new surviving a sales & use tax audit & sales of business assets · 2020. 8. 21. · in...

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Surviving a Sales & Use Tax Audit & Sales of

Business AssetsJuly 31, 2020

With You Today

[email protected]: 918.236.1286 – Cell: 918.284.8499

www.saltapllc.com2

SALTA, PLLCYOUR STATE AND LOCAL TAX ADVOCATES

Brent Watson, CPA

mailto:[email protected]

LIMITATION OF PURPOSE

This document supports SALTA, PLLC’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation.

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LEARNING OBJECTIVES

• Be equipped to handle audits of sales and use taxes

• Be prepared for potential audits based on the knowledge of what may be needed during an audit

• Be aware of issues encountered during the sale or purchase of business assets

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STATE LAW

Explanations of tax laws in this presentation pertain to Oklahoma unless noted. Sales tax laws vary between states and are frequently inconsistent.

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AGENDA1) A “Stitch in Time Saves Nine”: Preparation for

Audits

2) The Launch of an Audit

3) The Care and Feeding of Auditors

4) The Audit Process: Typical Issues and Procedures

5) Resolution of Audits - Informally

6) Resolution of Audits – Formal Procedures

7) The Sale of Business Assets

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AGENDA1) A “Stitch in Time Saves Nine”: Being Prepared for

Audits







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AUDITS ARE COSTLY

• Impacts of sales tax audits range from minor to catastrophic

• Costs of Audits:

• Monetary costs

• Time and personnel costs

• Third party assistance

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CHECKLIST TO PREPARE FOR AUDITS OF SALES

• Check Nexus Profile

• Check Exemption Certificates

• Consider Other Factors

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Nexus

Physical Presence Factors

• Payroll or property located in a state

• Temporary presence for installations, delivery in company vehicles, repairs, or regular sales calls

• Contract workers - acting as an agent of the seller

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Nexus

Physical Presence

• Sellers should be monitor changes in business that could create nexus:

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Nexus

Economic Nexus – Wayfair v. South Dakota

• States now can impose their sales tax laws on vendors who have no physical presence in their state

• Effect of this change extends far beyond large e-commerce sellers

• General rule : sales in excess of $100K within a one-year period

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Nexus

• What to do if you discover nexus exposure

• Registrations

• Collection of certificates and or uncollected tax from customers

• Voluntary Disclosure Agreements

• Other Solutions for Drastic Situations

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Exemption Certificates

• Multiple States – multiplies exposure!

• Validity of Certificates

• Expiration of Certificates

• Management of Certificates

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Other Factors To Consider in Audits of Sales

• Local taxes – boundaries, city/county/district

• Taxable basis

• Sales v. use tax applicable to sales across state lines

• Non-taxable items

• Filing of returns

• Sales tax software

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PREPARATION FOR AUDITS OF PURCHASES

• Payment of Tax to Vendors

• Accruing Use Tax

• Common Errors for Tax Applicable to Purchases

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Audits of Purchases

Payment of Tax to Vendors:

• Overpayments on exempt purchases

• Improper issuance of exemption certificates

• Documentation

• Credit card purchases

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Audits of Purchases

Use Tax Accruals:

• Use tax accruals may be needed (SOL issue)

• Use tax account

• Direct Payment Permits

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Audits of Purchases

Common Errors for Tax Applicable to Purchases

• Warranty work

• Contractor’s purchases

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Audits of Purchases

• Common Errors for Tax Applicable to Purchases

• Temporary Storage in OK for usage elsewhere

• Credit card purchases

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Audits






7) The Sale of Business Assets21

The Launch of an Audit• Focus on potential positive values of an audit

• Relating to the Auditor:

• The Golden Rule applies to auditors too!

• Auditors usually do not know your business like you do.

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Sampling

• Can be advantageous to all parties

• Can produce skewed and damaging consequences

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Sampling Agreements

• How sampling works generally

• Types of Sampling

• Sampling is NOT mandatory in OK

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Statute of Limitations Waivers

• Agreeing to an SOL Waiver is NOT mandatory

• Length of waiver to agree with

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Begin Preparation Before the Audit Commences

• Exemption certificates

• AP/purchases and sales data

• Sales tax reported data

• Sales tax software

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Audits







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The Care and Feeding of Auditors

• People skills are important in all areas of life -including business – and especially in dealing with audits

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Audits







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Typical Issues and Procedures - Sales

• Reconciliation of sales reported to GL

• Exemption certificates

• Calculation of tax

• Contractors versus Dual-Operators

• Bad debts

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Typical Issues and Procedures -Procedures

• Selection of Accounts of Interest

• Assets

• Expenses

• Contractors

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Contractors

Pass-through exemptions• Pass-through exemptions are of special importance to

contractors in OK

• For some types of exempt taxpayers, the contractor can also purchase consumable materials used in the project on an exempt basis.

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Contractors

Entities with Pass-through Exemption Status (OAC 710:65-7-13(b)):

• Oklahoma municipalities and counties

• Public school districts

• Institutions of the Oklahoma System of Higher Education

• Rural water districts

• Specific state agencies and quasi-governmental agencies including: the Grand River Dam Authority, the Northeast Oklahoma Public Facilities Authority, the Oklahoma Municipal Power Authority, the City of Tulsa-Rogers County Port Authority, the Broken Bow Economic Development Authority, the Muskogee City-County Port Authority, the Oklahoma Ordnance Works Authority, the Durant Industrial Authority, the Ardmore Development Authority, the Oklahoma Department of Veterans Affairs, the Central Oklahoma Master Conservancy District, or Department of Central Services only when carrying out a public construction contract on behalf of the Oklahoma Department of Veterans Affairs 33

ContractorsEntities with Pass-through Exemption Status (OAC 710:65-7-13(b)):

• 710:65-7-13(b)(2) Private schools - However, the institution must be registered or accredited with the Oklahoma State Regents for Higher Education, the State Board of Education, or the State Department of Education.

• 710:65-7-13(b)(3) Agricultural permit holder to construct a facility which will be used directly in the production of any livestock, including facilities used in the production and storage of feed for livestock

• 710:65-7-13(b)(4) Colleges – IF: they are exempt from taxation pursuant to Section 501(c)(3) of the Internal Revenue Code and they have exemption status from the Tax Commission

• 710:65-7-13(b)(5) Pollution Control Agencies – must have a letter certifying the exemption status from the Tax Commission

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Contractors

Entities with Pass-through Exemption Status (OAC 710:65-7-13(b)):

• 710:65-7-13(b)(6) A contractor, or a subcontractor to such contractor, with whom a church has duly entered into a construction contract may make purchases of tangible personal property or services exempt from sales tax which are necessary for carrying out such construction contract.

• 710:65-7-13(b)(7) Rural electric cooperatives

• 710:65-7-13(b)(8) Child care centers operated for educational purposes, qualified for exemption pursuant 68 O.S. §1356(69)

• 710:65-7-13(b)(9) Manufacturing operation classified under NAICS No. 324110 (Petroleum Refineries)

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Contractors

Pass-through Exemption Status – DOES NOT INCLUDE:

• Manufacturers – except in the case of refineries.

• Federal government

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Contractors

Vendors should require (see OAC 710:65-7-13(c)) that contractors claiming exempt basis based on a pass-through exemption provide the proper documentation

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Contractors

• Consumers use tax may be due on equipment brought into the state

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Audits







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Informal Adjustments• Auditors will typically provide an information

“work-in-process” listing during the audit process

• Request listings from auditors frequently as the audit progresses


Audits







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Formal Protests of Assessments• Assessment

• Written protest

• Statute of Limitations

Formal Protests of Assessments• Review by an Administrative Law Judge

• Three options exist for hearings with the ALJ:

• Written presentation

• In person at hearing

• Teleconference hearing

Formal Protests of AssessmentsThe protest should include:

• Facts about the issues/items protested

• Citation of applicable law or rules

• Position regarding the applicable law or rules

• Summary requesting relief

Formal Protests of Assessments

• Direct Appeal to the Tax Commissioners

• Appeal to the OK Supreme Court.


Audits







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BULK SALE RULE

• Purchasers of business can be liable for the seller’s unpaid trust fund type taxes

• Purchasers should request documentation from the seller

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OCCASIONAL/ISOLATED/CASUAL SALES

• OK is one of the few states that does not provide an exemption for occasional sales (sales of TPP -non-trade assets) except for some very limited exceptions:

• Sales of non-inventory business assets are NOT generally exempt.

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• Surprises companies making such transactions

• Sellers are primarily responsible for filing a sales tax return

• Identifying the value for which TPP is transferred

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• The OTC aggressively checks for sales tax reporting of assets shown to be sold

• Historically, the state had only been pursuing oil and gas operators

• Valuation asserted by the OTC has been a huge issue

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• The OTC can pursue either the buyer or the seller

• Treatment of sales tax in PSAs

• Purchasers need to obtain a sales tax permit, manufacturer’s sales tax exemption permit, or other exempt designation BEFORE the purchase

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Examples of Tax Liability for Occasional Sales

Example 1: Sale of Restaurant

The sale of a restaurant is made. $200,000 of the sales price is attributable to equipment, furniture and fixtures and $10,000 is attributable to food inventory.

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Example 2: Sale of Factory

• The sale of a factory is made with the following breakout: $200,000 furniture and fixtures, $800,000 for inventory, and $5M for mfg. equipment.

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Example 3: Sale of Oil and Gas Properties

• A group of leases on oil and gas properties is made. Allocation of the sale price is included in the PSA, listing the value of each well, but no other detail is provided

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Example 4: Material Transfers Between Related Entities

Transfer of assets between partnerships with uncommon ownership is also an issue – mainly affecting oil and gas operators. Example:

Partnership A (partners 1,2,3, & 4) transfers materials to Partnership B (partners 1,2,3, & 5)

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