). Indications are it may be attached to a broader piece of “must-pass” legislation to avert a government shutdown. 18
- 19. ERP Marketplace FairnessAct cont. A University of Tennessee study conducted in 2009 projected that annual state and local sales tax losses on e-commerce would grow to $11.4 billion by 2012 The National Conference of State Legislatures estimated in 2012 that states lost $23.3 billion in 2012 from being prohibited from collecting sales tax from online and catalog purchases 19
- 20. ERP Internet TaxFreedom Act Currently a two month extension to the ITFA has been passed by Congress, however the Permanent Internet Tax Freedom Act (PITFA) measure is in jeopardy due to potential combination with the MFA, which is a contradictory measure (the combined bills introduced by the Senate are now termed the Marketplace and Internet Fairness Act (MITFA) Seven grandfathered states -Texas, Hawaii, New Mexico, North Dakota, South Dakota, Ohio and Wisconsin maintain Internet access taxes with the extension. The states could lose hundreds of millions of dollars a year if Congress takes away their authority to tax Internet charges according to the Congressional Budget Office PITFA would continue to protect consumers from increased costs when accessing and using the Internet by making permanent the current temporary moratorium on Internet access taxes, and it would also prevent the multiple and discriminatory taxation of Internet sales. If allowed to expire on November 1, states and localities could: begin to collect taxes on Internet access, or apply other discriminatory taxes that may already be in place which have been held at bay during the moratorium Jurisdictions could begin passing new tax laws that discriminate against the Internet and Internet commerce as a means to raise more revenue 20
- 21. ERP Internet TaxFreedom Act cont. The August congressional recess ended with both chambers convening on Sept. 8. A flurry of activity is expected in the next month relating to: inversion transactions, the extension of expired tax incentives, the estate tax, retirement security, and Internet access taxes. However, their compressed schedule makes it unlikely that lawmakers will have time to get any significant tax legislation through both chambers and to the president prior to the pre-election break. The House is currently set to be in session for just 12 days (Sept. 8-11, 16-19, and Sept. 29-Oct. 2) before they adjourn for a final round of campaigning prior to the Nov. 4 midterm elections. Senate Majority Leader Harry Reid, D-Nev., has indicated that he hopes that the Senate will wrap up its pre-election work by Sept. 23, and the chamber may remain in session on weekends to adhere to that timeline. If the Senate does adjourn by Sept. 23, it is expected that the House will follow suit and cancel legislative business the following week. 21
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- 23. ERP Updates inOther States Click-through affiliate nexus States such as New York, California, Texas and Pennsylvania have passed laws where nexus can be created by “click-through” or “affiliated” activities Rather than following physical presence nexus standards, many states are now aggressively asserting nexus and tax collection from businesses who only have affiliates in the state. Click-through affiliate nexus generally occurs when an out-of-state retailer enters into an agreement with an in-state resident under which the in-state resident, for a commission, directly or indirectly, refers potential customers, by a link on an Internet website or otherwise, to the out-of-state retailer. 23
- 24. ERP Updates inOther States cont. States having enacted click-through nexus provisions: – Arkansas: Threshold: More than $10,000 – California: Threshold: More than $10,000 and more than $1 million in annual in-state sales – Connecticut: Threshold: More than $2,000 – Georgia: Threshold: More than $50,000 – Illinois: Threshold: More than $10,000 – Kansas: Threshold: More than $10,000 – Maine: Threshold: More than $10,000 – Minnesota: Threshold: More than $10,000 – Missouri: Threshold: More than $10,000 – New York: Threshold: More than $10,000 – New Jersey: Threshold: More than $10,000 (eff. 6/30/14) – North Carolina: Threshold: More than $10,000 – Pennsylvania: Threshold: none – Rhode Island: Threshold: More than $5,000 – Vermont: Threshold: More than $10,000 Several additional states have introduced legislation to enact click-through affiliate nexus recently (although not enacted): – Indiana, Hawaii, Tennessee, Ohio, Michigan 24
- 25. ERP Updates inOther States cont… Cloud based software (Saas, IaaS, PaaS, services, etc.) Constantly evolving area of sales/use tax What is it/how is it defined? Depends on the facts (very fact specific) Depends on state codes, rules, guides, case law (sometimes no guidance) Depends on the location of the users Depends on the location of the servers Depends on the nexus created by salesmen/agents/technicians/trainers/affiliates Some recent rulings have determined… Ohio – Taxable Automatic Data Processing VA, MI, GA, NE – Non-taxable service/software (NE - Sales and Use Tax Guide for Computer Software, January 22, 2014 updated to non-taxable) 25
- 26. ERP Which oneis taxable in Colorado & Washington? 26
- 27. ERP Interesting developments • “Legalized” marijuana stores opened recently in Washington, where recreational marijuana sales are forecast to generate $51.2 million in revenues during the upcoming 2015-17 biennial budget. • WA – excise tax rate of 25%, sales tax rate of 9.6% • CO – 15% excise tax rate, 12.9% sales tax rate
- 28. ERP Taxman Ifyou drive a car, I'll tax the street; if you try to sit, I'll tax your seat; if you get too cold, I'll tax the heat; if you take a walk, I'll tax your feet. —The Beatles 28
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- 30. ERP 30 SS&GContacts Mike Feiszli, CPA 330-668-9696 [email protected] Brian Berning, Managing Director, Cincinnati 513-984-1489 [email protected]
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