Benefits of Combining a Sales and Use Tax Refund Review With an Audit

Franklin Chow on May 10, 2023

When a state informs a company of an ensuing sales & use tax audit, there is always uncertainty and stress. The stress is caused by the concern about tying up the business’ resources and the fear of potential liability that may exist. Combining a Sales and use tax refund review with an audit may alleviate some of these concerns.

Many of an audit’s time-consuming aspects center around gathering the documentation. What is the state going to ask us to provide? These documents need to be reviewed by the auditor to determine if a tax liability exists. Conversely, the documents can also determine if sales and use tax overpayments were made. State auditors are not obligated to identify tax overpayments they discover in their review.

The benefits of combining the two projects include efficiency (in time and resources), lower overall payments, and more money available for refund review.

Efficiency

The same documents are utilized for both reviews. Having pulled the documents for audit, there is little additional work required to review the documents for refund opportunities. Handling both projects simultaneously will result in fewer inquiries from your tax personnel than if they were conducted separately. Any errors resulting in over or underpayments can be addressed simultaneously.

Lower Payments

Rarely does an audit result in a “no change” finding. When combining a refund with the audit, the refund will offset any liability found, not just of the tax due but also of the interest and potential penalties. Due to high-interest rates (15%+) imposed by states, the interest amount due can be significant.

More Money Available

Most states typically have a three-year or four-year statute of limitations for audits, meaning that is the time legally open for review. An open audit results in that period also being open for refund review, resulting in a longer than normal period being open for refund review. A refund review done separately from an audit is limited in the amount of purchases you can review for overpaid tax. If an audit goes back five years, those periods are open for potential liability and refunds.

Source Advisors can Help You with Your State and Local Tax Credits

Navigating an audit or a refund review requires knowing the process needed to be successful. Combining the two can streamline the process and generate positive results. If you have any questions or would like more information, please contact Source Advisors.

What is the Federal Universal Service Fund Fee?

Franklin Chow on April 25, 2023

The Role of Telecommunications in the Federal Universal Service Fund

Telecommunications companies operating in the United States are subject to the Federal Universal Service Fund (USF), a program administered by the Federal Communications Commission (FCC). The USF aims to promote access to telecommunications services for all Americans, regardless of location or economic status. It is funded through contributions from telecommunications service providers—the USF funds four programs – High-Cost Program, Lifeline Program, Schools, and Libraries Program. Telecommunications companies may be subject to contributions to one or more of these programs based on the services they offer and the areas they operate in.

Telecommunications companies are required to contribute to the USF based on a percentage of their interstate and international revenues. This contribution is known as the Universal Service Fund Fee. It is calculated as a percentage of a company’s end-user telecommunications revenues. The rate varies but typically ranges from 15.5% to 33%. FUSF surcharges may be passed through to the final user of the telecommunications services.

Fee Collection and Reporting

All telecommunications companies are required to contribute to the USF fund. Companies providing telecommunications services to retail customers, either to other businesses or residential, must register with the FCC and file the necessary forms. Each quarter, the FCC sets a contribution factor, which is a percentage of interstate and international revenue, that each contributor is required to contribute. Telecommunications companies are responsible for quarterly collecting and submitting USF fees to the FCC.

The fees are typically passed on to consumers as a line-item charge on their telephone or broadband bills. Contributors to the USF fund must file FCC form 499Q quarterly to report and project their quarterly revenue. Additionally, companies must report their annual revenue on FCC form 499A filed by April 1st of every year.

The USF charge is typically applied to most telecommunications services, including wireline and wireless telephone services, broadband internet services, and certain other communication services. Companies that are not generally considered telecommunications providers may still be subject to the FUSF contributions due to the very broad definition of telecommunications services. Many services, such as private-line telecommunications and VoIP services, have multiple reporting and allocation issues and/or methodologies to consider.

Need Help?

At Source Advisors, we help companies understand their FUSF reporting responsibilities and assist in reporting and remitting the fees. If you have any questions or would like to get more information, please get in touch with a Source Advisors professional to answer your questions.

What is Business Personal Property Tax?

Franklin Chow on April 14, 2023

The Business Personal Property Tax

Business Personal Property Tax is a tax assessed on tangible personal property businesses own. This type of property includes equipment, furniture, computers, machinery, and inventory, among other items not permanently attached to a building or land. Local or state government jurisdictions typically impose the tax, and the rate of taxation varies depending on the location and the property’s value. Business owners are usually required to file an annual tax return and pay taxes based on the value of their personal property assets. Failure to pay the required tax may result in penalties and interest charges.

Do I Need to File Business Personal Property Taxes?

https://sourceadvisors.com/state-and-local-tax/Whether you need to file Business Personal Property Tax depends on the state and local laws where your business is located, as well as the value and type of assets that your business owns. In general, if your business owns tangible personal property such as equipment, furniture, machinery, computers, or inventory, you may be required to file a Business Personal Property Tax return and pay taxes on those assets.

However, some states may have exemptions or minimum thresholds for Business Personal Property Tax filing requirements. For example, some states may exempt businesses with a certain level of assets or a certain amount of annual revenue from filing Business Personal Property Tax returns.

Are there any states that do not tax business personal property?

Twelve states currently do not tax business personal property. These states include Delaware, Hawaii, Illinois, Iowa, Minnesota, New Hampshire, New Jersey, New York, North Dakota, Ohio, Pennsylvania, and South Dakota. However, some of these states may have local jurisdictions that impose a personal property tax, or they may have other taxes or fees that apply to businesses.

Are there any exemptions for Business personal property tax?

Yes, there are exemptions for Business Personal Property Tax. The specific exemptions and qualifications for exemption vary depending on the state and local laws where the business is located.

Common exemptions for Business Personal Property Tax include:

Need Help?

Source Advisors has assisted many clients with processing their business personal property renditions and has saved clients thousands of dollars through timely and accurate filings and the use of various exemptions provided through local jurisdictions. Please contact us if you have any concerns regarding business personal property taxes.

Why Do We Have Sales & Use Tax?

Franklin Chow on April 11, 2023

What is Sales & Use Tax?

Sales and Use Tax is a consumption tax, a form of tax that is levied by state or local governments on the sale of goods and services. A wide range of goods, including clothing, electronics, vehicles, food, and entertainment, are typically subject to Sales and Use Tax. Some states also levy Sales tax on services, such as legal services, haircuts, and car repairs. The rules governing what is and is not subject to Sales tax can vary by state. The percentage of a state’s revenue that comes from Sales and Use Tax can vary widely depending on the state. In general, the Sales and Use tax is one of the largest sources of revenue for most states. According to the United States Census Bureau’s Quarterly Summary of State and Local Government Tax Revenue, Sales and Gross receipts taxes accounted for approximately 31.2% of total state government tax revenue in the second quarter of 2021.

The primary reason for implementing Sales tax is to raise revenue for state and local governments. This revenue is necessary to fund essential public services that benefit the entire community. Sales tax is considered a stable revenue source, as it is less volatile than other forms of taxation, such as income tax, which can fluctuate based on economic conditions.

In addition to raising revenue, Sales tax can also be used as a policy tool to influence consumer behavior. For example, states may implement Sales tax exemptions or reductions for specific products or services to encourage the purchase of goods that are considered beneficial to the community, such as energy-efficient appliances or medical supplies. Conversely, states may implement higher Sales tax rates on products that are deemed harmful, such as cigarettes or alcohol.

In the United States, Sales tax is collected by state and local governments, and the rates can vary widely depending on the location. In some states, such as Alaska, Delaware, Montana, New Hampshire, and Oregon, there is no Sales and Use Tax. However, Alaska does have a local Sales Tax. In other states, such as California and New York, Sales tax rates can be as high as 10% or more.

Source Advisors can Help You with Your State and Local Tax Credits

Understanding the Sales and Use tax consequences of your businesses’ activities can be complicated as the rules vary from state to state. If you are operating a business and are unsure of your Sales and Use tax obligations, Source Advisors is here to help.

Lack of Documentation on Sales & Use Tax Audits

Franklin Chow on April 7, 2023

Defending tax audits can be a daunting process for businesses. Defending an audit requires a thorough understanding of the tax laws, regulations, and reporting requirements. Although proper documentation is necessary for all types of tax audits, it is incredibly challenging for Sales & Use Tax audits due to the number of different entities (i.e., customers, vendors, etc.) a company interacts with and the volume of transactions that an audit can incorporate (i.e., all sales and purchases). Further intensifying the need to handle this correctly is the fact that the auditor has the legal authority to see detailed records and supporting documentation for all transactions.

The lack of proper documentation can create significant problems for businesses during sales and use tax audits. Here are some specific issues that can arise:

1. Increased Tax Liability

Sales and Use tax auditors typically use a sampling method to identify transactions for review. If a business cannot provide supporting documentation for these transactions, the auditor may assume that the proper tax amount was not remitted to the State on all transactions during the refund claim period (not just the sampled ones).

2. Penalties and Interest

In addition to increased tax liability, the lack of documentation can also lead to penalties and interest. Auditors may impose penalties for failing to collect and remit sales tax or to maintain proper documentation. Interest charges can also accrue on unpaid taxes, which can add up quickly if the audit covers several years

3. Time and Resource Demands

The lack of proper documentation can also create a time and resource-intensive audit process. Auditors may require businesses to provide additional information, conduct employee interviews, and unnecessarily review financial statements. This can be time-consuming and costly for businesses, particularly if they do not readily have the proper documentation.

When the proper documentation is not available on hand, various options are available to taxpayers. This includes contacting vendors with liability mitigation letters. A liability mitigation letter is a helpful document to understand if vendors has undergone a voluntary disclosure agreement, collected sales tax upfront, or learn more about their product/service and why it may be potentially exempt. By doing so, we can effectively mitigate any potential liabilities.

Source Advisors can Help You with Your State and Local Tax Credits

If you’re a business undergoing a sales tax audit, Source Advisors is here to help. Our team of experienced tax professionals is well-versed in the latest sales tax regulations and has a proven track record of helping businesses successfully navigate the audit process.

New York City Utility Excise Tax

Franklin Chow on March 3, 2023

What is the New York City Utility Excise Tax?

In New York City, the Utility Excise Tax (UXS) is a tax imposed on utility service providers that operate within the city. These providers include electricity, gas, steam, and telecommunications companies. Telecommunications services are defined as the transmission of voice, image, data, information, and paging using wire, cable, fiber optic, laser, microwave, radio wave, satellite, or similar media. This tax is in addition to any federal and state taxes that are imposed on utility service providers.

What Is Taxed?

The tax is calculated as a percentage of the utility service provider’s gross operating income from providing these services to customers within the city. The current tax rate for electric, gas, steam, water, refrigeration, and telecommunications services is 2.35%, and the tax rate for an omnibus operation is 1.17%.

The revenue generated from this tax goes into the city’s general fund and is used to support a variety of public services and programs. Returns are only required semiannually for taxpayers whose utility tax liability is less than $100,000 for the preceding calendar year. When taxpayers first become subject to UXS, they must file monthly returns for every month of the calendar year in which they first become subject to the utility tax. Service providers that do not comply with tax laws and regulations are subject to penalties and interest.

Tax Exemptions

Some tax exemptions exist, for example, for certain residential customers, government entities, and nonprofit organizations. Additionally, the tax may be subject to various deductions and credits, depending on the specific circumstances of the utility provider and customer. Lastly, certain types of income may be excluded from gross operating income, such as income from non-utility sources or income from certain types of customers (i.e. residential customers).

The specific rules for calculating gross operating income can be complex and may be subject to interpretation by the relevant government agency. If you have questions about what is taxable under the New York City Utility Excise Tax, it would be valuable to consult with a tax professional such as Source Advisors.

Need Help?

Source Advisors can guide you through the New York City Utility Excise Tax calculation and return filing process. Source Advisors has assisted clients in calculating and filing these returns. If you have any questions or would like to get more information, please contact one of our professionals to help assist you in getting started with your utility excise tax filings.

The Usage and Management of Tax Exemption Certificates

Franklin Chow on February 16, 2023

What is a Tax Exemption Certificate?

Tax exemption certificates are documents issued by taxing authorities, usually the states, that grant businesses exemption from certain taxes. These documents are issued as a certificate and must be presented to the taxing authority to claim the exemption. Tax exemption certificates are typically issued to businesses registered as tax-exempt entities. However, in some cases, for-profit businesses qualify to use tax exemption certificates based on what is being purchased and its intended use.

Types of Tax Exemption Certificates

There are several types of Tax Exemption certificates including but not limited to:

How Are Tax Exemption Certificates Used?

Tax exemption certificates are used to purchase goods or services from vendors without paying tax. Resale certificates allow resellers to avoid paying taxes on their sale since the purchaser will pay the taxes when the goods or services are resold. Exempt use certificates are typically used when the purchaser intends to use the purchased items in a way that is exempt from tax. For example, a manufacturing company may provide an exempt use certificate when buying materials incorporated into its products. Tax exemption certificates vary by state and typically must be completed and filed with the seller before the purchase is made to be valid.

The Issues

The difficulty with tax exemption certificates is with the storage and maintenance of the certificates. Each taxing authority maintains its rules and regulations governing the certificates they issue. These rules can include various conditions, such as:

Tax exemption certificates must be stored securely to prevent fraud and data theft.
They need to be regularly updated or replaced due to changes in laws or regulations.
The business’ storage system may not be able to accommodate large volumes of certificates.
The storage system must be regularly audited to confirm the validity of the certificates.
Tax exemption certificates may have expiration dates that must be monitored.

Source Advisors is Here to Help!

At Source Advisors, we understand our businesses’ needs, especially regarding the necessity, storage, and management of tax exemption certificates. We offer a comprehensive application, TaxCertHub, which is a valuable tool to help businesses acquire, maintain, and address all their concerns regarding tax exemption certificates. With the use of TaxCertHub, businesses can be sure that their tax exemption certificates are in good hands and are being managed effectively, allowing them to focus on other essential aspects of their business. To find out more about TaxCertHub and other products and services we offer, contact a Source Advisors tax specialist today.

What is the difference between Sales & Use Tax and Value Added Tax?

Franklin Chow on February 10, 2023

Sales and Use Taxes vs Value Added Tax

Sales and use taxes in the United States and the value-added tax (VAT) used in most other countries have some similarities and differences.

Similarities:

Both sales and use taxes and VAT are indirect taxes, meaning that they are levied on the sale of goods and services rather than on the income of the seller or buyer.
Both taxes aim to tax the value added at each stage of the production and distribution chain. This means that only the value added by the seller at each stage is taxed, and the seller can recover the tax paid on inputs by charging it to the buyer.
Both taxes are typically levied at a percentage of the sale price of goods and services.

Differences:

Coverage: VAT is used in most countries around the world and covers a wide range of goods and services. In contrast, sales and use taxes in the United States are imposed at the state and local level, and the coverage of goods and services subject to tax can vary significantly from jurisdiction to jurisdiction.
Administration: VAT is typically administered by the national government, while sales and use taxes in the United States are administered by each state and local jurisdiction. This can result in significant variations in the rules and procedures for complying with the tax and can create additional compliance costs for businesses operating in multiple jurisdictions.
Registration: In most countries with VAT, businesses must register for VAT and file regular VAT returns, while in the United States, businesses may be required to register for sales and use taxes in each jurisdiction where they have a taxable presence.
Rates: VAT rates in most countries tend to be uniform across the country and are set by the national government, while sales and use tax rates in the United States can vary significantly from jurisdiction to jurisdiction and can change frequently.

Despite these differences, both sales and use taxes in the United States and VAT in other countries serve the same primary purpose of taxing the value added at each stage of the production and distribution of goods and services.

Businesses need to understand their tax obligations, including the frequency of returns and the potential penalties for not filing returns, in each jurisdiction where they have a taxable presence. Source Advisors can assist businesses with their sales & use compliance obligations.

What is Washington Business & Occupational (B&O) Tax?

Franklin Chow on February 3, 2023

Washington Business & Occupation (B&O) Tax is a tax imposed by the state of Washington on the privilege of doing business within the state. It is a tax on gross receipts, regardless of profit, and is based on the type of business activity being conducted. The tax is imposed on companies operating a business in the state, including out-of-state businesses that have a presence in Washington. The revenue generated from the B&O tax helps fund various state programs and services.

Who is Responsible?

The responsibility for paying the Washington Business & Occupation (B&O) Tax falls on the business or individual conducting the business activity within the state of Washington. The business must register with the Washington Department of Revenue and file regular B&O tax returns to report their gross receipts and pay the tax owed. If a business fails to pay the B&O tax, it may be subject to penalties and interest.

Business & Occupational (B&O) Tax vs. Sales Tax

Washington Business & Occupation (B&O) Tax and sales tax are two different types of taxes imposed by the state of Washington. Sales Tax is a tax on the sale of goods and services, and it is calculated as a percentage of the sale price and is collected by the seller at the time of the sale. The revenue generated from sales tax is used to fund state and local government programs and services. In Washington, the state sales tax rate is 6.5%, with some cities and counties adding additional sales tax. The B&O tax rate varies based on the type of business activity being conducted. Washington B&O Tax and Sales Tax are reported on the same tax return, the Combined Excise Tax Return.

An area of confusion is whether a taxpayer should register and file Washington B&O tax if they are not collecting sales tax. Almost all businesses are subject to B&O tax since it’s a tax on gross income and not just taxable sales. Washington has different classifications for B&O business activities; the four main classifications are Retailing, Wholesaling, Manufacturing, and Services & Other Activities.

Need Help?

Source Advisors can assist taxpayers and business owners with their Washington B&O and Sales & Use Tax filing requirements. We can assist with registering your business and, if necessary, with ongoing filing needs. If you have any questions or want more information, please contact Source Advisors, and we can help you with your indirect tax compliance obligations.

Refund Opportunities on Purchases of SaaS in Specific Industries and Jurisdictions

Franklin Chow on January 31, 2023

The Changing Landscape of Sales Tax in the Age of SaaS

The continued changes in the world of software have opened the door to many opportunities for sales tax refunds. The economic benefit of these opportunities can vary depending on one’s industry and location. Generally, a sales tax refund on purchases is driven by the availability of an exemption or if what is purchased is not taxable in the purchased state.

Software as a Service (SaaS) has become an area of confusion because of how most sellers apply sales tax on invoices. SaaS-type services go by many names, including Platform, Desktop, and Information as a Service. One thing that most of these purchases have in common is that the service users no longer need to be in one specific area; they can be located in many different regions of the United States or other countries. That being said, much of the confusion is because sellers usually tax the invoice assuming all the users are located at the “ship to” location.

Industries of Focus

Several industries, financial/banking, insurance, and commercial real estate, purchase a significant amount of these products. One thing these industries have in common is that many employees are located outside the home state but still use the SaaS shipped to the home office.

Jurisdictions of Focus

Two jurisdictions come to mind for a high concentration of these industries, New York City and The City of Chicago. A common factor between these two is the high tax rate associated with doing business. New York City has a sales tax rate of 8.875%, and Chicago imposes not a sales tax but a Personal Property Lease Transaction Tax on what they call Non-Possessory Computer Leases. This rate is even higher at 9.00%—a benefit of being located in these jurisdictions potential for a tax refund on purchases of SaaS.

Our Latest Insights

Efficiency

Lower Payments

More Money Available

Source Advisors can Help You with Your State and Local Tax Credits

The Role of Telecommunications in the Federal Universal Service Fund

Fee Collection and Reporting

Need Help?

The Business Personal Property Tax

Do I Need to File Business Personal Property Taxes?

Are there any states that do not tax business personal property?

Are there any exemptions for Business personal property tax?

Need Help?

What is Sales & Use Tax?

Source Advisors can Help You with Your State and Local Tax Credits

1. Increased Tax Liability

2. Penalties and Interest

3. Time and Resource Demands

Source Advisors can Help You with Your State and Local Tax Credits

What is the New York City Utility Excise Tax?

What Is Taxed?

Tax Exemptions

Need Help?

What is a Tax Exemption Certificate?

Types of Tax Exemption Certificates

How Are Tax Exemption Certificates Used?

The Issues

Source Advisors is Here to Help!

Sales and Use Taxes vs Value Added Tax

Similarities:

Differences:

Who is Responsible?

Business & Occupational (B&O) Tax vs. Sales Tax

Need Help?

The Changing Landscape of Sales Tax in the Age of SaaS

Industries of Focus

Jurisdictions of Focus

We’re Here to Help