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TAX UPDATES

Tennessee Issues Letter Ruling on Fuel Meters
A Tennessee taxpayer that calibrates fuel meters at gas stations and fuel terminals, recently asked the Tennessee DOR to rule on whether or not its services were subject to State sales and use tax. Using "Rule 54" as the basis for its opinion, the DOR determined that such services are not taxable when the fuel meters are attached to real property. After classifying the calibration service as "repair" or "repair services" because the meters were restored to their original functioning condition, Tennessee tax code and Rule 54(2) were cited to explain that repairs and repair services to tangible personal property do not include ". . .fixtures attached to and a part of any real property." When the calibration service is performed on meters affixed to realty, the "repairs" are not subject to Tennessee sales and use tax; but, such services are subject to tax when meters are not affixed to real property.

Missouri DOR Issues Guidance on Utilities
Food preparation customers who operate retail locations are eligible for state sales tax exemptions on purchases of utilities according to a recent Missouri Administrative Hearing Commission decision. The Commission decided that making snack foods in convenience stores is "processing" as broadly defined in Missouri's tax code rather than accepting the notion that the stores were not eligible for tax exemptions because they are not industrial-style "plants." The Commission reversed a decision by the Director of Revenue, who warns that every retail location in Missouri that prepares coffee and snacks including book stores, snack bars, restaurants, and convenience stores will be able to claim an exemption from sales tax. Pending a decision made on appeal to the Missouri State Supreme Court, the DOR issued guidelines to utilities and retailers recommending that applicable sales tax be accrued on utility purchases.

Illinois Clarifies Tax Guidance for Information Services
In a recent General Information Letter, the Illinois DOR provided guidance on the definition and taxability of online video presentations that are not downloaded and/or transferred to tangible media. Taxes that could possibly be applied include the Illinois Retailers' Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax. However, because there is no transfer of software or tangible personal property when viewing online video presentations, none of these taxes would apply in the State of Illinois.

New York Tax Appeals Tribunal Reverses Law Judge's Decision
An administrative law judge's determination was reversed by the New York Tax Appeals Tribunal in a matter concerning the tax-exempt purchase of a truck scale as a capital improvement. The truck scale was installed to weigh trucks that carried sand and gravel from the taxpayer's mine. The tax exemption was denied because it was not proven that the scale was permanently affixed in a manner that would cause damage to property or the scale itself if it were removed. A tax exemption was allowed for the taxpayer's purchase of an asphalt milling machine based on evidence that the machine was used only to extract and grind recycled asphalt pavement for sale to customers, which complied with the definition of machinery or equipment used in the production of tangible personal property.

Kansas Lengthens Previously Shortened Refund Claim Period
Beginning on June 15, 2009, Kansas shortened the period for filing sales tax refund claims or credits from three years to one year from the due date of the return for the reporting period. After July 1, 2011, the claims filing limitation was restored to three years.

Indiana Updates Guidance for Utilities Used in Manufacturing
Revisions to sales and use tax exemptions related to utilities used during manufacturing were included in a recent Information Bulletin issued by the Indiana DOR. The bulletin lists the types of manufacturing or production activities that are excluded from paying tax on electricity, gas, water, steam, or steam heat sold by public utilities or power subsidiaries. The utility must be consumed as an integral part of an integrated process that produces tangible personal property, which includes environmental controls that are essential for production to occur. Utilities consumed for testing during production are also exempt as are food heating and cooling equipment that are required for production such as fryers for chicken or freezers for making ice cream. Utilities must be consumed more than 50% of the time for the excepted uses and must be separately metered to qualify.

Indiana Issues Letter Ruling on Test Cell Exemption
While Indiana law allows exemptions for research and development equipment purchased for manufacturing, a taxpayer that operates test cells for R&D purposes is not exempt from paying sales and use taxes for most of its purchases. In its letter ruling following an audit, the Indiana DOR stated that prototype items that were tested were not "marketable goods," which is a requirement for tax exemption. Most of the testing equipment also did not qualify for sales tax exemption because it was not durable and had a useful life of less than one year as set out in an information bulletin issued in 2008.

Virginia Paints Clear Picture for Manufacturers
In a recent letter ruling, the Virginia Department of Taxation said that certain components of paint spray booths are tax exempt, but the materials used to build the booths are not exempt unless they are built with specialized materials. A taxpayer argued that the paint booths created a special environment that ensured high-quality finishes on its products and were necessary and integral to the manufacturing process. The Department's reply indicates that environment control systems that ensure proper drying or remove paint overspray are exempt because they protect product integrity. However, if the walls, ceilings, floors, and doors are built with common materials or are not built in a specialized manner, their purchase is taxable.

Illinois DOR Squeezes Out Press Packing Materials
Printers in Illinois who use paper or plastic press packing materials to build up plates and blanket cylinders in the prepress process must pay taxes on the items. According to a recent general information letter, the DOR states that although graphic arts machinery and equipment are tax-exempt, materials used or consumed in the printing process are not. One-time expendable supplies, such as printing plates and packing materials would not qualify for the exemption.

Tennessee Expands Several Exemptions
New sales and use tax legislation allows companies that construct or expand their headquarters in Tennessee to claim tax credits for qualified purchases. At least $10 million must be invested, at least 100 new full-time jobs must be created in connection with the facilities, and the facilities must be used as a headquarters for at least 10 years from the end of the investment period. The legislation also extends exemptions for material handling and racking systems at qualified warehouse or distribution facilities that are either renovated or expanded with an investment exceeding $10 million over a period of less than three years.

Indiana DOR Goes Misty on Environmental Controls
During a recent audit, an automotive aluminum die cast parts manufacturer was assessed use tax on capital asset purchases that included a dust-hog system, mist collectors, and a lot traceablity system. The taxpayer's protest was based on evidence that the mist collectors and dust-hog were mandated by Illinois Department of Environmental Management requirements, that the equipment prevented contamination of the product during production, and that they prevent respiratory injury to production workers. The DOR was satisfied that the collectors and dust-hog met the exemption requirements for complying with an environmental quality standard. The lot traceability system, while needed to ensure that vehicles were assembled with the correct components, was considered to be a taxable convenience item and not an essential and integral part of the production process.

Texas Governor Perry Vetoes Controversial "Amazon" Law
Texas House Bill 2403, which would have mandated online retailers with a physical presence in Texas to remit state sales taxes, was vetoed by Governor Rick Perry. The controversial legislation was passed by Texas lawmakers in response to State Comptroller Susan Combs' running battle with Amazon.com over sales tax collections. In clearly defining what constitutes nexus, or a physical presence, in Texas for tax purposes, H.B. 2403 said that "substantial ownership" in a business physically located in Texas was required. Because Amazon.com uses a warehouse in Texas that is run by an "affiliate, but not a subsidiary, of the Amazon retailing entity," Amazon.com resisted attempts by the Comptroller's Office to pay $269 million in back sales taxes. In his veto message, Governor Perry said that he worried about risking unintended consequences and called for a "thorough policy discussion" with consumers, retailers, technology experts, state lawmakers in Texas and other states, and the federal government.

California Contemplates Use Tax Police on Internet
Under a controversial plan proposed by the Board of Equalization, the State of California would hire private vendors to find which Californians are not paying use taxes for online purchases that are shipped from out of state. Plan proponents say that the program could generate up to $1.1 billion in uncollected taxes for purchases exceeding $5,000. Critics of the plan have privacy concerns saying that the data collected could be misused. Retailers are concerned that California customers will stop buying from them leading to declining sales. For now, the BOE has withdrawn its idea and has asked for more time to study the idea.

Washington Allows Exemption for Fire Suppression Systems
A tax determination by the Washington Department of Revenue favored a taxpayer who protested an assessment for a fire suppression system installed in a spray/bake paint booth. When the new booth was installed at an automobile panel manufacturing plant, the fire suppression system was installed and wired through the spray/bake booth control panel in such a manner that the painting booth would not operate without the suppression system. The DOR found that the new fire suppression system was an integrated component of a tax-exempt spray/bake booth and was eligible for the state's machinery and equipment exemption.

Wisconsin Supports Exemption for Water Slide Steel
When a new fiberglass water park slide was bought for a Wisconsin hotel resort, the cost for the slide included steel support structures, engineering design services for installation, and installation services. The owner did not pay sales/use tax on the design services, steel supports, and installation, which was assessed during a subsequent audit as taxable personal property. The taxpayer appealed to the Wisconsin Tax Appeals Commission, which found that the items are nontaxable "real property construction activities." In supporting its decision, the Commission applied the three-part Harvestore test and found that the water slide was physically annexed to the real estate and that it was adapted to the use or purpose to which the realty was devoted. The third and most important factor was intent to "make a permanent accession to the freehold." Since the steel beams were very large, cost the taxpayer $8.7 million, were fastened to a concrete foundation, and were basic real property construction materials, the Commission sided with the taxpayer.

Missouri Scraps Repair Parts Exemption
A taxpayer that processes scrap metal in Missouri asked the DOR for a letter ruling on repair parts for cranes and loaders used in another state. The purchases for the parts used at the taxpayer's facility in another state are not exempt from Missouri sales and use tax because the exemption is applied to manufacturing plants only in Missouri. In addition, the DOR ruled that repair parts for excavators and front-end specialty loaders for digging blast furnace pits at the taxpayer's integrated locations are also not exempt from sales tax because the machines are not directly part of the manufacturing process.

Indiana Scraps Exemption for Baler System Purchase
An air filter frame manufacturer filed a protest after an audit assessed sales and use tax with interest on the purchase of a baler system for scrap paperboard. At the hearing, the taxpayer asserted that since a large amount of paper scrap is generated during manufacturing, a baler system is necessary and integral to the process to avoid a shutdown of the entire process from excessive clogging of the die cutters. In addition, after paper scrap is removed, it is compressed and baled before it is sold and, thus, is a product whose form changes and is packaged and sold. The DOR explained in a Letter of Findings that the baler system was not essential to the manufacturing process but was installed to make disposal of scrap material easier. Because the scrap material was handled after manufacturing production of air filter frames was complete and because the scrap paperboard was essentially repackaged without substantial change or transformation, the DOR denied the protest.

Indiana DOR Sheds Light on Curtain Emitters
An Indiana automotive parts manufacturer protested a sales/use tax audit assessment on purchases of several safety-related items. Because purchases of personal protective equipment used during manufacturing are tax-exempt, the taxpayer stated that cable pulls that allow workers to stop the manufacturing process due to an emergency fit the description. The Indiana DOR disagreed, saying that the cable pulls are not an integral part of manufacturing that allow workers to participate in the production process, such as protective gloves, eyeglasses, helmets, hoods, etc. The taxpayer also maintained that light curtain emitters, which stop machinery when a light beam is interrupted by operators who are endangered by coming into close contact with dangerous equipment, are also tax-exempt for the same reason as the cable pulls. In this case, the DOR sustained the taxpayer's protest by agreeing that without the light emitters, the production workers would not be able to run the machines without injury.

Utah Tax Commission Overhauls Repair Rules
Revised sales tax rules have been issued by the Utah State Tax Commission regarding charges for labor and repairs that are completed under service plans, extended warranties, or other prepaid arrangements. Charges that are taxable include: (1) future repairs and (2) deductibles for the customer's share of repairs. When items of tangible personal property are converted to real property, the service plan charges are not taxable. When a service plan charges for tangible personal property items that are permanently attached to real property, (1) labor charges are not taxable and (2) parts are taxable unless the parts qualify for an exemption.

Well Is Dry for Services Firm Operating in Kansas
In response to a recent inquiry from an out-of-state oil well service company, the Kansas DOR put a cap on the company's notion that occasionally sending employees to Kansas to service wells did not give rise to nexus. In its terse response, the DOR said that sales tax is imposed on labor services at gas or oil wells following well construction and that physical presence of the company's employees in Kansas constituted nexus. A 2002 ruling and complementary tax guide cited by the DOR explain taxes on labor for well maintenance and repair services as well as equipment, materials, and miscellaneous items used while providing such services.

Michigan Tax Tribunal Rejects Agricultural Exemption Argument
When audited, a Michigan taxpayer that operated an animal feed mill was assessed use tax on the purchase of truck scales, storage/processing tank, storage tank inventory monitoring equipment, a liquid storage tank, a personnel elevator, and other equipment. The taxpayer appealed the assessment by claiming that an agricultural exemption should be allowed based on the idea that the feed mill was used and consumed in raising or caring for livestock, poultry, or other horticultural products and, therefore, was an integral part of agricultural production. The Michigan Department of Treasury asserted that feed mill operations are properly classified as industrial processing and that even if the taxpayer was engaged in agricultural production, the items at issue were not used and consumed in a qualifying activity. The Tribunal ruled that because the taxpayer did not use its equipment to feed or care for animals, mixing grain for wholesale is not a direct part of raising or caring for animals. If the Michigan legislature intended such an application of its agricultural exemption, then every business that made and sold products to farmers would arguably be qualified.

Kentucky Court Affirms Legislative Legal "Fiction" in Software Case
When a data management services company purchased prewritten software in 2002, little did it know that nearly a decade later its sales and use tax refund request would inflict dismay upon the Kentucky Court of Appeals. At issue was the definition of taxable "tangible personal property." At the time of purchase, its definition was "personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses. . ." Examples included natural and artificial gases, electricity, water, and prepaid calling arrangements. The Kentucky DOR's policy at the time was that software was taxable only when it was delivered on a physical, tangible medium. In 2004, the Kentucky legislature "clarified" the law by amendment to expressly include prewritten computer software within the definition of tangible personal property. Although the taxpayer argued that its purchase was made when the old DOR understanding of the law was in effect, the Court ruled that such software was not exempt before the amendment. Stating that the legislature had chosen to create a legal "fiction," the Court conceded that whether or not an object is tangible or not, it doesn't matter when it is deemed by the legislature to be tangible for tax purposes. Since computer software at the time of purchase could have plausibly been taxable tangible property at the time of purchase, the Court reluctantly upheld the lower court decision.

Nebraska Issues Revised Manufacturing Sales/Use Tax Regulations
The Nebraska Department of Revenue has recently amended the definition of "manufacturer" in regard to manufacturing machinery and equipment exemptions. In general, the sale, lease or rental of manufacturing machinery and equipment for use in manufacturing is not taxable in Nebraska. A "manufacturer" is now defined as a person who derives more than 50% of their total annual revenues from sales of products manufactured and sold as tangible personal property or from production labor performed on products sold as tangible personal property by other manufacturers. Persons who derive more than 50% of total annual revenues for sales of annexed property, intangible property, services other than manufacturing, or any combination of those activities are not "manufacturers." Materials and parts purchased and used by a manufacturer to build its own machinery, molds, and dies are tax exempt.

Florida DOR Issues Technical Advisement on “Canned” Software
The Florida DOR recently released guidance about the taxability of “canned” or prepackaged computer software. When software is delivered in a tangible form and is fully useable by a customer without modifications (including installation and configuration), it is considered taxable. For the software to qualify as an exempt service, it must be modified or altered without selling other tangible personal property, such as when it is changed as part of the sale of a license. Software downloads and license renewals via the Internet are not subject to tax unless the initial transaction was taxable, such as when software is first bought in the form of a CD ROM.

Illinois Appeals Court Rules Aircraft Based Out of State Have Nexus
The Illinois Court of Appeals decided that aircraft based outside the state can have substantial nexus with Illinois and be subject to state use tax. The court found that an international corporation maintained an office in Illinois for some of its corporate officers and used one of its subsidiaries to provide air transportation using aircraft it owned. The aircraft was purchased and delivered to Arkansas and was subsequently based in Nebraska. During an audit, it was discovered that more than one-third of its flights originated or ended in Illinois. While the circuit court determined that 4% of the aircraft’s value (proportionate to its use in Illinois) was subject to use tax, the appeals court found that apportionment is not warranted for use tax purposes, especially when a credit mechanism can be used to avoid paying the tax twice. Since the taxpayer had not paid any sales or use tax on the transaction, the Court of Appeals felt that at least one state should be able to tax the entire amount of the sale. The Illinois DOR and the taxpayer appealed the case to the Illinois Supreme Court, which heard the arguments in May 2010. A decision is expected later in the year.

Ancillary Telecom Services Not Taxable in Indiana
The Indiana DOR has released an updated bulletin on ancillary telecommunications services. The bulletin emphasizes that ancillary services, such as caller ID, conference calling, call forwarding, detailed billing, voice mail, and directory assistance are not subject to sales and use tax because they do not qualify as telecommunications services. An ancillary service, which is associated with or incidental to providing telecommunications services, is not taxable.

Indiana DOR Asserts Taxability of Downloaded Software
In a recent letter of findings concerning a car dealership, the Indiana DOR has determined that web-based prewritten software accessed via the Internet constitutes tangible personal property and is subject to sales and use tax. Although the taxpayer claimed that software was neither purchased nor owned and was accessed online, a master software license agreement stated that the software was delivered to and installed by the taxpayer. Citing state tax code, the DOR found that prewritten computer software is defined as tangible personal property and that there is no exemption provided for software that is purchased and delivered electronically, such as via the Internet.

Indiana DOR Unloads Penalty on Concrete Company
Following a sales and use tax audit, the Indiana DOR levied an assessment and 10% negligence penalty on a ready-mix concrete company for failing to pay taxes on the purchase of a front-end loader and parts and materials used to repair and maintain it. The taxpayer said that the loader is used to weigh and move raw materials from storage to the beginning of an integrated and automated concrete-making process and claimed that the machine was essential to production based on the taxpayer’s interpretation of another case involving a quarry and crushing operation. In that case, the Indiana Supreme Court ruled that equipment used to transport stone from a quarry to a crusher and then to stockpiles was directly used in the production process and was entitled to the manufacturing exemption because the manufacturing process began at the quarry when stone was blasted and mined. In this case, the DOR ruled that the loader did not have an “immediate effect” on the materials being handled and that it was, instead, used to deliver raw materials to the beginning of the manufacturing process as a pre-production activity. The 10% penalty was waived at the DOR’s discretion because it believed the taxpayer had a reasonable cause to not pay sales taxes on the loader and repair and maintenance parts and was not guilty of willful neglect.

Kansas Revises Exemption for Propane Use
Tax treatment on the sale of propane used to power forklifts has been clarified by the Kansas DOR. Previously, propane used by forklifts in manufacturing or warehouse facilities was exempt from sales tax. The DOR’s revision describes propane used to power forklifts that transport, convey, handle or store property that undergoes manufacturing or processing at any time from when production begins to when the final product is warehoused or distributed at a facility or plant.

Remotely Accessed Software Taxable in Louisiana
A recent revenue ruling issued by the Louisiana DOR asserts that products such as software, stored media and entertainment media that are electronically delivered to equipment in the state (including mobile hardware) are tangible personal property and are subject to sales and use taxes. Included as taxable transactions are subscriptions or one-time use of remotely accessed software, information materials, and entertainment media that are downloaded when a payment or consideration is made.

Conveyor System at Michigan Steel Mill Found Exempt
A complex and expensive conveyor system used by a Michigan steel manufacturer qualifies for the industrial processing exemption for use tax. The conveyor system moved iron ore pellets from storage to the first processing step when coke and other materials were added before moving along to a blast furnace. The ambiguous industrial processing statute during the audit period was later clarified to include production material handling within the definition of industrial processing. A ruling prior to the audit period also said that production material handling is an industrial processing activity. When the pellets began moving from storage onto the conveyors, the process of moving them to the blast furnaces was continuous and part of the industrial process.

Missouri DOR Articulates Exemptions for Logging, Lumber Processing Equipment
In a recent letter ruling, the Missouri DOR states that sales of forklifts and front-end articulated wheel loaders used for processing logs, drying, inspecting, and packaging lumber are exempt from sales and use tax when used directly in producing lumber. The exemption applies when such machinery is used directly in manufacturing and is essential to the manufacturing process. However, fuels, lubricants, and coolants are not considered to be tax-exempt machinery, equipment, or parts. Instead, these items are considered supplies and materials and are exempt only when they are solely required for installing or constructing the machinery, equipment, and parts.

In another letter ruling, sales of logging machinery used at harvesting sites are tax-exempt based on the fact that they are used exclusively for agricultural purposes on land owned or leased for producing farm products and are used directly in producing products that are ultimately sold in processed form or otherwise at-retail. The ruling also includes exemptions for sales of forklifts at lumber processing mills that are used before the lumber is processed because the equipment is an essential and integral part of the manufacturing process. Forklifts used after processing are not tax-exempt.

Sawmill, Pallet Mill Machinery Exempt in Missouri
The Missouri DOR recently released a letter ruling indicating that sales of sawmill and pallet mill machinery and equipment are tax-exempt. Pallets are resold to end-users that purchase goods strapped to the pallets. Since the pallets are sold ultimately for final use and consumption, the machinery and equipment used to make them are exempt from sales tax. The saw blades, replacement saw teeth, and shanks are also exempt because these items are sold as replacement parts for manufacturing machinery and equipment. In another related letter ruling, the DOR said that sales of steel banding used for shipping such items as pallet lumber, railroad ties, and flooring are tax-exempt because banding is resold to end-users who buy the goods bound by the banding materials.

Without Documentation, New York Can Use Estimated Tax Method
In a recent case before the New York Tax Appeals Tribunal, a corporation that owned service stations provided inadequate tax records because there were no source documents such as sales invoices, purchase invoices or cash register tapes. The New York Division of Taxation properly used an estimated audit methodology to determine sales and use tax liability. The methodology was validated by a post-audit review of the taxpayer’s records for a sales tax quarter in the extended audit period.

New York Takes Bite Out of Sandwich Sales
The New York Commissioner of Taxation and Finance recently ruled that sales of sandwiches at wholesale to convenience stores is not subject to sales tax as opposed to sales tax on sandwiches sold at restaurants or other establishments. When sandwiches are manufactured exclusively for sale at wholesale to convenience stores, the taxpayer is selling tangible personal property not subject to tax. When the sandwiches are purchased at convenience stores for consumption, the sales are considered taxable.

North Carolina Stirs Up Constitutional Controversy With Amazon
Giant online retailer Amazon.com is not happy with North Carolina’s attempt to find millions of dollars owed from Internet sales. Filing its complaint in Federal District Court in Seattle, the company said that a recent audit of its online business violates First Amendment and privacy rights of both customers and Amazon. During a sales and use tax compliance audit, Amazon furnished the North Carolina DOR with the order identification numbers, city, county, ZIP code, price, transaction date, and standard product codes for all sales to customers with a North Carolina shipping address over a period of nearly 7 years. Amazon has resisted requests by the DOR to furnish personally identifiable information such as name, address, phone number, or email address.

Amazon argues that the government can snoop on customers by viewing purchasing records for such items as books and other personal items that express customers’ private choices. The complaint mentions that public figures in particular could have their purchases examined and used for political purposes. North Carolina claims that it could care less about particular items that are sold and is only interested in whether or not such items are subject to North Carolina taxation. Nevertheless, Amazon counters that customers’ perception that purchases are not private will make them less likely to make purchases, thus hurting its business.

Texas Case Throws Water on Soda Fountain Exemption
The Texas Court of Appeals has ruled that two soft drink distributors were not entitled to tax-exempt purchases of fountain equipment that was given away to retailers. Under commitment agreements, the retailers, such as bars and restaurants, agreed to make minimum purchases of syrup, carbon dioxide and cups to stock the fountains. The distributors were not eligible for manufacturing tax exemption because the fountain equipment was used by the distributor’s customers to manufacture soft drinks. The distributors also did not qualify for a resale exemption because providing the fountain equipment to customers was not done or performed for consideration and, therefore, was not a sale. The distributors’ motion for a rehearing was denied.

South Dakota Legislature Delivers Blow to Governor’s Veto
The South Dakota legislature overrode Governor Mike Rounds’ veto of a bill that provides sales and use tax refunds for new or expanded wind energy facilities. Wind energy facilities built between January 1, 2010 and December 31, 2012 are eligible. The refund amount is based on a sliding scale starting at $10 million for costs incurred and paid between July 1, 2010 and January 1, 2013 except for performance retainage amounts. Wind energy facilities are systems that convert wind movement into electricity, new or upgraded electric transmission lines and associated facilities, and any new business that manufactures, assembles or distributes wind energy equipment or transmission components.

Emergency Rules Issued by Wisconsin DOR Clarify Penalties
In response to provisions in new sales and use tax statutes that penalize failure to produce records, the Wisconsin Department of Revenue issued emergency rules for clarification. The controversial provisions penalize persons who fail to produce records or documents that support information required to be on tax returns in a timely manner. Penalties include disallowing deductions, credits, exemptions, or income for sales tax, additional taxable sales or purchases related to the requested records. An additional penalty in the amount equal to the greater of $500 or 25% of the amount of the additional tax on any adjustment resulting from the person’s failure to produce the records may be imposed at the DOR’s discretion if the records are not produced on time due to factors beyond the person’s control. The DOR admits that its penalties are unique for both federal and state tax regulations. The language in the statutes and rules fails to define “person” nor do they distinguish between “person” and “taxpayer.” Critics argue that the penalties could be applied to tax preparers, accountants, or others who are not the actual taxpayer.

Tax Collectors Lurking on Facebook Are Nabbing Scofflaws
The Wall Street Journal reports that tax deadbeats are being found by tax collectors trolling through postings on popular social networking websites. Some state revenue agents have conducted searches of information about relocations, professional profiles, and financial boasts to find tax evaders. In California, a delinquent taxpayer in an unusual occupation was found on a discussion board by a collection agent. In the thread, the taxpayer’s location was identified in answer to a query concerning his whereabouts, which led the agent to the taxpayer. A tax evader in Minnesota was found on MySpace after announcing a return to his hometown to work for a certain employer as a real-estate broker. While some states are aggressively using the information found on the Web to collect back taxes, others have no programs for using social media or have set limits on what agents can do.

“Shocking” Opinion Delivered in Colorado
A district court in Colorado has ruled that generating electricity is considered to be manufacturing because it produces tangible personal property. According to Colorado regulations, tangible personal property includes “commodities.” The court found that since electricity is traded on commodity exchanges as a type of merchandise, it is, therefore, tangible personal property. The court also found that electricity is produced by stripping electrons from atoms, organizing them in a current, and endowing them with voltage. Thus, electricity producers create a new product that wouldn’t exist otherwise, which qualifies them as tax-exempt manufacturers.

Georgia Changes Tax Credits
A recent bill signed into law substantially changes some Georgia tax credits effective for tax years beginning on January 1, 2009. One of the changes eliminates the 3-year statute of limitations for claiming tax credits, particularly those related to job creation and retraining. Now, all credits must be claimed within a year from when the tax return was filed or the due date of the return, whichever is earlier. In addition to capping the retraining tax credit at $1,250 per employee, the law allows regular Jobs Tax Credits to be used against Georgia withholding taxes on projects designated by the Commission of Economic Development as being “competitive.” The law also allows qualified Georgia taxpayers to use Georgia Research and Development Credits and the new Quality Jobs Tax Credit against employee withholding taxes. The credits must be first applied to Georgia income tax liability before excess credits can be applied to employee withholding taxes.

Chilling Corrections Come from Pennsylvania
The Pennsylvania Department of Revenue recently issued a correction to a previously published list of tax-exempt items. Published in the Pennsylvania Bulletin at least once every three years, a list of taxable and exempt property is updated quarterly. Among the items erroneously omitted are refrigeration and cooling equipment used to store farm products.

Florida Adopts Emergency Rule for Tax Credit Scholarship Program
Following an expansion of the scholarship contribution tax credit by the 2010 Florida legislature, the Florida DOR adopted an emergency rule that establishes administrative procedures for the Florida Tax Credit Scholarship Program. For taxpayers who pay sales and use taxes, corporate income tax, insurance premium tax, certain alcoholic beverages taxes, and certain severance taxes, the program gives credits for contributions to nonprofit scholarship funds. Applications for a credit allocation against excise taxes on certain alcoholic beverages and as a sales and use tax credit and an oil and gas production tax credit begin on July 1, 2011. The emergency rule covers approval of credit allocations and rescindments, approval of carry-forward tax credits to a following tax year, and procedures for taxpayers to follow when they claim tax credits on tax returns.

South Carolina DOR Reduces Refund Interest Rates
The South Carolina Department of Revenue issued an information letter on June 21, 2010 that indicated a 2% reduction in listed interest rates on refunds paid during the period between July 1, 2010 and June 30, 2011. A revised information letter issued on July 22 stated that HB 4657, passed into law earlier in the year, reduced the interest another point to 3%.

Indiana’s DOR is Hot for Sewing Lights, Cool on Air Conditioning
In a recent Letter of Findings, the Indiana DOR approved the sales tax-exempt use of electricity for sewing lights at a footwear manufacturer’s factory. In the same letter, the DOR denied the taxpayer’s request for sales tax exemption for electricity used to cool storage areas for leather and related materials at the same location. The DOR reasoned that the sewing lights were an integral part of the footwear production process. Indiana tax law provides the exemption for such purchases when they have an immediate effect on the article being produced. On the other foot, the DOR noted that the stored materials did not undergo a change while they were in storage. In Indiana, tangible personal property used to store work-in-process or semi-finished goods is not taxable if the goods are ultimately completely produced for resale or are resold. The DOR also denied the claim based on predominant use of the electricity source.

Massachusetts DOR Accused of “Bullying” New Hampshire Businesses
The New Hampshire Senate has passed a bill protecting state businesses from collecting sales taxes for other states. The bill was written after New Hampshire retailers complained that small and mid-sized businesses near the Massachusetts state line were being pressured by the DOR to collect sales taxes from Massachusetts residents who cross the border to make tax-free purchases. The Massachusetts DOR claims its residents are “forgetting” to pay legally required use taxes for purchases made in New Hampshire. The DOR has been accused by New Hampshire of bullying business owners into collecting and remitting taxes to Massachusetts. Meanwhile, a suit filed by a New Hampshire tire company against the DOR is now before the Massachusetts Supreme Judicial Court. The company says that the DOR, not the company, is responsible for collecting an estimated $108,947 in use taxes that Massachusetts says border-crossing customers should have paid over a three-year period.

Kansas Court Rules on Sales Tax Exemptions for Loaders and Haulers
The State of Kansas Court of Tax Appeals has ruled in favor of a taxpayer who was denied a sales tax refund for purchases of parts for haulers and loaders used to manufacture cement. Rejecting a summary judgment filed by the Kansas Department of Revenue, the Court invoked the State’s integrated plant theory and ruled that loaders and haulers transporting materials between adjacent taxpayer-owned properties are to be considered operating at a single, fixed location.

California Raises Sales Taxes to Highest in Country
Effective April 1, 2009, California became the country’s sales tax leader by increasing the minimum sales tax to 8.25%. Local municipalities are allowed to add more, which means that most Californians will pay an average of 9% in sales taxes. The honors for the highest sales taxes in the state go to the cities of Pico Rivera and South Gate, whose consumers pay 10.75% on their purchases. Runners-up cities include Avalon, El Monte and Inglewood at 10.25%. The state’s higher sales tax is being imposed to help close a $42-billion budget gap. Businesses and retailers are worried that higher sales taxes will reduce purchases of expensive goods including furniture and cars, which will deepen the current recession.

Ohio Supreme Court Reverses Appeals Court on CAT Tax
The Ohio Supreme Court overturned an appeals court decision that had ruled Ohio's CAT Gross Receipts Tax unconstitutional when applied to food purchases. The 6-1 decision reversed the lower court's opinion that viewed the tax as an excise tax on food, which is prohibited under provisions of the State's 1934 constitution. The Ohio Supreme Court agreed with the State Attorney General that the CAT is a permissible tax on the privilege of doing business. The Ohio Grocers Association, which brought the suit, claims that the ruling will unfairly tax high-volume, low-margin businesses, such as family supermarkets.

Chicago Board Votes to Cut Sales Tax
The Cook County Board recently voted to reduce its sales tax after the Illinois Policy Institute released a report on how last year’s tax increase (which was briefly the highest in the country) was shifting shopping and revenue collections to neighboring counties. The 10.25% tax rate, eclipsed this spring by several cities in California after the passage of 1% statewide increase, will likely stay in place because the Board’s president has vowed to veto the measure.

Wisconsin Supreme Court Issues Canned Software Judgment
In a closely divided decision, the Wisconsin Supreme Court favored Menasha Corporation in defining custom programs when applied to Wisconsin sales and use tax. The ruling is the culmination of a long battle that began after the Wisconsin DOR denied a sales tax refund for SAP business software purchased by Menasha. The case was previously heard by the Wisconsin Tax Appeals Commission, the Dane County Circuit Court, and the Wisconsin Court of Appeals. The case hinged on the interpretation and application of seven criteria that define custom programs. Taxpayers claiming the exemption will need to document these criteria to claim refunds, which may total more than $250 million.

Georgia Refund Procedures Are Changed
Governor Sonny Perdue signed into law H.B. 441, which changes the Georgia tax code related to sales and use tax refund claims. The amended code allows taxpayers’ refund claims to be fast-tracked, but imposes potential penalties from “frivolous” claims. Fast-tracked refunds are to be issued within 30 days, but the application must be accompanied by a security bond for any taxes, interest, penalties, fees or costs associated with refund errors. Civil and criminal penalties can be imposed on taxpayers who file for “excessive” refunds in which all or part of the excessive claim is “based on a position which is knowingly and willfully advanced in bad faith and is patently improper.” Another procedural change was enacted in H.B. 485, which specifies that refunds are to be filed in writing, that they must list the contested transactions, and that a summary of the grounds for contesting the transactions be included.

Tennessee Changes Sales and Use Taxes on Software
Tennessee DOR’s annual Technical Corrections Bill contains provisions enacted by the General Assembly that changes the sales and use tax on computer software warranty and maintenance contracts. Contracts for future computer software updates or upgrades, or that provide support services are now taxable. The new law was enacted because taxpayers were claiming that software warranty contracts outside the state are not taxable. The sales tax now applies when the maintenance contract is purchased as part of a computer software sale that is taxable and the contract is for computer software installed on computers located in Tennessee or the purchaser has a Tennessee address. Charges for repairs, modifications, updates or upgrades under the contract are also taxable. The Tennessee Legislature also changed the exemption for cases in which a taxpayer develops and uses its own software. In the recent Tennessee Court of Appeals ruling on the TEKsystems v. Chumley case, the Court found that when software is developed by temporary IT staff, the software qualified for the “in-house” exemption because the temps were agents and not independent contractors. The new law limits the exemption to software developed by a direct employee that is paid by the company for which the software is developed.

Kansas Refund Claims Limitation Period Changed
Effective for all sales and use tax refund or credit claims filed after June 15, 2009, the statute of limitations is reduced from three years to one year from the due date of the return for the reporting period.

Kansas Ends Exemption on Motor Vehicle Manufacturer Rebates
The Kansas Legislature failed to extend the exemption on Kansas retail sales and use tax on all manufacturer rebates that are paid directly to retailers when a new motor vehicle is either sold or leased. Therefore, on July 1, 2009, all manufacturer rebates are subject to sales and use tax.

Florida DOR Issues New Rules on Containers, Warehousemen Activities
The Florida DOR has changed and consolidated four rules concerning labels and printed matter, containers and packaging materials, deposits, and furniture and storage warehousemen. The amendments clarify that charges for moving, storing, packing, and shipping tangible personal property belonging to other persons are not subject to tax. Warehousemen who sell packaging materials and other shipping items are required to register as dealers and collect sales taxes on taxable items. If they operate a business that sells tangible personal property, they must collect tax on such sales. In addition, if they buy and then provide boxes, crates and other materials for moving, storing, packing and shipping tangible personal property belonging to others, such purchases are taxable.

Illinois DOR Starts Voluntary Disclosure Option
The Illinois DOR has begun offering taxpayers the option to report and pay use tax liabilities that have been accrued for the previous four years. Taxpayers who voluntarily report underpayments will then be notified to pay Illinois use tax and interest owed within 60 days. Penalties will be waived as will tax and interest owed for the fifth and sixth years.

Minnesotans Vote to Increase Sales and Use Taxes
Effective July 1, 2009, the Minnesota sales and use tax rate increased from 6.5% to 6.875%. The increase was approved by a constitutional amendment that was voted on during the November 2008 general election. The tax increase is part of The Clean Water, Land and Legacy Amendment, which will help clean up rivers and purchase forest land for recreation. It is estimated that the average Minnesota household will pay an extra $60 per year to invest in Mother Nature.

Amazon.com and Overstock Lose New York Challenge
The New York Supreme Court dismissed lawsuits filed by Amazon.com and Overstock that challenged a new law concerning Internet retailers. Under the law, retailers are required to collect and remit New York sales taxes if they solicit business by entering into an agreement with a state resident for a commission or other consideration when the resident refers customers via the Internet. The companies alleged that they did not have sufficient nexus with New York and that because receipts needed to exceed $10,000, the law violated the Equal Protection Clause. The Court dismissed the cases for failure to state a cause of action.

California and Minnesota Follow New York Lead
Emboldened by the New York Supreme Court’s recent action regarding Internet retail sales, the California Legislature has introduced A.B. 27 and A.B. 178, while the Minnesotan lawmakers wrote H.F. 401 and S.F. 282. The proposed laws are similar to the New York law that was recently upheld when challenged by Amazon.com and Overstock, two Internet retailers. Hearings for California’s A.B. 178 have been delayed until January 2010, but hearings for the nearly identical A.B. 27 have not been scheduled, which includes a change to the definition of “retailer engaged in business in California.” If passed, A.B. 27 would include any retailer that has any representative, agent, salesperson, canvasser, independent contractor, or solicitor who services or repairs tangible personal property authorized by the retailer. It is estimated that $150 million per year in new tax revenue would result from its passage.

Nevada Legislature Gambles on Sales Tax Increase
The Nevada Legislature has passed a temporary increase in the state sales and use tax rate. The Local School Support Tax of 0.35% will go into effect for every county from July 1, 2009 to June 30, 2011. The increase will push the state’s highest sales tax rate (Clark County) up to 8.1% as part of a $781 million tax plan. The Legislature passed the plan over the veto of Governor Jim Gibbons who condemned the many tax and fee increases in the plan as a conspiracy to kill the state’s economy during a recession.

Arkansas Passes Utilities Sales Tax Reduction
Arkansas legislators passed H.S.B. 875, which reduces the state sales tax on industrial utility bills. With a whopping 3.875% tax and a 0.125% conservation tax tacked on, Arkansas is the only state in its local region that does not exempt utility taxes, except for Mississippi, which charges a mere 1% sales tax. The $54 million collected by the State represents 2% of the total sales and use tax. The initial 0.75% reduction of the utility tax to 3.125% effective July 1, 2009 was passed to maintain manufacturing and industrial jobs in the state. However, the lost revenue would come at a time when the State could least afford it because overall tax revenues are significantly lower in 2009.

Kentucky Allows Refunds for Energy Efficient Machinery
The Kentucky DOR is using a new regulation for the Sales Tax Exemption for Manufacturing Facilities program that allows for a 100% sales tax refund for new or replacement machinery and equipment purchased on or after July 1 2008. The new or replacement machinery must reduce energy consumption in a plant’s manufacturing processes by at least 15% while maintaining or increasing production. Refunds will not be allowed for purchases of energy-efficient windows, lighting, other improvements to buildings, or repair, replacement, and spare parts for machinery. The reduction in energy consumption is based on the total amount of energy used by all machinery within a single plant.

Kentucky Court Rules on Exemptions for Energy Used at “Separate and Distinct” Operations
After a long history of litigation in lower courts, the Kentucky Court of Appeals affirmed a 2007 circuit court decision concerning sales taxes on fuels. The Court ruled that a manufacturer that produces distilled methylmethacrylate (MMA) from raw MMA and then uses it in its plastics and emulsions manufacturing operations is entitled to a sales tax refund paid on energy consumed in the process. The case focused on the exemption for "energy and energy-producing fuels" used in manufacturing and refining that exceeds the "cost of production" by 3%. The manufacturer argued that the exemption applied because the plastics and emulsion operations were separate and distinct from the MMA distilling operation. The Court of Appeals found that the plastics and emulsions operations were separate and distinct from the distilling operation because both could buy distilled MMA from third parties and that each operation produced completed products suitable for sale. The manufacturer separated the distilling operation from the other operations physically and kept separate accounting records.

Missouri Gives Break to Front Loaders
In a recent letter ruling issued by the Missouri DOR (LR4514), dyed diesel fuel used by front loaders while producing mulch and lumber is deemed exempt from state sales and use tax and local use tax to the extent the fuel is consumed for manufacturing purposes. Front loaders deliver logs to mills, transport lumber from mills, stack lumber, and load it on trucks for delivery. They also transport wood slabs from mills for stacking or to grinders to be ground into mulch. The loaders also carry mulch to grinders for regrinding and load mulch on trucks for delivery. Fuel consumed by loaders while materials are unloaded and placed in storage or when finished products are loaded onto trucks for delivery is not exempt because the uses are before and after the manufacturing process. Local sales taxes are still applicable. The diesel fuel consumed for the other uses is exempt because it is consumed in the manufacturing process.

Louisiana Speeds Up Sales Tax Phase-Out Plan
The Louisiana legislature knocked a year off of its seven-year-long sales tax phase-out plan by enacting a 100% sales and use tax exclusion for the purchase, lease or rental of certain manufacturing machinery and equipment on July 1, 2009 instead the original planned date of July 1, 2010 (SB 12). In addition, the original phase-in plan was changed to specifically include manufacturers that produce rubber-tired farm tractors, cane harvesters, cane loaders, cotton pickers, combines, hay balers, attachments and sprayers, clippers, cultivators, discs, plows, and spreaders.

Paper Towels Ruled Exempt for Missouri Manufacturers
A manufacturer of air moving equipment was recently successful in applying to the Missouri DOR for a sales and use tax exemption for paper towels used in its plant after its supply vendor refused to accept a sales tax exemption certificate. The applicant's employees use paper towels to clean equipment and products, clean spills, and wipe their hands. The Missouri DOR reasoned that the paper towels are "materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product" that are exempted under Missouri SB 30 that became effective in August 2007. The towels still remain subject to local sales tax.

Missouri Exempts Machinery Used For Flood Control on Farms
In a recent letter ruling (LR4667), the Missouri DOR states that machinery that is bought by farmers and is used to build, maintain and repair levees and terraces to protect their croplands from erosion and flooding are exempt from Missouri sales tax. To meet exemption requirements under Section 144.030.2(22) RSMo, the farm machinery and equipment must be used exclusively for agricultural purposes, be used on land owned or leased for producing farm products, and be used directly in producing farm products that will ultimately be sold at retail. Section 144.030.2(22) RSMo also exempts repair or replacement parts, supplies and lubricants used on such machinery.

No Exemptions at Storage Facility for Missouri Cement Manufacturer
The Missouri DOR recently clarified state regulations for a cement manufacturer seeking sales tax exemptions for barges and storage facilities. The DOR's letter ruling (LR4678) stated that a new delivery barge, dry cement pumping equipment, and a dome cement storage structure did not qualify for sales tax exemption as expanding an existing manufacturing plant because they are not used directly in the manufacturing process. Because the barge, pumping equipment, and storage structure are not used directly in the manufacturing process, they also do not qualify as tax-exempt manufacturing machinery and equipment used and consumed in manufacturing a product.

Georgia Supreme Court Reverses Owens Corning Case
The Georgia Supreme Court overturned a 2007 Georgia Court of Appeals ruling in a machinery and repair parts sales tax exemption case filed by Owens Corning. Owens Corning sought exemptions on purchases of repair and replacement parts for manufacturing machinery based on a 1997 version of the exemption statute for sales taxes paid on parts purchased between July 1997 and December 1999. Citing that the law began with a clear and unambiguous legislative intent that machinery repair parts were not exempt from sales tax before 2000, the Supreme Court noted that the law was revised in that year to address and clarify exemptions for repair parts. The revised statute deleted "including components thereof" and added a new subsection that explicitly provided a phased-in exemption for machinery repair parts. The Court majority found that the Georgia DOR should be entitled to a summary judgment, not Owens Corning.

Missouri Adopts Permanent Electricity Rule
An emergency rule for sales and use tax exemptions on electricity, gas (natural, artificial or propane), coal, water, and energy sources has been permanently adopted by the Missouri DOR. Scheduled to expire on April 16, 2008, the DOR made the rule permanent effective April 30. The exemption is for energy consumed in manufacturing, processing, compounding, mining or producing any product, or used or consumed in the processing of recovered materials, or used in research and development for manufacturing, processing, compounding, mining, or producing any product.

South Carolina Clears Up R&D Machinery Exemption
The South Carolina DOR recently issued a letter ruling (#08-3) indicating that more than 50% of a research and development machine's total use must be for direct research and development to qualify for the sales and use tax exemption. Using the definition of research and development in the exemption statute, the DOR said that machines used indirectly in research and development (teaching or administrative use) or not in the experimental or laboratory sense of research and development is a nonqualifying use. The DOR also stated that R&D machinery not used for new products, new uses for existing products, or improving existing products is a nonqualifying use as well.

Utah Makes Pollution Facilities Exemption Permanent
The Utah State legislature recently passed into law a permanent exemption from sales and use tax for pollution control facilities. The previous temporary exemption was permanently extended with technical changes that apply to sales or uses of property, materials, or services used to build or that are incorporated into a pollution control facility. The temporary exemption allowed exemptions only from July 1, 1986 through June 30, 2009 and only applied to construction in that period.

New Rule in Utah for Mining Equipment
With the input from state mining interests and support from the Utah Mining Association, the Utah State Tax Commission has issued a new rule for the January 1, 2008 sales and use tax exemption for mining machinery and equipment and normal operating repair and replacement parts with an economic life of three years or more that are used in qualified mining, research, support, and development. The exemption includes accessories for controlling machinery and equipment. If machinery and equipment are used primarily for qualified activities, they qualify for the exemption even if used for nonqualifying purposes. When a purchase includes taxable and nontaxable items, the exempt items must separately stated to qualify; otherwise, the entire purchase is taxable.

Georgia Appeals Courts Grants Summary Judgment in Shield Gases Case
The Georgia Court of Appeals granted a summary judgment to Ethicon, Inc. in a case involving shielding gases purchased to protect medical products from degrading in an oxygen-rich production environment. The Court of Appeals noted that contrary to DOR arguments, the exemption for the purchase of the gases did not require that a substance physically adhere to a product for it to provide a coating effect nor that it ultimately comprise a manufacturer's end product. The case was appealed after the Habersham County Superior Court ruled in favor of Ethicon last year.

Georgia Legislature Enacts Temporary Fuel and Electricity Exemptions
On May 15, 2008, the Georgia State Legislature put into effect a temporary partial exemption from state sales and use tax for natural or artificial gas, No. 2 fuel oil, No. 6 fuel oil, petroleum coke, coal and propane used directly or indirectly in manufacturing products primarily for resale (HB 272). The exemption also applies to the fuel cost recovery component of retail electric rates. The partial exemption means that the first $7.60 per decatherm of natural or artificial gas, the first $2.48 per gallon of No. 2 fuel oil, the first $1.72 per gallon of No. 6 fuel oil, the first $1.44 per gallon of propane, the first $57.90 of per ton of petroleum coke, the first $57.90 per ton of coal, or the first $0.0344 per kilowatt hour of the fuel cost recovery component of retail electricity rates (whether separately stated or embedded in the rates) are not exempt. The exemption period starts on July 1, 2008 and ends on December 31, 2010.

Integrated Plant Theory Adopted in Georgia
The Georgia legislature has enacted amended provisions that affect sales and use tax exemptions for manufacturing machinery, material handling equipment, and pollution control equipment in line with the so-called "Integrated Plant Theory." For manufacturing machinery, the purchase of machinery, equipment, and related components that are necessary and integral to the manufacture of tangible personal property when purchased to replace or upgrade machinery or equipment in a Georgia manufacturing plant are exempt. The previous law only exempted machinery used directly in the manufacture of tangible property when such machinery was used for the first time.

The new law also exempts the sale or use of repair or replacement parts, machinery clothing, replacement machinery clothing, molds, replacement molds, dies and replacement dies, waxes, and tooling or replacement tooling for machines that are necessary and integral to the manufacture of personal tangible property. Previously, the law only exempted items used directly in the manufacturing process. A $150,000 cap on the sales price of repair or replacement parts was also rescinded.

Included in the new law is a provision that exempts sales and use tax on the purchase of primary material handling equipment and racking systems in warehouses or distribution facilities. The exemption is allowed when the equipment is part of an expansion worth at least $5 million at an existing facility or when the equipment is part of a new facility that has a total value of at least $5 million combined for real and personal property. Material handling equipment and racking systems were previously exempt only when used directly for handling and moving tangible personal property and racking systems used for the conveyance and storage of tangible personal property.

Pollution control machinery and equipment purchases are also tax-exempt under amendments in the legislation. The exemption includes machinery, equipment, and related repair, replacement, and component parts that are used primarily for reducing or eliminating air or water pollution. Repair, replacement, and component parts were not previously exempted and pollution control machinery equipment had to be incorporated into a facility to meet exemption requirements.

Amazon Takes on New York in Internet Sales Tax Battle
Amazon.com, the Internet retail sales giant, is suing the State of New York over a new law that mandates out-of-state companies that sell products to New York shoppers to collect New York sales tax. The law requires companies that have $10,000 or more in New York sales that don't have a physical presence in New York but have at least one person in the state who works as an agent (such as someone who links to a website and gets related sales commissions) to collect the sales tax on online purchases. New York, which says it needs to update its tax collection for the modern retail environment, stands to collect about $50 million annually because it replaces the honor system used in most other states where residents are supposed to remit use taxes on their state tax returns. Amazon's lawsuit charges that the new law unfairly targets the company, violates the commerce clause of the U. S. Constitution because it forces out-of-state companies to collect taxes, and is overly broad and vague.

Court Rules on Wheeled Machinery in Georgia
The Superior Court of Lee County, Georgia has decided in favor of Oxford Construction Company concerning wheeled and skid-mounted asphalt-producing machinery. The Georgia DOR claimed that such machines were taxable mobile equipment based on its interpretation of manufacturing taking place at fixed locations. The court ruled that the term applied to the physical location of the manufacturing plant and did not apply to wheeled machinery used within plant premises.

North Carolina Phases Out Electricity and Fuel Taxes

The current 2.6% sales and use tax on electricity bought by manufacturers and the 2.83% rate for farmers will be phased out over three years: 1.8% effective October 1, 2007; 1.4% effective July 1, 2008; 0.8% effective July 1, 2009; and repealed on July 1, 2010. The 1.0% privilege tax for fuels used at manufacturing plants will also be phased out: 0.7% effective October 1, 2007; 0.5% effective July 1, 2008; 0.3% effective July 1, 2009; and repealed on July 1, 2009.

New York Goes High Tech
The New York Department of Taxation and Finance now allows selected sales and use tax resale and exemption documents to be issued electronically. Purchasers and sellers can create electronic replicas of the paper documents with specific e-certification and electronic signature language. Sellers must accept e-certificates with the purchaser's electronic signature in good faith if it is properly completed within 90 days after delivery of service or goods. E-certificates are subject to the same recordkeeping requirements as for paper certificates.

Georgia Appeals Court Reverses Repair and Replacement Parts Decision
A claim by Owens Corning for sales tax exemptions on repair and replacement parts for manufacturing machinery bought between July 1, 1997 and December 31, 2000 was initially rejected by a trial court. The decision was based on the conclusion that the 1997 version of OCGA included only machinery components that were bought to upgrade manufacturing machinery. The Court of Appeals ruled that the language had only one reasonable interpretation: the tax exemption applied to machinery and components that are bought to both upgrade and replace existing manufacturing machinery. The 1997 version of the statute was superseded in 2000.

Florida Changes Tax Administration, Adds Criminal Penalties
Florida's Chapter 2007-106 now contains major changes concerning tax collection and registration. A new 100% civil penalty and new criminal penalties may be applied to those who deliberately fail to collect or register to collect a number of taxes including sales and use, transient rentals, and rental or license fees for use of real property. The penalties go into effect after a person or business fails to register and collect taxes after notification in writing by the DOR. Businesses that have the wrong address on file with the State of Florida and do not receive the notices will not be excused from criminal or civil penalties.

Michigan Thinks Twice, Then Kills Services Taxes
The Michigan Senate passed a bill to repeal a new 6% use tax on 23 personal services when the original tax was to take effect on December 1, 2007. Michigan passed the controversial law on September 30, but it immediately came under attack by business owners across the state. A subsequent Senate bill delayed implementing the tax until December 20. Michigan lawmakers have vowed to draft another tax to make up for the revenue shortfall by virtue of repealing the services tax.

Internet Access Taxation Spared Again
The United States Senate and House of Representatives approved a 7-year extension of the moratorium that bans state and local taxes of Internet access. President Bush signed the Internet Tax Freedom Act Amendments Act of 2007 on October 31, 2007. The moratorium was scheduled for expiration on November 1, 2007 following a previous 7-year ban. The new expiration date is now November 1, 2014.

Arkansas Must Shed Light on Tax Opinions

Legal opinions on sales taxes issued by the Arkansas Department of Finance and Administration are public records that must be disclosed. The Supreme Court of Arkansas overruled a Circuit Court opinion and held that such opinions must be disclosed when requested under the Freedom of Information Act as long as the persons or entities cited in the opinions are redacted to protect their privacy. The decision allows taxpayers to determine the tax status of the sales and purchases and ensures that taxpayers get fair treatment.

Missouri Issues Emergency Rules for Sales/Use Tax Exemptions

Subsequent to passage of Missouri Senate Bill 30 that became effective on August 28, 2007, the Missouri DOR issued Emergency Rules for taxpayer guidance in the November 15 issue of the Missouri Register. The rules state that in general, electricity, gas (natural, artificial, or propane), water, coal, and energy sources, chemicals, machinery, equipment, and materials used or consumed in manufacturing, processing, compounding, mining or producing any product, or used or consumed in the processing of recovered materials, or used in R&D related to manufacturing, processing, compounding, mining or producing any product is exempt from state sales and use tax and local use tax, but not local sales tax. The emergency rules will expire on April 16, 2008.

Airplane Use Taxes Can Clip Owners' Wings

When buying expensive airplanes, many aircraft buyers assume that buying an airplane in a state without sales taxes or from a private owner will save tax dollars. However, some state DORs are using sophisticated research tools to tap into aircraft sales and FAA databases to track plane movements. The result has been, in some recently reported cases, six-figure tax bills for out-of-state owners who land their planes in states that are strictly enforcing use tax laws. Laws in each state vary. Maine levies its tax when out-of-state planes are parked there for more than 20 days a year; in Washington, it's 90 days a year; and in Florida it's one touchdown within 180 days of purchase. Depending on when, where, and how often an airplane is flown after purchase, it is conceivable that use taxes, penalties, and interest could exceed the sales tax.

Florida Changes Some Rules
Sales and use tax regulations concerning certificates of exemption, tax due at the time of sale, and tax returns in Florida were recently changed. The amendments provide instructions for using the DOR's Certificate Verification System that validates Certificate of Exemption numbers, updates the DOR contact information for validating the numbers, and clarifies Certificate of Exemption recordkeeping requirements for dealers. New instructions also allow taxpayers to direct the DOR to transfer foregone collection allowances to the Educational Enhancement Trust Fund. Due to legislation passed in 2006, the Apalachicola Bay Oyster Surcharge provisions were stricken.

Reduced Tax Rates for Energy Use by Arkansas Manufacturers
On July 1, 2007, manufacturers who buy electricity and natural gas used directly in the manufacturing process will be levied a reduced rate of 4.5% through June 30, 2008. After that date the state tax rate will drop to 4.0%. To qualify for the lower tax rates, a manufacturer must register with the Arkansas Department of Finance, which will issue a certificate with approved percentages of metered usage of natural gas or electricity. Manufacturers that apply must provide documentation to determine percentage of use from mixed-use meters.

New Missouri Legislation Creates New Manufacturing Exemptions

Missouri Senate Bill 30, effective on August 28, 2007, creates new state sales tax exemptions for numerous items consumed during production. The new items exempted will include machinery, chemicals, equipment, water, coal, gas, electricity, or any other materials consumed during manufacturing, mining, processing, compounding, or producing any product, or consumed while processing recovered materials, or used in manufacturing-related R&D. The new statute omits the "directly used" requirement related to equipment, machinery and parts in the old law. The exemption doesn't apply to any local taxes.

North Carolina Permanently Hikes Sales and Use Tax

Effective July 31, 2007, North Carolina permanently extended an additional 0.25% state sales and use tax that was scheduled to expire on August 1, 2007. If allowed to expire, the tax would have been reduced to 4.0%. The new general state sales and use tax rate, which will remain at 4.25% until July 1, 2009, results in a combined state and local rate of 6.75% in all counties except Mecklenburg.

Florida Exempts Taxes for Electricity on Farms

Florida DOR recently clarified House Bill 7075 (effective July 31, 2006) regarding sales and use tax exemptions for electricity used in the production or processing of farm products on a farm. The exemption now applies to indirect use of electricity including that used for facilities that repair farm equipment and supply power to administrative offices and restrooms. The electricity must be separately metered; mixed-use metering is fully taxable.

"All or Nothing" for Natural Gas in Florida

Florida requires that all natural gas bought and used for both exempt and taxable purposes is subject to sales and use tax. If the gas is used exclusively as fuel during manufacturing, it may be purchased tax-free. However, if any portion of the gas is used for any other purpose, such as heating a building, none of the fuel is exempt. Florida requires that natural gas used in any type of manufacturing must be separately metered.

Georgia Superior Court Rules Protective Gases Are Exempt

A recent case decided by the Superior Court of Habersham County in December 2006 concluded that some gases used during manufacturing qualify for exemption from sales tax. Ethicon, a surgical suture manufacturer, argued that argon and nitrogen were applied to its products to prevent degradation by driving oxygen from the manufacturing environment. The court upheld that the gases are "industrial materials" consumed during manufacturing that formed a "protective coating," a material that is applied but later removed from finished products and are, therefore, exempt. At this date, the State of Georgia has not moved to appeal the case.

Florida Explains Deadlines for Refund Claims

Sales tax payments made directly to the Florida Department of Revenue or a county that are not owed, paid in error, or were overpaid can apply for a refund by completing and submitting Form DR-26S, Application for Refund - Sales and Use Tax. The statute of limitations is three years from the date the tax was paid. In practical terms, the DOR reminds taxpayers that the deadline for filing a refund claim is not the third anniversary date of when the tax payment was due. Sales tax refund claims must be postmarked on or before the third anniversary date that taxes were paid, or in the case of late payments, the date when the tax payment was due.

Wisconsin Supreme Court Hears Custom Software Case

The Wisconsin Supreme Court has decided to hear a Wisconsin Court of Appeals decision involving customized business software. There is an estimated $350 million at stake for Wisconsin businesses that could benefit from a tax appeal case brought by Menasha Corporation after it purchased a software package from German-based SAP. The software was modified by SAP, which Menasha claimed qualified the sale for tax exemption. The Wisconsin Tax Appeals Commission sided with Menasha, but the ruling was overturned in Dane County Circuit Court. Menasha won its argument at the State Court of Appeals before the DOR filed for final judgment at the Supreme Court. Thousands of affected businesses are closely monitoring the case, which will ultimately define the distinction between "custom programs" and "prewritten programs" based on the amount of effort needed to make software useful for a particular customer. If the Appeals Court ruling stands, it will change the way taxes are levied on both software sales and maintenance.

Special Procedure Qualifies for Software Sales Exemption

Sales and use tax provisions in most states are applied to the sale of tangible personal property. Special provisions are made for the sale, lease, or license of computer software. Generally, the sale of "canned" (prewritten) software is taxable if the software is sold and transferred from the seller to the buyer using a tangible medium, such as a diskette. A "load and leave" transaction, in which the seller installs a "canned" program on a purchaser's equipment using a tangible medium and then "leaves" with the medium, is usually not taxable. There is, however, a method to transfer ownership and use of software in a tangible medium that significantly reduces the sales tax. A purchaser can simply buy the medium, such as a diskette or portable memory storage data device, such as a USB flash drive, and have the seller copy the software to the medium. The purchaser only pays sales tax on the medium and not on the software while maintaining ownership of the software on a tangible medium.

Louisiana Exempts Tax on Energy Used by Paper and Wood Manufacturers

Becoming effective on July 1, 2007, Act 471 (S.B. 331) excludes the purchase of electric power, energy or natural gas used by paper or wood manufacturers from Louisiana sales and use tax. Previously, paper and wood manufacturers were only allowed a sales and use tax exemption for their purchase and use of natural gas sold in excess of $6.25 per million Btu.