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 do 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

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 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 3 year Statute of Limitations

Areas of Current Interest 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 on the land.

Value determined the county assessor based on one of three methods

Market value Percentage of market value Classified assessment level

Value remains constant unless there are changes in market value, modifications in size or 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 classified as real or 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 of every kind, both tangible and intangible, not included in the term real estate.”

AZ Department of Revenue Personal Property Manual: ’’Property is personal property if it can be removed without damaging itself or the property to which it is attached and its only temporarily attached, or it is interchangeable with other items, or if the real property to which it is attached can function without it.

Tangible personal property is taxed in most states; inventories are not taxed in most states.

Property Taxes—Exempt Property Great variation among local jurisdictions in

terms of specific exemptions Common Exemptions

Agricultural land Government property Education and library property Health care property Religious property Cemeteries Property of widows, widowers, veterans,

homeowners, the elderly and disabled Various other not for profit organizations

Property Taxes--Valuation Tangible Personal Property

Major Classifications Machinery & Equipment including supplies,

consigned goods and goods in transit. Inventories—stock in trade + accrued costs Leasehold improvements—walls, ceilings,

carpeting and lighting (may be real property in many jurisdictions)

Property Accounting Systems Consultants and accountant can use

information from these systems to challenge the assessed classification and valuation.

Property Taxes--Valuation Important Issues

Assessor’s Identification of Property Self declaration or rendition prepared by

the business Review of government filings

Income tax returns Business license lists Airport & marina lists Charters and permits

Audits Desk, telephone, correspondence & physical

inspection

Property Taxes--Valuation 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 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: Direct costs Indirect costs Reasonable Profit

Depreciation Straight reduction for wear and tear

Obsolescence Physical Functional External

Real and Personal Property ValuationThe 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, § 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 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

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.

Equipment Incentives Investment Credits (enterprise zone) Research and Development Credit

Building Restoration Incentives Restoration of old structures

Resource Related Credits 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)