Sales Tax Resource Group

The California State Board of Equalization (“SBE”) staff recently proposed changes to the  Qualified Purchaser Program, which seeks to collect use tax from businesses not otherwise required to file sales and use tax returns.  In essence, businesses who do not sell tangible personal property (i.e., CPA firms, law firms, and yes, sales tax consulting firms) are required to register and report purchases they make from out of state vendors who do not
collect the California sales tax. The problem is that nearly half of the 517,065 accounts registered under the program resulted in the filing of $0 returns. Translation: half of the program’s registered businesses did not remit one dime of revenue!

In order to resolve this issue, the SBE is considering a number of changes to the
program, including:

1)      Discontinuing the simplified (automatic) registration program;

2)     Allowing taxpayers to close permits if revenues drop to below $100,000 per year for two years; and,

3)    Automatically deregistering taxpayers who file $0 returns for two or three consecutive years.

The simplified registration program automatically registers taxpayers who meet
certain criteria (annual revenue over $100K, for instance). At the program’s inception, the SBE originally estimated that 200,000 businesses would be registered; however, the SBE actually registered 500,000 businesses, and then found out that another 300,000 were eligible but were not currently registered.   That’s over 800,000 registrants!  The SBE currently administers only 850,000 regular sales and use tax accounts, so the amount of
work created by the program was vastly underestimated, as was the total cost the program.

The SBE has decided that the time and energy spent on registering and following up on
all of these delinquent returns would be better spent identifying and registering taxpayers that are more likely to have an actual use tax liability due to factors such as industry type, gross receipts, or other available information.

Currently, taxpayers registered under the program remain registered until they close their business, or become registered as sellers under the regular sales and use tax program. In order to relieve the burden of processing $0 returns, as well as the burden on taxpayers
to file returns, the SBE is considering allowing companies to deregister if their sales revenue drops below the $100,000 threshold for two or three consecutive years.  In addition, the SBE is considering deregistering taxpayers automatically if they file $0 returns for two or three consecutive years.

Although these changes will go far toward relieving the burden on California taxpayers, the state could do more, such as allowing taxpayers to use a lookup table to determine their use tax liability, or changing the filing deadline to April 15, consistent with the income tax return deadline.  Nevertheless, the proposed changes outlined above will help make this
program less burdensome on California taxpayers.

This is an article by Alfred Lee, Los Angeles Business Journal…
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Mike Paek has been doing taxes for customers in Koreatown for more than 10 years.

But he’s not one of the 300 certified public accountants who cater to L.A.’s Korean-American community, the largest in the country. Instead, he is what’s known as an enrolled agent – authorized to do tax preparation and bookkeeping but not other CPA-only services such as auditing.

For a long time, enrolled agents and CPAs managed an uneasy co-existence, offering overlapping services in Koreatown. But as the downturn has shrunk their revenue, they’ve become embroiled in a fight over advertising.

“It’s a turf war,” said Paek, who prepares taxes for Korean-American businesses and individuals from his office on Wilshire Boulevard. “They see us as a competitor, but this is no way to go about it.”

Paek and others have been attacked by Koreatown’s CPAs who claim enrolled agents are unfairly moving in on their territory in Korean-language directories and newspapers. The dispute comes down to a matter of translation: For years, Paek and others have advertised using the phrase “kong in sae moo sa,” which he claims translates to “licensed tax specialists.” But Korean CPAs complain the phrase actually means “certified tax accountant,” violating state laws that ban non-CPAs from using the word “certified.”

The dispute heated up last month when the Korean American Certified Public Accountants Society of Southern California, which has more than 300 members, sued 16 Korean enrolled agents in Los Angeles and Orange counties. The CPAs claim their rivals were using misleading advertising and causing them to lose business.

“They hold themselves out using this title that confuses the public,” said Benjamin Koo, a KACPA member who also is representing the organization as its attorney. “They want to place themselves in the same category as a CPA. Who knows, soon they might be calling themselves attorneys, too.”

Koo convinced 10 other Korean-American enrolled agents to stop using the disputed phrase in the pages of publications such as the Korea Daily newspaper or the Radio Korea Business Directory by sending them a cease-and-desist letter. The 16 who are being sued didn’t comply with the letter.

One thing both sides agree on is that business has been sluggish since the downturn. And new tax and accounting professionals targeting local Koreans continue to open their doors, increasing competitive pressure.

“There’s more and more competition, and (the CPAs) think we’re taking away their business,” said Paek, the enrolled agent. “My business is hurting, just like everyone else’s.”

Koo, the attorney-CPA, said he’s seen a similar crush of attorneys in Koreatown, and attributed the overflow of service professionals partly to the predisposition of Korean immigrants toward starting businesses instead of working as employees.

Enrolled vs. certified

Even without translation problems muddying the issue, the difference between enrolled agents and CPAs can be confusing.

There are about one-eighth as many enrolled agents as there are CPAs in the United States. Enrolled agents pass a two-day exam to prove their familiarity with tax laws. CPAs, on the other hand, take accounting and business courses, earn a bachelor’s degree, and spend at least one year working under the supervision of a licensed CPA in California. They also need to pass an exam that covers not just tax law but auditing, business concepts and financial reporting.

But the difference between the two doesn’t really matter to the average Korean-American client in Los Angeles, according to Paek, because the services in demand are usually just tax related.

Friction between the two sides in Koreatown goes back at least 10 years. At first, Koo said, the enrolled agents just listed themselves as “sae moo sa,” meaning either “tax specialist” or “tax accountant.” Korean CPAs griped about it even then, but didn’t take much action. Enrolled agents then drew more complaints by adding in another phrase that can mean either “licensed” or “certified.”

The lawsuit states that in 2008, one enrolled agent wrote an article in a Korean-language newspaper defending his right to use the disputed term.

At about the same time, Korean CPAs pleaded their case to the California Board of Accountancy and the Internal Revenue Service, but the arguments over translation made it hard to get much traction. That’s when the 28-year-old KACPA finally sent the cease-and-desist letters and filed suit against the agents who didn’t comply, Koo said.

“Korean CPAs are very conservative and don’t like fighting or conflict,” he said. “They tried to persuade (the enrolled agents) again and again, but they are adamant about using this term.”

The legal fight has had the effect of mobilizing Korean enrolled agents, who previously operated as lone wolves. Most of those being sued have banded together to hire an attorney, and vow to fight the lawsuit, which is in Los Angeles Superior Court. Two weeks ago, they revived a long inactive organization, the Korean American Society of Enrolled Agents. So far, more than 30 enrolled agents in Los Angeles and Orange counties have joined.

One of those is Ken Kim, an enrolled agent based in Northridge whose clients are mostly Korean immigrants.

“The lawsuit was definitely a factor (in joining),” Kim said. “We haven’t had any association up to now, but we felt we needed some sort of group representation.”

Some states now require online sellers to collect sales or use tax. See Paying Sales Tax On Internet Purchases? There are ongoing court battles and more brewing. It’s about revenue and about perceived unfairness. And Amazon and California are squaring off over California’s law taking effect July 1st. See Internet Sellers Must Collect Tax, Like It Or Not and Amazon to California: Read My Lips, No Online Sales Tax.

Taxes level the playing field between main street merchants who collect sales tax and online merchants who don’t. The impact goes beyond mom and pop sellers. Huge chains and big box stores have a stake in this fight given their competition with the online world.

Amazon taxes are imposed in states such as New York, Illinois, Rhode Island, North Carolina, and Colorado. Laws are proposed in Arizona, Hawaii, Minnesota, Mississippi and Vermont. Some estimate the tax dollars could total more than $10 billion a year.

California passed the newest and toughest of law, requiring many online merchants to collect California sales tax on shipments into California. See California Law Pressures Amazon. California’s law reaches far beyond making retailers collect tax if they have a physical presence. Online affiliates in the state trigger the obligation. Plus, California collects sales tax if the retailer (directly or though a subsidiary) designs or develops products sold by the retailer. Amazon has a subsidiary in California, so that’s enough. As expected, Amazon has cut ties with its California affiliates. See Letter Regarding Amazon Position on Sales Tax Nexus Bills. Court challenges are expected.

Sales tax is almost always paid by the buyer, but the only effective collection mechanism is getting the seller to collect it. Many states have become aggressive, but the U.S. Constitution prohibits taxing “interstate commerce.” See Is Internet Tax Constitutional? No state can force an out-of-state merchant to collect or pay sales/use tax unless it has a “nexus” in the state.

Catalog companies long battled how much nexus was enough. Then in 1992, the U.S. Supreme Court ruled in Quill Corp. v. North Dakota that a business had to be physically present in a state before it was required to collect tax. Merely shipping into a state isn’t enough but a warehouse, showroom or office in the state is. Even an agent in the state taking orders, assembling merchandise, or making deliveries can be enough.

Yet as more court battles heat up and merchants, consumers and activists cry foul, the federal government may step in. Senator Dick Durbin (D. Illinois) is poised to introduce a measure giving states authority to require all retailers to collect sales taxes in the 45 states and the District of Columbia that have them. Apart from addressing the more obvious aspects of the online battleground, this would simplify state and local sales tax systems. It would turbo-charge the Streamlined Sales Tax Project, a joint state and business effort started in 1999.

Buying online? Get ready to pay.

On April 27, 2011, the California Supreme Court denied the California State Board of Equalization’s petition for review of the Court of Appeal decision in Nortel Networks, Inc. v. State Board of Equalization, holding that a license of prewritten software falls within California’s sales and use tax exemption for transfers of intangible property pursuant to a technology transfer agreement (TTA).1

The Nortel case has broad implications for the taxation of prewritten software in California. The longstanding position of the State Board of Equalization (“SBE”) has been that all sales of prewritten software are subject to the sales tax; however, the SBE must now review every software license on a case-by-case basis (even canned mass-market software) to determine whether the software is subject to a patent or copyright and, thus, covered by the TTA exemption. According to the SBE, under the Court of Appeal’s ruling, which is now final, “sales of software programs, such as Windows 7 operating system, Microsoft Word, Quicken or TurboTax, will be subject to claims of exclusion from tax.”2

Based on the SBE’s longstanding position, many companies have been collecting California sales or use tax on all of their sales or licenses of prewritten computer software. Since most computer software is subject to copyright and/or involves patented processes, taxpayers who sell prewritten computer software and have been collecting California sales or use tax on such sales should consider filing claims for refund. Additionally, customers who have paid California sales or use tax on purchases or licenses of prewritten software should work with vendors to file claims for refund.

1. Court of Appeal of California, Second District, No. B213415, January 18, 2011, petition for review denied, California Supreme Court, No. S190946, April 27, 2011.

2. Nortel Networks, Inc. v. State Board of Equalization, Petition for Review, p. 10.

Sales Tax Resource Group has extensive experience dealing with California sales and use tax refunds and has been monitoring the Nortel case closely. If you would like a review of your purchases to determine whether a refund claim should be made, or if you have other questions related to state sales and use taxes, please contact our office by email or by calling (714) 377-2600.

Recently, a small closely held corporation was assessed a fairly large sum of money due to a routine sales and use tax audit.  The auditor followed all appropriate procedures during the audit, and in the end the company owed the money. 

When confronted with this realization, the president and CEO’s initial reaction was, “Well, if the state wants to take it, I’ll just shut this company down and they won’t get anything!”  I have to admit, this was probably the 100^th time I had heard this reaction to an audit liability over the past 20 years. 

The fact is, dissolving or otherwise discontinuing the operations of a corporation with a sales tax liability can open the door for the California State Board of Equalization to hold almost anyone personally liable for the corporation’s sales tax debt. 

California Regulation 1702.5 states (and I paraphrase) that any responsible person who willfully fails to pay or to cause to be paid any taxes due from an entity shall be personally liable for any unpaid taxes and interest and penalties on those taxes not so paid upon termination, dissolution, or abandonment of the business of the entity.  That entity can be a corporation, partnership, limited partnership, limited liability partnership, or limited liability company.

Which means, basically, if you are an officer, member, manager, employee, director, shareholder, partner, or other person who is responsible for filing returns and paying sales or use tax to the state, then under certain circumstances the state could go after your personal assets in the event the entity goes out of business, even if you just work there! 

In practice, the state generally pursues individuals who are corporate officers (Pres, VP, CFO, Secretary, etc.), or those who have signed the sales tax returns (controller, bookkeeper, accounting manager), or anyone who signed checks to employees, vendors, landlords, or anyone else instead of to the state.  In short, they go after just about everyone. 

However, several elements must be met for the state to hold an individual responsible for a corporate debt.  In a nutshell…

     1)  The company must have ceased to do business;

     2)  The company must have collected sales tax, or failed to pay use tax on purchases;

     3)  The individual must be “responsible,” that is, have or had the duty or responsibility to file and pay the tax; and

     4)  The nonpayment of tax must have been “willfull,” that is, voluntary, conscious, and intentional, even if without bad purpose or evil motive. 

Nevertheless, the state typically issues determinations first, and ask questions later.

So in retrospect, it may not be such a good idea to shut the corporation down and attempt to leave the state holding an empty bag.  There are other alternatives, such as settlement, installment payment agreements, and offers in compromise, which may make the liability more of an inconvenience than a game-ender, and at least they won’t empty your personal bank account because you signed a sales tax return, paid the rent, or issued payroll checks instead of paying off the sales tax audit.

Due to the recession and budget issues, several states are turning to amnesty programs to rake in some extra cash. 

Tax Amnesty programs provide comprehensive tax relief.  Typically an amnesty has a very short window of opportunity, and the goal is to collect as much back taxes as possible in a very short period of time, usually two or three months.  Generally, the state will waive penalties if you file returns and pay your taxes during the amnesty period and sometimes will waive interest, as well.  In addition, the state will often impose larger than normal penalties if you fail to take action during the amnesty period.  Through an amnesty program you can file late returns, revise returns to report additional income or improper deductions, and pay off an outstanding balance in full.  

Amnesty programs give those who owe back taxes a chance to pay off their debt without all the interest and penalties that normally apply, but keep in mind, if you accidentally overpay the tax under an amnesty program, you may not be allowed to file a claim for refund to get the tax back! 

The following is a snapshot of current and upcoming state sales and use tax amnesty programs for 2010.  These programs may also include provisions for other types of state taxes administered by the state, such as income, payroll, etc.  

Florida
Application Period:      July 1, 2010 through September 30, 2010
Waiver:                        All penalties and a portion of the interest

Illinois
Application Period:      October 1, 2010 through November 8, 2010
Waiver:                        All penalties and interest

Kansas
Application Period:      September 1, 2010 through October 15^, 2010
Waiver:                        All penalties and interest

Maine
Application Period:      September 1, 2010 through November 30, 2010
Waiver:                        95% of penalties and 95% of interest under certain circumstances

Nevada
Application Period:      July 1, 2010 through October 1, 2010
Waiver:                        All penalties and interest

New Mexico
Application Period:      June 7, 2010 through September 30, 2010
Waiver:                        All penalties and interest

If you would like to take advantage of any of these amnesty programs, or if you have other questions related to state sales and use taxes, please contact our office by email or by calling (714) 377-2600.

A huge clerical error resulted in a major budget hit to Suffolk County, NY when a small business owner, in remitting tax on out-of-state Internet purchases, reported owing $10 million, when he meant to report only $1,000. 

The remedy to the situation should not have been a big deal, but the Department of Taxation and Finance didn’t catch the error until after the tax had already been credited to the county. 

A $10 million tax figure would translate to $116 million in purchases by one small business!  It’s funny, as long as you don’t work for either the NY State Department of Taxation and Finance or the Suffolk County Finance Department. 

via Huge Tax Error Costs Suffolk County Sales Tax Revenue.

According to a July 13, 2010 Forbes article, Georgia State University economics professors found that only 18% of sellers on eBay bothered to collect sales tax even on sales to buyers within their own states.  Their study was published in the National Tax Journal and also found that compliance increased significantly with larger sellers; however, even fairly large sellers were found not collecting sales tax on their taxable sales.  

States such as California are continuing efforts to hold online sellers responsible for collecting sales tax; however, is it time for online auctioneers, such as eBay and Priceline.com, to be required to collect sales tax on their customers’ taxable sales in the same way that brick-and-mortar auctioneers are?