Sales Tax Defined

Sales Tax
Imposed on the retail sale of
tangible personalty or services
within the taxing jurisdiction

Use Tax Defined

Use Tax
Imposed on the possession, use,
storage, or consumption of
tangible personal or services within
the taxing jurisdiction

Use Tax Illustration

Doris OBrien

Resident of State A
Purchases $ 30,000 of goods
Pays $ 1,200 sales tax (*)
$ 30,000
X 6.5%
$ 1,950
(1,200)
$
750 net tax due

Types of Sales Tax

Retail Sales Tax

Seller Privilege Tax
Gross Receipts Tax

Retail Sales Tax The

Basics

An Overview

Sale must take place within the territorial

boundaries of the taxing jurisdiction
Sale must be of tangible personal property
Intangibles, real property and services
generally excluded
A planning issue for mixed activities
(property & services)

If there is any doubt collect the tax

If the issue is material, seek a letter ruling
from DOR

Retail SalesThe Basics

What is a sale?

Ownership Transfer
Consideration

Arizona Definition 42-5001(13)

Any transfer of title or possession, or both,

exchange, barter, lease or rental, or by conditional
or otherwise, in any manner or by any means
whatever, including consignment transactions and
auctions, of tangible personal property or other
activities taxable under this chapter for a
consideration.
Includes property held as security, fabrication for
consumers, furnishing property consumed on
premises.

Retail salesThe Basics

Scope of a Retail Sale

Imposed only once during the entire chain of

events starting from the point where the
goods are manufactured and culminating with
their eventual sale to the retail customer.
Exclusions

Sales-for resale
Casual or Occasional Sales
Sales of items used in manufacturing,
processing and fabricating
Sales of machinery and equipment
Sales of certain essential items
Sales to certain organizations or entities

Measure of the Sales and Use

Tax

ID 79-3602(h) Gross ReceiptsTotal

selling price or the amount received as
defined in this act, in money, credits,
property or other consideration valued in
money from sales at retail within this
state.
ID 79-3602(g) Selling priceTotal cost
to the consumer exclusive of discounts
allowed and credited, but including
freight and transportation charges from
retailer to customer

Measure of the Sales and Use

Tax

Gross Receipts do not include:

Cash discounts
Returns and allowances
Transportation chargesseparately
stated
Trade-ins
Finance and service charges
Bad debts

Constitutional Issues in
Imposing Sales and Use
Taxes

Two key provisionsthe Commerce Clause

and the Due Process Clause
Landmark Cases

McLeod v. J.E. Dilworth Co. 322 US 327 (1944)

Miller Brothers Company v. Maryland 347 U.S.
340 (1954)
National Bellas Hess, Inc. v. Department of
Revenue 386 US 753 (1967)
Quill Corp. v. North Dakota 504 U.S. 298 (1992)

Streamlined Sales Tax Project

Administration of Sales and

Use Taxes

Reporting Obligations

Fiduciary Responsibilities to Report,

Collect and Remit the Taxes
Reporting Obligations

Register Business
File Tax Returns

Returns

Due Datesvary by jurisdiction and amount

Content

Administration of Sales and

Use Taxes

Rates

State
Counties and Cities
Definitions a key consideration in applying rates

Recordkeeping

Regular books of accounts

Invoices to document taxes paid
Contracts and purchase orders
Bills of lading
Support for credit returns and bad debt write offs
Exemption and resale certificates to support
exempt transactions

Administration of Sales and

Use Taxes

Audits

State agencies; audit may be industry

specific
Block samples and Random samples
3 year Statute of Limitations

Areas of Current Interest

Definition of Specific Exemptions

Taxation of Services
Sales Tax Audits (Tyco)
Taxation of e-Commerce
Streamlined Sales Tax Project
Alternative Approaches to Sales/Income Tax
Sales/Use Tax on Capital Changes
Competition with No Sales Tax States
NH,DE,MT,OR
Tax Amnesty, Holiday Programs

Property Taxes

The Property Tax Base

Real property taxes

Imposed on land, buildings, and

improvements on the land.
Value determined the county assessor based
on one of three methods

Market value
Percentage of market value
Classified assessment level

Value remains constant unless there are

changes in market value, modifications in
size or quality, or there is a general
revaluation

Property Taxes

Tangible Personal Property

Valued annually as of a specific

assessment date
Taxpayers file annual property tax
reports which show by class of property,
the original cost of the asset by year of
acquisition.
Base value determined by comparables,
adjusted to arrive at final value

Property Taxes

Challenging the Assessment

Property is classified as real or personal based

on the definitions provided by state statute.
Process of differentiation is called cost
segregation.
Taxpayers can challenge the assessment
based on whether:

Property is properly classified

Property is not specifically exempt from the
tax base
Property is correctly valued

Property Taxes-Classification

Real versus Personal Property

A.R.S. 42-11002(7)Personal property includes

property of every kind, both tangible and
intangible, not included in the term real estate.
AZ Department of Revenue Personal Property
Manual: Property is personal property if it can
be removed without damaging itself or the
property to which it is attached and its only
temporarily attached, or it is interchangeable
with other items, or if the real property to which
it is attached can function without it.
Tangible personal property is taxed in most
states; inventories are not taxed in most states.

Property TaxesExempt
Property

Great variation among local jurisdictions in

terms of specific exemptions
Common Exemptions

Agricultural land
Government property
Education and library property
Health care property
Religious property
Cemeteries
Property of widows, widowers, veterans,
homeowners, the elderly and disabled
Various other not for profit organizations

Property Taxes--Valuation

Tangible Personal Property

Major Classifications

Machinery & Equipment including supplies,

consigned goods and goods in transit.
Inventoriesstock in trade + accrued costs
Leasehold improvementswalls, ceilings,
carpeting and lighting (may be real property
in many jurisdictions)

Property Accounting Systems

Consultants and accountant can use

information from these systems to challenge
the assessed classification and valuation.

Property Taxes--Valuation

Important Issues

Assessors Identification of Property

Self declaration or rendition prepared by

the business
Review of government filings

Income tax returns

Business license lists
Airport & marina lists
Charters and permits

Audits

Desk, telephone, correspondence & physical

inspection

Property Taxes--Valuation

Cost
Income
Market
Methods parallel those used for
real estate

Property Taxes--Situs

Important Issues

Stationary property taxed where located

Moveable property generally requires a
permanent situs from which it operates
in order to be taxed
In transit property moved by common
carrier or private conveyance is
excluded from taxation when not at the
business premises.

Realty ValuationThe Income

Method

Frequently used for apartments, hotels,

shopping centers, and strip malls
Yield capitalization approach

Used when cash flow is unstable

Income = (Projected Future Cash Flows X
Discount Rate)
Rate based on trends in sales, investment &
industry sources
Example 5-3 provides an illustration

Real & Personal Property

ValuationThe Income
Approach

Direct capitalization approach

Used when the propertys cash flow is stable

Value = Net Income/Capitalization Rate
Net Income From Property Equals

Total Estimated Income from Property

Less Vacancy and Collection Loss
Add Other Income from Property
Less Operating Expenses

Review Example 5.2

Real and Personal Property Valuation

The Cost Method Approach

Attempts to find the value or cost to replace an

improvement with a new improvement
Includes only those costs that actually increase
the propertys economic value
Consider replacement cost, reproduction cost
and either physical functional or economic
depreciation
Cost Value = Cost of improvements + Land (valued as
vacant)
Less Depreciation/Obsolescence

Real and Personal Property Valuation

The Cost Method Approach

Cost of Improvements include:

Depreciation

Direct costs
Indirect costs
Reasonable Profit
Straight reduction for wear and tear

Obsolescence

Physical
Functional
External

Real and Personal Property Valuation

The Market Method Approach

Valued using comparable sales

recent sales of similar property
Market value is the most probable price
that a property would bring in a
competitive and open market, in which
the price is not affected by undue
circumstances.
Example 5.5 illustrates the market
method.

Real and Personal Property Valuation

Issues with General Application

Contributionthe value of a particular

component measured in terms of its
contribution to the value of the whole, or as
the amount that its absence would detract
from the whole.
Highest and Best UsePhysically possible
and financially feasible
Substitutionprudent purchaser will pay no
more than the cost of acquiring an equally
desirable substitute on the open market.

Intangibles Tax

Primarily assessed on the fair market

value of stocks and bonds

Alabama
Florida
Kentucky
Pennsylvania
West Virginia (bonds only)

Or Deposits

Kentucky
Rhode Island

Administrative Issues

Real PropertyGenerally No Reporting

Requirements
Personal PropertyAnnual Tax Return
Based on the Values at the Assessment
Date
Taxpayer may appeal to

Assessor
State Board of Equalization
Courts

Some Constitutional Issues

State Constitutional Issues

The Uniformity or Equality Clause

Article 9, 1 of the Arizona Constitution an

illustration
Taxes (may be subject to uniformity or equality
clause) versus Fees (not subject to the clause)
Property Tax (subject to the Clause) versus
Excise Tax (not Subject to the Clause)

Fundamental distinction is whether the tax

applies to all the privileges of owning the
property or some of the privileges.
Imposed on a fixed day or happening of some
event or in contrast a one time event.

Unemployment TaxesBasic
Features

Federal Unemployment Tax

6.2% of the 1st $ 7,000

State Unemployment Tax

Range between $ 7,000 and $ 25,800

Rates are determined through a rating
system (range of 0% to 11%)
Rates increase based on unemployment
benefits claimed by former emploees.

Planning with Unemployment

Taxes

Avoiding Employee Classification

Employeeemployer has right to control and direct the

individual; Independent contractor controls outcome of
work and means by which the work is accomplished
Tests for employee status

Place of work
Furnishing Tools
Right to Terminate

Employee Leasing
Operating in a New State (start with nominal work
force)
Acquisition of another company (successor
employer)
Business Restructuring (spin off strategies)
Selling Off Part of a Business (Stock vs. Assets)

Special Tax Incentives

Area Specific Incentives

Enterprise Zones

Areas with higher than normal unemployment

Tax credits and benefits

Sales and use tax credits for machinery

purchases
Hiring credit
NOL carry-forwards
Expensing depreciable property
Lender income deductions to zone businesses
Preference points on state contracts
Local and non tax incentives also important

Special Tax Incentives

Foreign Free Trade Zone

Transactions occurring within the

zones are treated as if they occurred
outside U.S. borders.
Sales/Use, Property Tax and Income
Tax Adjustments and Credits
Example 8.2 provides an illustration.

Special Tax Incentives

Employee-Related Incentives

Equipment Incentives

Restoration of old structures

Resource Related Credits

Investment Credits (enterprise zone)

Research and Development Credit

Building Restoration Incentives

Use in areas of high unemployment, often as part of

enterprise zone incentives.
Work Opportunity Tax Credit, AFDC Credit Welfare to Work
Credit are examples.

Environment related

Privately Negotiated Incentives

To encourage substantial investment in a new location

Review Tax Management in Action 8.1

Non-Tax Incentives

State Financing (page 193)

Other Incentives (page 193)
Local Incentives (page 194)