Stay informed about sales tax regulations, regularly assess activities for registration obligations, and seek guidance from tax advisors to avoid these pitfalls and get business registrations right.

By Connie Zoerink

If a taxpayer is transacting business in the U.S., they will most likely have a state and local tax (SALT) obligation. Sales tax registration is required to comply with this obligation in jurisdictions where business was transacted. When and how to register can be perplexing for the uninitiated, creating potential pitfalls that businesses should be aware of to avoid issues and ensure proper compliance. Here are some common pitfalls we have seen regarding sales tax registrations. 

1.         Registering Late 

Failing to register for sales tax in a timely manner often happens because businesses underestimate the speed at which they reach registration thresholds. Many businesses are not even aware of the thresholds or activities in the state that could create a registration requirement. Late registration can lead to potential penalties. 

2.         Ignoring Nexus 

Nexus is the connection a business has with a state that requires it to collect and remit sales tax. Physical presence nexus and economic nexus co-exist, creating a wide net of compliance obligations. Businesses that fail to understand the breadth of these nexus requirements can end up overestimating or underestimating their obligations in certain jurisdictions. 

Businesses that fail to monitor their economic activities in various states may find themselves unintentionally non-compliant. Economic nexus makes an out-of-state seller liable to collect sales tax in a state once a set level of transactions or sales activity is met. These sales tax thresholds relate to the number of transactions or the dollar value of the transactions, which are set on a state-by-state basis. Every state has different laws and rules making it particularly difficult to track, monitor and implement.

3.         Registering Errors 

Inaccurate or incomplete information on the registration can cause delays, and in some cases, may result in fines or penalties. 

4.         Ignoring Business Activities 

How a business is characterized, or how the business characterizes their activities, matters when is comes to state and local tax. Changes in those business activities can impact sales tax obligations, creating the need to update registrations to avoid non-compliance. 

5.         Ignoring Local Taxes 

Some jurisdictions have local sales tax requirements in addition to state-level obligations. Ignoring local tax registration requirements can result in non-compliance and potential penalties. 

6.         Assuming Marketplaces Compliance 

Businesses often look to an online marketplace provider to cross t’s and dot i’s of sales tax. But what happens when the marketplace is in error and fails to fully collect sales tax? That failure can become the businesses’ cross to bear. So, when it comes to online marketplaces, taxpayers must “trust but verify”, meaning taxpayers must understand their responsibilities and ensure they comply with all applicable tax laws, regardless of what the marketplace provider does. 

7.       Who Does What? 

Lack of communication within a business between the sales, finance, tax and legal teams can lead to the possibility of overlooking sales tax registration requirements. Post-registration, this can lead to a failure to monitor and update exemption certificates and fulfill other administrative duties related to sales and use taxes. 

What’s a Business to Do?

Now that we’ve covered what not to do, here’s a list of items businesses should do when it comes to business registrations.

1. Be timely! Taxpayers affirm to the date the business started under penalty of perjury.
2. Complete all information accurately, especially FEINs.
3. Know the type of business (wholesaler, retailer, contractor, etc.).
4. Make sure you have “checked” all relevant tax types or have considered them as you register, particularly if the other tax types are triggered when registering for one type of tax (e.g., register for sales tax but not income tax).
5. Check for the local requirements (city, county, special district, etc.) and the need to file with the Secretary of State.
6. Find out what compliance obligations you will have and the timing (e.g., filing sales tax returns quarterly).
7. Do not register if working through a Voluntary Disclosure Agreement or amnesty program as the registration process is completed with these remediation strategies.
8. Check with a marketplace facilitator if using that as the sales platform to make sure compliance is happening, either by them or you!

Businesses that stay informed about sales tax regulations, regularly assess activities for registration obligations, and seek guidance from tax advisors are best positioned to avoid these pitfalls and the costly consequences of getting sales tax compliance right. Businesses that forget, or ignore, registration requirements may be eligible for a Voluntary Disclosure Program or other remediation strategies. Contact your TaxOps Advisor for more guidance.

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The post Don’ts and Do’s in Sales Tax and Business Registrations first appeared on TaxOps.

Colorado’s efforts to simplify sales and use tax compliance has come a long way in six years. Today, every business selling into Colorado is impacted by the statewide Sales and Use Tax System (SUTS). Learn how best to proceed with SUTS and avoid the landmines of registering late with our latest Guide to Colorado’s Sales and Use Tax System.

By Judy Vorndran

Colorado is known for majestic mountains and landscapes. It is also known as being one of the most complicated states to comply with state and local tax.

But we have exciting news. I’ve been working on this for over 6 years with the coalition to Simplify Colorado’s Sales Tax! The Colorado’s Department of Revenue’s Sales and Use Tax System (SUTS) is (almost) fully operational for online sellers. Included is a GIS tax rate lookup tool, taxability and exemption matrices, and a single portal to deal with almost all the home rule jurisdictions.

We are close, but not quite at 100% participation of all home rule jurisdictions in Colorado. Aspen and Grand Junction go live in April. Telluride remains TBD. And Delta and Sterling have NOT signed the SUTS agreement, as of this writing (see SUTS Colorado Department of Revenue SUTS participants).

Using SUTS

Although using SUTS is voluntary for business taxpayers today, the state of Colorado encourages all retailers to file sales tax returns for the state, state-administered local jurisdictions, and participating home-rule cities using SUTS. But be aware: registering without remediating existing exposure can be costly.

While SUTS helps address some of the complications of tax compliance, the administrative burden is still there. Learn what online sellers must do to move their Colorado revenue online registration and begin remitting through SUTS in our Guide.

Learn

• Benefits and limitations of SUTS
• Vetting the issues that matter
• Action plan, accessing SUTS, and activating Accounts
• Key takeaways to reduce risk

Visit the Department of Revenue

• SUTS Information: https://tax.colorado.gov/SUTS-info
• SUTS Participants: https://tax.colorado.gov/SUTS-Jurisdictions

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The post Guide to Colorado’s Sales and Use Tax System (SUTS) first appeared on TaxOps.

The Internal Revenue Service is taking a bold step towards what it calls “restoring fairness in tax compliance.” In a sweeping initiative announced in IR-2023-166, the IRS is focusing its efforts on high-income earners, partnerships, large corporations, and promoters who may have slipped through the cracks in the past decade.

By Stacey Roberts, Director, State and Local Tax, Allen Gregory, Partner, Partnership Tax, and Lindsay Haskell, Corporate Tax

The Internal Revenue Service is taking a bold step towards “restoring fairness in tax compliance.” In a sweeping initiative announced in IR-2023-166, the IRS is focusing its efforts on high-income earners, partnerships, large corporations, and promoters who may have slipped through the cracks in the past decade.

To achieve this, the IRS is harnessing the power of AI and cutting-edge technology to uncover compliance threats and detect complex tax avoidance strategies. Their priorities include cracking down on digital asset compliance, addressing Report of Foreign Bank and Financial Accounts (FBAR) violations, regulating labor brokers, and enhancing audit and taxpayer protections.

Expect heightened audit activity if you fall within these target groups. This isn’t just a federal matter – state oversight might come into play if audit adjustments affect your state taxes.

Got questions or need guidance on tax compliance, planning, strategy, or audits? Reach out to your TaxOps Advisor today. They’re here to help you navigate these changes.

Let’s Talk Tax

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The post IRS Sharpens Enforcement on Partnerships and Large Corporations first appeared on TaxOps.

Meredith Smith and Stacey Roberts from the SALTovation Team at TaxOps continue the What Makes Us SALTy? series with an episode on managing exemption certificates. Read more or listen in.

In this SALTovation session, we continue our miniseries on the irritations and challenges faced in state tax. Daisy shares her thoughts on a topic that has been bothering her recently – exemption certificates. These certificates play a critical role in documenting tax exemptions for sales, but the administrative burden and potential pitfalls can be frustrating for both vendors and customers. Let’s dive into the complexities of dealing with exemption certificates and explore some practical solutions.

Nightmare of Exemption Certificates

Stacey begins by highlighting the pain and frustration many face when dealing with exemption certificates. For vendors and customers alike, the process can be both ridiculous and time-consuming. Exemption certificates are essential as they determine whether a sale is exempt from tax or not, which can impact audits and voluntary disclosures.

Stacey points out a common scenario where a taxpayer receives a valid blanket exemption certificate from a customer. While the vendor can rely on this document, problems arise if the customer later takes some of the items out of inventory for personal use. In such cases, the customer is expected to self-assess use tax, but this doesn’t always happen.

The Push-Pull Dilemma

One of the challenges emerges when customers push back on vendors, requesting special treatment regarding tax application. Customers might ask vendors to differentiate taxable sales from exempt sales, adding administrative burdens for vendors who struggle to manage the diverse tax treatment.

Stacey acknowledges that managing exemption certificates and related documentation is an administrative hassle. While the validity of proper documentation is essential, issues arise when customers misuse items initially purchased for resale or exempt purposes, or when customers request different tax treatments.

Meredith empathizes with the vendors’ nightmare of dealing with these complexities. Even though vendors might rely on exemption certificates in good faith, an audit could expose discrepancies that might lead to substantial tax assessments.

The Cumulative Impact

The conversation shifts to the cumulative impact of even seemingly minor errors in the exemption process. A single mistake could be amplified over time, especially if it becomes a common pattern during an audit period. This highlights the need for careful management of exemption certificates to avoid significant financial consequences.

Practical Advice for Clients

To manage exemption certificate challenges, Stacey emphasizes the importance of understanding the customer relationship. Vendors need to decide whether to grant customers special treatment when they know the items will be used for non-exempt purposes. While it might add administrative complexity, accommodating customer requests could improve relationships.

Stacey also advises vendors to proactively address any discrepancies related to exemption certificates. Open communication with customers about the validity of certificates can help resolve issues before they escalate into costly audit problems.

Exemption certificates are a necessary but cumbersome aspect of state tax. Dealing with these certificates involves careful management and effective communication between vendors and customers. By understanding the complexities and potential pitfalls, businesses can navigate the exemption process more effectively and minimize headaches down the road.

Let’s Talk Tax

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The post Exemption Certificate Management Makes Us SALTy first appeared on TaxOps.

By Tram Le, originally published in Tax Notes, Volume 109, July 3, 2023

Tram Le is a member of the SALTovation team at TaxOps and an adjunct professor at the University of Texas at Arlington. She writes about hot topics in state and local tax affecting business operations and growth strategies and can be reached at tle@taxops.com. In this installment of Spreading SALTovation, Le examines sales tax exemptions and other rules, which vary by state. She explains the true object test, classes of property that are often exempt from tax, and offers strategies for limiting risk through robust exemption certificate management.

Sales tax is a consumption-based tax for end-users of goods and some services [1]. When a taxpayer has nexus and is responsible for collecting and remitting sales tax, it must collect the correct amount of tax owed from customers based on what goods and services are taxable, excluded, or exempt. Determining what is taxable or exempt depends on where the goods and services are being consumed and the jurisdiction’s sales tax rules, which frequently differ by state. Multistate taxpayers are particularly at risk in this ever-changing sales tax landscape, where the way a state defines, classifies, and imposes tax today may not be the same tomorrow.

Sales Tax Base

Sales tax is imposed on the retail sale of tangible personal property unless it’s exempt. States generally exclude services from the sales tax base unless enumerated as taxable. Only a handful of states such as Hawaii, New Mexico, South Dakota, and West Virginia, tax most services. In these states, the retail sale of services is taxable unless exempt and the tax base is broad. A broad tax base eliminates problems of determining whether a transaction is taxable in states that tax on broad categories such as data processing or information services.

To properly manage their sales tax obligations, taxpayers selling into multiple states must understand the nature of what they are selling — goods, services, or both — and know the tax treatment where those goods or services are being delivered and provided. If a taxpayer is selling tangible personal property, sales tax generally applies. However, if the nature of the transaction is not considered a sale of tangible personal property or if a taxpayer is only providing a nontaxable service, the sale may not be subject to sales tax.

In determining the taxability of the goods or services, the taxpayer must know what is included in the tax base (goods and services that are subject to sales tax) and what is exempt in each state where the taxpayer has nexus. Significant differences in the sales tax base exist among the states because of the varying nature of exemptions and exclusions from sales tax and the lack of uniformity in how states define some goods and services.

Is It Tangible Personal Property?

In some instances, a transaction may not clearly be a sale of tangible personal property and may be considered a sale of real property, services, or intangible personal property. Tangible personal property is typically defined as personal property that can be seen, weighed, measured, felt, or touched, or is perceptible to the senses in any manner. Personal property is property that is movable. On the other hand, real property is property that cannot be moved, such as land or a building that is attached to land. A key distinction between tangible personal property and real property is whether the item can be moved from one location to another. As for intangible personal property, it includes such items as images, copyright, and patent interests, and is not defined or enumerated as taxable under state sales tax laws.

Items such as furniture and fixtures may be tangible personal property in one type of transaction but not in another. Since furniture and fixtures can be touched, seen, perceived, and moved, it would likely be considered tangible personal property. When the sale of furniture is lumped with the sale of real property, though, the nature of the transaction may not be considered a sale of tangible personal property and would not be subject to sales tax.

The sale of software and related maintenance and cloud computing services is another challenging area, because states take differing positions on the tax treatment and approach to imposing sales tax. Although prewritten or canned software is classified as tangible personal property under the Streamlined Sales and Use Tax Agreement, member states do not consistently tax software. Additionally, software maintenance contracts generally provide services and updates to ensure that the software will be maintained to operate properly, improve the software’s performance, and meet a user’s needs. Maintenance contracts may be a mandatory or optional part of the original sale or added after the initial purchase. The taxability of a maintenance contract may depend on factors such as the taxability of the original software, whether the maintenance contract is mandatory or optional, and whether the updates are provided on a tangible medium, such as a flash drive or CD.

In general, states tax prewritten or canned software regardless of delivery medium and exempt customized software, which may be defined as meeting the needs of one customer. It may include canned software modified for a specific customer. Some states exempt when the prewritten and canned software is delivered or transferred electronically or is considered a license, which is treated as intangible property. Other states may distinguish the tax treatment based on whether the software is “operating” versus “application” software. Still other states tax software as a sale of tangible personal property only if it is transferred in a tangible medium.

In many states, cloud computing is generally considered a service unless the transaction is characterized as a sale or rental of tangible personal property or as a transaction involving the sale of taxable prewritten software. The characterization of cloud computing is not generally dependent on whether cloud services are taxable. Instead, it is taxable if it’s considered data processing or information services in states that have a broader sales tax base and tax these services.

Bundled Transactions

When goods and services are sold together, it can be difficult to distinguish between the two. Many transactions do not fall squarely into one category or another. For example, a hairdresser may transfer goods to the customer in the form of shampoo or coloring agents while providing hairdressing services. When a sale includes both taxable goods and nontaxable services and are combined as one single charge, this is generally referred to as a bundled transaction. States typically apply a true object test to determine whether the transaction is ultimately a transfer of tangible personal property or whether the taxable good is incidental to the nontaxable service.

One potentially controlling factor is whether the taxable good is incidental to the primary purpose of the transaction. If the taxable property is valuable to the customer or is only useful as a component of the service, it is not likely considered incidental to nontaxable services and the transaction would likely be subject to tax. A bundled transaction will not generally be subject to tax if the true object of the transaction is the service itself, the transfer of tangible personal property is inconsequential, and the property can be stated separately from the service.

Exemptions From Sales Tax: Transactions

Sales tax exemptions are narrowly construed, and the application of exemptions may be based on the type of goods or services purchased, how the goods or services are being used, and purchaser’s status. Exemptions are provided for administrative purposes and policy reasons to address the regressive nature of sales tax. A regressive tax is one in which lower-income taxpayers absorb a greater share of the tax than higher-income taxpayers. Sales tax was historically imposed on goods and not services because services were not a significant part of the economy. Additionally, it was difficult to source and track where services were consumed.

When a purchase or transaction is exempt from sales tax, the purchaser must provide a valid exemption certificate to the seller. The seller is responsible for determining whether the certificate is valid. An exemption certificate is generally not required for purchases of goods or services that are not taxable.

Type of Goods or Services

Food and health-related items considered necessities are exempt in whole or part from the sales tax base in most states. For example, food for home consumption is exempt fully while prepared foods or food sold for immediate consumption is taxable in most states. Each state that exempts food for home consumption has its own definition of what that is and its own requirements to qualify for the exemption.

States may exempt food sold for home consumption based on the vendor or retailer’s status. In Arizona, food sold for home consumption must be sold by a retailer, such as a grocery store or convenience store, that is eligible to participate in the federal food stamp programs.1 A few states have limited exemptions, reduced tax rates, or partial exemptions for food or food items. Hawaii generally imposes a sales tax on food but has a limited exemption for purchases made with food stamps or Special Supplemental Nutrition Program for Women, Infants, and Children vouchers.2 Kansas imposes a sales tax on food and food ingredients, but at a reduced rate.3

States exempt some health-related items such as medicines, drugs, and equipment. Generally, drugs and medicines sold to individuals when required by federal law to be sold under prescription are exempt from sales tax. However, states vary in their requirements and definitions of what is considered a prescription drug. In Alabama, a drug includes any medicine prescribed by a physician, filled by a pharmacist, and sold to patients for human consumption.4

In other states, drugs and medicines are exempt from sales tax regardless of whether the drug or medicine is prescribed. In the District of Columbia, the exemption applies when any substance contains at least one recognized medicine, pharmaceutical, or drug intended for cure, mitigation, or prevention of disease.5 Texas exempts drugs that have a required “drug facts” panel in accordance with federal regulations.6

Exemption-Based Use of Goods or Services

How the purchaser will use a product or service also factors into determining whether the transaction is exempt from sales tax. Taxpayers engaged in manufacturing or research and development activities may qualify for some sales tax exemptions.

Manufacturing is exempt from sales tax in most states when the goods or services are used directly in the manufacturing process. This includes items such as machinery, equipment, raw materials, and services including design, utilities, and engineering that are used directly in the manufacturing process. As such, these goods or services cannot be used for any other purpose, such as for general business operations or for personal use.

Activities considered as manufacturing, and thus qualified for a sales tax exemption, vary from state to state. In Colorado, manufacturing is defined as the operation of producing a new product that is different from, and has a distinctive name, character, or use from, raw or prepared materials.7 An exemption is provided for the purchase of machinery and machine parts purchased to be used directly and predominantly in manufacturing.8 Colorado also provides an exemption for the purchase of ingredients and component parts purchased by manufacturers, which through the manufacturing process becomes a part of the manufactured product.9

Many states provide exemptions for purchases of property and equipment directly used in qualified R&D. In North Carolina, there are exemption provisions for the sale of equipment, or an attachment or repair part for equipment, that is sold to a company primarily engaged at the establishment in R&D activities in the physical, engineering, and life sciences; is capitalized by the company for tax purposes; and is used by the company at the establishment in the R&D of tangible personal property.10

In California, there’s a partial R&D and manufacturing sales and use tax exemption on the purchase of qualified machinery or equipment primarily used in some types of business. These include businesses engaged in manufacturing; biotechnology R&D; physical sciences, engineering, and life sciences R&D; and the generation and production, storage, or distribution of electric power. The purchase must be qualified tangible personal property that is used in a qualified manner.

Qualified tangible personal property includes machinery and equipment deemed to have a useful life of one or more years. Qualified uses include items primarily used (50 percent or more) in any stage of the manufacturing, processing, refining, fabricating, or recycling process; in R&D; or to maintain, repair, measure, or test any qualified tangible personal property.11

Lastly, purchasers who intend to resell a good or service are typically carved out from sales tax requirements. This exemption exists to avoid double taxation. Sales tax generally applies to the end-user, who is the person who consumes the good or service. The end user will ultimately pay the sales and use tax on taxable goods and services.

Purchaser’s Status

Sales to nonprofit, religious, and educational organizations and governmental entities are often exempt from sales tax when these entities and organizations meet exemption qualifications. In Colorado a nonprofit that has received tax[1]exempt status under IRC section 501(c)(3) must generally be the buyer of record; apply for a state tax-exempt certificate; and provide appropriate documentation at the point of purchase to substantiate its exempt status. Purchases by U.S., state, and local government agencies are typically exempt from sales tax when made for official purposes. However, qualifications and requirements vary by state. Purchases in California and South Carolina by the federal government are exempt from sales tax, but purchases by state and local governments are generally subject to tax.

Exemption Certificates Management

Once exempt purchasers have been identified, the next step is to manage exemption certificates. This is a critical aspect of sales tax compliance because it determines whether businesses need to collect tax or can claim exemptions. However, exemption certificate management can be burdensome and fraught with risks for taxpayers. It involves more than just the product being sold, because factors such as the purchaser’s identity and the product’s intended use come into play.

To claim a sales tax exemption based on a particular use, the purchaser must provide the seller with a valid exemption certificate. The certificate requirements vary from state to state, but they typically include information such as the vendor and purchaser’s name, address, and the type of goods or services being purchased.

To avoid the costs of noncompliance, vendors must possess proper exemption certificate documentation. Missing, invalid, or expired certificates can quickly escalate the risks for businesses. Small mistakes in obtaining and managing certificates can compound, making it challenging to gauge the extent of the risk. Assessments, penalties, interest, and lookback periods may apply in various states. These penalties aim to encourage voluntary compliance.

Taxpayers that sell to exempt purchasers must keep records of the transactions, including copies of exemption certificates. This includes doing a periodic review of exempt purchasers and ensuring certificates on file are current. Businesses should monitor when certificates expire, because state-specific statutes of limitations determine how long to retain records. If a business is audited, it may be required to produce evidence to support the exempt status of a transaction. This evidence may include a copy of the customer’s current resale certificate and the business’s own files of valid customer resale numbers, if the business is substantially engaged in reselling products like those being purchased. Forms vary by state and by whether an entity is in-state or out-of-state.

An exemption certificate is not required when the goods or services are not taxable in the state. As a seller, where items are not taxable or a statutory carveout of some items exists, like food, clothing and medical supplies, the seller does not need to obtain an exemption certificate. The specific exemptions that apply in a state vary, so it is important to check with the department of revenue.

Conclusion — Minimize Risk

Sales tax administration poses challenges for businesses, particularly when it comes to exemption certificate management. Poor documentation and nuanced laws can increase the risks associated with these activities, leaving taxpayers vulnerable to penalties for noncompliance and other issues. To mitigate these risks, businesses should invest in proper exemption certificate management systems and processes, including staying up to date with state- specific requirements and regularly validating certificates.

By navigating the complexities of exemption certificates, businesses can reduce their exposure to risk and maintain compliance with sales tax regulations. Staying informed about updates in sales tax exemptions, understanding key issues related to resale certificates, and effectively managing retailer documentation are crucial steps toward ensuring sales tax compliance in a constantly evolving tax landscape.

• 1 Ariz. Rev. Stat. section 42-5101(1), (3) and Ariz. Rev. Stat. section 42- 5102(A)(1).
• 2 Haw. Rev. Stat. section 237-24.3.
• 3 Kansas Department of Revenue, Pub. No. KS-1223 (Jan. 2023).
• 4 Ala. Code section 40-23-4.1.
• 5 D.C. Mun. Regs. tit. 9, section 449.
• 6 Tex. Tax Code Ann. section 151.313.
• 7 Colo. Rev. Stat. section 39-26-709(1)(c)(III).
• 8 Colo. Rev. Stat. section 39-26-709(1).
• 9 Colorado Department of Revenue, Taxation Division, Sales & Use Tax Topics: Manufacturing (rev. June 2021).
• 10 N.C. Gen. Stat. section 105-164.13.
• 11 Cal. Rev. & Tax. Code section 6377.1.

Let’s Talk Tax

Tram Le can be reached at tle@taxops.com or 720.227.0093.

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The post Sales Tax and Exemptions, Implications for Multistate Taxpayers first appeared on TaxOps.

From the basic principles to more advanced concepts, Lindsay Haskell and Daniel DeLau cover all things ASC 740 in their new CPE course, which includes a 10-step process for getting through the technical complexities of accounting for income taxes. Read on for additional resources to expand your ASC 740 knowledge.

ASC 740 calculations and reporting of income tax provisions requires painstaking attention to detail and expertise, which is often beyond the in-house capabilities at many public corporations and businesses looking to go public. That’s why TaxOps specialists are asked to share their technical knowledge in continuing professional education (CPE) forums.

Recently, Lindsay Haskell, Director of Corporate Tax, and Daniel DeLau, Corporate Tax Advisor, led a CPE discussion hosted by Lorman Educational Services on ASC 740. The CPE now available on-demand focuses on the tax provision compliance process as well as factors that impact financial statements.

10-steps to Compliance

ASC 740 requires companies to accurately calculate and report income tax provisions and uncertain tax positions, along with detailed footnote disclosures. The standard identifies two objectives in accounting for income taxes: one, recognize the amount of income taxes payable or refundable for the current year; and two, recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements and tax returns.

The principles of ASC 740 require a balance sheet focused approach. Calculations must be made for each entity included in the financial statements as well as for each jurisdiction in which an entity operates. TaxOps’ 10-step process for preparing a tax provision provides specific how-to details and examples on calculating current and deferred income tax, permanent and temporary differences, deferred tax assets (DTAs) and deferred tax liabilities (DTLs) (See ASC 740 Step by Step Guide).

In preparing the calculations, practitioners must identify permanent and temporary book-tax differences. The temporary differences must be individually tracked as each difference creates either a deferred tax asset (DTA) or deferred tax liability (DTL).

Changes in DTA’s and DTL’s result in deferred income tax expenses or benefits through the income statement, based on the applicable tax rate–a rate that includes state tax rate calculations adjusted for a federal benefit. The current income tax payable or receivable is also factored into the provision, based upon an estimate of taxable income (again, on an entity-by-entity basis for each jurisdiction in which the entity operates).

Uncertain Tax Positions

A comprehensive tax provision also identifies uncertain tax positions and applicable adjustments. Here, practitioners must evaluate each position reflected on tax returns filed with applicable government agencies to determine if it is more likely than not that the position will be upheld, if audited or evaluated. If not, then a liability reserve is established and updated for potential penalties and interest. For many public companies or businesses looking to go public, these calculations are some of the more intricate analyses to perform. 

Practitioners must evaluate each position reflected on tax returns filed with applicable government agencies to determine if it is more likely than not that the position will be upheld, if audited or evaluated.

Valuation Allowance

Both private and public companies must also calculate valuation allowances – mechanisms that offset a deferred tax asset – and complete various reporting tasks for financial statement footnote disclosures. ASC 740 requires that an analysis of “all available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. TaxOps recommends practitioners prepare an annual memo documenting the company’s position and analysis of the need for a valuation allowance.

In Summary

TaxOps has compiled common questions we receive regarding ASC 740 into a FAQs that you can access here. Often overlooked in this complicated set of steps is the effect of state taxation on income tax provisions, transfer pricing issues, and stock-based compensation, all of which can impact provision analyses. To dig deeper, see A Closer Look at Accounting for Income Taxes. More experienced practitioners with questions regarding business combinations and changes in tax rates can attend one of our advanced Accounting for Income Tax presentations at a future date.

Interested in more ASC 740?

Take a deeper dive with how to get provisions done, step-by-step. Download ASC 740 Fundamentals.

Wondering which businesses need tax provisions and when do they need them? Access A Transaction Primer.

Tax provisions under ASC 740 are difficult to manage, but understanding how and when to report them is half the battle.

This series of articles touches on the risk inherent in managing provisions through an initial public offering or other transaction. Businesses planning to go public, and often those with equity and debt backers, must account for income taxes and provisions that can negatively impact transaction value if not thoughtfully managed ahead of time. Mistakes in this area can be costly in profits, shareholder trust, job security and business reputation. Whether growing the value of a business or planning an exit strategy, accurately measuring the tax consequences of complex transactions provides the best protection against errors and omissions that can lead to financial misstatements and transaction risk.

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The post Gauging the Impact of Accounting for Income Taxes – ASC 740 first appeared on TaxOps.

By Lindsay Haskell

ASC 740 demands painstaking attention to detail and deep knowledge to accurately calculate and report income tax provisions and uncertain tax positions. Lindsay Haskell answers frequently asked questions about ASC 740, a complex and time-consuming set of corporate standards.

Accounting for income taxes (ASC 740) is a set of income tax standards requiring public companies and private companies preparing to go public to analyze and disclose income tax risks. The implications of getting it wrong–financial restatements and financial disclosures–can impact investor confidence and shareholder value. Complications can also lead to significant remediation costs and business distractions for key executives.

Complying with ASC 740 is challenging for due to the knowledge and experience needed to meet the significant tax and financial reporting requirements. For companies without an internal tax department, the challenge is greater. Learn more with this instant download.

• What is ASC 740?
• Why should companies be concerned with ASC 740?
• What is the scope of ASC 740?
• What income taxes are covered by ASC740?
• What is a tax position?
• What is an “uncertain tax position”?
• How is an uncertain tax position determined?
• Why is complying more challenging for private than public companies?
• What is the difference between ASC 740 and ASC 740-10?

If after reading you have questions, please do not hesitate to get in touch.

Need just the basics? Download a Closer Look at ASC 740.

Explore how accounting for uncertain tax positions can reduce your tax risk, smooth out tax liabilities, and improve financial statement transparency in A Closer Look at ASC 740: Accounting for Income Taxes. Having the in-depth knowledge, tax technical understanding, and experience to manage estimates and assumptions related to tax provisions is critical to getting ASC 740 calculations and disclosures right. The requirements and common pitfalls of complying with ASC 740 are explored in this White paper as we answer:

· Why do companies struggle with accounting for income taxes?
· Why does accounting for income taxes matter?
· What are the common pitfalls associated with accounting for income taxes?
· How do I get started?

Lindsay Haskell, CPA, Director of Corporate Tax, TaxOps

With an eye for what is practical, Lindsay Haskell brings private and public sector experience in corporate, income tax provision (ASC 740) and compliance as well as indirect tax experience to creating solutions that work for businesses.  Previously, Lindsay spent time at EY handling tax compliance and provision for corporate, international, federal, and state and local projects. She also worked in private industry at Webroot Inc., now Carbonite, Inc., where she performed cross-functional compliance and planning integration across tax disciplines. Lindsay is a licensed CPA and holds a Master of Science in Accountancy from Bentley University McCallum Graduate School of Business.

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The post ASC 740: Frequently Asked Questions, Accounting for Income Taxes first appeared on TaxOps.

By Tram Le, Spreading SALTovation for Tax Notes

Tax preparation and tax advisory services are not the same thing. It follows that the individuals doing tax preparation and tax advisory services are separate as well. Some tax professionals know deductions and credits and understand the facts and figures required to complete returns and achieve compliance. Other tax professionals dig into the laws, rules, and regulations and, applying knowledge and experience, take a position on tax treatment for a particular business and transaction.

Few providers cross easily between those two facets of state and local tax — knowing the numbers and understanding the law — which can leave their clients exposed by what they do not know. This is the setting I address in my classroom at the University of Texas in Arlington, where I teach graduate students the intricacies — and duality — of state and local tax. In the seats are the future CPAs, accountants, lawyers, and others who have an interest, for one reason or another, in finding out more about a complex and specialized area of tax where their perspective and experience may be limited.

Read how Tram Le, an adjunct professor at the University of Texas at Arlington, where she teaches highly technical SALT topics, handles the discrepancy and bridges the gap in knowledge and understanding with her graduate-level students, including:

• Explanation of the two sides of state and local tax
• Understanding different businesses, industries, and tax characteristics
• Teaching practitioners and businesses how to differentiate compliance from advisory solutions

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The post Bridging SALT Compliance and Advisory in the Classroom first appeared on TaxOps.

Every business selling into Colorado is impacted by the statewide Sales and Use Tax System (SUTS). Learn how best to proceed with SUTS and avoid the landmines of registering late.

Although using SUTS is voluntary for business taxpayers today, the state of Colorado encourages all retailers to file sales tax returns for the state, state-administered local jurisdictions, and participating home-rule cities using SUTS. But be aware:  registering without remediating existing exposure can be costly.

Learn

• Benefits and limitations of SUTS
• Vetting the issues that matter
• Action plan, accessing SUTS, and activating Accounts
• Key takeaways to reduce risk

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The post Guide to Colorado’s Sales and Use Tax System (SUTS) first appeared on TaxOps.

A beginner’s primer on nexus and sales tax in online marketplaces.

By Judy Vorndran and Stacey Roberts

So, you’re using FBA (Fulfillment by Amazon) to start your own online business selling a mug sourced from South Korea with a custom design imprint that you curated. Did you know that both items, the mug and imprint, are considered tangible personal property and subject to sales tax?  All states and the District of Columbia (which, much to its chagrin, is not a state!) charge sales tax except for five “NOMAD” states – Alaska, Delaware, Montana, New Hampshire and Oregon.  Thus, that mug and imprint are subject to sales tax in 46 jurisdictions. 

Also, under the FBA program, did you know that Amazon moves those mugs and imprints to its various warehouses all over the country at their discretion? Unfortunately, putting that inventory into a warehouse in any state is what is known as a traditional nexus creating activity, also known as physical presence. This means the taxpayer who owns the inventory item, in this case, the mugs and prints, that is housed in an out-of-state warehouse has goods creating an income source that is subject to sales tax and potentially tangible personal property tax filings in the state where the inventory is housed. 

Furthermore, the presence of that inventory creates a state income tax filing requirement where the items are warehoused. This occurs even if the warehouse is managed by an online marketplace like Amazon, regardless of the length of time the items are warehoused—a day, a week or more—or the value of the inventory that is housed.

Surprised by all this? Read what follows, or download to read later, and learn more about managing tax exposure related to inventory and marketplace sales.

Expanding sales tax

When people throw around the term “Wayfair”, they are referring to the U.S. Supreme Court case that allowed states to stretch their sales tax requirements beyond physical presence to an “economic presence”, which is measured by transactions and dollar volume. The minimum threshold approved by the U.S. Supreme Court in Wayfair is 200 transactions or $100,000 in revenue. Since Wayfair was decided on June 21, 2018, almost every state with a sales tax has rolled out a Wayfair-type law with varying thresholds. Two holdout states, Florida and Missouri, have both approved both Wayfair and a Marketplace law with varying enforcement dates in 2021.

The Wayfair “economic presence” laws, however, are only applicable if a seller does not otherwise have a presence in a state (i.e., inventory in an Amazon warehouse, remote employees or traveling employees or third parties). Unfortunately, there is no universal de minimis threshold on inventory so a single item in inventory may be enough to constitute nexus and the related tax obligations. There are a few states that have specifically said that housing inventory in an Amazon warehouse is NOT a nexus creating activity, but that is not the majority. This makes it imperative that when inventory is placed in a jurisdiction, the seller knows the rules of the state where the goods are housed.

In addition to Wayfair laws, many states have marketplace facilitator laws that make sellers like Amazon responsible for collecting and remitting sales taxes on sales to customers in states with a sales tax. This arrangement relieves the seller of the duty to remit the tax, but not always the obligation to register as a vendor. At the time of this writing, marketplace facilitator laws were in place in all but five states: Florida, Kansas, Louisiana, Mississippi, and Missouri. Having FBA Amazon inventory and Amazon collecting sales taxes on sales through the marketplace does not relieve a seller of collecting sales tax on their own website sales or reporting the sales and tax collected by Amazon.

Legal layers

To understand the layering impact of Wayfair and marketplace facilitator laws on a seller, let’s assume a vendor selling through Amazon houses their goods with Amazon, who will collect from buyers in most states. FBA sellers could have a duty to file a traditional non-resident income tax return or entity income tax return due to physical presence related to inventory in the state, no matter how minimal. States, including California and Massachusetts, were already on the hunt for these sellers pre-pandemic and other states are expected to follow suit.

A seller without an FBA relationship, however, is solely responsible for the sales tax cost of doing business. Independent sellers carry the burden alone of tracking when nexus thresholds have been reached as well as fulfilling the sales tax obligation when nexus is triggered, including registering, collecting and remitting taxes.

One upside of forgoing a third-party online marketplace is the potential for claiming a state income tax exemption under federal protection from Public Law 86-272. This law shields certain pure-play internet sellers of tangible personal property from paying income taxes in a state.

Taxing warehouse goods

So, let’s recap. The presence of inventory alone creates income, sales and use, and property tax nexus filing requirements. Sellers using Amazon are likely to benefit by offloading most of the sales tax collection responsibilities in marketplace states where inventory is housed.

A seller, however, could have an income tax filing requirement and personal property tax due to inventory housed in the state. While the amount of tax due could be nominal, there is a duty to comply nonetheless, and the cost of noncompliance rises fast.

If a seller stops using Amazon or also sells direct through their own website, they will have to monitor the Wayfair thresholds in all 45 states that charge a sales tax, plus the District of Columbia. When exceeded, the taxpayer must register, collect and remit sales taxes in each jurisdiction but may have no income or property tax filings since the Wayfair thresholds are based on having an economic – and not physical – presence in the state.

Which seems worse? As they say, the devil is indeed in the details, and there are no “get rich quick” schemes that are entirely free of tax consequences. Pick the right tax advisor to help you make sense of state and local tax, one with a fiduciary duty to act in your best interest (hint, that is not a sales tax software company).

Confused? Don’t fret. Marketplace laws are tough to navigate.

Reach out to a Tax Advocate at TaxOps.com/contact or info@taxops.com with questions on your business situation.

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• TaxOps Welcomes Sean Espy as Partner, Tax Minimization
• Your Tax Footprint Is Probably Bigger Than You Think: What Finance Leaders Need to Know About State Nexus

The post New to Online Marketplace Sales? first appeared on TaxOps.