Archive for the ‘Sales Tax’ Category

Are NFTs Subject to Sales and Other State and Local Taxes?

Wednesday, August 31st, 2022

Let’s say you’re Ralph, and you create a series of Non-Fungible Tokens (NFTs).  You begin selling these NFTs, and each sells for the equivalent of $100,000.  Of course, that income is subject to income tax (it’s an accession to wealth, and clearly income to Ralph).  Is it subject to sales tax?

Some states’ sales taxes cover digital (electronic) items; other states’ sales taxes do not.  There are even some states, such as Oregon, that do not have sales tax and other states, such as Florida, that exempt sales of digital items from sales tax.  But let’s say Ralph resides in Pennsylvania and he sells an NFT to Linda; she also resides in Pennsylvania.  Let’s further assume that Ralph is in the business of selling NFTs.  Does he (a) need to register with Pennsylvania as a retailer for sales tax purposes, and (b) does he need to collect sales tax?

The answer is yes, he does.  The Pennsylvania Department of Revenue released a new sales tax booklet that addressed this issue.  Under Pennsylvania law, “…[S]ales and use tax applies to any transfer of a digital product where the purchaser pays a consideration, unless that transfer is otherwise exempt.”  NFTs are specifically noted as taxable.  That means that Ralph must register as a retailer and collect and remit sales tax.  This income is, because Ralph is in business, also subject to local Earned Income Tax.

Let’s change the facts slightly.  Ralph resides in Oregon, a state without sales tax, and sells an NFT to Linda, a Pennsylvania resident.  Believe it or not, Ralph may still have to register for sales tax in Pennsylvania.  Under the Wayfair Supreme Court decision, out-of-state sellers are, in some circumstances, required to register for sales tax in other states (if they meet minimum threshold requirements).  Let’s further assume that Ralph doesn’t meet that threshold.  In that case, Linda owes use tax (the equivalent of sales tax when sales tax isn’t charged) to Pennsylvania and must include it on her individual tax return.

Pennsylvania isn’t alone in releasing guidance.  Washington state released interim guidance noting that NFTs would be subject to both sales tax and the state’s Business & Occupations Tax.  I strongly suspect NFTs are subject to sales tax in other states, too.

If you’re selling or purchasing NFTs, or you are a company facilitating the sales of NFTs, you should speak with your tax professional regarding handling sales and use tax issues.

Bobble Away

Tuesday, November 27th, 2018

Are bobbleheads promotional items that are subject to Use Tax? The Cincinnati Reds fought the Ohio Department of Taxation’s ruling that bobbleheads were subject to Use Tax all the way to the Ohio Supreme Court.

In this case, we are asked to consider how state tax law applies to the purchase of those promotional items by appellant, Cincinnati Reds, L.L.C. (“the Reds”). More specifically, the question before us is whether the sale-for-resale exemption of R.C. 5739.01(E) precludes the Reds from having to pay use tax on those promotional items. For the reasons explained below, we conclude that the exemption applies in this case. Thus, in the familiar words of Marty Brennaman, longtime Reds radio announcer and recipient of the National Baseball Hall of Fame’s Ford C. Frick Award, we determine that “this one belongs to the Reds.” We accordingly reverse the decision of the Board of Tax Appeals (“BTA”).

Now that I’ve spoiled the decision, we need to look at the law. When you purchase items for resale, they’re generally exempt from sales tax. When you sell them to the end-customer, they pay the sales tax. If you end up not reselling the items you purchase for resale, you owe Use Tax on those items.

Consideration, in the contract-law sense, is important here: the question whether the Reds purchased promotional items for resale entails asking whether fans furnished consideration for the Reds’ promise to hand out the promotional items at the games.

The Ohio Board of Tax Appeals ruled that the Reds were giving away the promotional items rather than selling them. The Reds argue that they resell the promotional items by distributing them (or promising to do that). “The Reds argue that this promise creates a contractual expectation on the part of the fans, who purchase tickets and attend the games as consideration for receiving the unique promotional items.”

The Cincinnati Reds’ CFO, Dan Healy, testified at the original hearing. He noted that the Reds distribute promotional items at less desirable games (from an attendance standpoint). That makes complete sense if you think about baseball. The Reds have 81 home dates, and some of those games will be against teams that aren’t very good (not that the Reds have been particularly good) who don’t draw well in Cincinnati–say, the San Diego Padres. Mr. Healy’s testimony is logical and sensible.

In determining that no consideration was given by fans in exchange for the promotional items, the tax commissioner and BTA focused on their findings that fans pay the same price to attend a game regardless of whether a promotional item is offered and that the cost of the promotional item is not included in the ticket price. But Healy specifically testified that the costs of promotional items are included in ticket prices when they are set before the start of a season and that promotional items are distributed at less desirable games for which tickets are not expected to be sold out. Thus, rather than offering discounted ticket prices to these less desirable games, it stands to reason that by including the cost of the promotional item in the ticket price, one portion of the ticket price accounts for the right to attend the less desirable game and a separate portion of the ticket price accounts for the right to receive the promotional item. Based on this record, we accordingly conclude that the promotional items constituted things of value in exchange for which fans paid money that was included in the ticket prices.

So the Reds didn’t strike out here (they did plenty of that during the 2018 season), and that portion of the Board of Tax Appeals decision charging the Reds with Use Tax on promotional items was thrown out at home plate.

Wayfair and Economic Nexus

Sunday, June 24th, 2018

Last week the Supreme Court ruled in South Dakota v. Wayfair that South Dakota’s law forcing Wayfair, an Internet retailer, to collect (and remit) sales tax to South Dakota (a state that it did not have physical nexus to) was valid. The decision overrides a previous Supreme Court decision called Quill Corp. v. North Dakota). There’s been plenty of excellent coverage on this ruling (see, for example, the Tax Foundation and Kelly Erb). But I’m wondering what this means for income tax and economic nexus.

A few states have passed laws stating that if you have economic nexus to a state you need to file a tax return to that state. California is one such state. Eventually, cases on economic nexus will go through the court system (and with a certainty the US Supreme Court will have the final say). While no one knows how the Court will rule on such cases, there are indications.

From a case called Complete Auto: “The Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides.” In Wayfair, the Court ruled that “Physical presence is not necessary to create a substantial nexus.”

The key point is noted by Justice Kennedy:

The Court has consistently explained that the Commerce Clause was designed to prevent States from engaging in economic discrimination so they would not divide into isolated, separable units. See Philadelphia v. New Jersey, 437 U. S. 617, 623 (1978). But it is “not the purpose of the [C]ommerce [C]lause to relieve those engaged in interstate commerce from their just share of state tax burden.” Complete Auto, supra, at 288 (internal quotation marks omitted). And it is certainly not the purpose of the Commerce Clause to permit the Judiciary to create market distortions. “If the Commerce Clause was intended to put businesses on an even playing field, the [physical presence] rule is hardly a way to achieve that goal.” Quill, supra, at 329 (opinion of White, J.).

So four questions need to be answered for whether a state can tax a service business conducting no services within that state. Let’s assume there’s a tax preparation business in Nevada that has customers in New York, and New York passes a law saying that if you have any sales to New York residents you must pay New York state income tax and register your business in New York. The questions that must be answered are: Is their substantial nexus to New York, is the tax fairly apportioned, does it discriminate against interstate commerce, and is the tax fairly related to the services that New York provides. We’ll assume the tax is fairly apportioned.

Consider a Nevada tax professional who has one client in New York out of one thousand total clients. Is there substantial nexus? Almost certainly not, and it would be hard to see such a tax passing muster. Thus, some sort of de minimis rule is necessary. Note that in the instant case that the South Dakota law has such a rule.

Consider now a Nevada tax professional who has 200 clients in New York out his one thousand clients. We’ll assume that passes the de minimis hurdle. The two other questions (and I think they’re linked) come into play: Is the tax fairly related to services that New York provides and does it discriminate against interstate commerce?

The first of these questions has two sides. All of the work done here (remember, this is a service business) is being done in Nevada, not New York. That leads to a conclusion that New York income tax is not related to services provided by New York. (However, if New York had a sales tax on services the business would likely need to comply.) On the other hand, the person contracting for the services is a New York resident.

I think the first argument is the better one. The income being earned is based off of work done in Nevada, not New York. Nevada, not New York, has the right to tax its residents on income earned in the state. Because of this, I think that if New York were to tax such income it would discriminate against interstate commerce. (There is an other side to this argument, though. New York can argue that there would be a tax credit available, and that would eliminate the issue. Still, the filing of the return adds to the burden of the Nevada taxpayer, and is an issue.)

That there are two sides to this argument shows that there is no one right answer. In the end, the Courts will end up making the decision about economic nexus and income tax. Indeed, sometime around 2021 I expect a Supreme Court decision on this issue.

Have I Committed Malpractice?

Friday, February 2nd, 2018

Let’s say John Smith is a consultant in Syracuse, New York. His business is conducted fully in Syracuse. He never travels outside of Syracuse. He writes reports on a niche area for businesses. Mr. Smith files and pay New York state income tax (as he’s a resident of New York) in addition to his federal income tax. Has he satisfied his income tax filing requirements? (There are no local income taxes in Syracuse.)

In my view, almost certainly. His activity is conducted solely within Syracuse, New York. He’s filed his tax returns every year. Yet in the view of the State of California he may owe tax to the Bronze Golden State. How, you might ask, might this be the case?

The State of California, in its unending wisdom, enacted legislation for “economic nexus.” If you have sales to California, a portion of your income is, in the view of California, subject to California tax. Here’s an excerpt from the FTB’s website:

Jill, a nonresident of California, owns a web design business that she holds as a sole proprietorship. She works from her home out of state but has customers in various states including California. For the 2013 taxable year, Jill’s sales receipts from California customers are $300,000 out of the total sales receipts everywhere of $1,000,000. Does Jill have a filing requirement in California?

Yes, nonresident individuals are taxed on all California source income. Jill’s sole proprietorship is carrying on a business in and out of California and will be required to apportion its income to California using UDITPA rules. Under market assignment, sales of services are assigned to California if the purchaser of the service received the benefit of the service in California. Accordingly, $300,000 will be assigned to the California sales factor numerator for Jill’s sole proprietorship and Jill would apportion 30% ($300,000 CA sales/$1,000,000 total sales) of its business income from her sole proprietorship to California. [emphasis in original]

In a tax professional’s forum I noted that while the California legislature enacted this law, there is a good chance that it’s unenforceable except for businesses with nexus to California. Consider a partnership with one of the partners a California resident and the other a New York resident. Here, there’s clearly nexus to California and California tax is owed.

However, in the example I give (above) Mr. Smith clearly has no nexus to California and while California thinks he has a filing requirement, he probably doesn’t because of court cases. I noted the following on that forum:

While I understand that’s the Franchise Tax Board’s position, the ability for a state to to force collection of taxes to a nonresident who resides in another state is governed also by Quill Corp. vs. North Dakota, the famous case on states having the ability to force collection of sales tax on nonresident companies. The background for this case is the “dormant commerce clause.” (Interestingly, the Supreme Court recently accepted another case on this same issue: South Dakota vs. Wayfair, so it’s possible Quill will be overturned.)

The principal of this is that California has the absolute right to tax individuals with nexus to the state. But does California have the right to tax me–a resident of Nevada with no nexus to California–on the (say) 10% of income I receive from California residents whose tax returns I prepare? Can California legally go after Jill who never sets foot in California? My suspicion is courts in Nevada and Jill’s home state would today look askance at such requests.

One tax professional said my response bordered on malpractice: advising clients to disobey laws. I don’t think that’s the case at all. What I am advising clients is that the California law is of dubious legality, and it is difficult for California to enforce on businesses without nexus to California (such as the hypothetical Mr. Smith). I am not ignoring what California is stating (and I’m informing clients who may be impacted by this). That said, based on current precedent federal courts would, in my opinion, rule for Mr. Smith. (Since Mr. Smith has no nexus to California, a court case would almost certainly be in federal court in New York–the only place he has nexus to.)

It’s important to realize that the law could change based on the decision in South Dakota vs. Wayfair. (South Dakota enacted a law regarding sales tax that allows for economic nexus to the state. South Dakota courts held the law was unconstitutional based on the Quill decision.) Today, though, the federal supremacy clause (the federal supremacy clause means that state constitutions and laws are subordinate to federal law) governs; current federal law holds that California cannot tax companies without nexus to the state–and today nexus means physical nexus.

Former NFL Player Alleged to Have Fumbled His Sales Tax Returns

Sunday, February 8th, 2015

I’ve said repeatedly that if you want to get in trouble with the IRS, one of the easiest ways to do so is to collect payroll taxes but not remit them. Less frequently I’ve commented about state tax agencies and mentioned that they don’t like you collecting sales taxes and not remitting them. A former NFL player is accused of that and committing wage theft against his employees.

Sam Adams played in the NFL for 14 years with Seattle, Baltimore, Oakland, Buffalo, Cincinnati, and Denver. A defensive lineman, he has 44 sacks credited to him in his career and made the Pro Bowl three times. He and his CFO, Dana Sargent, now face 21 counts of theft and tax evasion. From the Affidavit of Probable Cause:

Adams and Sargent have not only made multiple attempts to evade tax liabilities resulting in a tax bill, as of January 21, 2015, of over $446,571.38, but have failed to pay employees their deserved wages, failed to pay the medical premiums promised to employees as part of their benefit packages, failed to remit the premiums withheld from employees’ paychecks for medical insurance and failed to pay into unemployment insurance for employees, resulting in liens by the Employee Security Department on each company. During the latter part of 2013 through January 2014, Adams’s and Sargent’s illegal actions have caused employees, through no fault of their own, to have countless insufficient fund checks that they were unable to cash which resulted in employees losing their housing, being unable to pay household bills, being unable to buy Christmas gifts and accruing thousands of dollars in unpaid medical bills for themselves and their families. Numerous wage complaints have been filed against Lincoln Plaza Athletic Club, LLC, West Seattle Athletic Club, LLC, Adams and Sargent. The Department of Labor has been involved in efforts to assist employees in getting their unpaid medical, dental and vision bills paid due to Adams and Sargent either failing to pay the premiums as promised in the employees’ compensation packages and/or deducting premiums from employees’ pay checks and failing to remit them to the insurance company.

There’s plenty more in the affidavit, including West Seattle Athletic Club closing and the next day a “new” business opening (West Seattle Club) opening. That club paid its first three sales tax returns and then decided not to. That’s a good way to get on a tax agency’s naughty list. Mr. Adams operates six athletic clubs in Oregon and Washington. After reading the indictment, I think it’s possible he won’t be operating any soon.

Massachusetts Has a New Software Sales Tax

Saturday, August 17th, 2013

Taxachusetts, er, Massachusetts has had for years a reputation of being a high tax state. Lately, Massachusetts has become a somewhat better locale (based on taxes). It’s not that Massachusetts has improved; rather, other nearby states have enacted or increased taxes. Just when you thought you could throw away the Taxachusetts label, out comes a new sales tax.

Last month, the Massachusetts legislature passed a new sales tax on computer software services. At 6.25%, it’s the highest sales tax rate on this in the country. The tax applies to all “computer software, including pre-written upgrades, which is not designed and developed by the author.” The law was effective July 31, 2013.

One website has published a piece about how confusing this new tax is. Consider:

This added levy is not only cumbersome, it’s super confusing. For example:

  • if you install software (Microsoft Office, Constant Contact, Drupal, etc.), it’s taxable
  • if your client clicks the mouse to install it, it’s not taxable
  • training your client to use this software is not taxable
  • but if you “customize” or configure the software in any way, it’s taxable
  • if you don’t actually make any changes, but just discuss them and plan them, it’s consulting and not taxable
  • if you create graphic design mockups, it’s not taxable
  • but as soon as you implement that design (i.e. program it), it becomes taxable if you’re using “prewritten” software “not developed” by you (such as WordPress)

At least, that’s how we think it works.

The Massachusetts high-tech community is up in arms over the new tax. As Christopher Anderson, president of the Massachusetts High Technology Council, said in an interview on WBZ-TV (as reported in the Boston Globe,

“When we impose a tax that no other state in the country imposes as broadly as this, it is going to have an impact on those small and midsize companies, initially, in terms of their ability to win and retain business or add or retain employees,” he said.

“In fact, a number of them are telling me they may have to shed employees just to maintain the business load they have,” Anderson added in the interview with WBZ’s Jon Keller.

Democratic state Senator Karen Spilka has filed a bill to repeal the measure. Meanwhile, Florida Governor Rick Scott has urged unhappy Massachusetts companies to consider moving to the Sunshine State. I am certain that if this tax remains law Massachusetts will see some companies move out-of-state. Taxes matter, and when a business in Massachusetts faces a confusing 6.25% tax while a business in neighboring New Hampshire doesn’t, a business owner might just move.

Nite Moves Asks Supreme Court to Rule on Constitutionality of Taxing Pole Dances in New York

Sunday, August 11th, 2013

When I think of “Night Moves” I think of a Bob Seger song. That’s not what this post is about. It seems that the upstate New York adult entertainment facility named Nite Moves isn’t happy with a New York state sales tax on pole dancers. The essential question: Is a tax on just certain kind of music or entertainment legal?

New York’s highest court, the Court of Appeals, held in a 4-3 decision that a sales tax on pole dancing is just fine. The owner of Nite Moves, Stephen Dick, has filed a writ of certiorari with the US Supreme Court asking the Court to overturn the tax. The question of whether pole dancing is a form of art or something that doesn’t promote culture (and so can be taxed) might be argued next Spring in Washington.

Speaking of Night Moves:

Zappers OK in B.C. but Using Them Isn’t

Friday, July 19th, 2013

A Richmond, British Columbia firm marketed an interesting computer program. As I noted when I first wrote about this (in 2008):

Bradley Alvarez of the Canada Revenue Agency told The Province that, “Businesses are suspected of having hidden thousands of transactions and millions of dollars in sales across Canada.” The software, from InfoSpec Systems in Richmond, BC, will save an owner taxes. The RCMP noted in its application for a search warrant that an InfoSpec spokesman allegedly said that the software can be used for “deleting cash sales.” Additionally, the software vendor claimed that you can take the cash and “pay kitchen staff.” There’s no reason to stop at one felony when you can commit two, eh?

Well, the software vendor won a victory at the B.C. Court of Appeal. As the Vancouver Sun reported:

Four years after a Richmond computer company was charged and a year after it was convicted of tax fraud, the province’s highest bench has ordered the company acquitted…

“It is noteworthy that the law does not prohibit the making, possession, or sale of a zapper,” Justice Frankel said, even though a number of criminal code provisions target and restrict other instruments of crime used, for instance, in counterfeiting or falsifying credit cards.

“I do not accept the Crown’s submission that InfoSpec ‘engaged in a course of dealings that was by its very nature dishonest.’ InfoSpec participated in commercial transactions involving the sale of a computer program that is not prohibited by law; the restaurants got what they paid for. Whatever reasonable people might think about the propriety of such a sale, I am unable to say they would consider the vendor to have acted dishonestly.”

However, using the software to evade taxes was and still is a crime in Canada. It is likely that the Canada Revenue Agency will appeal this decision to the Canadian Supreme Court.

It’s 6,219 Miles from Calumet City to Amman

Saturday, March 2nd, 2013

What does Calumet City, Illinois have in common with Amman, Jordan? To be honest, not very much at all. However, this story begins in Calumet City and takes a detour through Amman before ending in Chicago (with a probable side trip to Springfield, Illinois).

Samer Farhan owns a gas station in Calumet City, along with another in Chicago. Gas stations have to collect lots of taxes: State sales tax, state gasoline tax, and federal gasoline tax. Of course, most people would prefer not paying taxes. Mr. Farhan is accused of taking this a bit too far on remitting others’ money that he collected.

Remember, when a business collects sales tax they become the agent of government. Like with employment trust fund taxes, sales tax agencies don’t like it when some of the money doesn’t end up where it belongs. Sales tax agencies regularly audit many businesses.

Mr. Farhan is accused of 28 counts of filing phony sales tax returns, two counts of mail fraud and five of money laundering. Mr. Farhan is alleged to have lowered the amount of sales so he didn’t have to pay nearly $1 million in sales taxes. That’s a lot of gasoline. However, he’s accused of going further–literally. Mr. Farhan allegedly took some of the profits of his scheme and sent them to a bank in Amman, Jordan; that money then supposedly returned to him. If proven, that’s money laundering. The Illinois Department of Revenue had the help of the US Secret Service in that aspect of the case.

Mr. Farhan will have a preliminary hearing later this month. If convicted on all charges, he’s looking at a lengthy term in prison (plus restitution).

I’m Envious

Monday, September 3rd, 2012

Two stories related to one of my favorite topics appeared over the weekend. The first comes out of Michigan, where the state legislature passed a law to ban “tax zappers.” The only zappers I ever heard of were these:

Bug Zappers, Courtesy of Wikipedia

That’s definitely not what Michigan banned. No, these zappers are used to skim cash from registers in cash-basis businesses so that sales could be under-reported. Who were the customers in Michigan? According to this story, Detroit area strip clubs. It appears that sales of the “Journal Sales Remover” may have been better than thought of. I wrote about this product in 2010; it wasn’t a bright idea then and it’s not one today.

Of course, the new Michigan law is overkill. Anyone violating the new law is also violating various sales tax laws, committing tax fraud against both the IRS and Michigan, and likely violating local ordinances, too.

So from Michigan lets head west to Minneapolis. Last Friday night Envy was raided. That’s Envy, the nightclub. Minnesota State Department of Revenue officers raided the club; the DOR alleges that the owners of the club, James and Susan Beamon, may be skimming cash, grossly underreporting withholding taxes, and not paying all their sales tax. This news story notes that per the search warrant the owners of the club reported negligible income for 2009 and haven’t filed 2010 or 2011 returns. And conspicuous consumption may have gotten the owners in trouble:

“Normally, persons with the income levels reported by the Beamons could not afford a high-priced Cadillac,” the search warrant said.

As a reminder, income is taxable whether you make it in cash, checks, or credit cards. That said, the idea that businesses that deal in large amount of cash would be tempted to skim is normal. That’s why cash businesses such as strip clubs and nightclubs are far more likely to be audited than, say, a jewelry store.

[Image from Wikipedia]