Sales tax presentation

Retail Sales Tax – The Basics Sale must take place within the territorial boundaries of the taxing jurisdiction  Sale must be of tangible personal property  Intangibles, real propert

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

Types of Sales Tax

 Retail Sales Tax

 Seller Privilege Tax

 Gross Receipts Tax

Retail Sales Tax – The Basics

 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

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

Measure of the Sales and Use

Tax

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

 Trade-ins

 Finance and service charges

Constitutional Issues in Imposing

Sales and Use Taxes

and the Due Process Clause

 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

Administration of Sales and Use

Taxes

 State

 Counties and Cities

 Definitions a key consideration in applying rates

 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

 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

 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

adjusted to arrive at final value

Property Taxes

 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

 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

 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 Situs

 Important Issues

 Stationary property taxed where located

 Moveable property generally requires a permanent situs from which it operates in order to be taxed

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

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

Real and Personal Property Valuation

The Market Method Approach

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

Administrative Issues

Requirements

on the Values at the Assessment Date

 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

 Rates are determined through a rating system (range of 0% to 11%)

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

 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

Special Tax Incentives

 Foreign Free Trade Zone

 Transactions occurring within the zones are treated as if they occurred outside U.S

borders

Adjustments and Credits

 Example 8.2 provides an illustration

Special Tax 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)