Tax Tips – January 2010

Sales Tax Goes Digital in North Carolina

NORTH CAROLINA

On January 1, 2010, digital property became subject to state and local sales & use taxes in North Carolina. This includes audio works (i.e., music, ringtones, etc.); audiovisual works (i.e., movies, music videos, etc.); books, magazines, newspapers, newsletters, or other publications; photographs; and greeting cards. The tax is applicable to digital property that is delivered or accessed electronically, is not considered tangible personal property, and would be taxable if sold in a tangible medium. The tax does not, however, apply to information services.

More information, including general sourcing rules and reporting and payment requirements, is available in Important Notice: Certain Digital Property Subject to Sales and Use Tax, North Carolina Department of Revenue, December 9, 2009.

With the enactment of this tax, North Carolina joins the growing number of states (almost half), including Mississippi, Washington and Wisconsin (enacted legislation in 2009), that tax sales of digital products electronically transferred to purchasers. States have been grappling with whether or not to tax digital products since the late 1990’s when electronic commerce really started to expand, and state taxing authorities realized the potential for tax revenue from online sales. While the Federal Internet Tax Freedom Act, first enacted in 1998 and extended three times, prevents states from taxing internet access and imposing multiple or discriminatory taxes on electronic commerce, it does not, however, bar a state from imposing use tax on internet purchases where the seller is not required to collect sales tax.

As states continue to struggle with revenue shortfalls and budget deficits in 2010, look for more proposed legislation and new regulations that extend the state’s sales & use tax to digital products. This includes both California and New York, who have been struggling with significant budget issues; and where similar measures were proposed or discussed in 2009.

Bad Debts – A sign of the times?
A sales tax controversy? Or both?

NEW YORK

In spite of signs of economic recovery, consumer credit failures continue to escalate. As a result, for retailers, the associated sales tax deduction (or refund) for “bad debts” is becoming an ever more important consideration. Think you know when you can take a bad debt deduction for sales tax purposes?

Think again.

In the Matter of Home Depot USA, Inc. v Tax Appeals Trib. of State of New York, Home Depot requested refunds relating to sales tax it remitted between 1997 and 2003 for accounts that were ultimately determined to be bad debts. Their request was denied in a decision rendered by the New York State Appellate Division on December 31, 2009. Home Depot had private-label credit card agreements with two, third-party finance companies. They paid Home Depot the value of each credit card transaction — including the full amount of sales tax due — less a credit card service fee. Upon receipt of such payments, Home Depot would pay the appropriate sales tax due to the Department of Taxation and Finance.

While 20 NYCRR 534.7 (b) (1) (the regulation that was in effect for the period of time of Home Depot’s refund claim) provides that, “[w]here a receipt … has been ascertained to be uncollectible … the vendor of the tangible personal property or services… may apply for a refund or credit of the tax paid on such receipt.”, Regulation Section 534.7 (b) (3) provides that such “refund or credit is not available for a transaction which is financed by a third party. The question that was before the Appellate Division distills to whether it was arbitrary and capricious for the Commissioner of Taxation and Finance to distinguish between transactions in which a vendor pays sales tax from its own sales receipts and transactions that are financed by third parties and, as occurred here, the vendor pays the sales tax out of contractual payments received from such third parties.

What formed the basis of the Appellate Division’s ruling?

First, the Appellate Division found that petitioner did not actually have any uncollectible receipts, stating that, “We are unpersuaded by petitioner's argument that its payment of the service fees fully reimbursed the companies for the uncollectible debts, thereby converting such losses to petitioner.” Second, the Appellate Division, found that, although the Commissioner of Taxation and Finance could have elected to allow the payment of refunds under these circumstances (as it now does, due to Tax Law § 1132 (including the amendments made by Ch. 664, Laws 2006, effective January 1, 2007), respondent was not required to do so. The Commissioner of Taxation and Finance “has the authority to promulgate regulations allowing vendors to apply for a credit or refund of sales tax already paid in relation to a debt that has been determined to be uncollectible.” “Contrary to petitioner's contention, the 2006 amendments to Tax Law § 1132 (whereby vendors and lenders may elect which entity is entitled to a sales tax deduction or refund) do not compel a different conclusion. Those amendments took effect after the sales tax payments at issue here and were intended to prospectively change the preexisting law.”

Key among a number of important tenants of the 2007 law, it is important to note that, contracts between the retailer/vendor and the lender must contain an irrevocable relinquishment of all rights to the account from the vendor to the lender. The lender and the vendor must file a joint election with the department, signed by both parties, designating which party is entitled to claim the deduction or refund.

Hopefully, those who do business in New York State have already updated the agreement(s) with their finance company(ies) to provide for the “irrevocable relinquishment” as set forth in the law filed the joint election with New York State Department of Revenue AND evaluated the impact of changes to the sales tax bad debt requirements in other states. If not, consider this a New Year’s resolution!

Ohio CAT Update

OHIO

The Ohio General Assembly has recently passed legislation to change certain due dates related to the Ohio Commercial Activity Tax (“CAT”). These changes were effective October 15, 2009.

Annual minimum tax

All CAT tax payers are subject to the $150 annual minimum tax for the privilege of conducting business in Ohio. Beginning in 2010 the $150 annual minimum tax will be due no later than May 10th of each year. Annual filers will report taxable gross receipts from the prior year and pay the annual minimum tax for the current year with their annual return due May 10th each year. Quarterly filers will pay the annual minimum tax with the first quarterly return filed each year. The annual minimum was previously due with the fourth quarter return each year.

Annual and quarterly returns

Annual returns will now be do on May 10th (previously due on February 9th) each year. The quarterly CAT returns were due on the 40th day after the end of each quarter. The new due date will be the 10th day of the second month following each tax period.

Cancellation of a CAT account

Taxpayers will also have longer to cancel a CAT account without paying the annual minimum fee. The cancellation date has been moved from February 9th to May 10th.

The following tax calendars reflect the current due dates:


Annual Filers - Use form CAT 12

Filing Period	Filing Due Date
Jan. 1 - Dec. 31	May 10

If the filing due date falls on a weekend or holiday, the return is due on the next business day. The CAT is a prepaid tax; therefore, the $150 annual minimum tax is due in advance on May 10 of the current tax year.

Quarterly Filers - Mandatory electronic filing via Ohio Business Gateway

Filing Period	Filing Due Date
Jan. 1 - March 31	May 10
April 1 - June 30	Aug. 10
July 1 - Sept. 30	Nov. 10
Oct. 1 - Dec. 31	Feb. 10

If the filing due date falls on a weekend or holiday, the return is due on the next business day. Taxpayers are required to pay the $150 annual minimum tax with the 1st quarter payment. For example, if the reporting period is from Jan. 1, 2010 - March 31, 2010, the taxpayer must pay the tax due for that quarter, plus the $150 annual minimum tax for 2010 by the May 10, 2010, due date.

Taxpayers should update their due date calendars for the change in due dates as well as the timing of their payment for the annual minimum tax of $150.

NEW: State Amnesty Programs At-a-Glance, updated monthly.

¹ Streamlined Sales Tax amnesty program does not
include use tax due on purchases or any other taxes..

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