SALT Final - Richard Fry Section
Fair Apportionment (Commerce Clause)
1. Internal Consistency - if you apply the same tax in all 50 states and if you are tax on more than 100% of income it is NOT internally consistent 2. External Consistency - Apportionment formula to be reasonable reflective of how income is generated
Commerce Clause Test (4 parts)
1. Taxpayer and activity must have SUBSTANTIAL NEXUS with the state 2. Not discriminate against interstate commerce 3. Be fairly apportioned 4. Fairly relate to services provided by state
Due Process Clause
Concerns the fundamental fairness of government activity, "Requires some definitive link, some minimum connection, between a state and the person, property or transaction it seeks to tax"
Jay-Z buys a yacht in New Hampshire, which does not impose a sales tax. He takes his yacht to the Bahamas to shoot a movie video. After the shoot, he takes the boat to Florida for cleaning and repairs. After it is serviced, Jay-Z takes his yacht back to the Hamptons in NY for the summer. Does Jay-Z own sales or use tax to any state on his yacht? What if Jay-Z instead rented his yacht out to his friends for charters?
Does Jay-Z own sales or use tax to any state on his yacht? In this case, Jay-Z purchased the yacht in New Hampshire, which does not impose a sales tax, so he would not owe any sales tax to New Hampshire. However, he took the yacht to the Bahamas to shoot a movie video, which may trigger a use tax obligation in that jurisdiction. Similarly, he took the boat to Florida for cleaning and repairs, which may also trigger a use tax obligation in that state. If he paid any sales tax in those states, he may be able to claim a credit against any use tax that is due. What if Jay-Z instead rented his yacht out to his friends for charters? If Jay-Z rented out the yacht in the Hamptons, he may have sales or use tax obligations in New York State. In New York, sales tax is imposed on the receipts from renting, leasing, or letting tangible personal property, including boats and yachts.
Is there a difference between Due Process and Commerce Clause nexus?
Due Process Clause Nexus - requires minimum connection - easiest to have Commerce Clause - Substantial Connection - Less easy to have
Globex Corporation manufactures widgets in Ohio. It has no employees or offices in any other state. Most of its sales are made through its e-commerce website with delivery made via U.S. Mail or common carrier. -How do we determine what states Globex is required to collect sales tax in? -Globex also sells its widget on a wholesale basis to brick and mortar retailers. Is Globex required to collect sales tax on these sales? -If Globex allows third-parties to sell their products through their e-commerce website, who must collect tax on these sales?
How do we determine what states Globex is required to collect sales tax in? - Globex would need to determine if it has met the economic nexus thresholds in each state where it makes sales. These thresholds vary by state, but commonly range from $100,000 to $500,000 in sales or 200 to 500 transactions in a given year. Globex also sells its widget on a wholesale basis to brick and mortar retailers. Is Globex required to collect sales tax on these sales? sales tax is generally due on the retail sale of tangible personal property, and there is an exemption for sales for resale. This means that if Globex sells widgets on a wholesale basis to brick and mortar retailers who provide a valid resale certificate, then it may not be required to collect sales tax on those sales in Ohio. If Globex allows third-parties to sell their products through their e-commerce website, who must collect tax on these sales? If Globex Corporation is acting as a marketplace facilitator, then it may be required to collect and remit sales tax on behalf of third-party sellers for sales made through its platform in Ohio.
Can Ohio tax Spectrum differently than DirecTV
In the context of taxing cable and satellite television services, the U.S. Supreme Court has held that states may treat cable and satellite companies differently, as long as the differences are based on actual differences in the services provided or the costs of providing those services. For example, if Ohio determines that cable and satellite providers incur different costs or have different levels of regulatory burden in the state, it may impose different taxes or regulations on each. Must have RATIONAL BASIS
Commerce Clause
Are states authorized to tax interstate commerce? Yes, as long as doing so does not unduly burden interstate commerce, 4 prong test
Equal Protection Clause
States may not create irrational classifications of similarily situated taxpayers
economies of scale
a unitary business that operates in multiple states can achieve economies of scale by centralizing certain administrative functions, such as payroll or accounting, rather than having separate departments in each state. This can lead to cost savings and more efficient operations.
Centralized Management
in a unitary business refers to the way in which decision-making and control is concentrated at the top of the organizational structure, with decisions made by a single centralized authority that oversees the operations of all the divisions or subsidiaries of the business.
What are some common exemptions to Sales & Use Tax?
Resale Exemption - This exemption applies to businesses that purchase goods for the purpose of reselling them. The business must provide a valid vendor's license number and certify that the goods will be resold in their original form or incorporated into another product that will be sold Manufacturing Exemption - This exemption applies to purchases of machinery, equipment, and supplies used in the manufacturing process. The purchaser must provide a manufacturer's exemption certificate and the goods must be used directly in the manufacturing process. Packaging & Labeling Exemption - the packaging and labeling materials must be purchased by a vendor who will use them to package and label products that are intended for resale. The vendor must provide a properly completed exemption certificate to the seller at the time of purchase.
Are irrevocable trusts subject to tax in states where their grantors, trustees, and beneficiaries are located?
Residence of the beneficiaries by itself does not provide the minimum connection requirement under the Due Process clause. If the beneficiaries do not receive any income from the Trust, cannot demand or control the Trust assets, and are not guaranteed any distribution from the Trust in the future, the trust lacks minimum connection with that state as required under the Due Process Clause
functional integration
used in state taxation to determine whether different components of a business should be treated as a single, unitary business for tax purposes based on the extent to which they are interdependent and contribute to a common business purpose.
If Globex Corporation (Ohio Corp & manufacturer) makes greater than $500,000 of sales to every state. Is Globex required to file and pay state income tax outside of Ohio? What if they are a service provider? How do we determine what portion of its income is subject to tax in each state?
Is Globex required to file and pay state income tax outside of Ohio? Under Public Law 86-272, a business that only engages in solicitation of orders for the sale of tangible personal property in a state, and meets certain other criteria, is protected from being subject to state income tax in that state. However, the law does not provide protection for businesses that have other types of activity in the state beyond solicitation. What if they are a service provider? if Globex Corporation is a service provider, rather than a seller of tangible personal property, it may not be protected by Public Law 86-272. In this case, Globex Corporation would need to consider other factors to determine if it has nexus, or a sufficient connection, with states outside of Ohio that would require it to file and pay state taxes in those states. How do we determine what portion of its income is subject to tax in each state? States would use either a Single, Double, or Triple weighted factor. Using Sales, Payroll, and Property in a state
Once completed, Globex's widgets are transferred into a cooler for the plastic to harden. Then, the widgets are transported on conveyor belts to the packing section where each is shrink wrapped and labeled. The wrapped widgets are placed into boxes of 10 which will be sold to the consumer. The 10-widget boxes are placed into cases for shipment to retailers. Is the cooler subject to tax? Does the packaging exemption apply to labels? Are the cases exempt from tax even though they will not be sold to the consumer?
Is the cooler subject to tax? The cooler used to cool the widgets and harden the plastic would likely be considered a part of the manufacturing process and therefore not subject to sales tax in Ohio, assuming that the cooling process is necessary and integral to the production of the widgets. Does the packaging exemption apply to labels? Yes, labeling is part of the packaging exemption Are the cases exempt from tax even though they will not be sold to the consumer? In Ohio, the purchase of packaging materials that are used to contain or protect tangible personal property for sale, transport, or storage can be exempt from sales tax under the packaging exemption.
Globex sells its subsidiary, Initech, which has offices in 10 states and provides consulting services to manufacturers throughout the country. Initech's sale creates a $1m gain for Globex. What states may tax Globex's gain for its sale of Initech? What if its not a Unitary Business?
It Depends on if Globex and Initech are considered a Unitary Business. A Unitary Business has Function Integration, Centralized Management, & Economies of Scale. What if its not a Unitary Business? The gain on sale will be considered investment income and be taxed in the state of the corporation
Can states tax nonresident individuals at a higher rate than residents?
No, would violate the Commerce Clause & Equal protections clause.
What is the difference between Sales & Use Tax?
Sales Tax - is a tax that is charged on the sale of tangible personal property (such as clothing, electronics, or furniture) and sometimes certain services in most states. The tax is typically a percentage of the sales price and is collected by the seller at the time of sale. The seller is then responsible for remitting the tax to the state or local government. The rate of sales tax varies by state and can also vary by locality within a state. Use Tax - is a tax that is charged on tangible personal property or certain services that are used or consumed in a state where sales tax was not collected at the time of purchase. For example, if a person purchases a product online from a seller located in a different state that does not collect sales tax, they may be required to pay use tax on the purchase when they file their state income tax return. Use tax is typically the same rate as the sales tax rate in the state.
Do different nexus standards apply based upon the type of tax?
Sales and Use Tax -The Wayfair case established an economic nexus standard, which is typically > $100,000 in sales into the state or > 200 separate transactions MTC factor presence (PL 86-272 does not allow a state to impose an income tax from sales of TPP when there is only solicitation of sales). Determined by the Burden to Impose the tax
What is the current status of substantial nexus under the commerce clause?
The Court established a new standard for substantial nexus, known as the "economic nexus" standard, which considers the level of economic activity a seller has in a state, regardless of whether the seller has a physical presence in the state. Under this standard, a state may require a seller to collect and remit sales tax if the seller's annual sales or number of transactions in the state exceed certain thresholds.
Globex purchases plastic resin for use in producing its widgets. Upon arrival, the resin is stored in containers before production begins. Forklifts deliver the resin to a hopper which feeds the resin into a machine that melts it down for production. When does the manufacturing operation commence? Are the storage containers, forklifts, and hopper subject to Ohio sales / use tax?
When does the manufacturing operation commence? The manufacturing process typically commences (Raw materials are comitted) when there is a change in the form, composition, or character of raw materials or components that results in the creation of a new product. This change could involve a variety of activities, such as assembly, fabrication, processing, mixing, blending, or any other type of physical or chemical transformation. Are the storage containers, forklifts, and hopper subject to Ohio sales / use tax? if these items are used exclusively in a manufacturing, mining, or refining operation, they may be exempt from Ohio sales tax under Ohio's manufacturing exemption. To qualify for this exemption, the items must be used directly in the production of tangible personal property for sale.
Can nexus arise through the activities of a third-party agent or independent contractor?
Yes, if the independent contractor acts on behalf of the company and engages in activities that create a substantial connection or presence with a state.