Determining Prior Period Tax Exposure for Veterinary Businesses

Do you owe Illinois Sales Taxes for Prior Periods?

What is important to understand about the agreement between ISVMA & IDOR:

It did not solve all of the issues that have led to audit assessments

Many veterinary businesses may still have some tax exposure for prior years that could be assessed during an audit

IDOR is offering a short period of time for veterinary businesses to settle up for prior periods and voluntarily pay any tax due.

The Purpose of this Presentation is to:

Assist you in determining whether you have any prior period tax exposure

Assist you in deciding whether to take advantage of IDOR’s offer

Explain the process for filing amended returns and paying back taxes

Let’s discuss the history of what happened to create this situation…

The Department of Revenue took an incorrect position relating to sales of flea and tick medications.

In several letter rulings they concluded that sales of these products would always be subject to ROT even if recommended by a veterinarian.

History of what happened to create this situation… - continued

Many veterinary businesses became registered as retailers.

They started purchasing flea and tick medications tax-free, and began charging tax when selling these medications to their clients.

They continued to pay tax to suppliers on purchases of other medicines and drugs. (other than flea and tick medications)

So what was wrong with this approach?

Per the SOT law, a veterinary business that is also a retailer cannot elect to satisfy their SOT liability by paying tax to suppliers.

They must purchase all medicines and drugs tax-free and account for the SOT as these products are administered, dispensed or sold as a part of providing veterinary services

What was wrong with this approach … - continued

The veterinary industry or the ISVMA did not understand the ramifications of a decision to become retailers as it related to the Illinois SOT law.

Department of Revenue of auditors began auditing veterinary businesses and assessing tax created as a result of this situation.

Basically what were the issues being raised by department auditors?

1. Where a business did become registered auditors applied SOT (state & local) on purchases of drugs and medicines being transferred or sold in conjunction with providing services.

2. Where a business did not become registered, auditors began applying ROT on sales of flea and tick medications.

Where SOT was being applied:

1. If ROT had been paid on sales of drugs and medicines, no SOT was assessed.

2. If the state Use Tax had been paid to suppliers, a credit was allowed against the state portion of the SOT due – only local SOT assessed.

3. If Use Tax was not paid to out-of-state suppliers because they were not charging Illinois tax, both the state and local SOT was assessed.

Where ROT was being applied:

1. ROT due was based on the selling price of flea & tick medicines – credit was given for tax paid to suppliers

2. Additionally, auditors assessed SOT on purchases of all other medicines in accordance with the explanation included in previous slide.

Were there other issues being raised by department auditors?

In all cases (registered or unregistered veterinary businesses) auditors reviewed purchases of assets and expense items that were used in the business and not transferred or sold to clients.

Where the Illinois Use Tax was not paid to suppliers, it was assessed in the audit.

Just how many audits did IDOR perform on veterinary businesses?

We really don’t know how many audits were finalized before our company got involved

We do know that we temporarily stopped ongoing audit activity in about 20 cases

We also know that most businesses were not yet under audit – we stopped IDOR from selecting additional cases

The first question to ask in determining whether there is prior exposure is …

Is the business involved in any type of retailing based on the new interpretation?

If the answer is no – there is some chance that there is some exposure.

If the answer is yes – there is almost 100% certainty that there is some exposure.

Let’s discuss each case…..

What is the exposure for veterinary businesses with No Retail Activity?

1. If a veterinary business made no retail sales as defined by new interpretation, they would have no ROT exposure.

2. If they had paid ROT on items that are now being interpreted as a sale of service, they have technically paid tax to the state that was not due.

Can they receive a refund of tax paid in this situation?

If the tax that was paid was collected from customers, no claim for credit can be claimed unless the tax is refunded to customers.

If tax was paid as a result of being assessed through an audit, a claim may be appropriate (if the payment was made within the last three years).

Exposure for veterinary businesses with No Retail Activity - continued

Businesses with no retail activity under new interpretation could have satisfied their SOT liability by paying tax to suppliers on drugs and medicines transferred or sold.

If tax was paid to all suppliers on drugs and medicines transferred or sold, then there would be no SOT exposure.

Exposure for veterinary businesses with No Retail Activity - continued

However, if there are purchases of drugs and medicines where tax was not charged by vendors, the business would have a Use Tax exposure on these non-taxed purchases.

The tax due would be 6.25% of the non-taxed purchases amounts.

What is the exposure for veterinary businesses with Retail Activity?

Businesses that are considered to be retailers under the new interpretation would have ROT exposure if tax was not being charged to customers and paid over to the department on selling price of retail items.

There would be no ROT exposure if the tax was being charged to customers and being paid over on returns being filed with the department.

Exposure for veterinary businesses with Retail Activity - continued

Businesses that are considered to be retailers under new interpretation may have SOT exposure on medicines and drugs transferred or sold in conjunction with providing services.

The exposure would be dependent on whether tax was being charged to customers and/or how tax was being paid to suppliers.

SOT Exposure for veterinary businesses with Retail Activity…

SOT (state & local) is due on cost price of medicines and drugs transferred or sold in service transactions.

Credit is available for tax charged customers and paid over

Credit is available for tax paid to suppliers

Veterinary Businesses – Use Tax Exposure

All veterinary businesses whether they are (or are not) also retailers under the new interpretation would have Use Tax exposure on any un-taxed fixed asset and consumable supply purchases.

Registered businesses would have a three year exposure while un-registered businesses would have a six year exposure.

What are the procedures for accepting the IDOR Settlement Agreement?

The period covered by the agreement would be:

1. January 1, 2004 through December 31, 2006 for veterinary businesses that are registered as retailers.

2. January 1, 2003 through December 31, 2006 for unregistered businesses

Procedures for accepting the IDOR Settlement Agreement - continued

Amended returns filed by registered businesses will be filed dependant on the businesses filing status during the look back period (i.e monthly, quarterly or annually)

Returns filed by an unregistered business must be filed on a monthly basis

Procedures for accepting the IDOR Settlement Agreement - continued

Businesses that accept the department’s offer must file returns by March 31, 2007 and pay all tax due at the time of filing.

The business will not be required to pay any penalties. (The current penalty rate that can be assessed by audit action is 20%.)

Procedures for accepting the IDOR Settlement Agreement - continued

By terms of the agreement, IDOR reserves the right to review returns that are filed and take additional action if material misrepresentations of facts have been made.

Assuming that returns filed as a result of this agreement are accepted by IDOR, the business can expect no further audit activity.

Should you take advantage of the IDOR offer? – JD Michael advice

Definitely take advantage of offer if currently under audit.

Consider taking offer if you have vendors not charging you tax on assets, supplies or medicines.

Would not take offer if tax is being paid to suppliers on all purchases.

Call us if you want to hire us to take a look and help you decide.