Ohio Tax
Workshop BB
Ohio Sales & Use Tax –
In-depth Review of Major
Developments Including New
Audit Policies &Procedures
and Areas with Significant
Number of Inquiries
Wednesday, January 29, 2014
11:00 a.m. to 12:30 p.m.
Biographical Information
Edward J. ("Ted") Bernert, Partner, Baker & Hostetler LLP
65 E. State Street, Suite 2100, Columbus, Ohio 43215
[email protected]
614.462.2687
Fax 614.228.1541
Edward J. (“Ted”) Bernert concentrates his practice in the area of state and local taxes with a particular
emphasis on the major Ohio taxes affecting businesses and business owners–sales and use, financial
institution, personal income, commercial activity and real property taxes. He represents national
companies concerning Ohio tax matters related to compliance, planning and tax legislation. Mr. Bernert
regularly deals with various tax department officials upon audit or administrative appeals. He has an
active tax litigation practice before the Ohio Board of Tax Appeals and upon appeal to the courts,
including the Supreme Court of Ohio.
Mr. Bernert is a member of the Executive Committee of the American Bar Association’s State and Local
Tax Committee and is a past chair of the Ohio State Bar Association Taxation Committee and the State
and Local Tax Section of the Columbus Bar Association. Mr. Bernert was appointed by the Governor to
the Ohio Business Gateway Steering Committee to address the continued development of an electronic
link for filing taxes and other matters affecting business. He also serves as a member of The Ohio
Chamber of Commerce Taxation Committee. Mr. Bernert is an adjunct professor of state and local taxes
at the Capital University Law and Graduate Center and served as Chief Editor of Ohio Tax Review,
formerly published by the Center. He currently serves as the co-editor of the Guidebook to Ohio Taxes,
published by Commerce Clearing House. He has repeatedly been named an “Ohio Super Lawyer” in the
area of Taxation and holds an AV rating by Martindale-Hubbell.
Steven B. Russell, Assistant Administrator, Audit Division, Ohio Department of Taxation
30 E. Broad St. 20th Floor, Columbus, OH 43215
614.466.9635
Fax: 614.466.1082
[email protected]
Steven (Steve) Russell began his career at the Ohio Department of Taxation over 19 years ago. For the
last 16 years, he has specialized in sales and use tax auditing which includes experience with
manufacturers, construction contractors, and retailers. Prior to becoming assistant administrator, Steve
was a part of the Audit Division’s Review and Support Group where he helped administer the direct pay
authority program. As assistant administrator, he is responsible for forming Audit Division practices and
providing technical guidance. Steve is an audit representative to the Streamlined Sales Tax Project for
the state of Ohio and received his B.S. in accounting from Otterbein College, Westerville, Ohio in 1991.
Allan R. Thompson, Manager - Corporate Taxes, AK Steel
9227 Centre Pointe Drive, West Chester, OH 45069
513-425-2685
Fax: 513-425-5251
[email protected]
Mr. Thompson is a graduate of University of Toledo (1977 - B.B.A., Accounting) and Cleveland-Marshall
College of Law (1980 - J.D., Taxation). His career includes 9 years of tax consulting experience in public
accounting and over 24 years in tax management positions with several large Ohio manufacturers. He
has over 25 years of hands-on experience in various types of tax audits at the Federal, state and local
levels with particular emphasis on Ohio sales and use tax. During this time he has worked toward
equitable resolutions of compliance audits, voluntary disclosure agreements, administrative appeals and
pending litigations with representatives of taxing jurisdictions ranging from field auditors to tax
commissioners.
Mr. Thompson has made numerous presentations for Lorman Education Services and the Ohio Society of
CPAs on the subject of Ohio sales and use tax exemptions and exceptions. He recently started a second
tour of duty as Chairman of the Tax Committee of the Ohio Manufacturers Association.
Ohio Sales and Use Tax
January 2014
Steven Russell
Ohio Department of Taxation
[email protected]
(614) 466-9635
Allan R. Thompson
AK Steel Corporation
[email protected]
(513) 425-2685
Edward J. Bernert
Baker & Hostetler LLP
[email protected]
(614) 228-1541
Topics
• Law Changes HB 59
• What’s New(er) in Audit
• Proposed Rule Changes
• Ohio Cases
• Fracking/Mining
• Construction Contracting
2
Law Changes HB 59
• Budget bill as originally introduced would have
expanded the list of taxable services
• Language removed through the legislative
process – no new taxes on services
• Procedure for reporting and remitting wireless
9-1-1 charge changed effective January 1, 2014
• Charges are not new – no longer administered by
the PUCO but by the Department of Taxation
3
Law Changes HB 59
• Wireless service providers and resellers collect and remit
a wireless 9-1-1 charge of twenty-five cents per month
per wireless phone number on postpaid wireless service.
• Sellers of prepaid wireless calling service (including
prepaid wireless cards) are required to collect and remit a
wireless 9-1-1 charge of five tenths of one percent (.005).
See R.C. 128.42 Wireless 9-1-1 charge must be collected
at point of sale and separately stated on customer’s
receipt. Wireless 9-1-1 charge is not part of taxable price.
4
Law Changes HB 59
• Sellers, wireless service providers and resellers must
register, file, and pay on OBG - a separate account is
required and returns filed monthly (due the 23rd of the
month beginning 2/23/2014) R.C. 128.46(B)
• Sellers, wireless service providers and resellers may
retain 3% of the charges as a collection fee R.C.
128.46(B)(4)
5
Law Changes HB 59
• State portion of sales and use tax rate
increased from 5.5% to 5.75% on
September 1, 2013
• Magazine subscriptions are taxable
beginning January 1, 2014
• “Specified digital products” taxable
effective January 1, 2014
(5739.01(B)(12)
6
Law Change HB 59
• 5739.01(B)(12) All transactions by which a
specified digital product is provided for
permanent use or less than permanent use,
regardless of whether continued payment is
required.
• (QQQ) "Specified digital product" means an
electronically transferred digital audiovisual
work, digital audio work, or digital book.
7
Law Changes HB 59
• As used in division (QQQ) of this section:
• (1) "Digital audiovisual work" means a series of related images that,
when shown in succession, impart an impression of motion, together
with accompanying sounds, if any.
• (2) "Digital audio work" means a work that results from the fixation
of a series of musical, spoken, or other sounds, including digitized
sound files that are downloaded onto a device and that may be used
to alert the customer with respect to a communication.
• (3) "Digital book" means a work that is generally recognized in the
ordinary and usual sense as a book.
• (4) "Electronically transferred" means obtained by the purchaser by
means other than tangible storage media.
8
Law Changes HB 59
• Specified digital products:
- Delivered electronically including
less than permanent use
- Sales to or by cable service provider,
video service provider or radio or TV
station are not taxable
- “Electronically transferred” also
means access to specified digital
products specified
9
What’s New(er) in Audit
• New Refund Procedure:
- Department has previously used the “T-300”
to notify taxpayers of a reduction to their
refund
- Sales & Use Tax Division Refund Unit
ended its use of the T-300 about 2 years ago
- Audit Division no longer using T-300 as of
August 2013
10
What’s New(er) in Audit
•
New Refund Procedure: (cont.)
-
How do I file an appeal in a T-300less world?
•
Taxpayer will receive dated notification of
denial (partial or in full)
•
Taxpayer has 60 days from the date of the letter
to appeal and/or provide additional information
•
If additional information doesn’t result in full
refund then will be sent to Tax Appeals
11
What’s New(er) in Audit
•
•
•
Quick Service Restaurants (QSR)
-
Dine in food is taxable
-
Need to ask if food is “for here” or “to go”
Bar/Restaurant/Carry-out
-
Under-reporting of alcohol/food sales
-
Use of mark-up analysis
See information release – Restaurant and Other Food
12
Vendors ST 2012-01
What’s New(er) in Audit
•
Pit Cleaning – Department has taxed as janitorial/
maintenance service as long as inside building
-
•
Department now exempting service if the waste is
recycled back into the manufacturing process
Returnable containers – used by manufacturers to send
materials between suppliers and the “end” manufacturer
-
Department has taxed based on the period of time which
the container is in the possession of the end manufacturer
• Department had determined that the containers meet
the exemption in R.C. 5739.02(B)(15)
13
What’s New(er) in Audit
•
R.C. 5703.58 “…the commissioner shall not make or issue an
assessment against a consumer … if the tax was due before
January 1, 2008”
-
Department originally held this was for only those unregistered
taxpayers
Buehler’s Final Determination of 3/27/2013
Only for assessments made after 9/29/2011
Department making efforts to refund pre-1/1/2008 audit
liability if assessed (and generally paid) after 9/29/2011
Department making efforts to provide a settlement for pre1/1/2008 audit liability if paid but not assessed after 9/29/2011
14
Sales & Use Tax Division Seeks
Comments on Proposed Rule Changes
As part of the Department’s five-year rule review process, the Sales &
Use Tax Division proposes the following rule changes:
Rule Number
Proposed Change
5703-9-01
Rescission. This rule is unnecessary because the
requirements for vendor’s licenses are set forth in
Ohio Rev. Code 5739.17.
This rule was revised to delete provisions of the rule
that duplicate Ohio Rev. Code 5739.03 and 5739.13.
Since more than 50% of the rule has changed, the
Legislative Service Commission requires rescission of
the existing rule and adoption of a revised rule with
the new language.
15
5703-9-02
Sales & Use Tax Division Seeks
Comments on Proposed Rule Changes
Rule Number
Proposed Change
5703-9-03
This rule was revised to delete provisions of the rule
that duplicate Ohio Rev. Code 5739.03 and 5739.031.
Since more than 50% of the rule has changed, the
Legislative Commission requires rescission of the
existing rule and adoption of a revised rule with the
new language.
Revised to correct citations to the Ohio Rev. Code.
Revised to correct citations to the Ohio Rev. Code.
5703-9-04
5703-0-05
16
Sales & Use Tax Division Seeks
Comments on Proposed Rule Changes
Rule Number
Proposed Change
5703-9-11
5703-9-12
No changes.
Minor revisions.
All comments regarding the proposed rule changes should be sent to
Phyllis Shambaugh, Counsel, Sales & Use Tax Division, at
[email protected] by January 31, 2014.
17
Ohio Cases
Dunagan v. Testa, Ohio BTA No. 2011-A1466 (October 31, 2013).
• Transfer from SMLLC to owner not
taxable
• No consideration
18
Ohio Cases (cont.)
Schlegel v. Levin, Ohio BTA No. 2010-A1757 (May 23, 2013).
• Casual sale for sale of aircraft
• Need to prove actions of seller relative
to aircraft
• No longer need to be used in Ohio by
seller
19
Fracking/Mining
• R.C. 5739.02(b)(42)(a) … to use or consume the
thing transferred directly in producing tangible
personal property for sale by mining, including,
without limitation, the extraction from the earth of all
substances that are classed geologically as minerals,
production of crude oil and natural gas, or directly in
the rendition of a public utility service, …Persons
engaged in rendering services in the exploration for,
and production of, crude oil and natural gas for
others are deemed engaged directly in the exploration
for, and production of, crude oil and natural gas.
20
Fracking/Mining
• The Fracking Site:
• Water, chemical, and sand brought to site by trucks/trailers
and stored in Frac tanks (water) and sand silos. Chemical
add tanks store multiple chemicals and feed into the frac
blenders. Hydration units also provide liquids to the frac
blenders. Conveyors feed sand to the blender
• Frac blenders blend the water, chemicals, and sand
• Blenders feed into as many as 20 frac trucks
• The equipment above has been deemed prior to drilling and
taxable
• http://fracfocus.ca/sites/all/themes/fracfocus_look/images
/process.jpg
21
Fracking/Mining
• Employment Services means:
− (1) “…providing or supplying personnel, on a
temporary or long-term basis to perform work or
labor…”
− (2) “…under the supervision or control of
another,…”
− (3) “…when the personnel so provided or supplied
receive their wages, salary, or other compensation
from the provider or supplier of the employment
service or from a third party that provided or
supplied the personnel to the provider or supplier.”
22
Fracking/Mining
• The Fracking Site (cont.)
• The frac blenders feed the frac pumps
(maybe as many as 20 at a site) which are
attached to a “missile.” The missile is heavy
steel that attaches to the well.
• A “data truck” or equipment contains
monitoring and controlling equipment
• The frac pumps, missile, and data truck
equipment have been deemed to be exempt
23
Fracking/Mining
• The Ohio Supreme Court has determined that in order to
be exempt under the mining exemption, the tangible
personal property must be used after drilling has begun.
Kilbarger Construction v. Limbach, 37 Ohio St.3d 234,
syllabus (1988). In that case, the Court held:
• In the case involving the production of crude oil and natural
gas, for the purpose of applying “direct use”, actual drilling
is the appropriate place for the commencement of the
activity of production
• The use of the term “exploration” in (now) R.C.
5739.02(B)(42(a) does not expand the exception from sales
taxation to include site preparation prior to the drilling for
24
crude oil and natural gas
Fracking/Mining
• With this in mind:
• Areas of taxability include:
• Equipment and materials used to make roads, to clear and
level the site, and prepare right of ways for flow lines from
the drilling site to the storage tanks - Kilbarger
Construction, Inc. v. Limbach, 06/29/1988
• Trucks used to haul water and waste water; storage for such
water Golden Water Service, Inc. v. Limbach, No. 85-F-142,
June 23, 1986
• Purchase of limestone and gravel that are used as a leveling
agent for the pump units and production tanks - Universal
Minerals, Inc. v. Limbach, Case #86-E-322, 6/30/1989
25
Fracking/Mining
• Areas of Taxability (cont.)
• A backhoe used to dig culverts, dig pits for the storage
of fresh and salt water and in the reclamation of the
land. A dozer used to construct the road from the
roadway to the drilling site, dig pits for the storage of
water, prepare the drilling site, to tow other equipment
and in reclamation.
• The BTA found that while the items may be important
to and complementary of the production of crude oil
and natural gas, they are not used during the actual
production process.
• Oil Field Services, Inc. v. Limbach, Case #84-C-55,
3/30/1987
26
Fracking/Mining
• Mining vs. Manufacturing
• Toured a facility that “manufactures” cement for sale.
Cement is used to provide strength and stability of the
well casing. Since they are a service provider, they are
able to claim some of their equipment such as:
• Cement blend tanks and mixer/pumps are exempt as manufacturing
equipment.
• A fracking company that does its own cement work
would not be able to claim the manufacturing exemption
on its equipment because it is not manufacturing for sale
27
Fracking/Mining
• Most of the equipment is on trailers
moved by tractors. We found that some
equipment operates off of the tractor
power (power take-off) and some has its
own generators. The taxability of the
equipment determines the taxability of the
generators and even the tractors
28
Fracking/Mining
• Piping that moves the gas/oil from the well site is
exempt if oil/gas company owns the processing
plant and is processing the oil/gas
• If processing is done by a third party, the piping is
taxable unless they are a public utility
• Universal Minerals, Inc. v. Limbach, Case #86-E322, 6/30/1989
29
Property Classification
• Real Property – ORC § 5701.02
• Personal Property – ORC § 5701.03
• Importance to contractors
• Accurately bid the job
• Claim resale or pay tax on materials purchases
• Collect tax (or exemption certificate) on sales of tangible
personal property
• Efficiently set up job documentation and billing procedures
• Avoid sales tax assessments
• Avoid use tax assessment on materials
30
Real Property – ORC 5701.02
• Land
• Building
• Structure
• Improvement
• Fixture
31
Tangible Personal Property –
ORC 5701.03
• Everything not attached to real
property
• Things attached temporarily
• Business Fixtures
32
Business Fixtures
• Permanently affixed
• Primarily benefits the business, not the real
estate
• Can include parts of buildings
• Excludes fixtures that are common to
buildings no matter what business is
conducted
33
Rule of Thumb
• If item does not meet definition of
real property in ORC 5701.02, item
is TPP
• If item meets definition of real
property in ORC 5701.02, item is
real property unless otherwise
specified as TPP
34
Exceptions
• Carpeting
• Farm drain tile and grain bins
• Landscaping
35
Sales and Use Tax Issues
• The contractor’s dilemma
• Consumer or vendor?
• The problem
• Property classification
• Incidence of the tax
• Exemptions
• Importance of addressing the issues
• Who bears the burden of figuring all this out?
• Who bears the consequences of doing it wrong?
• Potential for “under” or “over” compliance
36
How can you solve this Dilemma?
• Contractee Certification!
• The contractor can request the contractee to
“certify” those portions of the job that are real
property and tangible personal property. ORC
5739.03
• The contractor or vendor may in good faith
rely on the contractee’s certification
• Contractor or vendor cannot provide advice to
the contractee as to how to treat the job
• See Associated General Contractors of Ohio
37
Flow-Through Exemptions
•
•
•
•
•
•
Government jobs
Churches
Charitable organizations
Non-profit schools
Exemption only for materials
Exemption certificates (EC)
• Construction Contractor’s EC
• Contractor’s EC
38
Construction Contracts
• Admin Rule 5703-9-14 (H)
• Machinery, equipment, tools, supplies, and
other tangible personal property purchased or
leased by a construction contractor and used or
consumed in performing a construction
contract, including a contract specified in
paragraph (D) of this rule, are taxable
39
Construction Contracts
• Taxable items:
•
•
•
•
•
•
•
•
Lift equipment
Job trailers
Scaffolding
Portable toilets
Safety equipment
Specialized tools
Consumable fuels
Off road (dyed) diesel fuel, oxygen, acetylene
40
Construction Contracts
• Tangible personal property that is temporarily affixed
during construction, is not incorporated into real property
for sales and use tax purposes such as:
•
•
•
•
temporary electricity or water service hook-ups
fencing
construction elevators
shoring lumber concrete forms
• This applies even if these items remain affixed after
construction is completed due to inadvertence,
convenience, or economic necessity
41
Construction Contracts
• Services consumed by the contractor
even if for an exempt job include:
• Security
• Building maintenance & janitorial (see
Cousino Constr. Co. v. Wilkins, 108 Ohio St.3d
90, 2006-Ohio-162
• Employment service
42
Questions?
43