Sales Tax Defined
Sales Tax
 Imposed on the retail sale of tangible
personalty or services within the taxing
jurisdiction
Use Tax Defined
Use Tax
 Imposed on the possession, use,
storage, or consumption of tangible
personal or services within the taxing
jurisdiction
Use Tax Illustration
Doris O’Brien
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Resident of State A
 Purchases $ 30,000 of goods
 Pays $ 1,200 sales tax (*)
$ 30,000
X 6.5%
$ 1,950
(1,200)
$
750 net tax due
Types of Sales Tax
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Retail Sales Tax
Seller Privilege Tax
Gross Receipts Tax
Retail Sales Tax – The Basics
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An Overview
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Sale must take place within the territorial
boundaries of the taxing jurisdiction
Sale must be of tangible personal property
Intangibles, real property and services generally
excluded
A planning issue for mixed activities (property &
services)
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If there is any doubt collect the tax
If the issue is material, seek a letter ruling from
DOR
Retail Sales—The Basics
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What is a sale?
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Ownership Transfer
Consideration
Arizona Definition §42-5001(13)
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Any transfer of title or possession, or both, exchange,
barter, lease or rental, or by conditional or otherwise,
in any manner or by any means whatever, including
consignment transactions and auctions, of tangible
personal property or other activities taxable under
this chapter for a consideration.
Includes property held as security, fabrication for
consumers, furnishing property consumed on
premises.
Retail sales—The Basics
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Scope of a Retail Sale
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Imposed only once during the entire chain of
events starting from the point where the goods
are manufactured and culminating with their
eventual sale to the retail customer.
Exclusions
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Sales-for resale
Casual or Occasional Sales
Sales of items used in manufacturing, processing
and fabricating
Sales of machinery and equipment
Sales of certain essential items
Sales to certain organizations or entities
Measure of the Sales and Use Tax
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ID § 79-3602(h) Gross Receipts—Total
selling price or the amount received as
defined in this act, in money, credits,
property or other consideration valued in
money from sales at retail within this state.
ID §79-3602(g) Selling price—Total cost to
the consumer exclusive of discounts
allowed and credited, but including freight
and transportation charges from retailer to
customer”
Measure of the Sales and Use Tax
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Gross Receipts do not include:
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Cash discounts
Returns and allowances
Transportation charges—separately stated
Trade-ins
Finance and service charges
Bad debts
Constitutional Issues in Imposing
Sales and Use Taxes
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Two key provisions—the Commerce Clause
and the Due Process Clause
Landmark Cases
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McLeod v. J.E. Dilworth Co. 322 US 327 (1944)
Miller Brothers Company v. Maryland 347 U.S. 340
(1954)
National Bellas Hess, Inc. v. Department of
Revenue 386 US 753 (1967)
Quill Corp. v. North Dakota 504 U.S. 298 (1992)
Streamlined Sales Tax Project
Administration of Sales and Use
Taxes
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Reporting Obligations
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Fiduciary Responsibilities to Report, Collect
and Remit the Taxes
Reporting Obligations
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Register Business
File Tax Returns
Returns
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Due Dates—vary by jurisdiction and amount
Content
Administration of Sales and Use
Taxes
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Rates
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State
Counties and Cities
Definitions a key consideration in applying rates
Recordkeeping
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Regular books of accounts
Invoices to document taxes paid
Contracts and purchase orders
Bills of lading
Support for credit returns and bad debt write offs
Exemption and resale certificates to support
exempt transactions
Administration of Sales and Use
Taxes
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Audits
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State agencies; audit may be industry
specific
Block samples and Random samples
3 year Statute of Limitations
Areas of Current Interest
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Definition of Specific Exemptions
Taxation of Services
Sales Tax Audits (Tyco)
Taxation of e-Commerce
Streamlined Sales Tax Project
Alternative Approaches to Sales/Income Tax
Sales/Use Tax on Capital Changes
Competition with No Sales Tax States—NH,DE,MT,OR
Tax Amnesty, Holiday Programs
Property Taxes
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The Property Tax Base
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Real property taxes
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Imposed on land, buildings, and improvements on
the land.
Value determined the county assessor based on
one of three methods
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Market value
Percentage of market value
Classified assessment level
Value remains constant unless there are changes
in market value, modifications in size or quality,
or there is a general revaluation
Property Taxes
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Tangible Personal Property
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Valued annually as of a specific assessment
date
Taxpayers file annual property tax reports
which show by class of property, the
original cost of the asset by year of
acquisition.
Base value determined by comparables,
adjusted to arrive at final value
Property Taxes
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Challenging the Assessment
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Property is classified as real or personal based on
the definitions provided by state statute. Process
of differentiation is called cost segregation.
Taxpayers can challenge the assessment based on
whether:
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Property is properly classified
Property is not specifically exempt from the tax
base
Property is correctly valued
Property Taxes--Classification
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Real versus Personal Property
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A.R.S. §42-11002(7)—Personal property includes
“property of every kind, both tangible and intangible,
not included in the term real estate.”
AZ Department of Revenue Personal Property
Manual: ’’Property is personal property if it can be
removed without damaging itself or the property to
which it is attached and its only temporarily
attached, or it is interchangeable with other items, or
if the real property to which it is attached can
function without it.
Tangible personal property is taxed in most states;
inventories are not taxed in most states.
Property Taxes—Exempt Property
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Great variation among local jurisdictions in terms of
specific exemptions
Common Exemptions
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Agricultural land
Government property
Education and library property
Health care property
Religious property
Cemeteries
Property of widows, widowers, veterans,
homeowners, the elderly and disabled
Various other not for profit organizations
Property Taxes--Valuation
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Tangible Personal Property
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Major Classifications
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Machinery & Equipment including supplies,
consigned goods and goods in transit.
Inventories—stock in trade + accrued costs
Leasehold improvements—walls, ceilings,
carpeting and lighting (may be real property in
many jurisdictions)
Property Accounting Systems
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Consultants and accountant can use information
from these systems to challenge the assessed
classification and valuation.
Property Taxes--Valuation
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Important Issues
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Assessor’s Identification of Property
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Self declaration or rendition prepared by the
business
Review of government filings
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Income tax returns
Business license lists
Airport & marina lists
Charters and permits
Audits
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Desk, telephone, correspondence & physical
inspection
Property Taxes--Valuation
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Cost
Income
Market
Methods parallel those used for real
estate
Property Taxes--Situs
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Important Issues
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Stationary property taxed where located
Moveable property generally requires a
permanent situs from which it operates in
order to be taxed
In transit property moved by common
carrier or private conveyance is excluded
from taxation when not at the business
premises.
Realty Valuation—The Income
Method
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Frequently used for apartments, hotels,
shopping centers, and strip malls
Yield capitalization approach
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Used when cash flow is unstable
Income = Σ (Projected Future Cash Flows X
Discount Rate)
Rate based on trends in sales, investment &
industry sources
Example 5-3 provides an illustration
Real & Personal Property
Valuation—The Income Approach
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Direct capitalization approach
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Used when the property’s cash flow is stable
Value = Net Income/Capitalization Rate
Net Income From Property Equals
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Total Estimated Income from Property
Less Vacancy and Collection Loss
Add Other Income from Property
Less Operating Expenses
Review Example 5.2
Real and Personal Property Valuation—
The Cost Method Approach
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Attempts to find the value or cost to replace an
improvement with a new improvement
Includes only those costs that actually increase the
property’s economic value
Consider replacement cost, reproduction cost and
either physical functional or economic depreciation
Cost Value = Cost of improvements + Land (valued as vacant)
Less Depreciation/Obsolescence
Real and Personal Property Valuation—
The Cost Method Approach
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Cost of Improvements include:
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Depreciation
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Direct costs
Indirect costs
Reasonable Profit
Straight reduction for wear and tear
Obsolescence
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Physical
Functional
External
Real and Personal Property Valuation
The Market Method Approach
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Valued using “comparable sales”—recent
sales of similar property
Market value is the most probable price that a
property would bring in a competitive and
open market, in which the price is not
affected by undue circumstances.
Example 5.5 illustrates the market method.
Real and Personal Property Valuation—Issues
with General Application
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Contribution—the value of a particular
component measured in terms of its
contribution to the value of the whole, or as
the amount that its absence would detract
from the whole.
Highest and Best Use—Physically possible and
financially feasible
Substitution—prudent purchaser will pay no
more than the cost of acquiring an equally
desirable substitute on the open market.
Intangibles Tax
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Primarily assessed on the fair market value of
stocks and bonds
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Alabama
Florida
Kentucky
Pennsylvania
West Virginia (bonds only)
Or Deposits
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Kentucky
Rhode Island
Administrative Issues
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Real Property—Generally No Reporting
Requirements
Personal Property—Annual Tax Return Based
on the Values at the Assessment Date
Taxpayer may appeal to
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Assessor
State Board of Equalization
Courts
Some Constitutional Issues
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State Constitutional Issues
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The Uniformity or Equality Clause
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Article 9, § 1 of the Arizona Constitution an
illustration
Taxes (may be subject to uniformity or equality
clause) versus Fees (not subject to the clause)
Property Tax (subject to the Clause) versus Excise
Tax (not Subject to the Clause)
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Fundamental distinction is whether the tax applies
to all the privileges of owning the property or some
of the privileges.
Imposed on a fixed day or happening of some event
or in contrast a one time event.
Unemployment Taxes—Basic
Features
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Federal Unemployment Tax
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6.2% of the 1st $ 7,000
State Unemployment Tax
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Range between $ 7,000 and $ 25,800
Rates are determined through a rating
system (range of 0% to 11%)
Rates increase based on unemployment
benefits claimed by former emploees.
Planning with Unemployment
Taxes
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Avoiding Employee Classification
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Employee—employer has right to control and direct the
individual; Independent contractor controls outcome of
work and means by which the work is accomplished
Tests for employee status
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Place of work
Furnishing Tools
Right to Terminate
Employee Leasing
Operating in a New State (start with nominal work
force)
Acquisition of another company (“successor employer”)
Business Restructuring (“spin off” strategies)
Selling Off Part of a Business (Stock vs. Assets)
Special Tax Incentives
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Area Specific Incentives
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Enterprise Zones
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Areas with higher than normal unemployment
Tax credits and benefits
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Sales and use tax credits for machinery purchases
Hiring credit
NOL carry-forwards
Expensing depreciable property
Lender income deductions to zone businesses
Preference points on state contracts
Local and non tax incentives also important
Special Tax Incentives
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Foreign Free Trade Zone
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Transactions occurring within the zones are
treated as if they occurred outside U.S.
borders.
Sales/Use, Property Tax and Income Tax
Adjustments and Credits
Example 8.2 provides an illustration.
Special Tax Incentives
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Employee-Related Incentives
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Equipment Incentives
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Restoration of old structures
Resource Related Credits
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Investment Credits (enterprise zone)
Research and Development Credit
Building Restoration Incentives
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Use in areas of high unemployment, often as part of enterprise
zone incentives.
Work Opportunity Tax Credit, AFDC Credit Welfare to Work Credit
are examples.
Environment related
Privately Negotiated Incentives
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To encourage substantial investment in a new location
Review Tax Management in Action 8.1
Non-Tax Incentives
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State Financing (page 193)
Other Incentives (page 193)
Local Incentives (page 194)