If you do a google search for “Texas and Amazon” you will find several articles about the $269 million dollar sales tax assessment Texas is litigating with Amazon.  Check out TechFlash’s Article.

Here’s the excerpt from Amazon’s 10-Q filing:

In September 2010, the State of Texas issued an assessment of $269 million for uncollected sales taxes for the period from December 2005 to December 2009, including interest and penalties. The State of Texas is alleging that we should have collected sales taxes on applicable sales transactions during those years. We believe that the State of Texas did not provide a sufficient basis for its assessment and that the assessment is without merit. We intend to vigorously defend ourselves in this matter.

Apparently, Amazon operates a distribution center in Texas, but the distribution center is owned by a subsidiary and not the Amazon entity that sells goods online.  Therefore, Amazon has argued that the online company does not have nexus in Texas.  Texas seems to disagree.
 
Amazon has been under attack for the past few years with New York, North Carolina and Rhode Island and their “Amazon.com nexus” laws.  In addition, other states like Colorado have tried to make their compliance requirements so burdensome that out of state “non-collecting retailers” will voluntarily collect sales tax on their sales. 
 
Stay tuned for the continuing saga.
 
For more info on Amazon’s “trials and tribulations,” check out another article by TechFlash.
 
Also, check out my other posts on Nexus.

A New York statewide trade association representing the interests of all sizes of food stores petitioned the state of New York for an “Advisory Opinion” as detailed in  NY TSB a10(49)S. The petition resulted from reports that the trade association’s members in New York City were being fined by the New York City Department of Consumer Affairs for charging sales tax on the retail sale of Red Bull Energy and Sugar Free Shots. The NYC Department of Consumer Affairs claimed that the drinks labeled as dietary supplements are not subject to the sales tax.  The sellers, by collecting a tax on the sales of these beverages were deemed to be in violation of the NYC Deceptive Trade Practices Act.  After analysis of the container labeling the state affirmed the petitioner’s assumption the beverage in question was a non-carbonated beverage that is marketed primarily as an energy drink.

While Tax Law section 1115(a)(1) offers an exemption for “…beverages, dietary foods and health supplements, sold for human consumption, but not including soft drinks and sodas, unless they are sold for 75 cents or less through a vending machine activated by the use of coin, currency, credit card or debit card. Soft drinks and sodas include carbonated and noncarbonated beverages, carbonated water, dietetic beverages and cocktail and other alcoholic drink mixes.” Red Bull shots are soft drinks or dietetic drinks. Thus, Red Bull shots are subject to state and local taxes because they do not qualify for the exemption.

Similar drinks such as Awake and Gatorade have previously been classified as taxable as detailed in Publication 840, A Guide to Sales Tax for Drugstores and Pharmacies, page 27, and Publication 880 Taxable and Exempt Foods and Beverages Sold at Retail Food Markets and Similar Establishments. The food stores must continue to collect the state and local taxes on their sales of Red Bull shots.

Effective for tax years beginning on or after January 1, 2010, any companies, partnerships, and S corporations that derive income from Connecticut or have a substantial economic presence within Connecticut, in either case attributable to the purposeful direction of business activities toward Connecticut, will be subject to tax in Connecticut.

To provide guidance to taxpayers, Connecticut released an “Informational Publication 2010(29).”  The publication provides answers to several questions taxpayers have about the application of Connecticut’s economic nexus standard. 

According to the publication, the purposeful direction of business activities toward Connecticut will be evaluated based on the frequency, quantity and systematic nature of the business’s economic contacts in Connecticut.

The publication also provides taxpayer examples and a “bright line test.” 

A company, partnership or S corporation that is not otherwise subject to income taxation or a requirement to file a return in this state under Chapter 208 or Chapter 229 of the Connecticut General Statutes shall not be deemed to have economic nexus for a taxable year if the frequency, quantity and systematic nature of the business’s economic contacts with the state are such that it has receipts from business activities that are less than $500,000 attributable to Connecticut sources during such taxable year. This bright line test does not preclude the Commissioner from contending that a company, partnership or S corporation has an obligation to file a return or pay a tax under Chapter 208 or Chapter 229 of the Connecticut General Statutes as a matter of law other than attributable to the Economic Nexus Legislation. Note: The determination as to whether a pass-through entity, including, but not limited to, partnerships and S corporations, satisfies the bright line test shall be made at the entity level.

Regardless of the economic nexus standard, it is important to remember that Federal Public Law 86-272 does provide protection to businesses that have economic nexus in Connecticut against Connecticut taxation.  According to the publication, P.L. 86-272, 15 U.S.C. 381-384, restricts Connecticut from imposing an income tax on income derived within its borders from interstate commerce if the only business activity of the business within Connecticut consists of the solicitation of orders for sales of tangible personal property, which orders are to be sent outside Connecticut for acceptance or rejection, and, if accepted, are filled by shipment or delivery from a point outside Connecticut. P.L. 86-272 protection is not afforded to transactions other than sales of tangible personal property. In addition, P.L. 86-272 does not apply to taxes that are not based on income.

Example: Catalog Corp., an out-of-state corporation that is not otherwise subject to Connecticut income taxation, remotely solicits (i.e. by mail and telephone) orders for the company’s tangible products from Connecticut customers. Sales are approved and shipped via common carrier from outside Connecticut. Although Catalog Corp. may have a substantial economic presence within Connecticut, it is nevertheless immune from Connecticut income taxation pursuant to P.L. 86-272.

As stated in other posts, the “economic nexus” standard is a growing trend among states.  If you have questions how this standard impacts your business, please contact me.

Brian Strahle is State and Local Tax Practice Leader at Baker Tilly Virchow Krause, LLP, in addition to being the Founder and Author of LeverageSALT, the State and Local Tax Blog at http://www.leveragestateandlocaltax.com/. He can be reached at brian.strahle@bakertilly.com.

We are in the midst of a major push by the states for any additional revenue they can find.  One favored approach that many states are using is the Amnesty Programs.  For 2010, 12 states plus a city either currently have an amnesty program, have one yet to start later this year or closed one earlier in the year.

Generally, a tax amnesty program is a state-enacted and administered program that allows persons who have underreported a tax or failed to file a return the opportunity to pay the past due taxes, usually without being assessed penalties and interest.  These programs are different from Voluntary Disclosure Agreements (VDAs) which also allow delinquent taxpayers to come forward and settle tax liabilities in that amnesty is typically available to both current and potential taxpayers, while VDAs are only available to persons who have not yet registered with or been contacted for audit by the state, amnesty programs

Another difference is that most amnesty programs do not offer a limited look-back period, which means that all back taxes will be due.  On the other hand, VDAs offer a limited look-back period, usually between 3-5 years.  However, VDAs rarely waive interest, but usually waive penalties.    Further, state amnesty programs often stipulate that participants must waive their appeal rights.  This can become an issue if the taxpayer overstates tax, or if a ruling is issued that changes taxability or interpretation in favor of the taxpayer.  The choice between settling unpaid taxes through an amnesty or VDA should be made on a company-by-company basis.

Another issue faced by taxpayers willing to come clean via an amnesty program is that all of the taxes must be paid before the close of the amnesty program in order for a taxpayer to be eligible.  Timing the payment of a tax liability within a period of a few weeks to months can be difficult or impossible if the sum is very large.  However, some states will allow for the negotiation of installment agreements.  In this case, the taxpayer will only be out of compliance, and thus subject to penalties and interest if the tax is not paid back according to the schedule agreed upon.  In the past, both Indiana and California have allowed installment payments under their amnesty programs.

Generally, the aim of amnesty programs is to increase tax law compliance, correct for underreporting errors, and encourage new taxpayers to register for sales and use taxes.  In many cases, these programs provide the states with many years worth of back taxes, which can create a big boost for the states’ depressed budgets and act as a quick fix for to reduce the shortfall that many are facing.  Additionally, although the state is forgoing the penalties and interest on the taxes paid under the amnesty program, adding a new taxpayer to the books will create a continued revenue stream as long as the taxpayer has nexus in the state.

So how successful are these amnesty programs for the states that enact them?  The result differs by state, but these programs have generated significant sums for some states.  Of the states that held an amnesty program in 2009, the total tax dollars brought in ranged from $1.1 million in Vermont to $725 million in New Jersey.  A use tax amnesty program in Delaware brought in 14,000 new taxpayers.  The Federation of Tax Administrators has published a chart of historical results of amnesty programs.  http://www.taxadmin.org/fta/rate/amnesty1.pdf

The success of these programs is usually tied to how much publicity they get.  For example, the Kansas DOR was aided in a recent Amnesty program by the Kansas Association of Broadcasters who aired a public service announcement about the program that they had developed and produced.  This enabled the state to far surpass its estimated revenue of $19.5 million and instead generate more than $23.6 million throughout the life of the program.

To make amnesty programs more memorable, states often come up with cheeky or cute titles to get the message across about the program.  For example, Alabama named a recent program “Operation Clean Slate” and Idaho recently titled a VDA initiative “Idaho Forgot to File”.  Virginia, a state who choose threatening symbols such as a guillotine and a character chasing a person down the street for its 1991 and 2003 amnesty, decided to take “a kinder, gentler” approach to its 2009   program  “Get Square on Back Taxes”, which was symbolized by a square smiley face.  

If a state offers an amnesty program, a business should take advantage of the program or settle its debt through a VDA before the amnesty period is complete. There is an increasingly popular trend among jurisdictions to impose harsher penalties after an amnesty program for businesses that are discovered.  For example, Chicago imposed a 50 percent penalty on businesses that were determined to have nexus that did not come forward during its amnesty program.  Illinois will impose double interest and penalty rates for any tax liability not reported under amnesty even for registered taxpayers in its upcoming program.  The recent Pennsylvania amnesty program stipulates that eligible taxpayers who do not participate will be assessed an additional 5% non-participation penalty, on top of normal penalties and interest. 

This trend becomes complicated when one considers the risk to taxpayers interpreting a gray area of tax law or who are in litigation over a tax decision.  Although these taxpayers are not the intended focus of the amnesty program’s additional penalties for non-participation, if a taxpayer is later found to be interpreting an ambiguous tax law incorrectly or receives an unfavorable ruling, it could be subject to the additional penalties because it did not pay tax liabilities under the amnesty program that in good faith it did not know it had. 

Another trend among states is to engage in more frequent amnesty programs, especially during times of economic downturn.  This started in the early 2000’s, when states felt the effects of the recession on their bottom lines and were trying to get an influx of cash.  For example, Massachusetts and Missouri had amnesty programs in both 2002 and 2003.  In the current recession, states are turning to similar tactics.  A study by Luna, Brown, Mantzke, Tower and Wright found that before 2000, a state waited 10.3 years between amnesties, on average.  However, between 2000 and 2006, the average fell to 4.6 years.

Although this may help offset immediate shortfalls, this can decrease overall program effectiveness and have negative effects on a state’s long term bottom line.  Naturally, each subsequent amnesty program will have diminished returns, but frequent amnesties also create subverted incentives for tax evasion.  If a taxpayer discovers an unpaid liability after the close of a state’s amnesty program, but suspects that a state will have another amnesty program in the future, the taxpayer has an incentive to not register pay the delinquent liability, penalties and interest in a timely fashion.  Although the taxpayer risks audit exposure, if the state does have another amnesty program, the taxpayer will have saved penalties and interests, and would have more time to get its systems and funds in order.  Therefore, amnesty programs that occur too frequently can subtly encourage bad taxpayer behavior.  Because of this, it is the common consensus that amnesty programs work best when used as sporadic initiatives to boost revenues and increase the taxpayer base.

The District of Columbia, Florida, Illinois, Kansas, Kentucky, Maine, Massachusetts, Nevada, New Mexico, New York, Pennsylvania, and the City of Philadelphia and Wisconsin either currently have amnesty programs scheduled or closed a program in 2010/2011.  Information on these current programs can be found on our website, http://www.ycstax.com/news.php#ref4.

 
Diane L. Yetter
President, Yetter Consulting Services, Inc.
dyetter@ycstax.com

About the author: Diane L. Yetter is the founder and president of Yetter Consulting Services, Inc. and the Sales Tax Institute, its training division.

TaxProf Blog author Paul Caron, the Charles Hartsock Professor of Law at the University of Cincinnati College of Law, reports that state sales tax revenues increased for the second consecutive quarter, up 2.2% for second quarter 2010.

The number comes from the Nelson A. Rockefeller Institute of Government. According to the Institute, corporate income tax decreased 18.8%, personal income tax increased 1.6% and sales tax increased 5.9%.

The largest increase was in the Northeast at 8.3%; the largest decrease was in the Rocky Mountain area at 4.4%. Overall, state tax revenues rose in 30 states.

The entire report  is available online.

In this time of economic inconsistency, an important growth strategy is getting a tighter handle on your engagement or new sales opportunities. No matter what business you are in, reigning in your sales process enables you to apply the right resources, at the right time, to the right opportunities, and close more new business.

To begin managing your opportunities, start simple.  Set up a sales pipeline report to track each engagement opportunity you have, keeping track of the prospective client organization name as well as the contact name, telephone number, and e-mail address. In addition, you’ll want to track a brief description of each service and/or product that’s of interest and the source of each lead for tracking the effectiveness of marketing campaigns and for determining which marketing activities to favor.  If you don’t already have a contact management or CRM system in place, we have a great Excel template for you to start with – access it by clicking here http://www.convergencecoaching.com/CSCguestsalesandmarketing.htm and choosing “Sales Pipeline Tool.”

As you’re setting up each opportunity, you will need to assign a probability that each engagement will close — we use a simple A, B, or C probability rating in our firm.   An A opportunity is one that needs services we can fulfill, their budget is within our range, we’re talking to the decision maker and their timing to close is within the next 60 days.  B opportunities are 61-90 days out in terms of close date, or once where we are still qualifying the need to ensure we’re a fit.  We rate opportunities a C if their timing is 91 days or more away or if we may not be a fit on service need or budget.  By rating your prospects, you’ll be able to prioritize and focus energies on those most likely to close in the near term.  

Each opportunity should also be assigned a single owner within your firm that is responsible for driving the engagement through the sales process and for updating the pipeline with the last date of contact, and the next follow-up action and date.  These dates provide firm leadership with the exact status of each opportunity and can help identify any technical or leadership resources needed to support the sales process and help project future service and/or product demand, to assist in capacity projections, too.  In this time where most firms have more resources than they have work, it’s critical to be able to project future capacity needed and the pipeline is a rare leading indicator of your firm’s upcoming performance.  Using it strategically can help you apply more marketing and sales resources to avert over-staffing issues and/or take necessary steps to reduce headcount if opportunities simply are not materializing or maturing as needed.

There has never been a better time to have solid information about your firm’s potential pipeline of new work – please start gathering this data in a sales pipeline report today! 

If you’re already using a sales pipeline report, we’d love to hear from you on what you’re using to track and manage it, how often you produce the report, who reviews it and any other wisdom you have to share with us.  And, if you are thinking about tracking your firm’s pipeline, we welcome your questions, too.  Post away!

Gratefully,

Jennifer Wilson

Jennifer Wilson is a partner and co-founder of ConvergenceCoaching, LLC, a leadership and marketing consulting and coaching firm that specializes in helping leaders achieve success.  Learn more about the company and its services at www.convergencecoaching.com.

According to new research compiled by the Tax Foundation, Tennessee has the highest combined state and average local sales tax rate of any U.S. state – 9.44 percent. California came in second at 9.08 percent; Arizona third at 9.01 percent.

A story on CNNMoney.com also reports that Birmingham and Montgomery, Ala. are tied for the highest combined state, county and city sales taxes at an average of 10 percent on purchases.

Although Chicago previously had the highest metro area sales tax, Cook County lowered its rate by .5 percent in July, making it the sixth highest rate at 9.75 percent. Of all other metro areas with a population of 200,000+, five California cities – Long Beach, Los Angeles, Oakland, Fremont and San Francisco – were at 9 percent.

We all have heard or read about the plights of the states in the recent economy. Revenues from all sources are down and states are desperate to increase them. Virtually all states are becoming more aggressive in their collection efforts and many are looking at creative new statutes or ways to reinterpret those already on the books. One prime example of these efforts is the Internet.  Most of the news about the Internet currently revolves around Amazon, with some statutes actually being dubbed the “Amazon Laws”. However make no mistake about it; it’s not just Amazon the states are thinking about.  If you are selling or buying on the Internet the states have their eyes on you also.

The reasons so many states are looking at Internet sales are because of their explosive growth and the fact that sales or use taxes often go uncollected on these transactions. Experts estimate that the uncollected taxes for these transactions will total $18 billion dollars this year and predict that by 2012 the number will grow to $23 billion. The cumulative amounts for the period of 2009-2012 could reach $55 billion dollars. It’s no wonder the states have their eyes on the Internet; capturing these uncollected taxes would go a long way to closing their budget gaps.

In their pursuit of this Internet treasure the states are taking a number of different approaches. The states easiest to follow are those that have passed new statutes. There are currently 3 of these states that have passed “Amazon Laws”; NY, NC and RI. One of the major components of all three of these statues is what is called “Click-Through Nexus”. This nexus occurs when the seller enters into an agreement with an instate resident, where the resident is compensated for referring customers directly or indirectly to the seller. One form of this is an affiliate program where a potential customer clicks on a resident’s link and is redirected to the seller’s website. The laws are currently being challenged in court and many tax professionals have taken a wait-and-see approach.

While the professionals may be waiting, the states are not. According to BNA’s 2010 Survey of State Tax Departments, 14 additional states believe that their existing statutes allow them to pursue taxes through this “click-through nexus”. The approach of these states is much more stealthy and without the information contained in the BNA survey, many would be hearing about this the first time through an audit. The states referenced in the BNA survey are: Arizona, the District of Columbia, Florida, Iowa, Maryland, Missouri, Nevada, New Mexico, North Dakota, Pennsylvania, South Dakota, Tennessee, Texas, and Washington.

In addition to “Click-Through Nexus” many of the states are looking at (or have already passed in the case of Colorado & Oklahoma) “Sales & Use Tax Notice and Reporting Requirements” for transactions where sales taxes are not collected. Quite simply states are requiring sellers without nexus to inform purchasers that tax is due on individual transactions as well as provide year end summaries with instructions on how the taxes should be paid.  There are also requirements for reporting these sales to the state and provisions for penalties for noncompliant sellers.

If the new statutes were not enough, states are aggressively searching for companies that have “old-fashioned nexus”.  This nexus is caused by the usual myriad of ever-evolving activities whose importance in creating nexus can vary from state to state. Most of these activities are not directly related to the Internet and are conducted by other parts of your company, but could impact the sales tax aspect of your Internet business anyway. These activities are too many to list entirely but here is a quick list of 10 potential nexus-creating activities:

1. Owning or leasing property in a state.
2. Owning or leasing equipment in a state.
3. Travel into a state to perform sales.
4. Travel into a state to perform services such as installations, training, repair, etc, etc.
5. Travel to trade shows in a state.
6. Having payroll in a state.
7. Having agents or contractors in a state.
8. Licensing intangibles to others in a state.
9. Delivery into a state in a company owned truck.
10. Doing business with a bank in a state.

Let’s not forget those issues that are not nexus related.  Issues like changing taxability (software especially), delivery methods (downloads vs hard copy) and of course drop-shipping issues.  Are you responsible for the taxes on a sale someone else makes? You could be. If your purchaser is not registered in a state and you have nexus in that state you may be liable.

If you are beginning to wonder if you need to take another look at how you are approaching these issues pat yourself on the back. All too often I speak to very smart people at companies of all sizes and types, who work at all levels of the organization that I believe are much too complacent. They assume that if their system has worked up to this point why change it?  Some of them are right. They stay on top of the ever-changing environment and update their policies continuously. Others find out the hard way (usually in a Sales/Use Tax Audit), that just because it worked in the past doesn’t mean it’s going to work now.

Andy Johnson, a founding partner at Peisner Johnson & Company, believes that, “The greatest tragedy when it comes to sales tax is neglecting to collect sales tax on a taxable item at the point of sale, only to have it come out of your pocket later.” Because unlike an income tax which comes out of your pocket no matter when you realize it, sales tax that would have been paid willingly (if not grudgingly) by your customer at the time of the sale, ends up coming out of your pocket 3 to 5 years later.  And, don’t forget to add the penalty and interest insult to the injury.  Can you afford not to be compliant?

Ok you’ve started to wonder, now what do you do. Here are some suggested actions:

1. Educate yourself - Start with charts and matrices, attend webinars, contact the states.
2. Ask questions – Of your staff, your accountants, everyone. You can never ask enough questions.
3. Evaluate - Don’t assume your accountants or staff are up-to-date. They usually are multi-tasking.
4. Consult an expert – There are some excellent service providers that focus on issues like these.
5. Train your people – Knowledge is power. Empowered employees can help prevent problems.

There are a few good firms that can help you educate yourself or provide additional support as needed. I am partial to my employer Peisner Johnson & Company. We offer many free services designed to make your life easier. One of those free services is that we will provide you with a chart or matrix on just about any topic you would like. We also offer a free service called quick questions. If you have questions that we can answer without the need for research we will do so free of charge.

There are currently so many issues effecting Internet sales it is hard to cover them all or in great detail in a single article like this. It was my intention to alert you to as many of these issues as I could. If you have any questions or would like additional information please let me know. I can be reached at 800-940-9433 ext. 720 or by email at mfleming@peisnerjohnson.com.

Michael J. Fleming (Mike) is an Account Executive with Peisner Johnson & Company. Peisner Johnson, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax issues. Peisner Johnson has experience with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories and Canadian Provinces.  As an Account Executive Mike is responsible for business development and client relationship management which includes satisfaction and retention. Mike is passionate about staying abreast of current industry news and trends and believes that informed clients are happy clients.

(This is the second in a series of blogs featuring research compiled by Rick Telberg of CPA Trendlines. Telberg and his partner, Jean Caragher of Capstone Marketing, assist accountants with practice management through their Seven Keys to Success in CPA Firm Management.)

Software as a Service (SaaS) and cloud computing are two topics on the minds of audit committees, chief financial officers and chief information officers, according to Rick Telberg’s recent analysis of the 2010 American Institute of CPAs’ Top Technology Initiatives Survey.

“Cloud computing/SaaS appeared in two questions, reflecting both growing interest in web-based technology solutions for business and concerns about the new risks that they may introduce,” writes Telberg. “CPAs are providing vendor due diligence for their clients to ensure appropriate controls are in place in SaaS applications and confidential customer information is being protected.”

For the first time in its 20+year history, the Survey asked participants to rank a set of frequently asked questions. Cloud computing and SaaS were included in questions 9 and 10:

• Can our data remain safe if we utilize cloud computing, or Software as a Service (SaaS) applications?

• Can we deliver on our service and product promises to our customers if we utilize cloud computing services?

The AICPA conducts its Survey each year to raise awareness on current and future technologies among all fields of accounting, including public practice, business and industry, government, and education.

(This is the first in a series of blogs featuring research compiled by Rick Telberg of CPA Trendlines. Telberg and his partner, Jean Caragher of Capstone Marketing, assist accountants with practice management through their Seven Keys to Success in CPA Firm Management.)

According to the Bureau of Labor Statistics, CPA firms retained 391,700 non-seasonally-adjusted employees for June, representing  a marginal decline from May’s 392,700 and a 3.7% drop from June 2009.

However, tax preparation services reported non-seasonally-adjusted employment sank to 50,300 workers, down 19% from the month before and 5.8% from the year before.

July’s employment for the industry represented a 3% decline from the previous July, and, possibly, an acceleration in job losses because the 3% year-to-year decline in July followed a 2.8% year-to-year decline in June, 2.9% May-to-May, and 1.8% for both March and April.

Seasonally-adjusted total industry employment peaked in January 2008 at 970,100 workers, making the workforce in July about 7.9% smaller.

Read the full story for more information.