CSU 101
TAX DISCUSSION
CSU Tax Discussion
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Contrary to popular belief, there are
significant tax issues on CSU campuses.
While CSU campuses are not subject to
federal and state income tax, there are other
taxes that do apply.
Since most of you will not be primarily
focused on tax, this presentation will provide
an overview of the different tax issues that
arise on CSU campuses.
Agenda
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Campus and auxiliary tax status
Common payment types and related tax issues
CSU tax responsibilities
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Sales and use tax
Out of state tax withholdings on service providers
Non Resident Alien (NRA) taxes
Unrelated Business Income Tax (UBIT)
University provided housing issues
Sample frequently asked tax questions
Campus Tax Status and Related
Filing Requirements
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Using my campus as an example, Cal
Poly SLO is exempt from federal and
state income taxes based on Title 26 of
the IRS code, section 115, which states:
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Gross income does not include… income
derived from any public utility or the exercise
of any essential governmental function.
Campus Tax Status and Related
Filing Requirements
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Cal Poly is not a 501C-3 and as a result is
not required to file a form 990, which is filed
by organizations exempt from income tax
under section 501 of the Internal Revenue
Code
Auxiliary Tax Status and Filing
Requirements
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What is an auxiliary organization?
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An auxiliary is a separate legal entity, usually
on your campus, with a separate taxpayer
identification number and legal status.
The auxiliary’s primary purpose is to support
the university and is exempt from federal and
state taxes under IRS code section 501
As a result of it’s 501(c) status, auxiliaries are
required to file an Organization Exempt From
Income Tax 990 Form
Why Do I Care About Auxiliary
Organizations?
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Ultimately any underreported or underpaid
tax liability that arises from one of your
auxiliaries is the responsibility of the
President of the University.
Can Payments Issued by an Auxiliary
vs. the University Receive Different
Tax Treatment?
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The simple answer is….NO.
Departments on campus will sometimes
assume that running a transaction thru one of
the auxiliaries instead of the University will
enable an individual to be compensated with
little to no tax implications.
Employee and independent contractor
payments have the same tax withholding
requirements whether payments are issued
by an auxiliary, or the University.
Common Non-Wage or Salary
Payment Types:
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Allowances
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Reimbursements
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Independent Contractor payments
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Honorariums/Stipends
Allowances
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An allowance is a payment made to an individual that compensates them
for a certain type of expenditure they have incurred, including:
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Housing
Car
Cell Phone
Meals
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Allowances do not require the submission of receipts by the payee and are
recurring (usually monthly).
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Housing and car allowances must be approved in writing by the
Chancellor’s Office in order to be granted and are fully taxable.
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Recommended treatment for allowances is that they be issued as a
separate check from the Payroll office and then be flat taxed based on the
current federal and state tax rates in effect.
Reimbursements
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Reimbursements can be issued for a variety of
different purposes:
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Travel (including meals and airfare)
Supplies and equipment purchased
Moving and relocation
Conference registration
Reimbursements are not taxable as long as they
meet the accountable plan rules.
Accountable Plan Rules
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To be an accountable plan, your University’s
reimbursement or allowance arrangement
must include all three of the following rules.
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Your expenses must have a University connection
- that is, you must have paid or incurred these
expenses while performing services as an
employee of the University.
You must submit receipts.
You must return any excess reimbursement within
a reasonable period of time.
Independent Contactor Payments
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First ensure that the individual can indeed be
considered an independent contractor:
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An independent contactor is someone that the
employer has the right to control or direct only
the result of the work and not the means and
methods of accomplishing the result.
Faculty are the only class of employee that may
independently contract with the CSU while
working as an employee of the CSU.
CSU Tax Responsibilities
Sales and use tax
 Out of state tax withholdings on
service providers
 Non Resident Alien (NRA) taxes
 Unrelated Business Income Tax
(UBIT)
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Sales and Use Tax Latest News
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Effective April 1, 2009, the state sales and
use tax rate increases by 1%.
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The 1% tax rate increase will expire on either
July 1, 2011, or July 1, 2012, depending upon
whether voters approve to extend it.
Sales and Use Tax
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Sales and Use tax are generally only applied to
purchases of tangible goods (equipment, furniture,
etc.).
Sales and Use tax are applied at the same
percentage rate (7.25% for the County of San Luis
Obispo).
Vendors (usually) include sales tax on their invoices
billing the University for the purchase of tangible
goods.
If the vendor does not charge the University sales
tax for the purchase, then it is the responsibility of
the University to apply use tax to the purchase.
Sales Taxes on Labor
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In general, sales taxes are not applied to
stand alone labor charges. However, some
labor charges in relation to taxable sales may
be subject to sales tax. For example;
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Fabrication Labor is considered taxable
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Manufacturing a new piece of machinery
Sizing and engraving a ring you are selling
Cutting metal or lumber being provided to a customer
Altering a new suit to better fit the buyer
Non Sales Taxable Types of Labor
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Sales tax generally does not apply to charges for
installation labor. For example; tax would not apply
to your itemized charges for installing a car stereo.
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Sales tax generally does not apply to repair labor.
Repair labor is work performed on a product to
repair or restore it to its intended use. For example:
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Repairing the broken the keypad on a cell phone
Replacing a hard drive in a used computer
Repairing damaged paint on your car
Use Tax Example
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An employee purchases books from Amazon using
the University Procurement (credit) card. The receipt
provided to the employee does not include sales
tax.
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Accounts Payable records and pays the charges for the
books purchased, charges the department use tax and
remits the use tax to the State Board of Equalization.
Please note:
Purchases made with the Procurement Card
(campus credit card) can generate a significant
amount of use tax that must be accrued and
remitted on a monthly basis.
Out of State Tax Withholdings
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Vendors coming from out of state to provide
services will have 7% in state taxes withheld
from their payment, once their total payment
received exceeds $1,500.
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Exception: If the vendor has a business office or
physical presence in the state of California, then
they do not have taxes withheld from their pay
Out of State Tax Withholdings cont’d.
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Example 1: Software programmer comes from
Nevada to your campus to provide services and
submits an invoice for $1,400. The programmer has
no physical presence in California
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Example 2: Same as above, but submits an invoice
for $1,600.
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Result: no taxes withheld from their payment
Result: 7% is withheld from the entire $1,600
Example 3: Same as example 1, but submits an
invoice for $1,400 followed by an invoice for $300 in
the same calendar year
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Result: 7% is withheld from $200 ($1400+$300 -$1,500)
Non Resident/Resident Alien
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As defined by the IRS
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An alien is any person who is not a United States citizen.
The Internal Revenue Service (IRS) classifies aliens as
either nonresidents or residents. A nonresident alien is an
alien who does not meet either the IRS's green card test
(i.e. a lawful permanent resident) or substantial presence
test. These test are discussed further in IRS Publication
519.
Resident aliens are taxed the same as a U.S. citizen.
Non resident alien tax withholding and reporting
requirements are significantly different.
How Do I Determine If the Payee is an
NRA vs. RA?
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Each campus has a Non Resident Alien Taxation
(NRAT) specialist that does the analytical work to
make the determination.
Most campuses are using a third party software
product, either Glacier or Windstar, to assist with the
determination.
Glacier (used by Cal Poly SLO) provides a detailed
web-based intake process that leads the Non U.S.
Citizen thru a series of questions to gather
information necessary in order to determine the
appropriate immigration status for tax purposes.
How Does an NRA vs. RA
Determination Affect the Payee?
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Resident aliens receive the same tax treatment as a U.S. Citizen.
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Payments to a resident alien independent contractor do not require
federal taxes to be deducted.
Resident alien employees may adjust their payroll tax withholdings
(within IRS guidelines) as they see fit.
Non resident aliens are taxed differently than U.S. citizens.
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Payments to a non resident alien independent contractor must have
30% federal and 7% state taxes withheld and remitted to the IRS and
Franchise Tax Board
Non resident alien employees generally must claim Single and 1
exemption on their W-4 (EAR)
Tax Treaties
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There are tax treaties that are in effect between the
U.S. and other countries.
Under these tax treaties, a campus may grant the
right for the employee or independent contactor to
claim an exemption from taxes subject to the
limitations listed in each treaty (different for each
country).
Alternatively, the University has the legal right to not
honor the tax treaty at the time of payment and
instead have the payee file a tax return at year end
to claim back any taxes withheld that they are
allowed to have returned based on IRS guidelines
and the appropriate tax treaty.
Non Resident Alien Tax Filing
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In March of each year all NRA tax related
activity is compiled and used to prepare the
form 1042 Annual Withholding Tax Return for
U.S. Source Income of Foreign Persons.
This tax return will summarize the tax
liabilities accrued vs. tax payments made and
reflect any over or underpayments made for
the calendar year.
Unrelated Business Income (UBI) Tax
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UBI is defined as any trade or business which
is regularly carried on and which is not in
furtherance of the purpose for which the
entity was granted their tax exempt status.
Examples of activities on your campus that
may generate UBIT include:
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Rental income, in conjunction with other services
Sponsorships
Research
Summer camps
Unrelated Business Income Tax
Cont’d
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IRS rules used to determine UBI and calculate the
potential tax are complex.
The individual responsible for UBI on your campus
has to constantly engage with University personnel
and departments to proactively assess potential UBI
situations.
University personnel and departments don’t
generally offer information about potential UBI
scenarios, and usually don’t have any idea that they
may be engaging in an activity that will create a tax
liability for the University.
University Provided Housing
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Common occurrence on campuses is the
situation in which a college wants to provide
on campus housing to an employee.
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Can the campus provide housing?
Will there be a tax consequence to the recipient?
Will there be a tax consequence or tax liability
assumed by the University as a result?
University Provided Housing
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The University can provide housing without the individual or the
University incurring tax liabilities as long as the housing is
provided in accordance with IRS Code Section 119 which
states:
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The value of lodging furnished to an employee by the employer
is excluded from the employee’s gross income if three tests are
met
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The lodging is furnished on the employer’s premises
The lodging is furnished for the convenience of the employer
The employee is required to accept the lodging as a condition of
employment
Please note: These three criteria should be incorporated into
the employee’s offer letter
Sample Tax FAQ’s
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Question:
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My department will be providing a $5,000 travel allowance
for a “volunteer” that is traveling overseas for one quarter
to assist with teaching a class, are there any tax
consequences?
Answer:
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Yes and No. If the volunteer incurs the expense and then
submits receipts for the amount expended then there is no
tax consequence. If the volunteer submits a travel claim
form with no receipts, then the volunteer would receive a
1099 for the $5,000 and be required to report the amount
on their tax return.
Sample Tax FAQ’s
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Question:
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My college is providing a moving and relocation
package to a faculty member just hired. Will there
be any taxes levied on the amount paid and how
will it be deducted?
Answer:
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Depends. Certain types of reimbursements, even
if accompanied by a receipt will be considered
taxable income and will increase the employee’s
W-2 reportable income for tax purposes.
Sample Tax FAQ’s
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Question:
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My department will be providing a housing
allowance for a dean or faculty member, are there
any tax consequences?
Answer:
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An employee that receives a housing allowance
will require authorization from the Chancellor’s
Office and will be paid thru the payroll system with
the appropriate amount of payroll taxes deducted
from each payment.
Sample Tax FAQ’s
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A couple of campus employees regularly sell Tshirts to the local community in order to raise money
for their college to be able to send faculty members
on a sabbatical. Are there any tax issues that I
should be aware of?
Since this appears to be a business that is regularly
carried on and the proceeds are not used in
furtherance of the University’s purpose, there would
most likely be UBI tax implications.
Useful Tax Links
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Tax withholding on out of state service providers
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Moving and relocation expense Tech Letter
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http://www.calstate.edu/HRAdm/pdf2009/TL-BEN200901.pdf
Travel and Relocation Expense Tech Letter
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http://www.ftb.ca.gov/individuals/wsc/agent_decision.shtml
#WhReq
http://www.calstate.edu/HRAdm/pdf2008/HR2008-10.pdf
Independent Contractor Determination:
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http://www.irs.gov/businesses/small/article/0,,id=99921,00.
html
CONTACT INFORMATION
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Marc F. Benadiba
Phone: 805-756-5864
Email: mbenadib@calpoly.edu
Campus:Cal Poly San Luis Obispo