Beer Drinkers Rejoice: Buckingham scores victory for Ohio bars confirming that preventative maintenance for draft beers systems is not subject to Ohio sales tax.

2017-04-18 20:17:11

The Ohio Board of Tax Appeals (BTA) ruled in favor of Great Lakes Bar Control, Inc. (“Great Lakes”) that maintaining draft beer dispensing services are not subject to Ohio sales tax. <a href=""><em>Great Lakes Bar Control, Inc. v. Testa</em></a><em>, </em>BTA Case No. 2016-34 (Apr. 14, 2017). Great Lakes was represented by Buckingham attorneys <a href="">Steve Dimengo</a>, <a href="">Matt Duncan</a>, and <a href="">Rich Fry</a>. The BTA correctly found that preventative maintenance services where the act of removing dirt and contaminants is necessary for the property to continue to operate properly are <strong><em>not</em></strong> taxable building maintenance and janitorial services. Great Lakes maintained draft beer systems for its customers by monitoring and inspecting the system, unclogging lines when necessary, applying cleansing solutions, and other measures to “ensure that the draft system is operating at its optimum performance.” And we applaud Great Lakes for its efforts to keep beer flowing across Ohio! The Ohio Tax Commissioner asserted that Great Lakes’ services constituted taxable building maintenance and janitorial services which include the cleaning of contents of a building. <a href="">R.C. 5739.01(II)</a>. However, since cleaning was only one aspect of Great Lakes’ regular maintenance program, which included much more than simply making the beer lines clean, the BTA held that the services at issue were not taxable. “Any cleaning of the system is only part of the overall maintenance provided, i.e., is incidental to the regular maintenance service provided.” Please <a href="">contact us</a> if you have any questions about this decision or other Ohio sales / use tax issues.

Ohio Sales & Use Tax: Digital Advertising Recognized as Nontaxable, but HB 466 Falls Short of Comprehensive Solution to Taxing on Services Delivered Online.

2016-06-15 12:36:50

As we <a href="">previously posted</a>, the Ohio Department of Taxation has taken an extremely expansive view of taxable electronic information services (EIS). Per the Department, EIS essentially includes any services delivered via telecommunications equipment, including the Internet. With technological advances, the number of services delivered electronically has grown exponentially, which clearly could not have been anticipated when EIS originally were made taxable decades ago. <a href="">House Bill 466</a> was presented as a solution to limit the extended scope of taxable EIS by specifically excluding digital advertising services. “Digital advertising services” includes services used to electronically display, deliver, place or transfer promotional advertisements to potential customers. <a href="">R.C. 5739.01</a>(RRR). However, we share the opinion of the Ohio Society of CPAs that H.B. 466 does not go far enough as other clearly nontaxable services may now implicitly be considered taxable simply because they are delivered electronically, such as webinars and information reporting (e.g., Carfax, credit reports, etc.). <em>See OSCPA Staff Reports, </em><a href="">Lawmakers exempt digital advertising from sales tax</a> (June 2, 2016) and <a href="">OSCPA seeks broader solution to taxation of online services</a> (May 5, 2016). Moreover, H.B. 466 does not apply retroactively and is not enacted as clarification of existing law. This confirms that digital advertising services were intended to be taxable in the past and does not relieve taxpayers who are currently under audit or have been assessed tax on such services. Please <a href="">contact us</a> if you have questions about the taxability of services delivered electronically.

Ohio Sales & Use Tax – Are you certain your business is complying with its Direct Pay Permit? Stiff penalties and personal liability exist for failures to observe direct pay requirements.

2016-06-07 20:19:54

<span style="color: #000000;font-family: Garamond">The Department of Taxation recently updated its direct pay authority program to help ensure compliance amongst permit holders. </span><a href=""><span style="color: #0000ff;font-family: Garamond">Information Release ST 2003-01 (Updated March 2016)</span></a><span style="color: #000000;font-family: Garamond">. As part of the program, direct pay permit agreements will be reviewed and updated periodically, typically at least every four years. </span> <span style="color: #000000;font-family: Garamond">Direct pay permit holders are regularly audited and generally are easy targets for significant liabilities. We have represented direct payment permit holders during audits and appeals who experienced substantial misfortunes due to the unawareness of their requirements or innocent mistakes as to nontaxability. For example, the Tax Commissioner does not give the direct pay permit holder credit for tax paid directly to vendors, since it agreed not to do so under the direct pay agreement. This requires the taxpayer to file a protective refund claim. Otherwise, if the taxpayer waits and the statute of limitations expires on its refund rights, the direct pay permit holder may be assessed tax on purchases which it already paid tax. Additionally, many direct pay permit holders operate under agreements that are decades old and do not reflect their current business operations. This makes it very difficult to show compliance during an audit. </span> <span style="color: #000000;font-family: Garamond">Many employees who work for direct pay permit holders also don’t realize they have significant personal exposure if their company does not comply with the direct pay permit agreement. </span><a href=""><span style="color: #0000ff;font-family: Garamond">R.C. 5739.33</span></a><span style="color: #000000;font-family: Garamond">. The employee may be held personally liable even if he/she is not an owner or officer, but merely has responsibility for filing returns or making payments. This can result in horror stories for these employees because responsible parties are unable to challenge the merits of whether the tax is actually owed – the individual is limited to challenging their status as a responsible party. So, if the company goes out of business without paying the liability, the responsible party will be personally liable with no way to challenge the liability. </span><span style="color: #000000;font-family: Garamond"> </span> <span style="color: #000000;font-family: Garamond">The Ohio Tax Commissioner is authorized to issue direct pay permits to certain taxpayers. </span><a href=""><span style="color: #0000ff;font-family: Garamond">R.C. 5739.031.</span></a><span style="color: #000000;font-family: Garamond"> The Department of Taxation publishes the list of all direct pay permit holders </span><a href=""><span style="color: #0000ff;font-family: Garamond">online</span></a><span style="color: #000000;font-family: Garamond"> (tab 90 on the List of Active Vendors). Under a direct pay permit, the taxpayer agrees not to pay sales tax directly to vendors, but rather accrue and pay sales / use tax directly to the Department of Taxation. The direct pay permit holder must provide its direct pay permit number to its vendors make tax-free purchases, and then self-report the applicable tax on a separate return. Direct pay authority is not a tax savings, but rather an administrative convenience so the permit holder need not determine whether an exemption applies at the time of each purchase.</span> <span style="color: #000000;font-family: Garamond">You should </span><a href=""><span style="color: #0000ff;font-family: Garamond">contact us</span></a><span style="color: #000000;font-family: Garamond"> if you need help understanding the requirements and ensuring compliance under your direct pay permit agreement with the Ohio Tax Commissioner. </span>  

Remote Vendor Nexus Coming To a Head

2016-05-20 16:24:28

Since the U.S. Supreme Court’s decision in <a href=""><em>Quill v. North Dakota</em></a> more than 24 years ago, states have been focused on addressing the ability to force a vendor to collect tax in their state in the absence of a physical presence as required by <a href=""><em>Quill</em></a>. The fundamental basis for the decision is that in the absence of a physical presence, it is too burdensome for a remote vendor to collect a state’s sales tax. Of course, <a href=""><em>Quill</em></a> empowered Congress to enact enabling legislation, but it has refused to do so. So what have the states done? They have moved on multiple fronts to force the issue and enhance their revenue including: <ul> <li>The <a href="">Streamlined Sales Tax Agreement</a> (“SSTA”) initiative, which is predominately a consortium of stats to provide uniform rates, definitions and compliance. The premise is that by easing compliance, those member states of the SSTA are being less burdensome on commerce.</li> <li>Required reporting by vendors to the state taxing jurisdictions of sales they have made including advising customers of their use tax obligations. In particular, Colorado and Oklahoma are on the forefront in this area.</li> <li>Deemed physical presence through affiliate and “click-through” internet nexus provisions.</li> <li>Ignoring <a href=""><em>Quill</em></a>, focusing on the mere economic nexus due to the fact of the drastic changes in the economy and technology. Alabama and South Dakota are on this forefront.</li> <li>Being aggressive with respect to physical presence, some jurisdictions deem that when somebody visits a vendor’s website at which time the vendor places a “cookie” on the visitor’s computer, such vendor’s cookie is a deemed physical presence in the customer state.Most recently, South Dakota initiated litigation to test its statutory provision, while at the same time, the American Catalog Mailer’s Association has initiated a suit against South Dakota.Thus, we expect much guidance on the federal front. Until then, be careful with respect to foreign jurisdictions and carefully plan your affairs including use of representatives outside of your home state as well as using installers or warranty work. Of course, if your activity in a foreign state is “<em>de minimis</em>”, regardless of its nature, then there will not be a tax consequence. However, that is a state by state determination as to what constitutes de minimis activity.We routinely consult in this area. Please let us know if we can assist you in your planning.</li> </ul>

Ohio State Bar Association Taxation Committee Sales and Use Tax Subcommittee Report

2016-02-05 19:29:20

As co-chairs of the <a href="" target="_blank">Ohio State Bar Association</a> Sales / Use Tax Subcommittee, <a href="/wp-content/uploads/2016/01/January-2016-Ohio-State-Bar-Association-Taxation-Committee-Sales_Use-Tax-Subcommittee-Report.pdf" target="_blank">here</a> is a link to the report <a href="" target="_blank">Steve</a> and <a href="" target="_blank">Rich</a> presented at the January 7, 2016 Taxation Committee meeting. Of particular interest is the recent Ohio Supreme Court case that held officers can contest procedurally defective corporate assessments. If you have any question regarding the subcommittee report or any sales / use tax questions, please contact <a href="" target="_blank">Steve Dimengo</a>, <a href="" target="_blank">Rich Fry</a>, or <a href="" target="_blank">Casey Davis</a>. <a href="" target="_blank">Contact us</a>.

Proposed settlement of Walmart sales tax class action calls for at least $3 Million to be reimbursed to customers.

2015-07-15 14:15:53

Plaintiffs filed a class action <a href="">complaint</a> last May against <a href="">Wal-Mart Stores Inc</a>. in the U.S. District Court for the Northern District of Ohio alleging that <a href="">Wal-mart</a> “systematically shortchanges customers who return products to a store located in an area with a lower sales tax than the store from which the product was originally purchased by using that lower sales tax rate to calculate the refund, rather than the amount actually paid.” The parties have reached a proposed settlement, pending the federal judge’s approval, whereby the retailer is required to implement return policies to ensure customers receive the proper refund amounts and pay $5 million in monetary relief. After paying attorneys’ fees and administrative costs, the remaining relief will be paid to class members in the form of gift cards ranging between $3 and $15 per customer. The class size is potentially nationwide, and includes anyone who, in the four-year period before the complaint was filed, was refunded less than the item purchase price due to sales tax differences at any Wal-Mart or <a href="">Sam’s Club</a> stores. Upon approval of the proposed settlement, a 75-day notice period will begin, with potential class members having until sixty 60 days following the notice period to claim their reimbursement. In March, Wal-Mart sought to dismiss this case, arguing that Ohio requires customers to file claims about sales tax refunds with the Ohio Tax Commissioner or Court of Claims. The U.S. District Court <a href="">disagreed</a> finding that the requirement to seek redress through the state agency only applies to cases in which that tax has definitely been remitted to the state. Since these claims involved returned items for which the full, tax-included price should have been refunded to the customer, it is not certain that the taxes in question were remitted to the state.

Are you sure you’re an Ohio non-resident? Bright-line residency effectively muted: Ohio Supreme Court rules taxpayers must satisfy the burdensome common-law domicile test for Ohio income tax even when residency affidavit filed.

2015-07-09 16:55:44

<a href="">The Ohio Supreme Court</a> delivered a significant blow to individuals claiming nonresident status for Ohio personal income tax under the bright-line residency statute. <em><a href="">Cunningham v. Testa, 2015-Ohio-2744</a></em>. The Ohio statute provides that an individual is irrebuttably presumed to be a nonresident if the individual satisfies three requirements: (1) maintains an abode outside Ohio for the entire year; (2) satisfies the contact period test (recently increased to less than 212 Ohio contact periods); and (3) files an affidavit verifying domicile is outside Ohio.  <a href="">R.C. 5747.24(B)</a>. Bright-line residency, originally enacted in 1993, is intended to streamline residency determinations which under the common-law domicile test are extremely fact intensive. Under the previous interpretations of the bright-line residency statute, an individual filing the required affidavit was considered a nonresident provided the two factual statements in the affidavit were true – the taxpayer maintained a non-Ohio abode and had less than the stated Ohio contact periods (182 prior to 2015). It was believed all other facts were irrelevant, even if the taxpayer would have been considered an Ohio resident under the common-law domicile test. This is no longer the case. <a href="">The Supreme Court</a> held that the presumption is not binding when the Tax Commissioner “has a substantial basis for rejecting the claim of non-Ohio domicile” that is supported by “specific information that warranted the finding.” In <em><a href="">Cunningham</a></em>, the taxpayer signed a homestead exemption application for his Cincinnati residence under penalties of perjury attesting that he was domiciled in Ohio. This contradictory statement meant his residency affidavit contained a false statement – that he was not domiciled in Ohio. Due to the false statement, the non-residency presumption was no longer irrebuttable and actually required the taxpayer to meet the common-law residency test. The <a href="">Court</a> then considered a bevy of additional facts in concluding the common-law test was not met – that the taxpayer voted in Ohio; held an Ohio driver’s license; was born, raised, and educated in Ohio; was married and raised a family in Ohio; and generally had mailed delivered to Ohio. Quoting the <a href="">Board of Tax Appeals’</a> <a href="">decision</a>, the dissent points out this decision “essentially renders the ‘bright-line’ non-residency status… moot, as the commissioner could always challenge the veracity of the statement that the taxpayer was not domiciled in Ohio.” The question now becomes what constitutes a “substantial basis” for disputing the affidavit’s non-residency statement and how specific must the Tax commissioner’s information be to support this basis. Does it require a contradictory statement sworn to under penalties of perjury, as in <em><a href="">Cunningham</a></em>, or is any fact supporting non-residency, such as registering a vehicle with Ohio, sufficient? The only certain protections taxpayers have are those facts which the Tax Commissioner cannot consider under <a href="">O.A.C. § 5703-7-16(A)</a>. This decision is contrary to <a href="">Governor Kasich’s</a> policy to reduce Ohio individual income tax obligations through reduced rates, minimizing tax on small-business owners, and increasing the permissible presence under the bright-line residency statute. It will have significant implications for taxpayers claiming non-Ohio residency, but having multiple residences, such as retirees with significant investment / intangible income that split time between Ohio and another state. We will post a follow-up article with planning tips that individuals should consider to increase the likelihood their non-resident status will be recognized under this new interpretation of the bright-line statute based upon our substantial experience supporting non-resident status under the common-law domicile test. If you have any questions, contact <a href="">Steve Dimengo</a>, <a href="">Rich Fry</a>, or <a href="">Casey Davis</a>. <a href="">Contact us</a>.

Ohio Budget Bill for FY 2016-2017 Enacted: Significant expansion of sales/use tax nexus, including click-through nexus; further personal income tax reductions, including for small business owners.

2015-07-05 01:31:31

Ohio’s biennium budget bill for FY 2016-2017 provides for expanded sales/use tax nexus and further income tax reductions. (<a href="">Am. Sub. H.B. 64</a>). <a href="">Gov. Kasich made extensive use of his line-item veto ahead of the signing, striking 44 provisions from the bill</a>. Several vetoes removed targeted benefits the legislature included for large businesses or industries, such as power plants, big box retailers, and nursing homes. Highlights of the budget bill are discussed below. <strong>Sales / Use Tax: Significant nexus expansion, including adopting click-through and affiliate nexus presumptions.</strong> Ohio joins several states who have enacted “click-through” nexus mandating sales tax collection for certain online, remote vendors. Click-through nexus presumes that a seller has substantial nexus with Ohio if it enters into agreements with Ohio residents to refer sales, including via web link. However, Ohio’s law has two interesting distinctions from those enacted by other states: (1) it specifically applies to sales referred by telemarketers, which may put Ohio telemarketers at a disadvantage when seeking business from retailers who are not already collecting Ohio sales tax; and (2) the applicable threshold for raising the presumption is significantly lower than other states – Ohio’s nexus presumption is raised if the referrals from Ohio residents results in at least $10,000 of sales, whereas other states require $10,000 in commissions to be paid to the in-state residents referring sales to raise the presumption. Generally, click-through nexus has been interpreted to exclude advertisements or other agreements where consideration is not based upon completed sales. <a href="">Gov. Kasich line-item vetoed click-through nexus</a> from the previous budget bill two years ago. Nexus is also presumed to exist if an out-of-state retailer uses an Ohio company (other than a common carrier) to: (1) receive orders; (2) advertise, promote, or facilitate sales; (3) delver, install, assemble, or perform maintenance for the retailer’s customers; (4) facilitate delivery of products sold; or (5) sell the same product lines or use the same trademarks, service marks, or trade names as the out-of-state retailer. These nexus-creating activities are similar to those provided for in affiliate nexus statutes enacted in other states. But Ohio’s law is not limited to such activities being carried on through common-owned affiliates of the out-of-state retailer. Instead, out-of-state retailers are now presumed to have nexus for Ohio sales tax collection purposes if any commonly-owned business has substantial nexus with Ohio, regardless of whether the affiliate’s operations are related in any manner or otherwise contribute to the retailer’s ability to establish or maintain an Ohio market. Lastly, an out-of-state seller must register to collect Ohio use tax before it provides property or services to any Ohio state agency. These provisions could provide for significant expansion of Ohio sales / use tax nexus, but their effect ultimately depends upon the Ohio Tax Commissioner’s interpretation and enforcement thereof. We will continue to monitor any guidance published by the Tax Commissioner. Despite significant nexus expansion, thankfully Gov. Kasich’s <a href="">original proposal to expand sales tax</a> to a bevy of new, poorly-defined services was not adopted. <strong>Individual Income Tax: Further rate reductions.</strong> The budget cuts personal income tax rates for all taxpayers by an additional 6.3%. Beginning with the 2015 tax year, the individual income tax rates will top out at 4.997% for the highest income bracket. Further, the legislation continues the current small business deduction allowing owners to deduct 75% of their business income up $250,000 in 2015. Starting with the 2016 tax year, small business owners will entirely exclude their first $250,000 of business income, with business income in excess thereof being taxed at a flat 3% rate. These tax reductions for small-business owners are extremely broad and apply to any income reported on the individual’s return (i.e., from a pass-through entity or sole proprietorship) “arising from transactions, activities, and sources in the regular course of a trade or business.” R.C. 5747.01(B) (business income definition). This could include income from rental real estate or from licensing intellectual property – if such activities are an integral part of your business. Additionally, since business income includes the gain from a complete or partial liquidation of a business, including that resulting from goodwill, Ohio small-business owners will be entitled to the reduced 3% rate on the sale of their business. <a href=""></a> raised an issue that certain small businesses or self-employed taxpayers will actually pay more in taxes for 2015. This is true for a small minority of business owners earning approximately $270,000 of business income resulting in a tax increase of less than $200. The vast majority of small-business owners, however, will experience a tax cut. <strong>Commercial Activity Tax: Can lobbying trump the Constitution?</strong> An exclusion from taxable gross receipts was enacted for receipts received from certain qualified integrated supply chain vendors engaged in manufacturing personal care, health, beauty and aromatic products. However, the exclusion is significantly limited and appears applicable to a single operation – <a href="">The New Albany International Beauty Campus operated by Bocchi Laboratories in the Columbus region</a>. The exclusion is so specific that it only applies to 400-700 acre sites located in a city with population between 7,500 and 8,000 and a county with population between 165,000 – 170,000. Further, uncodified Section 803.310 of the bill provides that the exclusion applies retroactively to July 1, 2011, meaning these select taxpayers operating at this one site will be able to apply for refunds for tax paid in prior years. This exclusion reeks of an unconstitutional, discriminatory tax incentive. <strong>Cigarette tax increased</strong> The budget bill increases the excise tax on cigarettes from $1.25 to $1.60 per pack. <strong>Local hotel / tourism tax increases authorized </strong> Certain counties are authorized to increase their hotel / lodging taxes. Additionally, municipalities may levy a tax on businesses making sales in a tourism development district, whether wholesale or resale. The tax is paid by the person making the sales and is imposed at a rate of 0.5%, 1.5%, or 2% of the person’s gross receipts derived from making the sales in the tourism development district. <strong>Tax amnesty vetoed</strong> The budget bill originally included a tax amnesty program to be conducted from January 1, 2016 through February 16, 2016. Gov. Kasich vetoed this program due to the recent 2012 amnesty program explaining that “[w]aiting longer between amnesty programs will encourage greater tax compliance … and generate higher revenues when programs are held.” If you have any questions regarding the budget bill and how it may affect you or your business, contact <a href="">Steve Dimengo</a>, <a href="">Rich Fry</a>, or <a href="">Casey Davis</a>.

Municipal Income Tax: Cleveland’s Method of Imposing “Jock Tax” Struck Down by Ohio Supreme Court

2015-05-04 13:44:35

UPDATE (7/9/15): The Ohio Supreme Court <a href="">denied</a> the City of Cleveland’s motion for reconsideration. Historically, Cleveland has taxed compensation of visiting professional athletes under the “games-played” method based upon the ratio of games played in Cleveland to all games played that year. Unlike the “duty-days” method, used by most states and municipalities, the “games-played” method ignores all other activities the athlete is required to report to work for, such as training camp, practice, meetings, etc. <a href="">Hunter Hillenmeyer</a>, formerly of the <a href="">Chicago Bears</a>, and <a href="">Jeff Saturday</a>, formerly of the <a href="">Indianapolis Colts</a>, challenged Cleveland’s games-played method contending it violated the players’ Due Process rights, among other objections. <em><a href="">Hillenmeyer v. Cleveland Bd. of Review, 2015-Ohio-1623</a></em>; <em><a href="">Saturday v. Cleveland Bd. of Review, 2015-Ohio-1625</a></em>. “Due process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city.” <em><a href="">Hillenmeyer, at ¶46</a></em>. The players contended that they earned their compensation for several activities in addition to playing in games, including mandatory minicamps, training camp, meetings, and practices. For visiting players, they performed these services for their employer outside Ohio. An <a href="">NFL Players Association</a> representative testified before the Cleveland Board of Review that the players were contractually obligated to work these additional days and, if they did not report to work, they faced fines and termination. <a href="">The City of Cleveland</a> argued that the players were paid solely for games played, not practice and other activities, and, accordingly, the city could tax the athletes based on the games-played ratio. <a href="">The Supreme Court</a> held that Cleveland’s method of taxing visiting athletes violated their constitutional Due Process rights because the player was being taxed on compensation earned while working outside Cleveland. In <a href="">Hillenmeyer’s</a> case, the games-played method resulted in 5% of his salary being taxed by Cleveland – 1 game played in Cleveland during the 20 game season (4 preseason games and 16 regularly season games). However, under the duty-days method, <a href="">Hillenmeyer</a> was present in Cleveland for only 2 of the approximate 160 days he was required to report to work each year. Thus, only 1.25% of his salary was earned in Cleveland and subject to tax. Accordingly, <a href="">Hillenmeyer</a> will be granted a refund of approximately 75% of the Cleveland income tax withheld by the team. <a href="">Saturday’s</a> case was even more egregious. He was injured for the one game the Colts played in Cleveland in 2008 and reported to work in Indianapolis that Sunday to rehab his injury. Cleveland argued <a href="">Saturday</a> was still paid based upon the game played in Cleveland and attempted to treat it as a sick day. However, Cleveland income tax is only imposed on compensation earned for work done or services performed or rendered in the city. Since <a href="">Saturday</a> did not perform any services in Cleveland that year, and actually reported to work in Indianapolis on gameday, the <a href="">Court</a> ruled that the tax was not authorized under Cleveland’s income tax ordinances and regulations. Accordingly, <a href="">Saturday</a> was granted a full refund. In <em><a href="">Hillenmeyer</a></em>, the <a href="">Court</a> also considered whether the exception for professional athletes and entertainers under the occasional-entrant rule (former R.C. 718.011(B)) violated constitutional Equal Protection. This occasional-entrant rule exempts individuals from municipal income tax on their wages if they worked less than 12 days in the municipality. Applying a more liberal standard, the <a href="">Court</a> found that because the events for which the athletes and entertainers are paid require a much higher public burden, such as for police protection, traffic, crowd control, and other public services, the city had a rational basis for treating these taxpayers differently. Accordingly, the exception from the occasional-entrant rule did not violate the player’s Equal Protection rights. Cleveland faces significant fallout from these decisions as professional athletes who paid Cleveland income tax on the games-played method should all be filing refund claims. Players for teams visiting the Browns will be entitled to a refund similar to Hillenmeyer of approximately 75% of the tax paid. But even Browns players who are not Cleveland residents have a significant refund opportunity. Presumably, these players have paid Cleveland tax on 50% of their revenue because half the games played were in Cleveland. Converting to the duty-days method, the player would owe Cleveland tax for days reporting to the Browns practice facility in Berea, which presumably would be significantly more than 50% of the total days the player reported to work. Lastly, Justice Pfeifer, who wrote the opinion in <em><a href="">Saturday</a></em>, must have spent his fair share of Sundays at the Factory of Sadness. In referencing Saturday’s absence from the game, the opinion notes that “[m]ore than 72,000 other souls attended the Colts’ dismal 10-6 victory over the Browns.” Your Honor, we share your pain. If you have any questions regarding the Court’s recent decisions, please contact <a href="">Steve Dimengo</a>,<a href=""> Rich Fry</a>, or <a href="">Casey Davis</a>. <a href="">Contact us</a>.

Retail Convenience Store Assessment Affirmed

2015-04-29 07:27:00

In <a href=""><em>M&A Food Store, Inc. v. Testa</em>, Dkt. No. 2013-4504 (01/27/2015)</a>, the Ohio Board of Tax Appeals affirmed the <a href="">Tax Commissioner</a>’s sales tax assessment against a retail convenience store. The taxpayer attempted to support its contention that the assessment was overstated by offering its 2010 corporate income tax return and an email from a <a href="">Department of Taxation</a> representative regarding potential adjustments that could be made to the assessment based upon records that had been provided. The <a href="">BTA</a> treated the Department’s email as a settlement offer, but found a lack of evidence supporting the adjustments discussed in the email. Ultimately, the BTA found the tax return and email were not probative evidence to reduce the assessment without testimony from the taxpayer’s representative to corroborate the representations therein. Accordingly, the assessment was upheld. This case illustrates the importance for taxpayers, who have the burden to prove to what extent the Tax Commissioner’s assessment is erroneous, to present a complete case to the BTA. This is particularly difficult, yet critical, for convenient stores, who are viewed very suspiciously by the Department. Please contact <a href="">Steve Dimengo</a>, <a href="">Rich Fry</a>, or <a href="">Casey Davis</a> to ensure your case is presented properly to the BTA. <a href="">Contact us</a>.

Responsible Party Developments: Paper Involvement Sufficient to Impose Personal Liability; Independent Contractor Not Enough

2015-04-23 13:37:55

In <a href=""><em>Leishman v. Testa</em>, Ohio BTA, Dkt. No. 2013-6262 (02/03/2015)</a>, the <a href="">Ohio BTA</a> affirmed the <a href="">Tax Commissioner</a>’s determination that even an “on paper” partner is a responsible party for unpaid sales tax. The taxpayer contended that the company was being managed by another individual who independently determined the sales tax due and reported that amount to the taxpayer, who then paid the stated amount. The taxpayer indicated her only involvement was “merely on paper” and the result of pressure from her then-husband. She was not involved in day-to-day operations. Despite being sympathetic to the taxpayer’s situation regarding coercion by her ex-husband, the <a href="">BTA</a> was unable to conclude that the taxpayer met her burden to prove error in the Tax Commissioner’s determination. The taxpayer “clearly had financial responsibility” for the company, as evidenced by her signing checks, filing sales tax returns, and being listed as president of the store’s ownership entry. Moreover, the <a href="">BTA</a> affirmed that “delegation of the day-to-day business responsibilities to another . . . does not relieve one of responsibility under <a href="">R.C. 5739.33</a>.” She still had the relevant authority/responsibility. Alternatively, in <a href=""><em>Kingery v. Testa</em>, Ohio BTA, Dkt. Nos. 2012-887; 2012-888; 2012-889; 2012-890 (01/27/2015)</a> the <a href="">Ohio BTA</a> reversed the decision of the <a href="">Tax Commissioner</a> and determined the taxpayer met her burden to show she was not a responsible party. The taxpayer testified that she was “not an Officer, Stock Holder, or an employee,” but was instead hired as an independent contractor, working part-time on financial matters, and presented a consulting service agreement confirming such arrangement. Despite being the secretary/treasurer and vice president of the company at one point, the <a href="">BTA</a> found that she was not a responsible party because the corporate minutes clearly showed she resigned well before the years at issue. Furthermore, the <a href="">BTA</a> found she was not an employee, having not received compensation for services performed. Any person asserted to be a responsible party must work on parallel fronts to protect his/her interests by: (a) making sure the corporation’s liability is correct before it becomes final; (b) making sure the <a href="">Department of Taxation</a> pursues all responsible parties; and (c) of course, fully defending the assertion of his/her responsible party status. If you have any questions regarding whether you are a responsible party or how to protect your interest, please contact <a href="">Steve Dimengo</a>, <a href="">Rich Fry</a>, or <a href="">Casey Davis</a>. <a href="">Contact us</a>.

Resale Exemption – Ohio BTA Denies Resale Exemption to Non-Licensed Dealer

2015-04-22 12:40:55

<a href="">The Ohio BTA</a> affirmed assessing use tax on six cars that had been purchased out of state and brought into Ohio, but subsequently shipped out. In <a href=""><em>Dotzauer v. Testa</em>, Case Nos. 2014-2030, 2014-2076 (2/27/2015)</a>, the taxpayers testified that they were “brokers/agents,” and had no intent to “use” the vehicles in Ohio or to do business in Ohio. They argued the vehicles were simply transported through Ohio on their way to a port, for delivery outside the United States. In addition, they argued that they were entitled to an exemption from use tax because they were engaged in sales for resale. The <a href="">BTA</a> disagreed. The <a href="">BTA</a> noted that although the six vehicles were physically in Ohio at the taxpayers’ residence for periods that ranged from a few hours to less than a week while waiting to be transported out of state, the taxpayers exercised ownership and control over the vehicles. The <a href="">BTA</a> also denied the resale exemption. The taxpayers were not licensed motor vehicle dealers, but rather “brokers/agents.” Therefore, the <a href="">BTA</a> found, by not being properly licensed to legally sell motor vehicles, the taxpayers could not “avail themselves of the exemption from the sales / use tax of such sales.” We are concerned that the <a href="">BTA</a> denied the resale exemption because the taxpayers were not licensed since, presumably, they were not required to be licensed due to the sales not occurring in Ohio. Moreover, there are many situations where vehicles are resold via lease to related entities in the absence of licensing. Nonetheless, the resale exemption is still available. If you have questions regarding resale exemptions, contact <a href="">Steve Dimengo</a>, <a href="">Rich Fry</a>, or <a href="">Casey Davis</a>. <a href="">Contact us</a>.

Absence of “Magic Permanent Assignment Language” does not Preclude Leased Employee Exception

2015-04-14 10:55:22

<a href="">R.C. 5739.01(JJ)(3)</a> provides an exception to otherwise taxable employment services for leased employees provided under a contract “<em>that specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis.</em>” In <a href=""><em>A.M. Castle and Company v. Testa</em>, Ohio BTA Case No. 2013-5851 (March 9, 2015)</a>, the taxpayer received leased employees “<em>as required</em>.” The <a href="">Tax Commissioner</a> asserted this contract language was insufficient to support their permanent assignment since it did not specifically state the number of provided personnel. Consistent with most recent Supreme Court <a href="">precedent</a>, the <a href="">BTA</a> found that the personnel were provided on a permanent basis in the absence of “magic” permanent assignment language. This was based upon the following: <ol> <li>The course of action under the contract supported the personnel were intended to be permanently assigned and were not seasonal, temporary, or short-term; and</li> <li>The individuals were not provided to other clients of the provider.</li> </ol> The <a href="">BTA</a> noted the number of permanently assigned employees need not “<em>be a static, specific number, which cannot be varied or adjusted based upon extrinsic factors, such as changes in business/operating conditions or employee performance.</em>” This case highlights the ability to support permanent assignment through the parties’ course of dealings reflective of such intent that the personnel are provided for an indefinite period. This case is on <a href="">appeal</a> to the Ohio Supreme Court. For questions, please contact <a href="">Steve Dimengo</a>, <a href="">Rich Fry</a>, or <a href="">Casey Davis</a>.   <a href="">Contact us.</a>

Restaurants Under Audit: Tips for Agreeing to Utilize a Test Check

2013-08-31 15:47:45

In a <a href="index.php?option=com_content&view=article&id=141:ohio-department-of-taxation-targeting-quick-service-restaurants&catid=54:ohio-state-tax-news&Itemid=59">previous post</a>, we discussed the increased scrutiny quick service restaurants and others with large reported carry-out orders are facing for under collecting Ohio sales tax. These restaurants under audit must be extremely careful before allowing the <a href="">Ohio Department of Taxation</a> to conduct a test check or sample audit, as a taxpayer who enters into such an agreement is usually unable to challenge the audit methodology set forth therein. Two specific items to address in negotiating a favorable method with the Department include site selection and providing for an offset in the calculation. For vendors with multiple locations, site location for the test check will have a significant impact on the ultimate liability since the results from the sample locations will be extrapolated to the remaining locations. The vendor must ensure the sample locations are representative of the whole business. Second, in our experience, the initially proposed sample agreement does not provide a reduction for periods which the statistical analysis results in an overpayment. Under the proposed calculation, if one month results in a $100 liability and the next month results in a $100 overpayment, the Department would ignore the second month and assess a $100 liability. This contravenes the very premise of a statistical sample, which is that some periods will be above the average ratio and some below. Moreover, the purpose of the test check is to measure overall compliance. So, as long as the aggregate results are in-line with the average, no liability should result. We have extensive experience in helping restaurants navigating through a sales tax audit, including negotiating the terms of the agreement to ensure the test check / sample audit reflects the restaurant’s actual operations and to avoid inequitable results, as well as minimize penalties. <b></b>

Ohio Governor Vetoes Click-Through Nexus

2013-07-02 12:32:43

Although included in the version passed by the <a href="">Ohio General Assembly</a>, Governor Kasich vetoed click-through nexus provisions from <a href="">Ohio's Budget Bill</a> signed Sunday night. <a href="">Similar laws</a> have been enacted in several other states presuming sales/use tax nexus to exist if a company enters into agreements with instate "affiliates" or representatives to refer sales, including via weblinks, in exchange for a commission - aimed at programs made popular by online retailers, such as Amazon and Overstock. Kasich stated that such laws "enacted in other states have resutled in extensive litigation without necessarily producing an increase in state revenue... Without the collection authority being clearly extended to the states for the purpose of out-of-state internet retailers, the legality of this item is uncertain and problematice. Congress must act before this policy change may become viable." <em>See </em><a href="">Statement of Reases for the Veto of Items in Amended Substitute House Bill 59</a>, at p. 6 (June 30, 2013). This reflects the Ohio executive branch's belief that it does not have the authority to impute nexus in the absence of such legislation (state or federal). This is contrary to revenue deparments in other states which have administratively imposed click-through nexus without a specific statute. See e.g., <a href=",d.aWc">Pennsylvania Dep't of Revenue Sales and Use Tax Bulletin 2011-01</a> (Dec. 1, 2011). Governor Kasich's action is consistent with his administration's <a href="">business friendly tax policy</a>.

Ohio Sales/Use Tax: Exempt Purchases of Property Incorporated into Real Property

2013-06-07 12:05:56

<a href="index.php?option=com_content&view=article&id=80:mr-contractor-are-you-correctly-addressing-ohio-sales-tax-on-your-construction-contracts-part-i&catid=47:ohio-sales-and-use-tax&Itemid=59">Generally, a contractor’s purchase of tangible personal property to be incorporated into real property is taxable.</a> However, a contractor’s material purchases are not taxable when incorporated into: <ul> <li>Real property under a contract with, or that is accepted for ownership by, the United States (including its agencies) or the state of Ohio or a political subdivision thereof;</li> <li>A horticulture or livestock structure for a person engaged in the business of horticulture or producing livestock;</li> <li>A house of public worship or religious education;</li> <li>A building used exclusively for charitable purposes by a charitable organization;</li> <li>A building under a contract with a 501(c)(3) tax-exempt organization, when the building is used exclusively for the organization’s exempt purpose;</li> <li>The original construction of a sport facility under R.C. 307.696;</li> <li>A convention center qualifying for the real property tax exemption under R.C. 5709.084; or</li> <li>Real property located outside Ohio, if the destination state would also exempt the contractor’s purchase of such materials.</li> </ul> These exemptions should be supported by the contractor's receipt of an exemption certificate. The contractor should obtain a "Sales and Use Tax Construction Contract Exemption Certificate" (<a href="">Form STEC CC</a>) from the customer / property owner. Then, the contractor should provide "Sales and Use Tax Contractor's Exemption" certificates (<a href="">Form STEC CO</a>) to its suppliers. <a href="">O.A.C. § 5703-9-14(I).</a> Even if the contract is exempt, the contractor is still liable for taxes on property <span style="text-decoration: underline;">not</span> incorporated into real property improvements, such as tools, equipment and consumables.

Ohio Sales and Use Tax - Proper Use of Exemption Certificates by Construction Contractors

2012-12-03 17:50:24

<a href="">Depending on the nature of the project</a>, contractors may claim an Ohio sales / use tax exemption on material purchases using several different exemption certificates. If installing a business fixture (<i>i.e.,</i> permanent attachment to real property that primarily benefits the specific business operated on the premises), the contractor, acting as a retail vendor in this situation, can claim the resale exemption by providing suppliers with a standard exemption certificate when purchasing materials that will be transferred to the customer. The contractor may use a <a href="">blanket exemption certificate</a>, which covers all purchases from that vendor unless specified otherwise, or a <a href="">unit exemption certificate</a>, which only covers a single purchase. Assuming the contractor will make future taxable purchases from the supplier of materials to be incorporated into real property improvements, a unit exemption certificate is likely more appropriate. Alternatively, contractors can also use the multi-state <a href="">Certificate of Exemption</a> adopted by the <a href="">Streamline Sales and Use Tax Governing Board</a>. To be valid, any exemption certificate must contain the information set forth in <a href="">O.A.C. § 5703-9-03</a>(G). When installing a business fixture, the contractor must collect sales tax from its customer unless an exemption is available. If claiming an exemption on its sale, such as when the customer is a government agency or charitable organization, or the property will be used <a href="">directly in manufacturing</a>, the contractor should obtain one of the aforementioned exemption certificates from its customer to evidence the exempt nature of the transaction. On the other hand, contractors may purchase materials exempt from Ohio sales and use tax based upon an exempt real property improvement. These include construction contracts whereby building materials are incorporated into real property under a contract with a government agency, or into a horticulture or livestock structure, a house of public worship or a hospital, among others. <a href="">O.A.C. § 5703-9-14(D)(1).</a> To properly claim the exemption in these cases, the contractor should obtain a <a href="">Sales and Use Tax Construction Exemption Certificate (Form STEC CC)</a> from the property owner or general contractor, and then issue a <a href="">Sales and Use Tax Contractor’s Exemption Certificate (Form STEC CO)</a> to its supplier. Refer to our earlier post for <a href="">protecting contractors from misclassifying real property improvements</a>.

Ohio Supreme Court clarifies the support needed to claim the permanent assignment exception for taxable employment services

2012-10-10 17:41:04

<span style="font-family: Arial; font-size: 10pt;">In <i><a href="">Bay Mechanical & Elec. Corp v. Testa</a></i>, the Ohio Supreme Court recently denied an Ohio sales tax exception based upon the taxpayer’s failure to </span><span style="font-family: Arial; font-size: 10pt;">provide sufficient evidence to support the permanent assignment of the personnel at issue. The Court integrated prior decisions in clarifying the required support for claiming the exception. </span> <span style="font-family: Arial; font-size: 10pt;">As an exception or exemption to taxation, <a href="">the permanent assignment exception</a> to taxable </span><span style="font-family: Arial; font-size: 10pt;">employment service characterization contained</span><span style="font-family: Arial; font-size: 10pt;"> in <a href="">R.C. 5739.01(JJ)(3)</a> must be strictly construed with the taxpayer bearing the burden to prove it is entitled to the exception. The Court reiterated that assignment on a permanent basis is present when "</span><i><span style="font-family: Arial; font-size: 10pt;">an employee is 'assign[end] to a position for an indefinite period', which in turn means that (1) the assignment has no specified ending date and (2) the employee is not being provided either as a substitute for a current employee who is on leave or to meet seasonal or short-term workload conditions</span></i><span style="font-family: Arial; font-size: 10pt;">". <i>Bay Mechanical, </i>at ¶ 18 <i>citing <a href="">H.R. Options, Inc. v. Zaino<span style="font-style: normal;">, 100 Ohio St.3d 373, 2004-Ohio-1</span></a></i>. Historically, taxpayers established the permanent assignment exception based heavily, if not solely, upon language in the employment service contract. However, in <i>Bay Mechanical</i>, the Court downplayed the importance of specific contractual language stating that it was simply “</span><i><span style="text-decoration: underline;"><span style="font-family: Arial; font-size: 10pt;">one element</span></span></i><i><span style="font-family: Arial; font-size: 10pt;"> that, along with the facts and circumstances of the individual assignments, established whether the provider was truly 'supplying personnel' in an exempt manner." </span></i><span style="font-family: Arial; font-size: 10pt;">(underlined added).  Yet, this "</span><i><span style="font-family: Arial; font-size: 10pt;">one element</span></i><span style="font-family: Arial; font-size: 10pt;">" seems critical in light of the statutory language that the "</span><i><span style="font-family: Arial; font-size: 10pt;">contract...specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis</span></i><span style="font-family: Arial; font-size: 10pt;">".</span><i><span style="font-family: Arial; font-size: 10pt;">  </span></i> <p style="text-align: left;" align="left"><span style="font-family: Arial; font-size: 10pt;">While is it always recommended to include </span><span style="font-family: Arial; font-size: 10pt;">"</span><i><span style="font-family: Arial; font-size: 10pt;">permanent assignment</span></i><span style="font-family: Arial; font-size: 10pt;">" language in the contract when claiming the exception, the Court’s decision supports that such language may <b><i>not</i></b> be required if the personnel were in fact permanently assigned and the contract language did not conflict with the exception. Therefore, regardless of whether explicit contractual language exists, a permanent assignment of personnel should be exempt from Ohio sales/use tax as long as:</span><span style="font-family: Arial; font-size: 10pt;"> </span></p> <p style="text-align: left;" align="left"><span style="font-family: Arial; font-size: 10pt;">    (a) The contract has at least a one year term and language consistent with permanent assignment, without the need to use specific wording (and without containing terms inconsistent with permanent assignment); and</span><span style="font-family: Arial; font-size: 10pt;"> </span></p> <p style="text-align: left;" align="left"><span style="font-family: Arial; font-size: 10pt;">    (b) The personnel are <b><i>actually</i></b> assigned indefinitely, rather than serving as seasonal workers, substitutes for regular employees on leave, or labor to meet a short-term workload.</span></p> <p style="text-align: left;" align="left"><span style="font-family: Arial; font-size: 10pt;">Bay Mechanical failed to satisfy (b) above by refusing to produce evidence requested by the Tax Commissioner concerning the facts and circumstances of the particular employees’ assignment – mainly, the employment service invoices.</span></p> <span style="font-family: Arial; font-size: 10pt;">Please feel free to <a href="">contact us</a> if you need help determining whether a particular situation is entitled to the permanent assignment exception to Ohio sales tax.</span>

Ohio Sales and Use Tax - Agriculture Exemption

2012-09-26 14:09:31

<p style="margin-bottom: 6pt;">Generally, Ohio sales and use tax is not imposed upon tangible personal property used or consumed directly in agricultural activities. R.C. 5739.02(B)(42)(n). Similar to the <a href="">manufacturing exemption</a>, the following items purchased by persons engaged in farming, agriculture, horticulture or floriculture are exempt from Ohio sales / use tax:</p> <ul> <li>Items to be incorporated into tangible personal property produced for sale;</li> <li>Items used or consumed directly in producing tangible personal property for sale;</li> <li>Items used or consumed directly in producing, or incorporated into, tangible personal property which will be used directly in producing products for sale;</li> <li>Items used or consumed in conditioning or holding products produced for sale; and</li> <li>Products used to cultivate or stimulate growth of crops or flowers to be sold.</li> </ul> <p style="margin-bottom: 6pt;"><a href="">O.A.C. § 5703-9-23.</a> Where a direct use in the agricultural activity is required, the item’s particular use is crucial as it must directly act upon the product being produced for sale. <a href="">Ohio Tax Comm’r Opinion 93-0004 (Aug. 26, 1993).</a> The agriculture exemption is consistent with the overriding intent of sales and use taxes to tax sales to consumers or end-users, but not property used in producing, or in this case growing, such consumer products.</p> <p style="margin-bottom: 6pt;">Notwithstanding, property incorporated into real property is not exempt from Ohio sales / use tax. For example, irrigation pipes purchased and installed by a farmer and building materials incorporated into a storage silo for agricultural products are subject to tax because the items become real property upon installation. However, likely through successful lobbying efforts, portable grain bins, field tile, and livestock and horticulture structures, and items incorporated into such structures, are exempt from tax. <a href="">Ohio Information Release ST 2002-02 (Issued April 2002; Revised May 2007).</a></p> <p style="margin-bottom: 6pt;">Please <a href="">contact us</a> if you need help determining which items are entitled to the agriculture exemption.</p>

Sales Tax on Employment Services... Taking a Deep Dive into the Tax Businesses Love to Hate

2012-08-08 12:27:40

Leased employees often come under scrutiny during Ohio sales tax audits. While many arrangements are exempt from sales tax, businesses should be proactive in documenting the transaction to properly evidence the exemption. <a href="images/docs/ohio_tax_course.pdf">Click here</a> to view the outline from the presentation by <a href="index.php?option=com_content&view=article&id=46:steven-a-dimengo&catid=37">Steven A. Dimengo</a> and Phyllis Shambaugh (Ohio Department of Taxation Legal Counsel, Sales and Use Tax Division) at the 2012 Annual Ohio Tax Course on August 9, 2012 regarding Ohio sales tax on employment services. Please <a href="">contact us</a> if you have questions concerning Ohio sales tax on your leased employee or properly documenting an exemption.

Recent Legislation Affecting Ohio Sales and Use Tax

2012-07-31 17:18:42

The following changes to <a href="">Ohio sales and use tax</a> were enacted pursuant to <a href="">H.B. 508</a> effective September 6, 2012: <ul> <li><span style="text-decoration: underline;">Sales Tax owed on the Acquisition of Interests in Certain Pass-Through Entities</span>: The definition of a “taxable sales” will now include transfers of ownership interests in a pass-through entity if the entity is not engaged in business and its sole assets are boats, planes, motor vehicles or other recreational property used primarily by the entity’s owners. This expands existing law, which requires sales tax to be paid on the sale of a corporation’s stock that only owns boats, planes, motor vehicles, etc. for the owner’s use, to LLCs, partnerships and other associations.</li> <li><span style="text-decoration: underline;">Displaying Vendor’s License</span>: All vendors must prominently display their vendor’s license or a copy thereof. Previously, this was only required for transient vendors.</li> <li><span style="text-decoration: underline;">Vendor’s License Types</span>: The service and delivery vendor categories are eliminated. The Tax Commissioner, however, is given authority to create specific vendor license classes. Descriptions of the different types of Ohio sales and use tax registrations can be found <a href="">here</a>.</li> <li><span style="text-decoration: underline;">Cancellation of Vendor’s License</span>: A vendor who moves locations may have its vendor’s license cancelled by the Tax Commissioner if it fails to notify the Commissioner of its new business location. Prior law did not have a penalty for failing to notify the Tax Commissioner upon moving to a new location.</li> <li><span style="text-decoration: underline;">Delay of Local Rate Changes</span>: Vendors making sales from a printed catalog are not required to apply local sales tax rates that differ from the rate specified in their catalogs until the beginning of the quarter 120 days after the Tax Commissioner gives notice of the local sales tax rate change.</li> </ul>

Gift Cards Distributed as part of an Award, Loyalty or Promotional Program are not subject to Ohio Sales and Use Tax

2012-03-03 00:25:33

Prior to the enactment of <a href="">Am. Sub. H.B. 153</a> last year, the <a href="">Ohio Department of Taxation</a> (Department) had taken the controversial position that the full face value of a gift card distributed to customers without additional charge, as a part of a promotional program, was included in the “price” when redeemed subject to Ohio sales tax. For example, when a vendor rewarded customers spending a certain amount with a $20 gift card for use on future purchases, the Department asserted the vendor must collect sales tax on the price before applying the promotional gift card. So when the customer returns to purchase $100 of goods, for instance, and uses the $20 promotional gift and pays $80 cash, the Department would require sales tax to be collected on $100, even though the $20 gift card was effectively a vendor discount provided to valued customers. <p style="margin-bottom: 0in;">Now, the gift card amount is specifically excluded from the definition of “price” as long as (1) the gift card is not sold by the vendor or purchased by the consumer; (2) the card is distributed pursuant to a vendor’s award, loyalty or promotional program; and (3) the vendor does not receive reimbursement or compensation from a third part for any portion of the card’s value. <a href="">R.C. 5739.01(H)(1)(c)(v).</a> Further, “gift card” is defined broadly to include both tangible and intangible documents, cards, certificate or records, meaning that digital gift cards provided electronically are also excluded from the “price” when redeemed. <a href="">R.C. 5739.01(PPP)</a>.</p> <p style="margin-bottom: 0in;">However, an issue still exists for online deals offered by third-parties, such as Groupon or Living Social, where customers can purchase a gift card or certificate to use at a store or restaurant for a fraction of the value. For example, when a customer purchases a $50 “gift card” to use at a store or restaurant for $25, the Department would still require the merchant to collect sales tax on the full value of the gift card upon redemption - $50 in this situation – instead of the $25 that the customer actually paid. Although strong contrary arguments exist, Ohio is not the only state to take this aggressive position, as the taxability of these social coupons is gaining more attention nationwide. <i>(See </i><a href="">Social Confusion: How do Sales Taxes Apply to a Groupon?</a> (<i>Forbes</i>) and <a href="">Groupon users paying too much in sales tax says tax man</a> (WKYC). We expect this issue to be an area of contention in future Ohio sales tax audits.</p> <p style="margin-bottom: 0in;">Please <a href="">contact us</a> if you need help addressing issues regarding promotional gift cards or social coupons, as planning opportunities exist to help avoid adverse sales tax collection obligations.</p>

Update to Consumer Use Tax Amnesty Program Payment Plan

2012-02-02 19:03:04

<p style="margin-bottom: 0in;">As originally proposed, the <a href="">Ohio Department of Taxation</a>’s administrative rule (O.A.C. § 5703-9-60) required taxpayers wishing to take advantage of the payment plan under the <a href="">Ohio use tax amnesty program</a> to make $1,000 minimum monthly payments and obtain two personal guarantors, or a surety bond, to secure the amount owed under the payment plan. However, in January, the Department proposed a new, more taxpayer friendly version of this rule reducing the minimum monthly payment to $500 and no longer requiring any personal guarantors. (<a href="">Click here</a> for the most current version). This updated rule is expected to become effective shortly.</p> <p style="margin-bottom: 0in;">We routinely work with our clients to minimize delinquent state tax liabilities by self-reporting through amnesty and <a href="">voluntary disclosure</a> programs. Please <a href="">contact us</a> if you need help in determining whether Ohio’s use tax or <a href="">general amnesty</a> program may be beneficial to you or your business.</p>

Ohio State Bar Association Sales/Use Tax Subcommittee Report for January 20, 2012

2012-01-24 20:17:31

<a href="images/osba2012report.pdf">Click here</a> to view Steve's January 20, 2012 report presented to the Taxation Section of the Ohio State Bar Association as Chair of the Sales/Use Tax Subcommittee.

Maximizing Ohio's Sales/Use Tax Exemptions

2011-09-26 19:30:23

<p class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Times New Roman; font-size: small;">Ohio’s sales/use tax rate on purchases of taxable property and services can be quite significant, <a href="">ranging from 5.75% to 7.75%</a>. Are you taking advantage of the following broad exemptions?</span><span style="font-family: Times New Roman; font-size: small;"> </span></p> <ul> <li><span style="font-family: Times New Roman; font-size: small;"><a href="">Leased employees</a> provided for an indefinite period under the appropriately worded contract.</span></li> <li><span style="font-family: Times New Roman; font-size: small;">Manufacturing exemption and its expansive rules with respect to the <a href="">beginning</a> and <a href="">end</a> of production.</span></li> <li><span style="font-family: Times New Roman; font-size: small;"><a href="">Packaging exemption</a> available to retailers and manufacturers for purchases of materials and equipment, both of which can be quite expensive. </span></li> <li><span style="font-family: Times New Roman; font-size: small;">Research and development property that has been capitalized.</span></li> <li><span style="font-family: Times New Roman; font-size: small;">The resale exemption for acquired property that is merely temporarily conveyed to another entity to support your business.</span></li> <li><span style="font-family: Times New Roman; font-size: small;">The transportation for hire exemption available for costs associated with transportation property used to carry property of another person (includes a related entity).<span style="font-family: Times New Roman; font-size: small;"> </span></span></li> </ul> <p class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Times New Roman; font-size: small;">We can help you <a href="">take full advantage</a> of these exemptions and others.</span></p>

Ohio State Bar Association Sales/Use Tax Subcommittee Report for September 9, 2011

2011-09-14 15:15:54

<p class="MsoNormal" style="margin: 0in 0in 0pt;"><a href="images/stories/9-9-11_subcommitteereport_dimengo.pdf"><span style="text-decoration: underline;"><span style="font-family: Times New Roman; color: #0000ff; font-size: small;">Click here</span></span></a><span style="font-family: Times New Roman; font-size: small;"> to view Steve’s report presented to the Taxation Section of the Ohio State Bar Association as Chair of the Sales/Use Tax Subcommittee. Of particular interest is the recent legislation (<a href=""><span style="text-decoration: underline;"><span style="font-family: Times New Roman; color: #800080; font-size: small;">Am. Sub. H.B. 153</span></span></a><span style="font-family: Times New Roman; font-size: small;">) providing for, among other things, Ohio's consumer use tax amnesty program. Additionally, the Report discusses recent BTA decisions that narrowly construe the Ohio Supreme Court’s decision in <i><a href=""><span style="text-decoration: underline;"><span style="color: #0000ff;">Funtime, Inc. v. Wilkins</span></span></a></i> as to the definition of a business fixture.</span></span></p>  

Do Not Expect Leniency from the Ohio Board of Tax Appeals for Financial Hardship

2011-05-23 15:19:00

<p align="justify"><span style="font-size: medium;"><span style="color: #000000;"><span style="font-family: Arial; color: black; font-size: 10pt;"><span style="font-family: Arial; color: black; font-size: 10pt;"><span style="font-family: Tahoma; color: black; font-size: 9pt;"><span style="font-family: tahoma, arial, helvetica, sans-serif;"><span style="font-family: Tahoma; color: black; font-size: 9pt;">In </span><em><span style="font-family: Tahoma; color: #333333; font-size: 9pt;"><a href=""><span style="color: purple;"><u>Cottonwood, Inc. v. Levin</u></span></a></span></em><span style="font-family: Tahoma; color: black; font-size: 9pt;">, Ohio BTA No. 2009-K-5 (April 19, 2011), the Tax Commissioner assessed a struggling business deficient sales tax, interest and penalties. The taxpayer appealed to the </span><span style="font-family: Tahoma; color: #333333; font-size: 9pt;"><a href=""><span style="color: purple;"><u>Ohio Board of Tax Appeals</u></span></a></span><span style="font-family: Tahoma; color: black; font-size: 9pt;"> (“BTA”) requesting a waiver of the interest and penalties, but without challenging the tax, based upon the fact that the deficient sales tax had been paid and the business’ financial hardship.</span></span></span></span></span></span></span></p> <p align="justify"><span style="font-size: medium;"><span style="color: #000000;"><span style="font-family: Arial; color: black; font-size: 10pt;"><span style="font-family: Arial; color: black; font-size: 10pt;"><span style="font-family: Tahoma; color: black; font-size: 9pt;"><span style="font-family: tahoma, arial, helvetica, sans-serif;"><span style="font-family: Tahoma; color: black; font-size: 9pt;">The Tax Commissioner has considerable discretion to include interest and penalties in an Ohio sales/use tax assessment pursuant to </span><span style="font-family: Tahoma; color: #333333; font-size: 9pt;"><a href=""><span style="color: purple;"><u>R.C. 5739.13 to 5739.133</u></span></a></span><span style="font-family: Tahoma; color: black; font-size: 9pt;">. A taxpayer challenging the use of this discretion must show more than an error of law or judgment, but rather that the Tax Commissioner’s decision was unreasonable, arbitrary or unconscionable. This is a lofty standard for taxpayers to overcome, and nearly impossible when the validity of the tax is upheld (or not challenged). Since taxpayers have this significant hurdle to overcome at the BTA, it is best to work with the Tax Commissioner’s office during the audit in an attempt to have interest or penalties excluded from the assessment in the first place. In our experience, the Tax Commissioner is often willing to waiver potential penalties, perhaps in exchange for immediate payment of the delinquent tax and interest, but is generally not willing to waive interest (and lacks the authority to do so in many circumstances). However, as evidenced by <em>Cottonwood</em> and several other BTA decisions, once assessed, it is very difficult for a taxpayer to successfully get interest and penalties waived.</span></span></span></span></span></span></span></p>

Ohio Use Tax Liability, Reporting, Compliance and Enforcement Issue

2011-04-28 19:26:14

<span style="color: #000000; font-family: arial, helvetica, sans-serif;">We have partnered with LexisNexis® Tax Law Community!  On April 27, 2011, our first <em>Podcast</em> aired.  Click </span><a href=""><u><span style="color: #800080; font-family: arial, helvetica, sans-serif;">here</span></u></a><span style="color: #000000; font-family: arial, helvetica, sans-serif;"> to hear our commentary related to Ohio Use Tax Liability and the Ohio Department of Taxation’s increased enforcement thereof.</span>

Maximizing the Manufacturing Exemption from Ohio Sales/Use Tax: Part 2 – When is a Product “Complete”?

2010-11-30 21:49:37

As described in <a href="">Part 1</a> of this article, the scope of the manufacturing exemption from Ohio sales and use tax is determined by the beginning and end of the “manufacturing operation.” A product being manufactured is complete, thereby ending the manufacturing process, when all the processes that alter the product’s state or form or enhance its value are finished. A "manufacturing operation", however, does not include packaging or quality testing performed after the product is complete. <a href="">Ohio Administrative Code Section 5703-9-21 </a>provides several helpful examples illustrating when the manufacturing operation ends. Particularly instructive is one involving an ice cream manufacturer, which explains that ice cream is not complete until it is cooled and hardened in a specialized freezer – the hardening room. However, the freezer after the hardening room that stores the ice cream while awaiting distribution is not entitled to the exemption because it merely maintains, but does not change or alter, the product's state and form as received by the consumer. Nonetheless, any change in the state or form of a product, no matter how small, will continue the manufacturing operation. In a recent <a href="">Ohio Board of Tax Appeals decision </a>addressing when pet food is complete, one of the final steps of production was sending the pet food through a screening process which removed small burrs, smoothed rough edges and removed abnormally shaped kibbles. Since this screening process changed the product’s form, “albeit ever so slightly”, and enhanced its value, the screening equipment was exempt from Ohio sales and use tax. However, if the screening process would have only filtered out the kibbles that were too large or too small, without also smoothing them, the exemption likely would not have been available. If you need help determining when the product you manufacture is considered “complete” for Ohio sales and use tax purposes, and therefore when your manufacting operation ends, please feel free to <a href="">contact us</a>.

Ohio Sales/Use Tax: Maximizing the Packaging Exemption for Food Processors and Retailers (and perhaps Wholesalers)

2010-10-22 17:49:09

<p align="left">An often over-looked and underutilized exemption from Ohio sales and use tax is the so-called “packaging exemption”. To claim this exemption, the business must engaged in one of several enterprises, including manufacturing or making retail sales.  This exemption is available for packaging materials and equipment, which are defined broadly. Further, since packaging material includes any property that restrains movement of the product in more than one plane of direction, this exemption will also cover bulk packaging, such as boxes, cartons and <span style="text-decoration: underline;">bound</span> pallets used to transport the product to the retailer. Thus, the packaging exemption covers much more than the standard bag or carton that the consumer ultimately receives the product in.</p> <p align="left">The packaging exemption is particularly important for food processors or retailers who change the state or form of the product thereby qualifying their status as a manufacturer. A typical food processing operation may involve the purchase of bulk products broken down into the form received by the consumer – such as cutting produce, slicing lunch meat or cheese, or grounding up beef. As a manufacturer, the food processor is not required to pay Ohio sales or use tax on: 1) packaging the consumer ultimately receives the product in; 2) bulk packaging, as explained above; 3) equipment that places the product in the package or is an integral part of this process; 4) labels; and 5) equipment which makes labels, prepare packages for labeling, or places/prints labels.  For example, a conveyor that automatically places a product into a package (including bulk packages), without any manual assistance, is exempt from Ohio sales and use tax. Likewise, equipment used to label packages or prepare packages for labeling, which may be integrated into a conveyor system, is also exempt.</p> <p align="left">Lastly, all may not be lost for wholesale businesses which do not qualify for the packaging exemption. As an alternative, a wholesaler may be able to claim the resale exception for packaging materials by charging its customer a separate amount for such materials independent of the charge for the underlying food product being sold.</p> <p align="left">Please do not hesitate to <a href="">contact us </a>if you need advice regarding your particular operation.</p>

Ohio State Bar Association Sales/Use Tax Subcommittee Report For September 24, 2010

2010-09-23 19:05:25

<a href="">Click here</a> for a brief summary of recent Ohio sales/use tax discussions <a href="index.php?option=com_content&view=article&id=46:steven-a-dimengo&catid=37">Steve</a> is presenting as Chair of the Ohio State Bar Association Sales/Use Tax Subcommittee at the September, 2010 Ohio Bar Association Taxatoin Committee meeting.  Of particular interest are the following cases: <strong><em>Fruedenberg</em></strong>.  This decision highlights the broad definition of “consumer”, which includes a retailer for purposes of the warehouse exemption. <strong><em>Commerce Energy, Inc.</em></strong>  The U.S. Supreme Court defers to Ohio courts to resolve tax disputes involving the constitutionality of exemptions for natural gas suppliers.

Sales Tax Collection Obligations Concerning Drop Shipments

2010-08-31 15:23:20

A drop shipment is when a vendor accepts an order from a consumer for a product it does not have in stock and directs its supplier (a manufacturer or wholesaler) to ship the product directly to the vendor’s customer. The supplier then delivers the product to the consumer via common carrier or in its own trucks, or may have the consumer pick up the product from the supplier’s location. Thus, there are two sales occurring: first, the supplier (i.e., drop shipper) sells the product to the vendor; and second, the vendor, without taking possession of the product, resells the product to the consumer. If the vendor has nexus with the destination state, it clearly must collect tax from its customer. Conversely, if neither the vendor nor supplier has nexus with the destination state, neither party must collect tax from the customer. However, states differ on the treatment of drop shipments when only the supplier/drop shipper has nexus with the destination state. In this problematic situation, some states require the drop shipper to collect and remit tax from the vendor’s customer, even though the drop shipper does not receive payment from the consumer or know the price the consumer has agreed to pay the vendor (i.e., the tax base). Presumably, to lessen the drop shipper’s burden to collect tax from the vendor’s customer, other states refuse to accept the resale exemption for the drop shipper’s sale to the vendor, thereby requiring the drop shipper to collect tax on its sale to the vendor. In such states, the drop shipper may be required to collect tax based on the drop shipper’s price to the vendor, the vendor’s price to the consumer, or a mark-up on the drop shipper’s price to the vendor. Although perhaps a factor in determining whether a vendor has substantial nexus with a particular state, it is not believed that any taxpayer has been required to collect a particular state’s sales tax solely due to its use of a drop shipper in the state. If you need help in determining the sales tax consequences of using or being a drop shipper, please <a href="index.php?option=com_contact&view=category&id=12:contacts">contact us</a>.

Ohio Sales And Use Tax: Should Food Service Operators Discard Their Separate Beverage Coolers?

2010-08-17 14:12:01

The Ohio Department of Taxation (“Department”) recently published an <a href="">Information Release </a>concerning the Ohio sales and use tax exemption under <a href="">R.C. 5739.02(B)(27)</a> for persons licensed to conduct  food service operations. Under this exemption, personal property primarily used for any of the following is exempt from tax: 1) to prepare food for human consumption, 2) to preserve food that has been or will be prepared for human consumption, except property used to display food for selection by the customer, and 3) to clean tangible personal property used to prepare or serve food for human consumption for sale. Further, the Department also released a helpful <a href="">reference guide</a> to assist food service operators in determining if their purchases are exempt from Ohio sales and use tax. If the property is used for both an exempt and taxable purpose, its primary use determines whether the property is entitled to the applicable exemption. As we understand, many food service operators have one cooler (or more) for food items and a separate cooler for beverages. Since beverages such as soda pop, beer and wine are not considered “food”, the separate beverage cooler and related equipment would <span style="text-decoration: underline;">not</span> be exempt, while the cooler primarily used to store food would be exempt. Alternatively, if the food service operator split the use of its coolers, such that each cooler’s storage capacity was allocated at least 51% to “food” items, then both coolers would be exempt from Ohio sales and use tax. Keep in mind, other general sales and use tax exemptions, such as the resale, manufacturing and packaging exemptions, may also be applicable to a food service operator. If you are a food service operator in need of help in determining which of your purchases are exempt from Ohio sales and use tax, please feel free to <a href="index.php?option=com_contact&view=category&id=12:contacts">contact us</a>.

Mr. Contractor: Are You Correctly Addressing Ohio Sales Tax On Your Construction Contracts? (Part I)

2010-06-30 12:21:46

As the deemed consumer, a contractor must pay Ohio sales/use tax (“tax”) on its purchases of materials incorporated into real property, unless an exemption exists. The contactor’s related transaction with the property owner is characterized as a construction contract. Since tax was already paid on the contractor’s purchases, no sales tax needs to be collected from the property owner on the construction contract. Alternatively, if the materials do not become real property upon installation, the contractor must collect sales tax from its customer on the contract price, including materials and installation labor.  In these circumstances, the contractor’s purchase of materials is exempt from tax pursuant to the resale exemption. However, if the contractor fails to claim the resale exemption, it is not entitled to offset the tax erroneously paid on its purchases against the sales tax required to be collected from its customer. Likewise, tax erroneously collected by a contractor from its customer cannot be used to offset the tax due on the contractor’s purchases of materials consumed in the performance of a construction contact. Thus, it is important for the contractor to correctly determine whether the materials it purchases will constitute real property after installation or remain personal property. In Ohio, “real property” includes a building, fixture, improvement or structure (and of course, land), each of which is further defined in <a href="">R.C. 5701.02</a>.  Real property does not include “business fixtures”, which are items of tangible personal property that become permanently attached or affixed to the real property but that primarily benefits the business conducted by the occupant of the premises and not the realty. <a href="">R.C. 5701.03(B)</a>. Accordingly, special purpose components of a building or structure generally are not real property. Business fixtures include signs; storage bins and tanks; transportation, transmission, and distribution systems; machinery, equipment, and foundations and supports therefor; and improvements specifically designed, constructed and used for the business conducted on the realty.  Specifically excluded from the definition of “business fixture” are general purpose property common to all buildings, such as heating, ventilating, and air conditioning systems, utility lines, and electrical and communication lines. Since the Ohio Supreme Court’s 2004 decision in <em><a href=" ">Funtime, Inc. v. Wilkins</a></em> (2004), 105 Ohio St.3d 74, the characterization of property as either real property or a business fixture has become increasingly difficult, seemingly expanding the definition of business fixture to include any property particular to the business being conducted on the land.  In <em>Funtime</em>, special use buildings and structures, including a water ride, roller coaster, a “Skyscraper” and the station house sheltering patrons standing in line for a roller coaster (Mind Eraser), were held to be business fixtures.  The Court found these items to be personal property because there was no evidence that the rides would be of any benefit to a buyer of the land who engaged in a different business. Nonetheless, subsequent decisions by the Ohio Board of Tax Appeals (“Board”) appear to limit business fixtures to distinct items of tangible personal property that: <ul> <li>do not become part of a permanent fabrication or construction on the property whose removal would cause "significant injury to the land"; and</li> <li>have a specific business purpose.</li> </ul> Often, it is difficult to determine at the time of the contractor’s purchase whether materials will become real property upon installation – meaning the contractor owes tax on its purchases – or if such materials will remain personal property – meaning the contractor’s purchases are entitled to the resale exemption.  A contractor can be protected from uncertain classification by requesting a written certification from the property owner, before entering into a construction contract, as to whether the improvement will be real or personal property.  As it is entitled to rely upon the owner’s certification, the contractor can simply pay or collect Ohio sales/use tax consistent with the owner’s certification of the property as being either real or personal property, with the risk of erroneous classification being transferred to the property owner. Additional considerations, to be addressed in subsequent articles, include exemptions available on a contractor’s purchase of materials which will become real property upon installation (Part II) and how to address mixed transactions, whereby some of the improvements provided under a construction contract will become real property while others constitute business fixtures and will remain personal property (Part III). Please contact us if you need help classifying property as either real or personal property.

Maximizing the Manufacturing Exemption from Ohio Sales/Use Tax: Part 1 – The Commitment of Raw Materials

2010-05-28 17:50:51

Generally, all property primarily used or consumed during the manufacturing operation is exempt from Ohio sales and use tax. Therefore, the scope of the manufacturing exemption is determined by the beginning and end of the taxpayer’s “manufacturing operation”. A manufacturing operation commences upon the commitment of raw materials, which occurs at the earliest point where: (i) material handling from initial storage ceases, or (ii) materials are mixed, measured, blended, heated, cleaned, or otherwise treated or prepared for the manufacturing process. A common misconception is that one’s manufacturing operation begins with the first process whereby the state or form of the raw materials is changed or transformed. However, such a change or transformation need not occur. Rather, nearly any affirmative act taken with respect to the raw materials for purposes of preparing such materials for production will begin the manufacturing operation. After raw materials are committed, property used to handle or process the materials are exempt from Ohio sales and use tax. <a href="">Ohio Administrative Code Section 5703-9-21 </a>contains several examples regarding the commitment of raw materials. If you need help determining the scope of your “manufacturing operation” for Ohio sales and use tax purposes, please feel free to <a href="">contact us</a>.

Watch Out For That Alleged "Business Fixture", I Mean Bunker, In Front Of The Green!

2010-04-05 19:57:12

In light of the Ohio Supreme Court’s decision in <em>Funtime v. Wilkins</em> (2004), 105 Ohio St.3d 74, the Ohio Department of Taxation (the “Department”) seems to have an increased interest in auditing golf courses for Ohio sales/use taxes. In <em>Funtime</em>, the Ohio Supreme Court held, in sum, that an item permanently affixed to real property remains personal property, constituting a business fixture, if it primarily benefits the business conducted on the land.  The Department has used this reasoning to assert that contracts for the improvement of golf courses, such as adding or repairing tee boxes and sandtraps, are sales of personal property subject to Ohio sales/use tax. The Department’s position, however, was rejected in <em>Inverness Club v. Wilkins</em>, Ohio BTA Case No. 2004-R-338 (May 11, 2007).  In this case, the Board of Tax Appeals (the “BTA”) found that many improvements to the golf course at issue became real property upon installation, and were not business fixtures (or taxable landscaping services).  The BTA dismissed the Department’s contention that the ultimate inquiry was whether the property was used primarily for a business or commercial venture, commenting that “it is unnecessary to consider whether or not the renovations ‘primarily benefit the business conducted’ on the property because these items fail to constitute an item of personal property … in the first instance.”  The BTA concluded that the tee boxes, sand used for bunkers, PVC pipe incorporated into an irrigation system and mason used for cart paths and green dressings were real property.  Therefore, when these materials are provided under a construction contract, the contractor is the consumer of such tangible personal property in performing the contract, meaning the golf course is not responsible for sales or use tax thereon. (It should be noted that the taxpayer in <em>Inverness</em> purchased certain materials to be incorporated by the contractor. Since the taxpayer purchased the personal property, it was responsible for sales tax thereon.) In our experiences, the Department has taken an aggressive position, even failing to follow the BTA’s ruling in <em>Inverness</em>, asserting that nearly all improvements to golf courses constitute business fixtures, thereby assessing sales/use tax on the same provided by a construction contractor.  One should be sure to review the <a href=""><em>Inverness </em>Decision</a> and the <a href=" ">Ohio Tax Commissioner Opinion No. 07-001</a> (March 29, 2007) when involved in a sales/use tax audit of a golf course.

When "Sales Tax Included" Is Not Actually Included...

2010-03-19 18:13:16

Many contracts for the purchase of tangible personal property include a lump sum purchase price and a phrase such as “all tax included” or “includes applicable sales tax”. However, this language is not sufficient to protect a consumer from collection of unpaid sales tax by the Ohio Department of Taxation (the “Department”). The Department has the option of collecting unpaid sales tax from either the vendor or consumer. Of course, the consumer will always obtain credit for tax actually remitted by the vendor. Yet, if the vendor fails to remit the applicable sales tax, and the tax is not separately stated in the contract or invoice, the consumer could be held liable for unpaid sales tax despite language stating applicable sales tax was included in the lump sum contract price. Although the consumer may have a contractual remedy against the vendor for reimbursement or indemnification, if the vendor becomes insolvent, the consumer will be left to pay the bill to the Department. Therefore, in order to ensure credit for sales tax paid in a lump sum purchase price, the contract, invoice or other purchase documents must reflect Ohio sales tax as a separately stated sum. The potential pitfalls of a failure to separately state Ohio sales tax is illustrated in a recent BTA decision, <em><a href="">Equilon Enterprises LLC v. Levin</a>, </em>Ohio BTA Case No. 2007-V-441 (February 9, 2010).

Using New Sourcing Rules to Minimize Ohio Sales Tax

2010-02-16 14:56:18

As explained in a <a href="index.php?option=com_content&view=article&id=62:new-sourcing-rules-for-ohio-sales-tax-effective-january-1-2010&catid=47&Itemid=59">previous post</a>, Ohio changed its sourcing rules effective January 1. Now, intrastate sales of tangible personal property (“TPP”) are generally sourced by origin (vendor’s location where order is received), and interstate sales are sourced generally by destination (consumer’s location).  More importantly, incremental use tax is not owed to the Ohio County of storage, use or consumption when the sourcing rules are followed.  The following two examples illustrate the potential for a sales tax savings based upon these new sourcing rules. Both examples use Cuyahoga County as the business’s location, which has a combined sales tax rate of 7.75% - the highest in Ohio. 1) An Ohio business located in a high tax rate county can obtain an advantage by purchasing taxable TPP from an in-state vendor instead of an out-of-state vendor.  Lets assume a Cleveland based company is purchasing $500,000 of taxable TPP.  If the business purchases the TPP from a vendor located outside Ohio, the Cuyahoga County rate of 7.75% will apply, resulting in sales tax of $38,750.  However, if the same business purchases from a Lake County vendor and the order is received by said vendor in Lake County, the transaction is taxed at 6.25%, resulting in sales tax of $31,250 – a savings of $7,500. 2) An Ohio business located in a high tax rate county could reduce the effective tax rate borne by its Ohio customers by receiving orders in a lower rate county.  Lets assume a Cleveland based business is concerned that it may lose purchases from Ohio customers due to the higher tax rate in Cuyahoga County.  Instead of having the 7.75% Cuyahoga County rate apply, the business could receive orders at a different location in Lake County, where the lower 6.25% rate would apply – effectively giving its customer a 1.5% savings.  Further, since the determining factor for origin based sourcing is where the order is received, the product could still be shipped from the vendor’s Cleveland location. As you can see, the new sourcing rules for Ohio sales tax have created a situation where a consumer can gain an advantage (or disadvantage) by choosing to purchase TPP from an Ohio vendor over a non-Ohio vendor (or even amongst different Ohio vendor).  This result could be the basis for a claim that Ohio’s sourcing rules discriminate against interstate commerce and, therefore, are unconstitutional.  Nonetheless, until such a determination is made, planning opportunities exist for Ohio based businesses, especially those located in Cuyahoga County, to minimize Ohio sales tax owed on its purchases or sales to Ohio customers. Click <a href="">here</a> for a map of Ohio’s Combined Sales Tax Rates effective January, 2010.

Ohio Sales and Use Tax Audits - What to Expect!

2010-02-03 21:24:11

With the addition of 85 agents to the Ohio Department of Taxation’s (the “Department”) Audit Division (representing a 32% increase), half of which are assigned to sales and use tax, audits in this area are certain to substantially increase in the coming years. As Ohio attempts to capture revenue, you should understand the process and expectations of a sales and use tax auditor. The first contact by the Department informing of an audit is generally an Audit Commencement Letter (ACL) requesting numerous documents from the taxpayer. Oftentimes, taxpayers respond to the ACL themselves hoping they can quickly resolve the matter. This is not likely. Prior to even sending the ACL, the auditor has compiled substantial information about the taxpayer by reviewing prior Ohio tax history and returns, federal tax returns, Security and Exchange Commission filings, and information available through Harris InfoSource and other databases, as well as the taxpayer’s website and searching Google, Yahoo and other search engines. Moreover, the taxpayer’s response to the ACL, and any information or documentation provided therewith, will be used by the auditor during the audit. Thus, it is imperative to respond to the ACL in a manner that preserves the taxpayer’s rights and presents the information/documentation in a light most favorable to the taxpayer. After the initial contact is made, the auditor will likely attempt to schedule a meeting at the taxpayer’s facility to discuss the method and timeline for conducting the audit, and perhaps request a plant tour. The timeline is helpful in that it gives the taxpayer an expectation as to the depth and procedure of a sales and use tax audit. Furthermore, if a test check will be conducted, where only a representative portion of the taxpayer’s purchases or sales will be examined, the auditor will attempt to enter into a sample agreement with the taxpayer setting forth the method for conducting the test check. Beware this sample agreement is binding and will foreclose any challenge on appeal to the methodology of the test check, except to the extent the agreement itself is unreasonable or unreliable. Many taxpayers dig themselves into a hole by attempting to head off an audit at the initial stages by responding to the Department’s inquiries themselves. Unfortunately, if one waits too long to retain a professional to assist with the audit, after crucial information has been disclosed, the taxpayer may unnecessarily waive some of its rights. By contacting a sales and use tax attorney immediately upon receipt of the ACL, you enhance the ability to present the required information and documentation in a favorable light, while preserving all of your rights as a taxpayer.

Are You Filing An Ohio Use Tax Return?

2010-01-13 18:15:41

Like other states, Ohio’s use tax is complementary to its sales tax, with tax being imposed upon the storage, use, or consumption of tangible personal property in Ohio and the receipt of the benefit of a taxable service, to the extent sales tax has not been paid.  The reality is that every Ohio resident and business operating in Ohio likely has a use tax liability arising from out-of-state purchases when the vendor did not collect Ohio tax (and, through December 31, 2009, also arising from purchases made from vendors in an Ohio county with a lower tax rate than the county of the consumer’s storage, use or consumption of the property).  The failure to file an Ohio use tax return enhances the likelihood: <ol> <li>You will be audited, as the Tax Commissioner will be concerned there is no means by which your use tax obligations are being met (and those not audited are simply lucky due to the limited resources of the Tax Commissioner).</li> <li>The penalty resulting from an audit will be the maximum 15%.</li> <li>An audit will encompass a substantial period since there is no statute of limitation if returns are not filed.</li> </ol> There are ways to ease into the filing of a use tax return, including through the <a href="index.php?option=com_content&view=article&id=56:voluntary-disclosure-a-procedure-to-minimize-delinquent-state-tax-obligations&catid=51&Itemid=59">voluntary disclosure</a> program if you are concerned about a past liability. Most importantly, Ohio use tax returns should be filed in order to start the four-year statute of limitations, thereby limiting the exposure of a potential audit.

New Sourcing Rules for Ohio Sales Tax Effective January 1, 2010

2009-12-28 13:19:45

<div><span style="color: #000000;">As  part of Ohio's participation in the Streamline Sales/Use Tax Project, Ohio was forced to switch to destination based sourcing for sales tax purposes. Now, since the governing rules have been relaxed, Ohio will revert back to origin sourcing for most sales effective January 1, 2010. The most significant change is with respect to delivery sales (i.e., mail order, telephone or online sales) made by an Ohio vendor to an Ohio customer.   Such sales, previously sourced to the customer's location within Ohio, now must be sourced to the vendor's location where the order is received. Caution --  the location where the order is received may not necessarily be where the order is processed or shipped.  Additionally, Ohio vendors who were forced to destination based sourcing under previous law are entitled to compensation for part of the actual cost incurred in switching back to origin based sourcing.</span><span style="color: #ff0000;"> <span style="color: #000000;"> </span></span></div> <div><span style="color: #000000;">Interstate delivery sales, however, will continue to be sourced to the customer's location where the merchandise is received. Thus, sales by an Ohio vendor delivered to a customer outside the state will not be subject to Ohio sales tax, but rather the sales tax applicable to the customer's location.  Furthermore, sales of tangible personal property received at an Ohio vendor's fixed location will continue to be sourced to the vendor's location, while sales of services will continue to be sourced to the location where the service is first received by the customer.</span></div>

Are You Maximizing the Ohio Sales and Use Tax Exemption for Packaging Equipment and Materials?

2009-12-11 20:19:25

Ohio provides a very broad packaging exemption for retail vendors and manufacturers, among others.  Packaging material is exempt from Ohio sales and use tax if it restrains movement of the enclosed contents in more than one plane of direction.  Further, the exemption is not limited to packaging in which the product is delivered to the retail customers, but includes bulk packaging as well.  Therefore, not only are the typical cartons, boxes and cases in which the product is held exempt, but shrink wrap and pallets may also qualify for the packaging exemption, provided the shrink wrap extends over the edge of the pallet. Packaging equipment is also exempt from Ohio sales and use tax.  This includes any property that places the product in the package or is “an integral part thereof”.  Finally, the packaging exemption has also been extended to include labels and property used to make and/or affix those labels to the product or packaging.  As sales and use tax attorneys, we can analyze your particular operation and determine the scope to which the packaging exemption applies, as well as provide advice as to how you can maximize this exemption.

Are You Paying Ohio Sales Tax on Leased Employees?

2009-12-04 00:00:00

Otherwise taxable “employment services” are exempt if the personnel are assigned to the purchaser on a permanent basis under a one-year contract. This does not mean the individuals must work for the purchaser forever (or even continuously during the one-year term), but only that each leased employee is intended to be used for an indefinite period of time (i.e., no contemplated ending date).  Thus, the employee cannot be provided as a substitute for an individual on leave or for seasonal or project work.  This issue is particularly relevant in the construction industry since the Ohio Tax Commissioner assumes all construction work is seasonal, precluding permanent assignment of such employees.  However, there clearly is permanent assignment in the construction industry when the leased personnel are intended to move from project to project. In order to qualify for this exception, a written contract must reflects the necessary “permanent assignment” language.  The contract must have a one-year term, preferably with annual renewals.  However, the authorities have respected contracts as being one-year contracts even though they are terminable upon 30 days’ notice (and possibly even if they do not last for a year as long as the termination was not contemplated from the beginning of the arrangement). Additionally, performance under such contracts must be consistent with permanent assignment.  Manifestations of such an intent are typically illustrated with a graph of the total number of leased employees, reflecting a constant or increasing level of employment of leased employees during the relevant time period.  Each employee’s employment would also be charted to illustrate consistent assignment (with an allowance for natural turnover). Finally, if any leased employees are contemplated to be provided on a non-permanent basis, a separate contract can be used for their retention so as not to taint the exempt, permanently assigned employees.  The Ohio Tax Commissioner has taken the position that non-permanently assigned employees provided under a “permanent assignment” contract makes the <span style="text-decoration: underline;">entire</span> contract taxable.  Although this position has been met with opposition, the issue has not been addressed by an Ohio court yet. Nonetheless, one can simply avoid the issue by having two separate contracts.

Oklahoma To Impose A Less Intrusive "Amazon" Law Merely Requiring Notification To Customers...

2010-07-09 15:39:09

You probably have been hearing a lot of news about so called “Amazon” laws being enacted to increase sales/use tax collection for Internet sales. Until recently, there have been essentially two types of these “Amazon” laws. The first presumes that a retailer has nexus with a state, requiring it to collect the state’s sales tax, by virtue of having affiliates in the state linking to the retailer’s website and the retailer realizing a certain threshold of sales from such weblinks. The second, recently becoming effective in Colorado, requires retailers who do not collect the state’s sales tax to provide the customer and state taxing agency with certain informational reports setting forth the sales made by the retailer which may be subject to the state’s sales/use tax. Both of these types of “Amazon” laws have garnered significant criticism and constitutional challenges. Oklahoma recently passed its own “Amazon” law, which is much less intrusive than the two types discussed above. Simply, <a href="">Oklahoma H.B. 2359</a> requires retailers who do not collect sales to provide customers with notification on their website or catalog and invoices that use tax is owed and must be paid by the purchaser, unless the purchase is otherwise exempt. The notification requirement also applies to “online auction websites” (although, not required on invoices for such websites).  This law, however, is not effective until the Oklahoma Tax Commissioner enacts an administrative rule regarding the law. Pursuant to a <a href="">proposed emergency administrative rule</a>, the retailer’s notification to its customers must include the following: (i) the retailer is not required, and does not, collect Oklahoma sales or use tax, (ii) the purchase is subject to Oklahoma use tax unless it is specifically exempt from taxation, (iii) the purchase is not exempt merely because it is made over the Internet or by catalog, (iv) Oklahoma purchasers must pay use tax on all purchases that were not taxed and such purchases must be reported on either the individual’s income tax  return (Form 511) or a consumer use tax return (Form 21-1), and (v) the referenced forms and corresponding instructions are available on the Oklahoma Tax Commission website, <a href=""></a>. As Oklahoma’s “Amazon” law will be become effective upon this proposed emergency administrative rule becoming effective, remote retailers should be prepared to include such a notice on their websites, catalogs and invoices. Other states will likely enact “Amazon” laws similar to Oklahoma’s law, at least until a determination as to the validity of the other types of “Amazon” laws is resolved.