Sales Taxes and Value Added Taxes

Sales Taxes and Value Added Taxes:
Common Issues and Planning Considerations
Presented by
David A. Fruchtman
Mark Houtzager
[email protected]
[email protected]
Ph: 646.681.2268 or 847.656.4823
Fax: 800.930.7271
Ph: 646.397.5855
HOW
VALUE ADDED TAX
WORKS
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HOW VAT WORKS - INTRODUCTION
VAT is a tax on the
supply of goods or
services, supplied by
a taxable person,
Originally “a
simple tax”, now
much more
complex.
VAT is a favorite
revenue tool for
many governments.
and on imports.
In the EU: one single jurisdiction, but
sometimes differences between EU and
local legislation.
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HOW VAT WORKS –
VAT IS ALMOST EVERYWHERE
Sales taxes
GST system
Existing VAT systems
Considering VAT system
EU VAT system
No GST/VAT System or no consumption taxes
Future VAT system
Future GST system
General consumption taxes
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HOW VAT WORKS –
OUTPUT TAX VS. INPUT TAX
Output Tax (Accounts Receivable)
Principle - VAT at each stage of the sales / supply chain (“output tax”)
Tax on almost all business transactions
goods
services
intercompany
changes
licenses,
royalties
Collected from buyer on
Vendors charge VAT
sales, or collected from
based on the price of the
importer on imports
goods or services.
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HOW VAT WORKS –
OUTPUT TAX VS. INPUT TAX
Input Tax (Accounts Payable)
Principle - VAT shown on purchase invoices received from vendors
("input tax") – credit for business buyer
EU businesses do not normally have an on-going net
VAT cost - all VAT paid “should be” reclaimable
VAT is finally a cost by the end
customer, which is a private person
The net balance shown as due to /
reclaimable from the tax authorities is a
balance sheet item (credit or debit balance)
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HOW VAT WORKS - RATES
VAT comes in different rates: typically, VAT jurisdictions have a standard rate, a lower
rate and a zero-rate.
The average VAT rate is the European Union is about 21%
Rates up to 25% (Denmark, Sweden) and
even 27% (Hungary) are common.
The lowest standard VAT rate is in Taiwan: 5%
Lower rates are for basic necessities (food, clothing).
The zero-rate applies when goods or services are exported.
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HOW VAT WORKS –
THE DISTRIBUTION CHAIN
The VAT system assume 20% VAT
Goods sold to distributor
for $100+$20 VAT
Supplier
$20 remitted
Consumer has the tax
burden of $60 VAT
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Distributor
Product sold to
Retailer $200+$40
VAT
$20 remitted
($40 VAT - $20 credit)
Total
Government
Revenue
$60
Final
consumer
Retailer
$20 remitted
($60 VAT - $40 credit)
Product sold to
consumer
for $300+$60 VAT
HOW VAT WORKS - INVOICES
Invoices are the backbone of any VAT system
Input tax: Vendor invoices
establish the amount of input tax
recoverable for the buyer
Output tax: Invoices
determine the VAT liability
Very strict requirements on the content and the
layout of the invoices
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HOW VAT WORKS – VAT VS. SALES TAX
In general, the 9% Sales Tax is only added to the retail
price of goods at the consumer level.
The 9% Sales Tax IS NOT A VAT.
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HOW VAT WORKS – VAT VS. SALES TAX
VAT vs. sales tax:
VAT applies at each stage
of the supply chain, and
VAT applies on virtually all
supplies of goods and
services
Business can credit
VAT incurred on all
purchases
Exemption
certificates are rare
in VAT
In fact – the input tax
credit in VAT is somewhat
similar to exemption
certificates, but much
broader
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HOW VAT WORKS – VAT PLANNING
Identify VAT on any expense and reclaim where possible.
U.S. companies can receive VAT refunds in most (Northern) European countries
Involve VAT in decisions for new business opportunities.
Be prepared – VAT can cost you!
Ensure that your company is VAT compliant.
Registration can be required even if there is no 'nexus'
Compliant invoicing, filing, tax liability are key audit items
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TAX PRESENCE
Current Law: Litigation
Colorado Click-Through Nexus
Direct Marketing Association v. Brohl
On February 18, 2014 Denver
District Court issued preliminary
injunction against state
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TAX PRESENCE
Current Law: Litigation
Colorado Click-Through Nexus
Direct Marketing Association v. Brohl
February 25, 2014 Petition for
Certiorari filed with U.S. Supreme
Court
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TAX PRESENCE
Current Law: Click-Through States
States With Some Type of
Click-Through Nexus:
CALIFORNIA
COLORADO
CONNECTICUT
GEORGIA
ILLINOIS (Invalid)
KANSAS
MAINE
MINNESOTA
NEW YORK
NORTH CAROLINA
OKLAHOMA
PENNSYLVANIA (DOR Position)
RHODE ISLAND
SOUTH CAROLINA
SOUTH DAKOTA
TEXAS
VERMONT
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TAX PRESENCE
Current Law: Proposed Legislation
Federal Legislation
Marketplace Fairness Act Update
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CHARACTERIZATION PLANNING
New Legislation
Colorado legalized sales of
marijuana.
Sales tax revenues January 1, 2014 –
February 28, 2014: $1.4 million
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WHO IS THE PURCHASER?
Current Law: Litigation
Louisiana case
Bridges v. Cepolk,
Case No. 13 – 1051
(Louisiana Court of Appeal
February 12, 2014)
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QUI TAM AND CLASS ACTIONS
Current Law: Litigation
Qui tam lawsuits are “Whistleblower Actions” based on alleged failures to collect or
pay taxes.
Class action lawsuits are brought when too much sales tax is collected.
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QUI TAM AND CLASS ACTIONS
Current Law: Litigation
February 27, 2014: People ex rel. Empire State
How
BIG?
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Ventures, LLC v. Sprint Nextel Corp., 970 N.Y.S. 2d 164
(Appellate Division).
New York appellate court refuses to dismiss qui
tam suit with treble damages claim of $400 million.
Whistleblower eligible for up to 25% of New York
State’s collections.
QUI TAM AND CLASS ACTIONS
Current Law: Litigation
Hobbs v. Verizon,
Case No. B249131 (California Court of Appeal February 26, 2014)
The False Claims Act is designed to supplement
governmental efforts to identify and prosecute
fraudulent claims made against state and local
governmental entities’ by authorizing private
parties (referred to as qui tams or relators) to
bring suit on behalf of the government…
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QUI TAM AND CLASS ACTIONS
Current Law: Litigation
Hobbs v. Verizon,
Case No. B249131 (California Court of Appeal February 26, 2014)
However, the False Claims Act also erects a
jurisdictional bar to qui tam actions that do not
assist the government in ferreting out fraud
because the fraudulent allegations or transactions
are already in the public domain…The False
Claims Act’s public disclosure bar is relaxed only if
the qui tam plaintiff was an original source of the
disclosure
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QUI TAM AND CLASS ACTIONS
And not just sales taxes...
March 14, 2014:
New York State’s Attorney General
announced that Bristol-Myers Squibb
paid $6.2 million to settle a New York
State and New York City qui tam
income tax case.
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QUI TAM AND CLASS ACTIONS
And not just sales taxes...
Unclaimed Property Case: State of Delaware and French
v. [Some 50 companies including] CARD COMPLIANT, LLC,
APPLE AMERICAN GROUP, LLC, HOMEAWAY.COM, INC.,
CALIFORNIA PIZZA KITCHEN, INC., NETFLIX, INC.,
OVERSTOCK.COM, INC., POLORALPH LAUREN
CORPORATION, RUTH'S CHRIS HOSPITALITY GROUP,
SHELL OIL COMPANY, SHOPKO STORES OPERATING CO.,
LLC, SHUTTERFLY, INC., SKECHERS USA, INC., ... Case No.
N13C06-289 FSS (June 28, 2013)
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QUI TAM AND CLASS ACTIONS
MTC Working Group
The Multistate Tax Commission has organized a working group of 12
practitioners and state officials to address this issue
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TAXING THE
CLOUD
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CLOUD COMMERCE
Definition
"Cloud" can be defined as "Services that
allow customers to access and use
computer software, servers, operating
systems, databases, and other computing
and storage resources via the Internet."
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VAT IN THE CLOUD
- SALES OF DIGITAL SERVICES
Online sales to EU residents.
Current rules for US online retailers:
US online seller of services
VAT at the rate of
the customer’s
country
EU-based individual
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No VAT
(reverse charge)
EU-based business
VAT IN THE CLOUD
- CHANGES ON JANUARY 1, 2015
2015
There will be no change for U.S. companies selling online.
Only change is for EU-based online retailers:
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CLOUD COMMERCE
Legislation
April 4, 2014
Idaho governor signs law (H. 598; Law
Chapter 340) ensuring that cloud
computing services are not subject to
sales tax.
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CLOUD COMMERCE
Rulings
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David Fruchtman,
Chair, Rimon P.C.'s State and Local (Subnational) Tax Practice
[email protected]
(646) 681-2268
Has advised clients regarding taxes in all 50 states.
For Mr. Fruchtman's complete biography and links to more than
30 of his articles, outlines and newsletters, please go to
www.rimonlaw.com
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Mark Houtzager, Value Added Tax consultant
Value Added Tax Blog: www.theVATblog.com
[email protected]
646-397-5855
VAT lawyer, based in New York City; 20+ years dedicated global VAT
experience, now 12 years in the U.S.
The Netherlands, Singapore, US; PWC and Deloitte
Started US VAT, Inc. in August 2010
Supports U.S. businesses in dealing with VAT outside the U.S.
• Large and mid-size multinationals
• companies planning on expanding overseas
• Online sellers
Frequent presenter, author and trainer
Vertex and Avalara partner
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