Category Archives for Sales Tax Refund Review

What Methods do States Allow for Obtaining Sale Tax Refunds and Credits?

The steps for claiming a sales tax refund or credit vary greatly by state, but the most common procedures include:

  • Adjusting the sales reported or tax due (or taking a credit) on a following return
  • Amending the original return(s)
  • Filing a separate refund claim either by letter or specific form

The easiest and quickest way to get a “refund” of taxes overpaid is by taking a credit on the return you’ll be filing next month. But, be careful here, just because a state allows this method as one mechanism does not mean that it’s allowed in all situations. For example, do not assume you can take a credit on next month’s tax return for tax you paid to a vendor in error. If a state allows you to do this, it’s usually only in the case where you paid tax in error on inventory for resale.

Check out this chart from CCH that summarizes the alternatives that each state has indicated that it will accept (keep in mind that other options may be also be available).

About Peisner Johnson and Company

We Have a Chart for That — You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. This particular matrix addresses this question of what methods the states allow for refunds. If you’d like to receive one of these charts, please go to this link and download it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.

What’s the Best Way to Get Answers to Your State Tax Questions?

CALL THE STATE? — This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it’s not that people at the state don’t know what they’re talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you’re protected in the event of a future audit.

But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a “form over substance” type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don’t get me wrong, I’m not saying there’s some sort of trick or code language that you must conform to or else, I’m just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.

Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.

GOOGLE IT? — With so much information available on the Internet these days, you can Google your question and chances are, you’ll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?

GET A RULING? — What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point — it’s just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you’re going to get in the ruling. It’s not always possible to do, but you don’t want bad precedent, if you can help it.

ASK THE EXPERTS? — Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do — We Solve State Tax Problems.

And, we don’t always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.

Sometimes we just flat know the answer to a question you have. We always tell our clients: “If you have a question, just call us or email us. If we can answer you off the top of our heads, we’re not going to charge you. If we need to do some research, we’ll tell you before we do the work and seek your approval before we do it.” You can expect no surprise invoices from us.

So What Questions Do You Have?

Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, “it depends!” And that may sound like a cop out, but it really does depend. The answer depends on which state we’re talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.
CAUTION ON CHARTS –A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it’s still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state’s own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We’re here to help, give us a call.

How do States Tax Manufacturing Equipment?

Manufacturers are usually entitled to sales tax exemptions.

The first thing you need to think about in determining if certain manufacturing equipment can be purchased tax free is what is manufacturing? I’m sure that it comes as no surprise that the definition of the term “manufacturing” varies from state to state. For example, all manufacturing probably includes some processing and/or fabrication, but not all fabrication or processing is manufacturing. Similar questions arise over refining, assembly, and construction. This is where the confusion arises: trying to distinguish between what is fabrication, processing, refining, assembly, etc.

Not only are there disputes over the definition of manufacturing,there is also usually a question of when the “manufacturing process” begins or ends. Machinery used either before or after the manufacturing process begins or ends usually does not qualify for a state’s sales tax exemption for machinery used in manufacturing.  In general, the manufacturing process begins when the raw materials are removed from their first point of storage and ends when the completed product is taken off the line and placed in storage. Some of the more typical areas not qualifying for the manufacturing exemption include receiving, inspection, shipping, intraplant transportation, and finished goods warehousing equipment. The key is usually whether the activity or equipment contributes to a change in the product being produced or is an essential step in the manufacturing process.

Then comes the question of whether a state’s manufacturing exemption applies strictly to “manufacturers” as that term is defined by the state (usually by reference to an SIC code) or if the exemption is for equipment used in “manufacturing”. Equipment that is only exempt if it is used by a “manufacturer” in the “manufacturing process” is less broad than if the exemption is for equipment that is simply used in the “manufacturing process”.

Check out this chart from CCH that summarizes the taxation of manufacturing machinery across the US.

About Peisner Johnson and Company, LLP

We Have a Chart for That — You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.

What’s the Best Way to Get Answers to Your State Tax Questions?

CALL THE STATE? — This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it’s not that people at the state don’t know what they’re talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you’re protected in the event of a future audit.

But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a “form over substance” type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don’t get me wrong, I’m not saying there’s some sort of trick or code language that you must conform to or else, I’m just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.

Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.

GOOGLE IT? — With so much information available on the Internet these days, you can Google your question and chances are, you’ll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?

GET A RULING? — What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point — it’s just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you’re going to get in the ruling. It’s not always possible to do, but you don’t want bad precedent, if you can help it.

ASK THE EXPERTS? — Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do — We Solve State Tax Problems.

And, we don’t always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.

Sometimes we just flat know the answer to a question you have. We always tell our clients: “If you have a question, just call us or email us. If we can answer you off the top of our heads, we’re not going to charge you. If we need to do some research, we’ll tell you before we do the work and seek your approval before we do it.” You can expect no surprise invoices from us.

So What Questions Do You Have?

Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, “it depends!” And that may sound like a cop out, but it really does depend. The answer depends on which state we’re talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.

CAUTION ON CHARTS –A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it’s still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state’s own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We’re here to help, give us a call.

Don’t Let Auditor Sleight-of-Hand Cost You An Arm & A Leg

1/3 of Sales Tax Audits Result in a Credit, But Does That Mean You Made Out Like A Bandit?

Not necessarily. Before you go bragging about your last sales tax audit while running to the bank, your sales tax auditor may be breathing a sigh of relief while peeling out of your parking lot after narrowly avoiding a much bigger refund check.

Take it from a bunch of Ex-Auditors who’ve been there. Auditor Priority #1: Bring in revenue to the State. You can probably imagine how much priority “Making sure Taxpayer gets credits for all taxes overpaid” has. Yes, it’s way down there. Especially now with bone-dry state coffers and meager revenues stacked up against bloated budgets.

The first thing an auditor looks for is easy money. Like unpaid tax on fixed assets, or missing & incomplete exempt/resale certificates, or unremitted tax on sales or rentals, or… the list goes on and on. But once an auditor depletes his bag of tricks and he’s found more credits than deficiencies, it’s time to get out of Dodge before more overpayments are found.

“You’re in good shape,” they say, hoping you won’t ask any more questions, “just keep doing what you’re doing.” Making sure you don’t pay too much tax is your problem (or opportunity?) not the state’s. So a no-tax due audit, and pat on the back might have (should have?) been  been a $100,000 refund.

The problem is, most companies after just getting a “clean” audit from the state become averse to review the same audit period for undiscovered credits or exemptions (due to recent court cases, and/or letter rulings, or flat out errors) even though it could result in a more accurate tax picture of their business activities and potentially much bigger windfall.

“Will Work For Refunds” is Our Cardboard Sign, & We’re Not Embarrassed By It

When considering a firm to do this kind of work, we are acutely aware that companies don’t want to pay hourly going after refunds they don’t even know exist, which is why most of the time we are willing to do this kind of work on a percentage of refunds found basis.

We can’t guarantee that we’ll find anything, but it won’t cost you anything to have us look either, and…

You Might Be Surprised To Find that you not only kept your arms and legs, but you thumbed your nose at the taxman while doing a victory dance.

No-Cost Consultation — We Don’t Want To Waste Your Time

We are happy to talk to you on the phone about your audit and discuss whether we think it’s worthwhile to get us involved or not. Sometimes a quick review of your audit documentation can tell us whether there is enough of an opportunity justify additional work.

Good Sales Tax News for Manufacturers

These days, when it comes to sales/use taxes, good news is hard to come by. So many states are increasing taxes and rolling back exemptions and stepping up audit enforcement. A quick perusal of the headlines provides all the proof. New York, North Carolina, California and others are taking the position that merely having otherwise unrelated people sign up as affiliates in those states means that Amazon.com (and other similarly situated companies) have nexus in those states. That’s what you call aggressive.

Meanwhile, New Jersey, Illinois, California and many other states are increasing taxes and letting exemptions expire.

News is pretty bad no matter where you look. And if we polled our subscribers on which state would be the worst for bad news, then Louisiana would surely rank high up on that list. But Louisiana, has come out with some great news for manufacturers.

Louisiana had been phasing in an exemption for certain manufacturing machinery and equipment. The exemption was to have been fully phased in by July 1, 2010. The good news is that by virtue of Act 12 of the 2nd Extraordinary Legislative Session of 2008, the last segment of the phase-in made the exclusion fully effective on July 1, 2009. The exclusions are from the state sales, use, lease, and rental tax for machinery and equipment used by eligible manufacturers in plant facilities predominantly and directly in the actual manufacturing for agricultural purposes or in the actual manufacturing of tangible personal property that is for sale to another.

The LA Department of Revenue has published an Information Bulletin (No. 09-016) with some answers to questions that might arise.

Is this Exemption Good in the Parishes as well?

The legislation authorizes political subdivisions of the state to provide these exclusions from local sales, use, lease, and rental taxes but does not require that they do so. If you have a specific parish question, ask us and we’ll do the research for you.

What is Manufacturing “Machinery and Equipment”?

“Machinery and equipment” is defined by R.S. 47:301(3)(i)(ii)(aa) as tangible personal property or other property that is eligible for depreciation for federal income tax purposes and that is used as an integral part in the manufacturing of tangible personal property for sale. “Machinery and equipment” also includes tangible personal property or other property that is eligible for depreciation for federal income tax purposes and that is used as an integral part of the production, processing, and storing of food and fiber or of timber.

Specific examples of tangible personal property that this statute categorizes as eligible “machinery and equipment” are computers and software that are an integral part of the machinery and equipment used directly in the manufacturing process; machinery and equipment necessary to control pollution at a plant facility where pollution is produced by the manufacturing operation; machinery or equipment used to test or measure raw materials, the property undergoing manufacturing, or the finished product, when such test or measurement is a necessary part of the manufacturing process; machinery and equipment used by an industrial manufacturing plant to generate electric power for self consumption or co generation; and machinery and equipment used to produce news publications whether the news publications are ultimately sold at retail, for resale, or distributed at no cost.

Buildings (usually) Don’t Count — Categorized by the statute act as ineligible for the manufacturing “machinery and equipment” exclusions are a building and its structural components, unless the building or structural component is so closely related to the machinery and equipment that it houses or supports that the building or structural component can be expected to be replaced when the machinery and equipment are replaced; heating, ventilation, and air-conditioning systems, unless their installation is necessary to meet the requirements of the manufacturing process, even though the system may provide incidental comfort to employees or serve, to an insubstantial degree, non-production activities; tangible personal property used to transport raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete; and tangible personal property used to store raw materials or manufactured goods prior to the beginning of the manufacturing process or after the manufacturing process is complete.

Used by a “Manufacturer”

Here’s one of the sticking points. To take advantage of this exemption, your company must be a “manufacturer”. The term “manufacturer” is defined in the statute as a person whose principal activity is manufacturing, and who is assigned by the Louisiana Workforce Commission a North American Industry Classification System (NAICS) code within the agricultural, forestry, fishing, and hunting Sector 11; the manufacturing Sectors 31-33; the information sector 511110, all as they existed in 2002, or under industry code 423930 as a recyclable material merchant wholesaler who is engaged in manufacturing activities, which must include shredding facilities. R.S. 47:301(16)(o) additionally defines the term manufacturer to include a person regulated by the Louisiana Public Service Commission or the Council of the City of New Orleans who is assigned a NAICS code 22111. This 22111 NAICS code applies to electric power generation businesses.

Persons whose principal activity is manufacturing, but who are not required to register with the Louisiana Workforce Commission for purposes of unemployment insurance, can apply to the Louisiana Department of Revenue to be classified as a “manufacturers” under NAICS sectors 11, 31-33, or 511110 for purposes of this sales tax exclusion. The department will determine from income tax data whether applicant would have been so classified had the applicant been required to register with the Louisiana Workforce Commission.

What is a “Plant Facility” and What is Meant by “Predominantly and Directly” in the Actual “Manufacturing Process”?

The term “plant facility” is defined as “a facility, at one or more locations, in which manufacturing referred to in sectors 11 and 31-33 of the North American Industry Classification System of 2002, of a product of tangible personal property takes place.” “Used directly” means used in the actual process of manufacturing or manufacturing for agricultural purposes.

“Manufacturing for agricultural purposes,” means the production, processing, and storing of food and fiber and the production, processing, and storing of timber.

“Manufacturing”, the statute provides, means putting raw materials through a series of steps that brings about a change in their composition or physical nature in order to make a new and different item of tangible personal property that will be sold to another. The statute provides that manufacturing begins at the point at which raw materials reach the first machine or piece of equipment involved in changing the form of the material and ends at the point at which manufacturing has altered the material to its completed form. Placing materials into containers, packages, or wrapping in which they are sold to the ultimate consumer is part of this manufacturing process.

For purposes of the sales tax exclusions, manufacturing does not include repackaging or redistributing; the cooking or preparing of food products by a retailer in the regular course of retail trade; the storage of tangible personal property; the delivery of tangible personal property to or from the plant; the delivery of tangible personal property to or from storage within the plant; and actions such as sorting, packing, or shrink wrapping the final material for ease or transporting and shipping.

What About Other States?

We put together a chart using our resources with CCH to show you the current status of the manufacturing exemptions in some of the top states. That chart is reproduced below. If you’d like more detail about those states, or in other states, just let us know and we can help you with that.

North Carolina Case Sends Shivers Through NC DOR

The North Carolina Court of Appeals has handed down a decision that has to be causing quite the stir at the NC DOR. It is certainly true that this decision is potentially far-reaching. It’s also a very surprising decision.

Anyone who has any use tax assessment pending in NC or has been assessed use tax in the last four years should take notice now. You could have a refund coming to you.

Let’s Set the Stage

Say you sell optional maintenance agreements. You decide to collect tax on the sale of maintenance agreements. If you collect tax on the sales of the agreements, it makes complete sense that no tax would be owed on parts that are used and/or transferred to your customers when you perform the warranty service. This is logical. But in some states, the converse is true (usually the ones who do not tax labor in general). That is, no tax is due upon the sale of the agreement itself, but use tax is due on the parts that are used in providing the warranty service.

Such is the case in NC. No tax is due on the sale of maintenance agreements; and use tax is due on parts used in performing warranty service. But, let’s say you collected tax on the sale of the agreement but did not pay tax on the parts used and now you’re under audit in NC. You make the completely logical argument that NC got their money, in fact NC probably got more from you than they would have if you had paid tax on the parts. You argue that NC should only tax you to the extent that cost of parts exceeds the revenue on optional maintenance agreements. Sounds like a valid argument, right?

It does, but NC is no different from most states in saying, first, that if you collect tax in error, you have to refund that money to your customers before they will pay it back to you. Second, NC would say (as would most states) that it’s a separate matter altogether that you owe tax on parts used in the service performed. NC would assess you a use tax on those parts and give you no refund or credit for the tax collected on the agreement sales. Even if the sale of the agreements were to the very same customer for whom you used parts in providing the warranty service.

The Double Standard of the State

Most states adhere to the theory that it would be unjust enrichment if a company were able to keep money it collected in error from its customers. When viewed from another viewpoint, the unjust enrichment theory is not without merit. For example, an unscrupulous retailer could simply tax everything it sells knowing that most people will pay tax whenever charged. Then that retailer would only remit tax on things that are actually taxable. And state governments don’t like anyone but themselves keeping tax on nontaxable items. So,  it does make sense that a state government would make it illegal for companies to keep sales taxes they’ve collected on nontaxable sales. It would be unjust enrichment and only the state can be unjustly enriched.

But, what about this situation? Is the company selling the maintenance agreements unjustly enriched here? They paid the tax on the sale of the maintenance agreements over to the state. It seems like if anything, NC is the only unjustly enriched party here.

The company fought the matter. My guess is that they were advised that they had little chance of prevailing. I’m also guessing that the NC DOR was supremely confident in their position. But the taxpayer did not go to battle without at least some ammo.  They had an argument based in North Carolina sales tax statute (Sec. 105-164.41) which says: “If upon examination of any return made under this Article, it appears that an amount of tax has been paid in excess of that properly due, then the amount in excess shall be credited against any tax or installment thereof then due from the taxpayer, under any other subsequent return, or shall be refunded to the taxpayer by the Secretary out of any funds appropriated for that purpose.” (emphasis added.)

The problem was of course that NC had an even more specific statute that seemed to say, very specifically, that in this scenario, you can’t offset use tax with sales tax improperly collected. It would have appeared to all parties that this taxpayer’s hopes were slim to none.

Here’s why this matters

First they went to the administrative hearing level and lost in a summary judgment. I’m sure no one was surprised that they lost at that level. Then the taxpayer filed for a judicial review of the agency decision with the Wake County Superior Court.

The Superior Court overruled the administrative decision, stating that the company was entitled to an offset against the use tax liability in the amount of tax charged on the optional agreements. The refund granted amounted to nearly $200,000 before penalty and interest.

The DOR must have been shocked by the courts decision. They appealed it to the next level.

But the appeals court affirmed the trial court.

The appeals court acknowledged the more specific statute, but held that statute did not apply to the specific transactions at hand and therefore 106-164.41 applied and the company should be allowed to use the tax improperly collected sales tax to offset the use tax.

Obviously, this was a big deal indeed for the company in this case, but it could have far-reaching impacts in NC.

If your company has been assessed a use tax on purchases in NC, you should also review your sales very closely to see if you’ve ever charged tax improperly on any of your sales in NC. Maybe you charged tax on something that is actually exempt, or you charged the wrong rate even. If so, according to our understanding, you could offset the use tax assessment.

Here is the full decision:

NO. COA11-655

NORTH CAROLINA COURT OF APPEALS

Filed: 21 February 2012

TECHNOCOM BUSINESS SYSTEMS INCORPORATED, Petitioner, v. NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent.

Wake County No. 10 CVS 004398

Appeal by respondent from order entered 7 January 2011 by Judge Ben F. Tennille in Wake County Superior Court. Heard in the Court of Appeals 9 November 2011.

Attorney General Roy A. Cooper, by Assistant Attorney General Tenisha S. Jacobs, for respondent-appellant.

The Wooten Law Firm, by Louis E. Wooten, and Everett Gaskins Hancock LLP, by E.D. Gaskins, Jr., for petitioner appellee.

BRYANT, Judge.

Where sales taxes were erroneously collected on optional maintenance agreements and paid to the North Carolina Department of Revenue, pursuant to N.C. Gen. Stat. §105-164.11(a), Technocom’s use tax liability should be offset by the erroneously collected sales tax. Therefore, we affirm the ruling of the trial court.

Facts and Procedural History

On 26 September 2008, the North Carolina Department of Revenue (“the Department”) issued a Notice of Final Determination (“Final Determination”) to Technocom Business Systems, Incorporated, (“Technocom”), a corporation in the business of selling and leasing office equipment. The Final Determination was the result of an audit performed on Technocom for the period between 1 June 2002 and 31 August 2005.

In the course of its business, Technocom purchases and uses parts, supplies, and materials to fulfill its optional maintenance agreements. It is under these maintenance agreements that Technocom services the equipment that it sells or leases to its customers. Regarding Technocom’s tax liability under these maintenance agreements, the Department made the following conclusion:

North Carolina imposes a State and local use tax on tangible personal property purchased inside or outside the State for storage, use or consumption in this State… . Use tax is payable by the person who purchases, leases or rents tangible personal property or who purchases a service.

[Technocom’s] use of parts, supplies and materials to fulfill its optional maintenance agreements during the audit period constitutes a taxable use of tangible personal property within the meaning of N.C. Gen. Stat. §105-164.3(49) 1. [Technocom] did not pay sales tax or accrue use tax on these items, and the Department has assessed [Technocom] for the appropriate use tax in its proposed assessment and this final determination.

Between 1 June 2002 and 31 August 2005, Technocom collected sales tax on its optional maintenance agreements. The Department held that these agreements were not subject to sales tax because they did not involve services necessary to complete the sale of tangible personal property under N.C. Gen. Stat. § 105-164.3(37) 2. Technocom stated to the Department that its sales and use tax liability should be offset by the sales tax it collected on its maintenance agreements. In response, the Department stated that it could not refund or credit Technocom pursuant to N.C. Gen. Stat. §105-164.11(a) 3 because there was no proof Technocom had refunded its customers the sales tax it erroneously collected on its optional maintenance agreements.

On 18 November 2008, Technocom filed a petition for contested case hearing in the Office of Administrative Hearings (“OAH”). Thereafter, on 1 May 2009, Technocom also filed a motion for partial summary judgment and the Department filed a motion for summary judgment. By order entered on 16 November 2009, an administrative law judge granted summary judgment in favor of the Department and sustained the Final Determination. The order concluded that no provision of the Revenue Act allowed Technocom to offset its use tax liability with sales tax it erroneously collected from its customers.

The Department, in a final agency decision, upheld the 16 November 2009 decision of the administrative law judge. On 18 March 2010, Technocom filed a petition for judicial review of the final agency decision in Wake County Superior Court.

Following a hearing held 10 December 2010, the superior court reversed the decision of the OAH and the Final Determination of the Department in a 4 January 2011 order. The superior court, in pertinent part, stated:

Transactions that do not generate a windfall and that do not result in the unfair treatment of customers are not included in the meaning of “exempt or nontaxable sales” in Section 105-164.11(a). Because the transactions at issue here are not “exempt or nontaxable sales,” Section 105-164.11(a) is not applicable. The general provision contained in Section 105-164.41 governs the outcome, and Technocom is entitled to a credit against the sales tax paid to the Department during the audit period.

The superior court remanded the case to the OAH with instructions to grant partial summary judgment in favor of Technocom, “leaving open the amount of the tax credit to which [Technocom] is entitled” for the OAH’s determination. Pursuant to the superior court’s order, the administrative law judge entered an order on 3 March 2011 stating the following:

1.   [Technocom] is GRANTED partial summary judgment on the following legal issue:

Whether the North Carolina Revenue Laws authorize Technocom to offset its use tax liability on the parts and supplies it provided to customers … with the sales taxes based on the sales of those same Service Agreements it had previously remitted in error to the Department[.]

2.   Petitioner is entitled to a tax credit of $192,457.33 on the parts and supplies [Technocom] previously charged, collected and remitted North Carolina sales tax on when it provided such items to its customers … if the Order entered in this matter on 4 January 2011 is affirmed on appeal.

3.   No further proceedings at OAH are required in this matter as there is no dispute about the amount of credit [Technocom] would be entitled to if the Order is affirmed on appeal.

The Department appeals the superior court’s 4 January 2011 order.

The sole issue on appeal is whether the North Carolina Revenue Laws authorize Technocom to offset its use tax liability with sales taxes erroneously paid by its customers. The Department argues that no provision in the North Carolina Sales and Use Tax Act (“Act”), N.C. Gen. Stat. §§105-164.1 et seq., permits Technocom to claim such a credit against its use tax liability.

An appellate court reviewing a superior court order regarding an agency decision examines the trial court’s order for error of law. The process has been described as a twofold task: (1) determining whether the trial court exercised the appropriate scope of review and, if appropriate, (2) deciding whether the court did so properly. When, as here, a petitioner contends the [superior court’s] decision was based on an error of law, de novo review is proper.

Holly Ridge Assocs., LLC v. N.C. Dep’t of Env’t & Natural Res., 361 N.C. 531, 535, 648 S.E.2d 830, 834 (2007) (internal quotation marks and citations omitted).

Because this appeal centers on a close reading of the Act, we must seek “[t]he principal goal of statutory construction [which] is to accomplish the legislative intent.” Lenox, Inc. v. Tolson, 353 N.C. 659, 664, 548 S.E.2d 513, 517 (2001) (citation omitted). “If the language of a statute is clear, the court must implement the statute according to the plain meaning of its terms so long as it is reasonable to do so.” Id.

[T]he Act, with certain exceptions and in pertinent part, imposes upon persons engaged in the business of selling tangible personal property at retail in this state a state sales tax at a rate of three percent of the sales price of each item sold. The Act also imposes a complementary state use tax “upon the storage, use or consumption in this state of tangible personal property purchased within and without this state for storage, use or consumption within this state” at a rate of three percent of the cost of such property “when the same is not sold but used, consumed, distributed or stored for use or consumption in this State. …”

In re Assessment of Additional N.C. & Orange County Use Taxes, etc., 312 N.C. 211, 214, 322 S.E.2d 155, 158 (1984) (citation omitted).

The first purpose of the Act is to generate revenue for the state. Id. This is accomplished by a sales tax which is

imposed upon the retail merchant as a privilege tax for the right to engage in that business. The tax is, however, designed to be passed on to the consumer. The second purpose of the sales and use tax scheme is to equalize the tax burden on all state residents. This is achieved through imposition of the use tax in certain situations where the sales tax is not applicable.

Id. at 214-15, 322 S.E.2d at 158.

“While a sales tax and a use tax in many instances may bring about the same result, they are different in conception.” Colonial Pipeline Co. v. Clayton, 275 N.C. 215, 222, 166 S.E.2d 671, 676 (1969). “A sales tax is assessed on the purchase price of property and is imposed at the time of sale. A use tax is assessed on the storage, use or consumption of property and takes ef[f]ect only after such use begins.” Id. at 223, 166 S.E.2d at 677.

The General Assembly has defined a “sale” as a “transfer for consideration of title or possession of tangible personal property … for consideration of a service.” N.C.G.S. §105-164.3(36) (2009). A sale may include such things as a “lease or rental” or a “transaction in which the possession of property is transferred but the seller retains title or security for the payment of the consideration.” Id. The sales tax collected on the “sales price” includes the “total amount or consideration for which tangible personal property … or services are sold, leased, or rented.” N.C.G.S. §105-164.3(37) (2009). A sales price includes “charges by the retailer for any services necessary to complete the sale.” Id. (emphasis added). A “use”, on the other hand, is the “exercise of any right, power, or dominion whatsoever over tangible personal property … by the purchaser of the property or service.” N.C.G.S. §105-164.3(49) (2009).

In the instant case, Technocom does not dispute that it improperly collected sales tax on amounts charged under its optional maintenance agreements and that Technocom should have paid a use tax in connection with the parts and supplies it provided under those agreements. However, it does argue that pursuant to N.C. Gen. Stat. §105-164.41, the Department is required to issue Technocom a credit against “any” tax. Technocom asserts that the Department should credit the sales taxes made in error against the use tax assessment levied by the Department, particularly, whereas here, the Department seeks to treat the transactions at issue as a “use” for tax purposes but as a “sale” for refund purposes.

N.C.G.S. §105-164.41, titled “Excess payments; refunds[,]” states that “[if] it appears that an amount of tax has been paid in excess of that properly due, then the amount in excess shall be credited against any tax or installment thereof then due from the taxpayer[.]” N.C.G.S. §105-164.41 (2009). On the other hand, N.C. Gen. Stat. §105-164.11 (2009), titled “Excessive and erroneous collections[,]” provides guidance in situations where excessive and erroneous collections are made and, specifically, prohibits the relief sought by Technocom. N.C.G.S. §105-164.11 provides the following:

When the tax collected for any period is in excess of the total amount that should have been collected, the total amount collected must be paid over to the Secretary. When tax is collected for any period on exempt or nontaxable sales the tax erroneously collected shall be remitted to the Secretary and no refund shall be made to a taxpayer unless the purchaser has received credit for or has been refunded the amount of tax erroneously charged.

N.C.G.S. §105-164.11 (2009) (emphasis added).

The rules of “[s]tatutory construction require[] that a more specific statute controls over a statute of general applicability.” Stewart v. Johnston County Bd. Of Educ., 129 N.C. App. 108, 110, 498 S.E.2d 382, 384 (1998). “When two statutes apparently overlap, it is well established that the statute special and particular shall control over the statute general in nature, even if the general statute is more recent, unless it clearly appears that the legislature intended the general statute to control.” Trustees of Rowan Technical College v. J. Hyatt Associates, Inc., 313 N.C. 230, 238, 328 S.E.2d 274, 279 (1985) (citation omitted).

N.C.G.S. §105-164.41 is the more general statute, applying to any situation where the amount of tax has been paid in excess of that properly due. However, although N.C.G.S. §105-164.11 is a more specific and particular statute, it does not apply to the instant case, as the Department would have us hold. N.C.G.S. §105-164.11 only applies to taxes collected on “exempt or nontaxable sales.” As previously stated, a sale is the transfer of tangible personal property for a consideration to be paid. In its February 2010 Final Agency Decision, the Department concluded that the optional maintenance agreements at issue constituted a taxable use of tangible personal property within the meaning of N.C.G.S. §105-164.3(49) and not a sale. Accordingly, the Department held that the agreements were subject to use taxes and not sales taxes. Therefore, N.C.G.S. § 105-164.11 does not apply. We hold that the general provision in N.C.G.S. §105-164.41 governs the outcome, entitling Technocom to a credit against the sales tax paid to the Department during the audit period. Based on the foregoing, the order of the trial court is affirmed.

Affirmed.

Judges ELMORE and STEPHENS concur.

  
Footnotes

1   N.C.G.S. §105-164.3(49) defines “use” under Article 5 of the General Statutes.

2   N.C.G.S. §105-164.3(37) defines the meaning of “sales price” under Article 5 of the general statutes.

3   N.C.G.S. §105-164.11(a) is titled, “Excessive and erroneous collections.”

Missouri Policy on Software Load and Leave is Ruled Out

Is Software Even Taxable in Missouri Now?

Special Bonus Content: Who Else Exempts Load and Leave?

The Missouri Administrative Hearing Commission (AHC) recently held that the sale of canned computer software to a customer through a “load and leave” delivery method was not subject to Missouri use tax because the software was not tangible personal property. This decision overrides a Missouri DOR policy that software transferred by the load and leave method is taxable. (FileNet Corp. v. Director of Revenue, Administrative Hearing Commission (Missouri), No. 07-0146 RS, August 20, 2010.) For a full copy of the lengthy decision, please contact us at www.PeisnerJohnson.com.

What is “Load and Leave”?

The load and leave method refers to a situation in which the vendor of the software typically brings the software to the customer location on some medium that is the property of the software vendor. Let’s say it’s on a usb flash drive. The vendor owns the the flash drive and never transfers that flash drive to the customer. The vendor transfers the software from the flash drive to the customer’s computer installing the software for the customer. The vendor removes the flash drive and leaves the customer location. No tangible media is ever transferred to the customer. This is a basic description of a typical load and leave transaction.

Missouri’s Old Policy

Until this Decision was reached, Missouri’s policy had been that computer software load and leave transactions were subject to sales and use tax. (See Tax Policy Notice TPN16, Missouri Department of Revenue, January 9, 2004; Letter Ruling LR1724.) Now, this policy is no longer valid.

The basis of the ruling in this case has potentially far-reaching effects. The AHC considered prior Missouri court precedents as well as conclusions reached in other states in recent cases but ultimately said it had to rely on the strict wording of the Missouri statutes in reaching their decision. In construing the statute, they made the point that taxation statutes must be construed in favor of the taxpayer. This is in noted contrast to the usual point made in many cases where taxpayers are contending they qualify for an exemption. In those cases, the administrative officers or judges, almost always will point out that since exemptions are the “antithesis of fair and equal taxation” they must be strictly construed against the taxpayer. In this case, the taxpayer’s main contention was that the tax did not apply to this transaction not because of an exemption, but because the statute did not explicitly tax it. Therefore, the statute must be construed in favor of the taxpayer. Fortunately for this taxpayer, the AHC agreed with them.

The taxpayer also made other alternative arguments, but the AHC did not address them with conclusions of law but they did make findings of fact relative to the arguments,  

Important Findings of Fact

Something tangible is capable of being perceived, especially by the sense of touch. It is a fact that software takes up space on a computer’s hard drive. However, the evidence in the record showed that a person cannot see or touch software. A person can only see the media on which the software is stored, such as a computer, a CD or a hard drive. If one had an oscilloscope, one could see the positive and negative charges moving across a chip, but the 1s and 0s could not actually be seen. Under the load and leave method, the taxpayer’s programs were transferred from the taxpayer’s portable USB hard drive onto the customer’s computer system. There was no use of any physical medium, such as tapes or disks, to transmit the computer programs to the end-user, and there was no sale of tangible personal property. Also, the taxpayer did not leave the portable USB hard drive or any other tangible storage media or other tangible personal property with the customer.

Software is Not Tangible Property in Missouri

Based on the record in this case, the AHC held that the taxpayer’s software was intangible. The statute taxes only the sale of tangible personal property. Since software is intangible, no tax is due in Missouri. Missouri’s old policy (before they changed in in January 2004) was that software delivered electronically where no tangible personal property was included (including when delivered by load and leave) was not taxable. They changed their policy effective back in January 2004.  After that date, all load and leave transactions were taxable. Electronic delivery with no tangible medium being transferred were not taxable. It was always odd that MO would make the distinction that while electronic downloads are not taxable, if the vendor downloads the software to their customer’s computer in person leaving behind no TPP, that it would now be taxable. But, thanks to this decision, there is no longer such a distinction.

But this decision seems to throw the whole question out in the open. Is software even taxable at all regardless of how it is delivered? Is the means of delivery completely superfluous and is it all about the true object of the transaction?  That certainly seems to be the overriding message to this reader. Consider this: the AHC stated that while it was true that precedents from the Missouri Supreme Court have applied to sales of software, the prior cases did not squarely address the issue of whether software is tangible personal property. In fact, tellingly, the AHC compared the sale of software on a disk to the sale of a share of stock. The sale of stock is not taxed because it is intangible in nature. Yes, it is represented on some fancy parchment stock paper, but the value of the paper is inconsequential to the value of the ownership interest it represents.  It could certainly be argued using the reasoning in this case that in Missouri all software is intangible by nature and whether it is transferred electronically, by load and leave, or by tangible medium does not matter.

This issue bears very close watching.

Where Else is Load and Leave Not Taxable?

We thought our readers might be interested to see how some other states tax software delivered by the load and leave method. Here is some good research from CCH on the issue.

NORTH CAROLINA

Prior to January 1, 2010, computer software delivered electronically or delivered by load and leave was exempt.

But wait … there’s more: according to the North Carolina Department of Revenue, effective January 1, 2010, the sale at retail and the use, storage, or consumption of computer software that meets any of the following descriptions is exempt: (1) software designed to run on an enterprise server operating system; (2) software sold to a person who operates a data center and is used within the data center; and (3) software sold to a person who provides cable service, telecommunications service, or video programming and is used to provide ancillary service, cable service, Internet access service, telecommunications service, or video programming.  In addition, and also effective January 1, 2010, computer software or digital property that becomes a component part of other computer software or digital property that is offered for sale or a service that is offered for sale is exempt. Custom computer software and the portion of pre-written computer software that is modified or enhanced, provided the modification or enhancement is designed and developed to the specifications of a specific purchaser and the charges for the modification or enhancement are separately stated, continue to be exempt. Pre-written computer software or licenses purchased by consumers for personal use are subject to tax. ( Important Notice: Computer Software, North Carolina Department of Revenue, February 2010)

ARKANSAS

Software that is delivered electronically or by “load and leave” is not taxable. For tax purposes, rentals and leases of computer hardware and software are considered sales. ( Sec. 26-52-304; Sec. 26-53-109, A.C.A.; Reg. GR-25)

GEORGIA

Pre-written or modified computer software transferred to the retail purchaser by means of load and leave is not subject to sales and use tax. The transaction is not deemed to be the sale of tangible personal property when the retailer installs the computer software and the computer software does not remain permanently in the purchaser’s possession in a tangible medium after the computer software has been installed. ( Reg. Sec. 560-12-2-.111(6)(a) )

RHODE ISLAND

Pre-written software is exempt if delivered electronically or by load and leave. ( RI Gen Laws Sec. 44-18-30(61) ; Reg. SU 09-25 )

NEW JERSEY

Pre-written software delivered electronically is generally taxable as tangible personal property. (N.J.S.A. 54:32B-2(g) ; Reg. 18:24-25.5 ) (Technical Bulletin TB-51R, March 13, 2007)  Nevertheless, there is one exception to the taxability of pre-written software delivered electronically. Sales of pre-written software delivered electronically are exempt if the software is to be used directly and exclusively in the conduct of the purchaser’s business, trade, or occupation. (N.J.S.A., Sec. 54:32B-8.56(15) ; Reg. 18:24-25.5 ) (Technical Bulletin TB-51R, March 13, 2007)

This exception does not apply, however, if the software is being delivered by a “load-and-leave” method. The transaction is not deemed to be the sale of tangible personal property delivered electronically, and therefore is not exempt, even if the software is to be used directly and exclusively in the conduct of the purchaser’s business, trade, or occupation. (Technical Bulletin TB-51R, March 13, 2007)

But make sure there is no tangible property delivered or left behind! If the purchaser of software initially delivered electronically also receives tangible storage media containing the software, then the transaction is not deemed to be a sale of software delivered electronically and is not exempt, even when the software is to be used directly and exclusively in the purchaser’s business. (Technical Bulletin TB-51R, March 13, 2007)

CALIFORNIA

California taxes the sale of “canned” computer software, which is software designed and manufactured for general retail sale and not under the specifications or demands of any individual client. ( Sec. 6010.9, Rev. & Tax. Code ) Tax applies whether title to the storage media on which the program is recorded, coded, or punched passes to the customer, or the program is recorded, coded, or punched on storage media furnished by the customer. Tax applies to the entire charge made to the customer, including any license or royalty fees. However, tax does not apply to license fees or royalties paid for the right to reproduce or copy a federally copyrighted program, even if a tangible copy of the program is transferred concurrently with the granting of the right. ( Reg. 1502(f)(1), 18 CCR )

In addition, tax does not apply to sales of canned software that are transmitted electronically from the seller’s place of business to or through the purchaser’s computer as long as the purchaser does not obtain possession of any tangible personal property in the transaction. Sales of canned software also are not taxable if the software is installed by the seller on the customer’s computer. They do not specifically say “Load and Leave” here but we can certainly infer it. However, the load and leave method is taxable if the seller transfers title to or possession of storage media in the transaction or the installation of the program is a part of the sale of the computer. ( Reg. 1502(f)(1)(D), 18 CCR)

FLORIDA (Load and Leave is Taxable Here)

So far, every state we’ve listed here exempts software sold and delivered by means of the Load and Leave method. Florida is not one of those states. But since they have recently published a TAA that addresses this issue on point, we include them in this discussion.

In Florida, software delivered electronically is not considered an exchange of tangible personal property and is not subject to tax. In addition, the charge for furnishing information by way of electronic images appearing on a subscriber’s video display screen is neither a sale of tangible personal property nor a sale of a taxable information service. ( Rule 12A-1.062(4), F.A.C, CCH Survey on the Sales and Use Taxation of E-Commerce, Florida Department of Revenue, October 3, 2000)

According to TAA 10A-010 issued  2/16/10, the sale of canned or pre-packaged software delivered to a customer in tangible form, including but not limited to, on a disk or via the load and leave method, is a sale of tangible personal property subject to sales tax. Charges for services, including installation and travel charges, that are part of the sale of tangible canned or pre-packaged software are a part of the sales price and subject to sales tax.

Certain Illinois Taxpayers May Lose Millions of Dollars on July 1, 2010

Illinois Taxpayers May Lose Millions of Dollars on July 1, 2010

The State of Illinois Manufacturer’s Purchase Credit (“MPC”) is unique among state incentives. Many Illinois taxpayers might qualify for this credit. If they do qualify, they must file the appropriate forms by June 30, 2010, or the money is lost forever.

What is the MPC Credit?
The MPC is earned when a manufacturer or graphic artist purchases manufacturing or graphic arts machinery and that equipment qualifies for the existing sales/use tax exemptions. The credit is equal to half of 6.25% state sales tax that would have been owed if the purchase was not otherwise exempt.
The MPC Credit may be used to pay state sales tax or use tax on future purchases of qualifying production-related tangible personal property. All unused MPC earned expires the last day of the second calendar year following the year in which the original tax exempt purchase was made. MPC may not be transferred to another party.
What Must You Do?
File an Illinois ST-16 Annual Report of MPC earned with the Illinois Department of Revenue by June 30,2010 for all qualified purchases made in 2009. In addition, the Illinois ST-17 Annual Report of MPC used should also be filed.
We Can Help
Facing a time crunch? Not sure if you qualify or which purchases you make meet the tests? We can help you. We will review the prior year’s capital purchases and Accounts Payable files to identify qualifying purchases. We will then prepare the ST-16 Report of MPC earned along with a ST-17 Report of MPC used on your behalf.
PJCo will also review the credit earned to ensure maximum usage of the credit. By reviewing your AP files we can identify transactions where MPC can be applied. If we discover tax was paid to a vendor or State we will prepare a refund to recover the taxes paid.
How Soon Can You Actually Get This Money in Your Pocket?
It’s one thing to qualify for a credit and file all the right forms — it’s quite another to actually get the cash in your hands. The state of Illinois doesn’t just send you a check. The credit has to be applied against other taxes owed. If it isn’t applied to some other tax in a timely fashion, it’s lost and all that work was wasted. This is where our experience and services become valuable in assisting your company in using the credit before they expire. We know exactly where to look to apply the credit on future or past purchases. Eligible purchases of the credit can be applied to many areas to include production related tangible personal property that is:
  • Incorporated into real estate within a manufacturing or graphic arts facility.
  • Used or consumed in activities such as pre-production, material handling, receiving, quality control, inventory control, storage and staging, and packaging for shipping purposes.
  • Used or consumed Tangible Personal Property for Research and Development.
What Should You Do Now?
Contact us today to arrange a review of all purchases made in 2009. Remember there is no extension available to file for this credit and the return must be filed by June 30, 2010. There is still time for us to marshal our resources and complete this critical filing on your behalf.

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