Say hello to

Rene

CPA, MST | Principal

When she’s not working in Bellevue, Rene can be found anchoring Clark Nuber’s “south sound office” from her home in Lacey, Washington. In her downtime, Rene enjoys cooking, golfing, and traveling. So far, she has visited 35 different countries – and counting!

By Nicole Lyons, CMI | Clark Nuber PS

Taxpayers taking advantage of any one of the available State of Washington tax incentives – including tax deferrals, reduced B&O tax rates, exemptions, and credits – may be required to file an Annual Report or Annual Survey.

Some incentives require that both the report and the survey be filed, while other programs do not have a reporting requirement.

For tax incentives taken in 2016, the due date for the Annual Report and Annual Survey is May 31, 2017.

There are over 50 different tax incentive programs in Washington. A partial list of common incentives includes:

  • High Technology B&O Tax Credit for R&D Spending
  • High Technology Sales & Use tax Deferral/Waiver
  • Biotechnology & Medical Device Manufacturing Sales & Use Tax Deferral/Waiver
  • B&O Tax Exemption for Manufacturing Fresh Fruit and Vegetables, Dairy and Seafood Products
  • Aerospace Industry Incentives
  • Incentives for Manufacturers and Retail Sellers/Distributors of Biofuels
  • Renewable Energy/Green Industry Incentives
  • Deduction for Government Funded Payments for Mental Health Services Provided by Non-Profit Organizations

Failure to file the annual report/survey by the due date will result in immediate repayment of 35 percent of the tax incentive claimed and an additional 15 percent of the tax incentive if the taxpayer has filed previous years’ reports/surveys late.

The Department of Revenue requires that the report/survey be filed electronically using the Department’s electronic filing system, accessible from its website. An extension is available, but it must be granted prior to the May 31 filing deadline.

Please contact Nicole Lyons if you have questions about whether these requirements apply to your business or organization, or if you’d like to find out if you are missing out on any available incentives.

 

Nicole Lyons Color Print Resolution

Nicole Lyons is a manager in Clark Nuber’s state and local tax practice. She specializes in providing consulting to clients in a variety of industries, including manufacturing, technology, healthcare, and professional services.

© Clark Nuber PS and Developing News, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

Keep Reading

Articles and Publications

Drop Shippers Beware: Should you be Collecting Sales Tax?

Generally, sales for resale are not subject to state and local sales taxes - provided that a purchaser supplies proper exemption documentation. As a result, wholesalers who deliver taxable products directly to their customer’s customer do not typically worry about collecting sales or use taxes. This is because they assume their customer can give a valid resale certificate. But, as explained below, that is not always the case. Figuring out when a purchaser can give a resale certificate can be challenging. No more so than in the case of a drop shipment. States’ sales tax rules on drop shipments can be complex, depending on the locations and circumstances of the parties involved. Failure to comply with these rules can lead to an expensive surprise on audit. A typical drop shipment transaction involves at least two sales. First, a consumer purchases a product from a retailer who does not have the product on hand. In order to fulfil the sale to the consumer, the retailer places an order for the product with a supplier, along with instructions to ship the product directly to the consumer. Drop shipment transactions may involve multiple intermediate sales, where someone in the supply chain ships the product directly to someone other than their customer. If the supplier has a taxable presence, or “nexus,” in the destination state and the product is taxable there, the supplier will want to collect a resale certificate (or similar exemption documentation) from its customer. The question then arises as to whether the customer can give a valid resale certificate to the supplier. If the supplier’s customer is registered in the destination state, the supplier should have no difficulty obtaining a valid certificate. However, what happens if the customer is not registered in the destination state? Can the customer give valid resale documentation? This is where the rules can get tricky. States have lost significant revenue from being unable to require that out-of-state retailers collect and remit sales tax. Consequently, some states have reacted by shifting collection obligations to suppliers that make drop shipments when they are registered, or do business, in those states. The complexities involved in determining the taxability of drop shipments are due to state nexus considerations. Generally, nexus with a state exists when a business has a physical presence in the state.  The state may then legally impose sales tax reporting and/or collection obligations on the business. Typically, an out-of-state supplier will have sales tax nexus in a state if they have a business location or an employee in the state. However, merely sending independent salespersons into the state, or engaging in other types of promotional activities, is enough. The following is a common example of how the rules apply to multi-state suppliers. Suppose a consumer in Connecticut purchases a product from a retailer located in Georgia. Suppose that retailer purchases the product at wholesale from a supplier located in Washington, who drop ships the product directly to Connecticut. The Washington supplier is registered for sales tax purposes in both Connecticut and Georgia.

Drop shipment graphic

  Under all states’ sales tax laws, an interstate sale of goods is deemed to occur at the shipment destination. Therefore, both the retail and wholesale sales in our example are considered Connecticut sales. Here are the questions to consider:
  • Since the product never ships to the Georgia retailer, should the supplier obtain resale documentation from the retailer pursuant to Connecticut’s rules, or Georgia’s rules?

Resale documentation usually includes a resale certificate, or permit number, issued by a state. During an audit, the supplier takes on the burden of showing that they collected “proper” resale documentation. What is considered “proper” varies by state.

Often, a retailer will do business in a number of states. This mean that the supplier should obtain the appropriate documentation for the state in which the sale occurs. In our example, that state would be Connecticut. While some states allow suppliers to accept retailers’ home-state resale certificates (Georgia in our example), some do not.

Further, more than twenty states that are members of the Streamlined Sales and Use Tax Agreement accept a “SST Exemption Certificate” to document resales. Washington allows suppliers to accept a valid reseller permit issued by the state, an SST Exemption Certificate, and certain other documents under appropriate circumstances.

  • Suppose the retailer does not have nexus in Connecticut and does not collect sales tax from the consumer. Since the supplier is registered in Connecticut, do they have an obligation to collect sales tax and remit it to Connecticut?

The answer is yes; the supplier must collect sales tax from the retailer. This is because, under Connecticut law, the supplier may only take a valid resale certificate from a retailer registered in Connecticut. In this way, Connecticut insures the sales tax will be collected and remitted to the state. This is the case in a number of other states as well.

  • If the supplier has an obligation to collect sales tax, is it collected from the retailer or the purchaser? Further, should sales tax be calculated based on the price of the wholesale sale, or the retail sale?

The majority of states, including Connecticut, require suppliers to collect sales tax from retailers based on retail prices, if known, or based on wholesale prices if retail prices are unavailable.

In the case of California drop shipments, the drop shipper is liable for sales tax based on the retail selling price. If the drop shipper does not know the retail price, California tax regulations provide a safe harbor that allows suppliers to calculate the amount of the tax due, based on a 10% markup of the wholesale price.

In summary, while the structure of a multi-state drop shipment may be simple, the sales tax consequences are complex.

In addition to dealing with resale documentation issues, suppliers making drop shipments must also be aware of, and comply with, the various tax collection requirements in each state.

Given the complexities involved, we encourage suppliers to contact their tax advisor or Clark Nuber for assistance in complying with each state’s drop shipment rules.

© 2017 Clark Nuber PS All Rights Reserved

Appeals Decision Creates Refund Opportunity for Investors in California Limited Liability Companies

In January 2017, the California Court of Appeals held in Swart Enterprises, Inc. v. Franchise Tax Board that an out-of-state C corporation could not be required to file a California franchise tax return and pay the $800 minimum tax merely because it held a 0.2% interest in a manager-managed LLC that operated in the state. In its decision, the appellate court compared this passive investment to a limited partner interest in a California partnership, which California courts have previously held does not create a taxable presence for the limited partner. On February 28, 2017, the California Franchise Tax Board announced it would not appeal the Swart decision and would issue refunds for prior years, where appropriate.  We expect a substantial number of refund claims to be filed because California has historically been aggressive in enforcing the filing requirement on out-of-state companies with ownership interests in California LLCs. Although the taxpayer in Swart is a C corporation, it appears the court’s logic could apply equally to California’s $800 LLC tax.  Where a parent or intermediate-tier LLC is not doing business in California in its own right and merely holds a non-manager interest in a lower-tier LLC doing business in the state, we question whether the LLC tax can still be imposed. Questions Remain Although it is a good outcome and a well-reasoned decision, there are several questions left unanswered by the court:

1. Does the ownership percentage matter? The Swart taxpayer owned only a 0.2% interest, but once we accept the Court’s logic that a company is not “doing business” in California simply by holding a passive investment in a California LLC, shouldn’t the same conclusion result even if the out-of-state member owns a 99% interest?

2. How important is it that the LLC’s operating agreement in Swart delegated “full, exclusive and complete authority in the management and control of the business” to the third-party manager? If the investor had participated in making major decisions for the LLC (but ceded authority to the manager on day-to-day operational issues), would the investor have been “doing business” in California?

3. Could the court’s ruling be extended to nonresident, non-managing LLC members whose California tax would exceed the $800 minimum? If so, the potential refunds (and the number of affected taxpayers) would increase substantially.

While we don’t yet have answers to all the questions, it is clear that, for investors matching the Swart fact pattern, California’s reviled $800 annual tax should thankfully become a thing of the past. Please contact Clark Nuber or your state tax professional if you would like more information about this decision or to discuss if it could affect your specific situation. © 2017 Clark Nuber PS All Rights Reserved

IRS Releases Form 990-EZ Tools to Improve Compliance Accuracy

In an effort to reduce the error rate on paper filed Forms 990-EZ, the IRS created an electronic PDF of the 990-EZ with 29 helpful pop up boxes. The boxes provide additional information and, in some cases, links to Form instructions, additional forms, another IRS publications or other helpful information. You may access the pop up box enhanced Form 990-EZ here. Once organizations have completed the Form 990-EZ, they can print and file the paper form. However, the IRS has a goal of moving all organizations towards electronically filing the 990 series returns. We have complied screenshots of the IRS’ helpful hints, which are available here. The information is in plain language and designed to improve accuracy of reporting in the areas that included most mistakes. Only organizations that have gross revenues of less than $200,000, have total assets of less than $500,000, and meet the following criteria may file the simplified Form 990-EZ, instead of the longer and more complex Form 990. The organization qualifies to file the simplified Form 990-EZ if it:
  • Did not sponsor a Donor Advised Fund (as defined by IRC section 4966)
  • Did not operate a hospital facility
  • Is not tax exempt under IRC section 501(c)(29),
  • Is not a controlling organization as defined by IRC section 512(b)(13),
  • Is not a private foundation as defined by 509(a), and
  • Is not filing a group return.
Of course, very small organizations, which normally have gross receipts of $50,000 or less (over a three year aggregate), may file the electronic Form 990-N. Please contact your Clark Nuber tax professionals if you have any questions, or would like additional information about filing Forms 990, 990-EZ or 990-N. © Clark Nuber PS 2017. All Rights Reserved.

Featured Resources