Sales tax presentation

Sales Tax Defined Sales Tax  Imposed on the retail sale of tangible personalty or services within the taxing jurisdiction Use Tax Defined Use Tax  Imposed on the possession, use, storage, or consumption of tangible personal or services within the taxing jurisdiction Use Tax Illustration Doris O’Brien   Resident of State A  Purchases $ 30,000 of goods  Pays $ 1,200 sales tax (*) $ 30,000 X 6.5% $ 1,950 (1,200) $ 750 net tax due Types of Sales Tax    Retail Sales Tax Seller Privilege Tax Gross Receipts Tax Retail Sales Tax – The Basics  An Overview     Sale must take place within the territorial boundaries of the taxing jurisdiction Sale must be of tangible personal property Intangibles, real property and services generally excluded A planning issue for mixed activities (property & services)   If there is any doubt collect the tax If the issue is material, seek a letter ruling from DOR Retail Sales—The Basics  What is a sale?    Ownership Transfer Consideration Arizona Definition §42-5001(13)   Any transfer of title or possession, or both, exchange, barter, lease or rental, or by conditional or otherwise, in any manner or by any means whatever, including consignment transactions and auctions, of tangible personal property or other activities taxable under this chapter for a consideration Includes property held as security, fabrication for consumers, furnishing property consumed on premises Retail sales—The Basics  Scope of a Retail Sale   Imposed only once during the entire chain of events starting from the point where the goods are manufactured and culminating with their eventual sale to the retail customer Exclusions       Sales-for resale Casual or Occasional Sales Sales of items used in manufacturing, processing and fabricating Sales of machinery and equipment Sales of certain essential items Sales to certain organizations or entities Measure of the Sales and Use Tax   ID § 79-3602(h) Gross Receipts—Total selling price or the amount received as defined in this act, in money, credits, property or other consideration valued in money from sales at retail within this state ID §79-3602(g) Selling price—Total cost to the consumer exclusive of discounts allowed and credited, but including freight and transportation charges from retailer to customer” Measure of the Sales and Use Tax  Gross Receipts not include:       Cash discounts Returns and allowances Transportation charges—separately stated Trade-ins Finance and service charges Bad debts Constitutional Issues in Imposing Sales and Use Taxes   Two key provisions—the Commerce Clause and the Due Process Clause Landmark Cases      McLeod v J.E Dilworth Co 322 US 327 (1944) Miller Brothers Company v Maryland 347 U.S 340 (1954) National Bellas Hess, Inc v Department of Revenue 386 US 753 (1967) Quill Corp v North Dakota 504 U.S 298 (1992) Streamlined Sales Tax Project Realty Valuation—The Income Method   Frequently used for apartments, hotels, shopping centers, and strip malls Yield capitalization approach     Used when cash flow is unstable Income = Σ (Projected Future Cash Flows X Discount Rate) Rate based on trends in sales, investment & industry sources Example 5-3 provides an illustration Real & Personal Property Valuation—The Income Approach  Direct capitalization approach    Used when the property’s cash flow is stable Value = Net Income/Capitalization Rate Net Income From Property Equals      Total Estimated Income from Property Less Vacancy and Collection Loss Add Other Income from Property Less Operating Expenses Review Example 5.2 Real and Personal Property Valuation— The Cost Method Approach     Attempts to find the value or cost to replace an improvement with a new improvement Includes only those costs that actually increase the property’s economic value Consider replacement cost, reproduction cost and either physical functional or economic depreciation Cost Value = Cost of improvements + Land (valued as vacant) Less Depreciation/Obsolescence Real and Personal Property Valuation— The Cost Method Approach  Cost of Improvements include:     Depreciation   Direct costs Indirect costs Reasonable Profit Straight reduction for wear and tear Obsolescence    Physical Functional External Real and Personal Property Valuation The Market Method Approach    Valued using “comparable sales”—recent sales of similar property Market value is the most probable price that a property would bring in a competitive and open market, in which the price is not affected by undue circumstances Example 5.5 illustrates the market method Real and Personal Property Valuation—Issues with General Application    Contribution—the value of a particular component measured in terms of its contribution to the value of the whole, or as the amount that its absence would detract from the whole Highest and Best Use—Physically possible and financially feasible Substitution—prudent purchaser will pay no more than the cost of acquiring an equally desirable substitute on the open market Intangibles Tax  Primarily assessed on the fair market value of stocks and bonds       Alabama Florida Kentucky Pennsylvania West Virginia (bonds only) Or Deposits   Kentucky Rhode Island Administrative Issues    Real Property—Generally No Reporting Requirements Personal Property—Annual Tax Return Based on the Values at the Assessment Date Taxpayer may appeal to    Assessor State Board of Equalization Courts Some Constitutional Issues  State Constitutional Issues  The Uniformity or Equality Clause    Article 9, § of the Arizona Constitution an illustration Taxes (may be subject to uniformity or equality clause) versus Fees (not subject to the clause) Property Tax (subject to the Clause) versus Excise Tax (not Subject to the Clause)   Fundamental distinction is whether the tax applies to all the privileges of owning the property or some of the privileges Imposed on a fixed day or happening of some event or in contrast a one time event Unemployment Taxes—Basic Features  Federal Unemployment Tax   6.2% of the 1st $ 7,000 State Unemployment Tax    Range between $ 7,000 and $ 25,800 Rates are determined through a rating system (range of 0% to 11%) Rates increase based on unemployment benefits claimed by former emploees Planning with Unemployment Taxes  Avoiding Employee Classification   Employee—employer has right to control and direct the individual; Independent contractor controls outcome of work and means by which the work is accomplished Tests for employee status         Place of work Furnishing Tools Right to Terminate Employee Leasing Operating in a New State (start with nominal work force) Acquisition of another company (“successor employer”) Business Restructuring (“spin off” strategies) Selling Off Part of a Business (Stock vs Assets) Special Tax Incentives  Area Specific Incentives  Enterprise Zones   Areas with higher than normal unemployment Tax credits and benefits        Sales and use tax credits for machinery purchases Hiring credit NOL carry-forwards Expensing depreciable property Lender income deductions to zone businesses Preference points on state contracts Local and non tax incentives also important Special Tax Incentives  Foreign Free Trade Zone    Transactions occurring within the zones are treated as if they occurred outside U.S borders Sales/Use, Property Tax and Income Tax Adjustments and Credits Example 8.2 provides an illustration Special Tax Incentives  Employee-Related Incentives    Equipment Incentives    Restoration of old structures Resource Related Credits   Investment Credits (enterprise zone) Research and Development Credit Building Restoration Incentives   Use in areas of high unemployment, often as part of enterprise zone incentives Work Opportunity Tax Credit, AFDC Credit Welfare to Work Credit are examples Environment related Privately Negotiated Incentives   To encourage substantial investment in a new location Review Tax Management in Action 8.1 Non-Tax Incentives    State Financing (page 193) Other Incentives (page 193) Local Incentives (page 194) [...]...       Definition of Specific Exemptions Taxation of Services Sales Tax Audits (Tyco) Taxation of e-Commerce Streamlined Sales Tax Project Alternative Approaches to Sales/ Income Tax Sales/ Use Tax on Capital Changes Competition with No Sales Tax States—NH,DE,MT,OR Tax Amnesty, Holiday Programs Property Taxes  The Property Tax Base  Real property taxes   Imposed on land, buildings, and improvements...Administration of Sales and Use Taxes  Reporting Obligations   Fiduciary Responsibilities to Report, Collect and Remit the Taxes Reporting Obligations    Register Business File Tax Returns Returns   Due Dates—vary by jurisdiction and amount Content Administration of Sales and Use Taxes  Rates     State Counties and Cities Definitions a key... Special Tax Incentives  Area Specific Incentives  Enterprise Zones   Areas with higher than normal unemployment Tax credits and benefits        Sales and use tax credits for machinery purchases Hiring credit NOL carry-forwards Expensing depreciable property Lender income deductions to zone businesses Preference points on state contracts Local and non tax incentives also important Special Tax. .. Cost Income Market Methods parallel those used for real estate Property Taxes Situs  Important Issues    Stationary property taxed where located Moveable property generally requires a permanent situs from which it operates in order to be taxed In transit property moved by common carrier or private conveyance is excluded from taxation when not at the business premises Realty Valuation—The Income... Uniformity or Equality Clause    Article 9, § 1 of the Arizona Constitution an illustration Taxes (may be subject to uniformity or equality clause) versus Fees (not subject to the clause) Property Tax (subject to the Clause) versus Excise Tax (not Subject to the Clause)   Fundamental distinction is whether the tax applies to all the privileges of owning the property or some of the privileges Imposed... event or in contrast a one time event Unemployment Taxes—Basic Features  Federal Unemployment Tax   6.2% of the 1st $ 7,000 State Unemployment Tax    Range between $ 7,000 and $ 25,800 Rates are determined through a rating system (range of 0% to 11%) Rates increase based on unemployment benefits claimed by former emploees Planning with Unemployment Taxes  Avoiding Employee Classification   Employee—employer... quality, or there is a general revaluation Property Taxes  Tangible Personal Property    Valued annually as of a specific assessment date Taxpayers file annual property tax reports which show by class of property, the original cost of the asset by year of acquisition Base value determined by comparables, adjusted to arrive at final value Property Taxes  Challenging the Assessment   Property is... consideration in applying rates Recordkeeping       Regular books of accounts Invoices to document taxes paid Contracts and purchase orders Bills of lading Support for credit returns and bad debt write offs Exemption and resale certificates to support exempt transactions Administration of Sales and Use Taxes  Audits    State agencies; audit may be industry specific Block samples and Random samples... the open market Intangibles Tax  Primarily assessed on the fair market value of stocks and bonds       Alabama Florida Kentucky Pennsylvania West Virginia (bonds only) Or Deposits   Kentucky Rhode Island Administrative Issues    Real Property—Generally No Reporting Requirements Personal Property—Annual Tax Return Based on the Values at the Assessment Date Taxpayer may appeal to    Assessor... personal based on the definitions provided by state statute Process of differentiation is called cost segregation Taxpayers can challenge the assessment based on whether:    Property is properly classified Property is not specifically exempt from the tax base Property is correctly valued Property Taxes Classification  Real versus Personal Property    A.R.S §42-11002(7)—Personal property includes “property ... goods  Pays $ 1,200 sales tax (*) $ 30,000 X 6.5% $ 1,950 (1,200) $ 750 net tax due Types of Sales Tax    Retail Sales Tax Seller Privilege Tax Gross Receipts Tax Retail Sales Tax – The Basics... Specific Exemptions Taxation of Services Sales Tax Audits (Tyco) Taxation of e-Commerce Streamlined Sales Tax Project Alternative Approaches to Sales/ Income Tax Sales/ Use Tax on Capital Changes...     Sales- for resale Casual or Occasional Sales Sales of items used in manufacturing, processing and fabricating Sales of machinery and equipment Sales of certain essential items Sales to