The SALT Shaker – January 2017
January 1, 2017
By Keith Habel, CPA
Partner, SALT Practice Leader
Updated Nexus Thresholds and an Expanded Definition of Doing Business May Trigger a California Filing Requirement: The California Franchise Tax Board announced new indexed nexus thresholds which were adjusted for inflation. The thresholds in effect for tax years beginning on or after January 1, 2016 are $54,771 of property, $54,771 of payroll and $547,711 of sales. In addition, each of the following circumstances is now considered doing business in California: actively engaged in transactions in California for gain or profit, organized or commercially domiciled in California, or sales, property or payroll that exceed the lesser of the indexed thresholds or 25% of the total sales property or wages. All sales, property, and payroll from pass-through entities are also included in calculations to determine doing business. California Nexus
Take Away: Businesses that have no physical presence or other connection with California should review their activities with the updated nexus thresholds; simply having sales, an employee, a warehouse, etc. in California can trigger a filing requirement.
Taxation of Shipping and Delivery Charges: A recent court case, Kean v. Wal-Mart Stores, Inc., has prompted the Illinois Department of Revenue to issue a general letter ruling discussing the taxation of shipping and delivery charges. At issue was whether there is an inseparable link between the sale and delivery of merchandise purchased. If there is an inseparable link, then the charge is taxable. ST 16-0039-GIL
Take Away: Taxpayers that bill for shipping and delivery to Illinois customers should review the revenue ruling, as it may affect how they charge their customers.
Taxation of Property Purchased by Landscape Contractor: The Illinois Department of Revenue released a general letter ruling discussing that sales tax is due on purchases made by landscape contractors of items of tangible personal property that will not be permanently affixed to real estate. ST 16-0045-GIL
Take Away: Taxpayers in the business of landscaping and construction (or a supplier to these industries) should review their activities for compliance. Examples of taxable purchases listed in the general letter ruling include silt fencing, ditch checks, wooden states, marking paint, guying wire and hydro mulch.
General Letter Rulings Regarding Computer Software Issued: The Illinois Department of Revenue provided three general letter rulings discussing taxability of computer software. The letters explain if a provider grants a customer access to the provider’s cloud-based network and downloadable services, but no transfer of tangible personal property to the customer occurs, then the transaction is not subject to tax. However, if the provider transfers computer software systems to the customer’s computer, the transaction is subject to tax. ST 16-0034-GIL, ST 16-0035-GIL, ST 16-0038-GIL
Take Away: Computer software and cloud computing has been a tricky and complicated area for states to get their arms around. All businesses should review their activities for compliance.
Cost of Performance Method Upheld: The Indiana Department of Revenue released a letter of findings that discussed a direct mail service company’s calculation of its sales factor for state income tax purposes. Upon audit, the department determined that the cost of performance method did not fairly reflect Indiana income (even though Indiana is predominately a cost of performance state). The taxpayer argued that they should be allowed to use the cost of performance method to source receipts since many of the costs to produce income were incurred outside of Indiana. The letter of findings ultimately agreed with the taxpayer. LOF 02-20150523
Take Away: Though the case is specific to a direct mailing company, it applies to any business that has a physical presence in Indiana and incurs a significant majority of its costs related with providing its services outside Indiana.
Cloud Computing and Remote Storage: The Indiana Department of Revenue provided a revenue ruling stating web services that deliver cloud computing, remote storage or data transfer fees are considered nontaxable. These services do not transfer software to the customer, therefore, no sale or transfer of tangible personal property occurs. Revenue Ruling 2012-05ST
Take Away: Taxpayers providing these services should review the revenue ruling to verify that they are compliant and are not charging sales tax on these services.
Amazon to Begin Collecting Iowa Sales Tax: Beginning January 1, 2017, Amazon will begin collecting and remitting Iowa’s 6% sales tax to Iowa customers. Amazon is not required to remit the 1% local option tax, since the retailer does not have a physical location in the state. The state estimates $18 million to $24 million will be remitted on Amazon purchases. The Gazette
Take Away: This is a win for Iowa businesses, as it eliminates the idea of a tax discount when buying from the online retailer and levels the playing field. Businesses who remit use tax on their Amazon purchases should take note so they do not pay the tax twice. Amazon now remits tax in 34 states (including Washington D.C.).
Geothermal Tax Credit Regulations Update: The Iowa Department of Revenue amended a regulation regarding the geothermal heat pump tax credit in response to 2016 legislative changes in the corresponding federal tax credit, which is set to expire. The current credit is only available if there is a corresponding federal credit. The amendment provides for a new credit that is to be available if the federal credit expires. ARC 2776C
Take Away: This change saves a popular Iowa credit from disappearing if the federal credit expires.
2016 State and Local News Recap
The following updates were previously included in our newsletter and are being republished as a summary and reminder for the upcoming filing season.
Single-Sales Factor Apportionment and Market-Based Sourcing Enacted: Effective for tax periods beginning on or after January 1, 2016, Louisiana has adopted a single-sales factor apportionment method and market-based sourcing. Revenue Bulletin No. 16-038
Take Away: Taxpayers who file in Louisiana will be required to calculate the apportionment percentage to Louisiana differently. In some cases, this could drastically alter the amount of income taxed by Louisiana.
Sales and Use Tax Economic Presence: An administrative rule filed by the Tennessee Department of Revenue will require out-of-state vendors with sales to Tennessee customers exceeding $500,000 in a twelve-month period to register with the Department by March 1, 2017. Beginning July 1, 2017, these dealers must collect and remit sales tax. This legislation is still pending. Administrative Rule 1320-05-01-.129
Take Away: If enacted, Tennessee will be added to the growing list of states that are requiring out-of-state vendors to remit sales tax. It will be imperative that businesses review their sales to determine if they have a potential filing requirement.