09.19.11

Ohio:  Consumer’s Use Tax Amnesty Program

The Ohio Department of Taxation recently introduced a consumer’s use tax amnesty program, beginning on October 1, 2011 and ending on May 1, 2013. During that period, Ohio will waive all unassessed use tax liability due for any periods prior to January 1, 2009.

In Ohio, consumer's use tax must be paid on purchases of tangible personal property or certain services used, stored or otherwise consumed in Ohio, if Ohio sales tax was not paid to a vendor or the sales tax was not paid to another state. In Ohio Tax Information Release No. ST 2011-01 (September 1, 2011), the State provides some examples of tangible personal property and taxable service which are subject to use tax. Examples of tangible personal property subject to use tax are computer equipment, printers, fax machines, office supplies (paper, envelopes, folders, pens, paper clips, etc.), furniture and cleaning supplies (mops, brooms, cleaners, paper towels, etc.). Examples of taxable services include installation, repair, employment services (temporary labor), automatic data processing, janitorial and maintenance services, storage services and maintenance contracts.

In addition, consumer's use tax paid under the amnesty program is not subject to interest or civil or criminal penalties. However, a taxpayer will be required to pay interest on any under-reported or unreported consumer's use tax, if the taxpayer registered for Ohio use tax before or on June 1, 2011. A taxpayer is required to make a nonrefundable payment of all consumer's use tax due on purchases made on or after January 1, 2009 through the last day of the month preceding the month in which you request amnesty. A taxpayer will also be required to register for consumer's use tax and file returns on an ongoing basis.

Taxpayers who do not qualify for consumer's use tax amnesty may still qualify for Ohio’s Voluntary Disclosure Program. However, if a taxpayer qualifies for consumer's use tax amnesty, the taxpayer is ineligible for voluntary disclosure for consumer's use tax.

Consequently, this new amnesty program provides a good opportunity for many Ohio businesses to properly register and correctly reported unpaid use tax liability, without the fear of penalty and interest.

Virginia Supreme Court Sidesteps Federal Internet Law which limits State Taxation

The Virginia Supreme Court, in Level 3 Communications, LLC v. State Corporation Commission, Et Al .710 SE2d 474 (2011), has defined the State Corporation Commission’s role in certifying a telecommunications company’s gross receipts for the purpose of determining the telecommunications minimum tax.

Virginia taxes telecommunications companies on the greater of a corporate income tax based on income from sources within Virginia or a minimum tax based on the telecommunications company’s gross receipts. Virginia Code § 58.1-400.1 assigns the Virginia State Corporation Commission (“SCC”) with the task of certifying a telecommunications company’s gross receipts for minimum tax purposes. Virginia tax law defines gross receipts and also provides two deductions that the SCC must take into consideration when determining a telecommunication company’s gross receipts. The two allowable deductions are for (1) revenue billed on behalf of another telephone company or person to the extent such revenues are later paid to or settled with that company or person, and (2) revenues received from a telecommunications company, or from a telephone utility company providing interstate communications service for providing certain specified services.

Level 3 Communications, LLC (“Level 3”) sought to change the SCC’s certification of its gross receipts by having the SCC exclude its internet-related revenues. Level 3 asserted that the federal Internet Tax Freedom Act (“ITFA”) prohibits state taxation of internet-related revenues. The SCC argued that since Virginia tax law defines gross receipts and specifies allowable deductions, it lacks the authority to establish deductions from gross receipts not enumerated in the statutes. The SCC also argued that ITFA does not affect the SCC because the SCC makes no determination of tax liability and imposes no tax.

The Virginia Supreme Court ultimately agreed with the SCC. The court stated that the SCC is bound by the plain meaning of the Virginia tax code and cannot create additional categories of deductions for internet-related revenues. The court also agreed that the ITFA does not reach the SCC since the SCC does not impose any tax.

The portion of the decision that held the ITFA does not reach the SCC is interesting since even though the SCC does not impose any tax, the minimum tax imposed by the Virginia Department of Revenue is entirely dependent on the SCC’s certification. Entities that pay the telecommunications tax should be cognizant of the only allowable deductions in order to comply with current Virginia rules. Additionally, telecommunications companies operating in Virginia should stay abreast of any future changes in Virginia case law related to this decision.

What Nonprofits and other Tax-Exempt Organizations need to know about Operating at the State Level

The Internal Revenue Service (“IRS”) exempts many organizations from federal income taxation.  Organizations are recognized as exempt if they are organized and operated for a variety of purposes, including religious, charitable, scientific, and educational. Some of these organizations may have revenue streams unrelated to their qualifying exempt purpose, which is referred to as ‘unrelated income,’ and that income is taxed by the federal government.

In addition to the federal income tax code, exempt organizations must be aware of differing state tax rules. Some states automatically exempt federally exempt organizations for state income tax purposes while other states require an additional registration to qualify for the state income tax exemption. Additionally, many states have their own unrelated income rules which may or may not mirror the federal rules. For example, New York modifies the federal definition of unrelated business income, while Ohio does not provide specific provisions related to the unrelated business income tax for Commercial Activity Tax purposes.

Exempt organizations must not only pay attention to state income tax rules, but they must also be familiar with other taxes imposed at the state and local level, such as sales and use tax, property tax, and franchise tax. States differ on whether exempt organizations are subject to sales tax when buying or selling tangible goods or services. For example, Alabama does not exempt sales made by a tax exempt organization while California exempts certain sales of an exempt organization. Organizations should not ignore state personal and real property taxes. For example, Georgia provides several exemptions to its property tax, but does not provide an exemption that would apply to a federally exempt organization.  Finally, some states impose a franchise tax in addition to an income tax.

All exempt organizations should carefully study in which states they have a taxable presence.  If there is a presence in a state, a careful evaluation of the state’s tax regimes should be performed along with the applicable exemptions.

Should you have any questions about how these developments might affect you, please contact Mike Fletcher at mfletcher@argy.com or 703-770-0533.

 

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