Sales and Use Taxes: General Principles (Portfolio 1300)

Bloomberg Tax Portfolio, Sales and Use Taxes: General Principles, No. 1300-2nd, discusses the fundamental principles applicable to sales and use taxes. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Bloomberg Tax Portfolio, Sales and Use Taxes: General Principles, No. 1300-2nd, discusses the fundamental principles applicable to sales and use taxes. The Portfolio discusses the historical development of sales and use taxes and the application of sales and use taxes to real property, tangible personal property, and services. The Portfolio includes analysis of the “true object” test as applied to transactions involving sales of both services and property.

Further, the Portfolio reviews the duties and obligations of the seller and the purchaser regarding collection of tax, maintenance of records, registration requirements, and potential officer liability. The Portfolio also discusses other variables that can affect sales and use taxes, including the application of discounts, rebates, coupons, and trade-ins on the sales price, the affect of bad debts on tax liability, the application of tax to procurement card transactions, the allowance of exemptions, and imposition of tax on bulk sale transactions. Finally, the Portfolio addresses administrative matters, including audit methodologies and officer liability.

Additional Portfolios providing detailed information on specific sales and use tax topics include 1320 T.M., Sales and Use Taxes: Information Services, and 1350 T.M., Sales and Use Taxes: Communications Services and Electronic Commerce. For additional relevant Bloomberg Tax Portfolios consult the Portfolio Classification Guide.

Subscribers to the Internet version of the Portfolio will find late-breaking developments reported in the Bloomberg Tax Daily Tax Report - State.

This portfolio may be cited as Nagel and Rosen, 1300-2nd T.M., Sales and Use Taxes: General Principles.

Authors

Arthur R. Rosen, Esq.

Mr. Rosen is a partner in the law firm of McDermott Will & Emery, where his practice focuses on tax planning and litigation relating to state and local tax matters. He has served as the Deputy Counsel to the New York State Department of Taxation and Finance, Tax Counsel to the New York State Senate Tax Committee and Counsel to the N.Y. Governor's Temporary Sales Tax Commission. Mr. Rosen was previously a partner with Morrison & Foerster in New York and has held executive tax management positions at Xerox Corp. and AT&T. Mr. Rosen holds leadership positions in professional tax organizations including the New York State Bar Association Tax Section, the NYU Tax Society, and the National Association of State Bar Tax Sections. He was chair of the State and Local Tax Committee of the American Bar Association Tax Section. Mr. Rosen is editor of the newsletter Inside New York Taxes, is co–editor of the newsletter New York Tax Highlights and of New York Tax Cases. He has written numerous articles that have appeared in professional publications and founded and chairs the New York University course entitled “Introduction to State and Local Taxes.” Mr. Rosen acknowedges the contributions of Craig B. Fields, Harry R. Jacobs, Sharon M. Keely, Judith E. Lansky, Michael A. Pearl and Irwin M. Slomka.

Walter Nagel, Esq.

Mr. Nagel is Vice President and Chief Tax Officer for Gannett in McLean, Virginia. Previously, Mr. Nagel was in private practice representing well known clients on tax and business matters, including multi-million dollar controversies. He was a partner with Crowell & Moring LLP and Reed Smith LLP. He served as of counsel with Sullivan & Worcester LLP. He has held positions with Reed Smith and Sullivan & Worcester LLP, in their Washington D.C. office. Mr. Nagel represents well known clients on tax and business matters, including multi-million dollar controversies. Mr. Nagel is an adjunct professor at the Georgetown University Law Center. He is a past Chair of the American Bar Association State & Local Tax Committee, a former member of the District of Columbia Tax Revision Commission and on governors' task forces in New York and Virginia. He also served as counsel to the United States Advisory Commission on Electronic Commerce. Mr. Nagel was chief tax executive for MCI Communications where he held the title of Vice President and General Tax Counsel and previously held tax management positions at TWA and AT&T. He was president of Peracon, an on-line commercial real estate portfolio company. Mr. Nagel is the editor and principal author of the Law Journal Press treatise: State Business Taxes , is the co-author of the law school textbook Leading U.S. Supreme Court State Tax Cases and has authored or co-authored dozens of published articles. Mr. Nagel has a B.A, an M.B.A., and a J.D. from Rutgers University and an LL.M. from Georgetown University Law Center. Mr. Nagel is admitted to practice law in the District of Columbia, New Jersey and before the U.S. Supreme Court.

Table of Contents

Detailed Analysis
1300.01. NATURE OF TAX
A. The Role of the Sales and Use Tax in Fiscal Policy
B. What is a Sales Tax?
C. Definitions of Key Terms
1. Sale
2. Tax Rate
3. Taxable Item
4. Exemptions
5. Receipt or Sales Price
a. Cash discounts
b. Trade, volume, employee or wholesale discounts
c. Early payment discounts
d. Vendor or manufacturer coupons
e. Trade-ins
f. Rebates
g. Credit card fees
h. Check cashing fees
i. Charges for shipping, handling, delivery, postage
j. Personal property taxes
k. Miscellaneous charges
6. Vendor
7. Purchaser
D. What is a Use Tax?
E. Credits for Taxes Paid
F. Similar Taxes
1. Gross Receipts Taxes
2. Privilege and Occupation Taxes
a. Arizona Privilege Tax
b. Retailer's Occupation Tax
3. Utility Taxes
4. Value Added Taxes
G. What's In A Name?
H. How to Analyze the Validity of a Sales or Use Tax
I. Current State of Sales and Use Tax Laws
J. Sales and Use Tax Law Reform Efforts
1. Internet Tax Freedom Act
2. Streamlined Sales Tax Project
3. Streamlined Legislation
1300.02. HISTORICAL BACKGROUND
A. Early Enactments of Sales Taxes
B. Initial Proliferation
C. Post–War Proliferation
D. Application of the Sales Tax and Problems Encountered
E. Application of Use Tax and Problems Encountered
1. Advent of Use Tax
2. Problems Encountered
1300.03. THE DUTIES AND OBLIGATIONS OF THE SELLER AND THE PURCHASER
Introductory Material
A. Distinction Between Legal Liability and Economic Incidence
B. Who Has the Duty to Collect the Sales Tax?
1. California
2. New York
3. Ohio
4. Texas
C. The Duty To Register
D. The Duty To Maintain Books and Records
E. The Ramifications of Legal Incidence
1. Restrictions on Absorption of Tax
2. Restrictions on Advertising Absorption of Tax
F. The State May Pursue The Seller or the Purchaser
G. Who Gets Audited
H. Who Pays for the Use Tax
I. Who Is The Ultimate Consumer
1300.04. TAXABLE TRANSACTIONS RELATING TO REAL PROPERTY
Introductory Material
A. Arizona
1. Transaction Privilege (Sales) Tax
2. Rental Occupancy Tax
B. Florida
C. New York City
1300.05. TAXABLE TRANSACTIONS RELATING TO TANGIBLE PERSONAL PROPERTY
A. Definition of Tangible Personal Property
B. The Importance of Understanding What is Tangible Personal Property
C. Mixed Transactions – The True Object Test
1. Ohio
2. California
3. Michigan
D. Special Types of Tangible Personal Property
1. Computer Software
2. Foods and Meals
3. Prescription Drugs
4. Marijuana
1300.06. TAXABLE TRANSACTIONS RELATING TO SERVICES
A. Overview
B. Taxation of Services Generally
C. Taxation of Selected Services
D. Administrability
1. “True Object” Test
2. Common Taxable Services
a. Utility Services
(1)  Electricity, Water, Natural Gas and Other Fuel
(2)  Telecommunications
b. Personal Services
c. Repairs and Installation Services
d. Business Services
(1)  Interstate Services
(2)  Tax Pyramiding
(3)  Economic Impact
(4)  Competitive Disadvantage
(5)  Small Business Disadvantage
(6)  Legal Services
e. Unusual Taxable Services
(1)  Temporary Help Services
(2)  Consulting Services
(3)  Information Services
E. Prognosis
1300.07. INTERSTATE ISSUES AND CONSTITUTIONAL ISSUES
A. The Destination Principle
B. Constitutional Issues
1. Commerce Clause
2. Due Process Clause
3. Supremacy Clause
4. Equal Protection Clause
5. Import-Export Clause
6. Privileges and Immunities Clause
7. First Amendment
C. Public Law 86-272 Does Not Apply
D. Nexus Issues
1. Basic Analytical Tests to Evaluate a Sales or Use Tax
2. Selected Cases
3. Special Rules for Mail Order Sales
a. The Quill Decision
b. Mail Order Rules Do Not Apply to Consumers
c. Other Issues
4. “Amazon Laws” or “Click-Through Nexus”
5. Nexus Based on Membership in Federal Group
E. Reporting and Notification Regimes
F. Drop Shipments
G. Interstate Agreements
H. Voluntary Disclosure
1300.08. BULK SALES, TRANSFEREE LIABILITY
1300.09. EXEMPTIONS AND EXCEPTIONS
Introductory Material
A. Entities
1. Indians and Indian Reservations
2. The Federal Government
3. State and Local Governments
4. Diplomats and Foreign Governments
5. Religious, Charitable or Educational Organizations
a. State Specific Examples
(1)  California
(2)  New York
(3)  Ohio
b. Sales Made by Religious, Charitable or Educational Organizations
B. Type of Property
C. Intended Use
1. Manufacturing
a. Indiana
b. New York
c. Ohio
2. Telecommunications
3. Magazines, Newspapers, and Other Publications
4. Promotional Materials
a. Gifts, Novelties, and Promotional Give-Aways
b. Printed Promotional Materials and Interstate Commerce
5. Research and Development
6. Enterprise Zones
7. Instrumentalities of Interstate Commerce
8. Green Industries
D. Type of Transaction
1. Sale for Resale
a. Resale Exemptions for Real Property Construction Activities
b. Resale Exemptions for Wrapping, Packaging, and Containers
2. Occasional Sales or Casual Sales
3. Temporary Storage of Inventory
4. Corporate Reorganizations and Mergers and Acquisitions
5. Donations
6. Gift Transactions
1300.10. AUDIT METHODOLOGIES
A. Direct vs. Indirect Audits
1. Indirect Audits: Mandatory or Voluntary
2. Use of Estimation Techniques in Refund Situations
3. Self-Audits and Managed-Audits
B. Test Periods
1. Description
2. Problems
a. Cyclical Businesses
b. Growing (Shrinking) Businesses
c. Changing Businesses
d. Valid Representation of Whole Period
C. Mark-Ups
1. Description
2. Problems
a. Sampling Methodology
b. Changes Over Time
c. Waste, Spillage, Pilferage
d. Discounts
D. Observation Tests
1. Description
2. Observed Days Are Not Representative
E. External Indices
1. Description
2. Examples
a. Industry Averages
b. Auditor's Experience
3. Problems
F. Audits Regarding Other Taxes
1. Comparing Gross Sales to Federal Income Tax Returns
2. Comparing Gross Sales to Various State Tax Returns
3. Ramifications of Increased Gross Sales
a. Increased Corporate Income Tax
b. Increased Personal Income Tax Liability
1300.11. OFFICER LIABILITY
A. Basis
B. Typical Statutory Language
C. Formal Relationship
D. Factors Indicative of Responsible Person Status
E. Willfulness
1300.12. ADMINISTRATIVE MATTERS AND MISCELLANEOUS
A. Separate Billing
B. Discounts, Rebates and Coupons
C. Trade-Ins
D. Collection and Remittance
E. Electronic Remittances
F. Reports and Returns
1. New York
2. Texas
G. Refunds and Credits
H. Bad Debts
I. Procurement Cards
J. Collection Fees
K. Exemption Certificates
1. Intention to Resell Items
2. Good Faith Acceptance
3. Timely Acceptance of Certificate
L. Direct Payment Permits
M. Installment Sales
N. Rentals, Leases or Licenses
O. Sale-and-Leaseback Arrangements
1. Taxation of Sale-and-Leasebacks Treated as Financing
a. Financing Transactions
b. Sales-type Lease
c. Option to Buy for Nominal Purchase Price
2. Taxation of Sale-and-Leasebacks Not Treated as Financing
a. Resale Exemption
b. Manufacturing Exemption
1300.13. STREAMLINED SALES AND USE TAX AGREEMENT
A. Introduction
1. Background
2. SSTP and SSTIS
B. Implementation Process
1. Enactment of Changes to State Statutes
2. Becoming a Member State
3. Effective Date
C. Agreement Provisions
1. Uniform Definitions
2. Uniform Administration
a. Delivery Charges
b. Direct Mail
c. Lease or Rental
d. Sales Price/Purchase Price
e. Tangible Personal Property
3. Product Definitions
a. Food and Food Products
b. Clothing
c. Computers and Related Items
d. Health Care
4. State Level Administration
5. Uniform State and Local Tax Base
6. Single Rates Per State, Caps, and Thresholds
7. Uniform Sourcing
8. Rate and Boundary Notification
9. Compliance Technology
a. Model 1 - Certified Service Provider
b. Model 2 - Certified Automated System
c. Model 3 - Certified Proprietary System
10.   Taxablility Matrix
11.   Uniform Procedures
12.   Uniform Returns
13.   Uniform Bad Debt Provisions
14.   Uniform Rounding
15.   Sales Tax Holidays
16.   Elimination of Exemption Certificate ‘Good Faith’ Requirement
17.   Customer Refund Procedures
18.   Amnesty
19.   Governance
20.   Dispute Resolution

Working Papers

Item Description Sheet
Worksheet 1 Exchange of Information Agreement (Sales and Use Tax) (proposed by the Multistate Tax Commission)
Worksheet 2 Recordkeeping Regulation for Sales and Use Tax Purposes
Worksheet 3 Uniform Sales and Use Tax Administration Act
Worksheet 4 Simplified Sales and Use Tax Administration Act