Surviving a Sales & Use Tax Audit & Sales of Business Assets - July 31, 2020 1 - StarChapter
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Surviving a Sales & Use
Tax Audit & Sales of
Business Assets
July 31, 2020
1With You Today
SALTA, PLLC
YOUR STATE AND LOCAL TAX ADVOCATES
Brent Watson, CPA
bwatson@saltapllc.com
Direct: 918.236.1286 – Cell: 918.284.8499
www.saltapllc.com
2LIMITATION 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.
3LEARNING 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
4STATE LAW
Explanations of tax laws in this presentation
pertain to Oklahoma unless noted. Sales tax
laws vary between states and are frequently
inconsistent.
5AGENDA
1) 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
6AGENDA
1) A “Stitch in Time Saves Nine”: Being Prepared 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
7AUDITS ARE COSTLY
• Impacts of sales tax audits range from minor to
catastrophic
• Costs of Audits:
• Monetary costs
• Time and personnel costs
• Third party assistance
8CHECKLIST TO PREPARE FOR
AUDITS OF SALES
• Check Nexus Profile
• Check Exemption Certificates
• Consider Other Factors
9Nexus
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
10Nexus
Physical Presence
• Sellers should be monitor changes in business
that could create nexus:
11Nexus
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
12Nexus
• 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
13Exemption Certificates
• Multiple States – multiplies exposure!
• Validity of Certificates
• Expiration of Certificates
• Management of Certificates
14Other 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
15PREPARATION FOR AUDITS OF
PURCHASES
• Payment of Tax to Vendors
• Accruing Use Tax
• Common Errors for Tax Applicable to Purchases
16Audits of Purchases
Payment of Tax to Vendors:
• Overpayments on exempt purchases
• Improper issuance of exemption certificates
• Documentation
• Credit card purchases
17Audits of Purchases
Use Tax Accruals:
• Use tax accruals may be needed (SOL issue)
• Use tax account
• Direct Payment Permits
18Audits of Purchases
Common Errors for Tax Applicable to Purchases
• Warranty work
• Contractor’s purchases
19Audits of Purchases
• Common Errors for Tax Applicable to Purchases
• Temporary Storage in OK for usage elsewhere
• Credit card purchases
20AGENDA
1) A “Stitch in Time Saves Nine”: Being Prepared 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
2
1The 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.
22Sampling
• Can be advantageous to all parties
• Can produce skewed and damaging consequences
23Sampling Agreements
• How sampling works generally
• Types of Sampling
• Sampling is NOT mandatory in OK
24Statute of Limitations Waivers
• Agreeing to an SOL Waiver is NOT mandatory
• Length of waiver to agree with
25Begin Preparation Before the Audit
Commences
• Exemption certificates
• AP/purchases and sales data
• Sales tax reported data
• Sales tax software
26AGENDA
1) A “Stitch in Time Saves Nine”: Being Prepared 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
2
7The Care and Feeding of Auditors
• People skills are important in all areas of life -
including business – and especially in dealing with
audits
28AGENDA
1) A “Stitch in Time Saves Nine”: Being Prepared 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
2
9Typical Issues and Procedures - Sales
• Reconciliation of sales reported to GL
• Exemption certificates
• Calculation of tax
• Contractors versus Dual-Operators
• Bad debts
30Typical Issues and Procedures -
Procedures
• Selection of Accounts of Interest
• Assets
• Expenses
• Contractors
31Contractors
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.
32Contractors
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
33Contractors
Entities 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
34Contractors
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)
35Contractors
Pass-through Exemption Status – DOES NOT
INCLUDE:
• Manufacturers – except in the case of refineries.
• Federal government
36Contractors
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
37Contractors
• Consumers use tax may be due on equipment
brought into the state
38AGENDA
1) A “Stitch in Time Saves Nine”: Being Prepared 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
3
9Informal Adjustments • Auditors will typically provide an information “work-in-process” listing during the audit process • Request listings from auditors frequently as the audit progresses
AGENDA
1) A “Stitch in Time Saves Nine”: Being Prepared 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
4
1Formal 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 Assessments The 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.
AGENDA
1) A “Stitch in Time Saves Nine”: Being Prepared 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
4
6BULK SALE RULE
• Purchasers of business can be liable for the
seller’s unpaid trust fund type taxes
• Purchasers should request documentation from
the seller
47OCCASIONAL/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.
48OCCASIONAL/ISOLATED/CASUAL
SALES
• Surprises companies making such transactions
• Sellers are primarily responsible for filing a sales tax
return
• Identifying the value for which TPP is transferred
49OCCASIONAL/ISOLATED/CASUAL
SALES
• 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
50OCCASIONAL/ISOLATED/CASUAL
SALES
• 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
51OCCASIONAL/ISOLATED/CASUAL
SALES
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.
52OCCASIONAL/ISOLATED/CASUAL
SALES
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.
53OCCASIONAL/ISOLATED/CASUAL
SALES
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
54OCCASIONAL/ISOLATED/CASUAL
SALES
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)
55You can also read
