tax exempt | TaxConnections (2024)

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15 May 2024

Texas Sales Tax Exemptions | Sales-for-Resale

The Texas Tax Code provides that, as a general matter, Texas sales and use tax are imposed on sales of “tangible personal property” or “taxable services.” [1] However, various exemptions apply to these items to provide relief to taxpayers where public policy dictates it should be given. One of the more common exemptions is the “sale-for-resale” exemption. Broadly speaking, the sale-for-resale exemption provides that the purchase of a taxable item can be exempt from Texas sales and use tax if the purchaser intends to resell the item as, or as part of, another taxable transaction.

Complexities may arise in determining whether a sale-for-resale has occurred. Additionally, another layer of issues exists with respect to proving the exempt nature of a transaction.

The Sale-for-Resale Exemption

Texas Tax Code 151.302(a) provides that the “sale for resale” of a taxable item is exempted from Texas sales and use tax.[2]The phrase “sale for resale,” in turn, is defined to include several different transactions.Most commonly, a “sale for resale” means a sale of:

“…tangible personal property or a taxable service to a purchaser who acquires the property or service for the purpose of reselling it as a taxable item as defined by Section 151.010 in the United States of America or a possession or territory of the United States of America or in the United Mexican States in the normal course of business in the form or condition in which it is acquired or as an attachment to or integral part of other tangible personal property or taxable service…” [3]

Or…

“…a taxable service performed on tangible personal property that is held for sale by the purchaser of the taxable service…” [4]

Written by Jason Hendrix | Posted in Sales Tax Exemption • Texas Tax

26 Mar 2024

Challenges of Tax Exemptions

One of several features that make tax systems complicated are the numerous exceptions that pull out from taxation something that is part of the tax base for a particular type of tax. It is probably almost impossible to find any federal, state or local tax that doesn’t have some type of exception. A list of sales tax exemptions produced by the California Department of Tax and Fee Administration (CDTFA) lists171 sales tax exemptions. All of them need a definition in the statute and often an explanation from the tax agency. This creates a lot of complexity because it is difficult to define most exemptions. For example, if a state wants to exempt food from sales tax but only healthy food, where does a “protein bar” full of sugar and not a natural item fall?

Our federal income tax law has Code sections 101 through 139I listing items of income, such as certain disaster relief payments, fringe benefits and gifts, that are income, but excluded from the measure of taxable income.A 2023 ruling in Iowa caught my attention as an example of the complexities of defining exemptions (Sweat Iowa LLC,No. 346007, 11/14/23). Iowa imposes a 6% sales tax on “enumerated services” which includes “all commercial recreation.” The term “enumerated services” signals that all potentially taxable services are not subject to sales tax. Generally, because a sales tax is imposed on personal consumption, everything that an individual purchases that is not for business use, should be subject to sales tax.

If the law in any state worked that way, the rate would be lower and the tax base broader (and mostly easier to define).For a sales tax (a tax on personal consumption), the only items that should be exempted medical services provided by a medical professional and tuition for a university or professional/job training.

In the Iowa ruling, the question was whether booking services for saunas with “science-backed technology of infrared (IR) and red light therapy(RLT) to optimize health and wellness” is “commercial recreation.”

Written by Annette Nellen | Posted in TaxConnections

23 Feb 2024

Arizona Transaction Privilege Tax Exemption For Forklifts Used By Manufacturers

The Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers has been clarified and expanded as a result of a recent ruling received by the sales tax consultants at Agile Consulting Group. Transaction Privilege Tax or TPT is to Arizona what Sales and Use Tax is to most other U.S. states. Transaction Privilege Tax is levied on sales of most goods and some services in the state of Arizona. However, there is an exemption in place for the manufacturing industry.

In a prior post, Agile has discussed theArizona sales tax exemption for manufacturing. The exemption is outlined inAriz. Rev. Stat. Ann. §42-5061(B)(1)and includes a number of different categories of purchases commonly made by manufacturers. One area where the Statutes and the Arizona Department of Revenue’s guidance has been lacking relates to forklifts, which are arguably one the most universally used types of machinery and equipment across all types of manufacturing operations regardless of the product being produced. In fact, no prior rulings or guidance have been provided regarding how the Arizona Department of Revenue suggests that the manufacturing exemption applies to forklift purchases, leases, repairs, as well as the fuel used to power these units.

Agile requested clarification of the Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers in a ruling submitted to the Arizona Department of Revenue in June 2023. Additionally, our sales tax consultants argued for favorable tax treatment of these forklifts across twelve different scenarios for forklifts in use at a plant for one of our longstanding Arizona manufacturing clients. In the response Agile received from the Arizona Department of Revenue’s Taxpayer Services Section representative, we received encouraging news for all Arizona manufacturers that use forklifts within their manufacturing process.

The key takeaways from the ruling Agile received about the Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers are:

Utility Studies For Sales And Use Tax Exemptions

While specific exemptions vary from state to state most manufacturers are aware that all states offer some type ofsales & use tax exemptionsfor having operations located within their state. Manufacturers always capture all of the savings pertaining to sales tax exemptions on raw materials, machinery and equipment, but often overlook the utilities exemptions. Some jurisdictions exempt manufacturers from paying sales tax on energy sources, such as electricity, natural gas, and water, when used in the manufacturing process.

What Is A Manufacturer?

The definition as to what qualifies as manufacturing varies from jurisdiction to jurisdiction. The key is that manufacturing involves the transformation of raw materials or components into finished goods through a series of processes. Different business activities and operations that can be considered as manufacturing including assembly, fabrication, processing, machining, chemical production, printing, textile production, automotive manufacturing, wood working, plastic molding, food and beverage production, pharmaceutical manufacturing, aerospace manducating, and packaging.

What Is A Utility Study?

A utility study, in the context of sales and use tax, refers to an examination and analysis of utility usage within a business to determine the portion of utility expenses that may qualify for tax exemptions. The goal of a utility study is to identify and document the usage of utilities—such as electricity, natural gas, water, and other energy sources—that are related to qualifying activities, typically those associated with manufacturing or other specified processes.

The sales and use tax regulations in most jurisdictions provide exemptions for certain types of utility usage, particularly when those utilities are consumed in specific activities that contribute to the production process. By conducting a utility study, businesses aim to segregate and document the utility consumption that qualifies for these exemptions, with the ultimate objective of reducing or recovering sales and use taxes paid on non-exempt utility usage.

What Are The Steps To Doing A Utility Study?

Performing a utility study to obtain a refund of sales and use tax for utilities used in the manufacturing process involves a systematic approach to document and analyze utility consumption. The process may vary based on jurisdiction, but here is a general guide:

Understand local regulations and identify eligible utilities
Document utility usage, determine exempt usage, and quantify qualifying and non-qualifying usage
Prepare legally required documentation including exemption forms
Submit refund, communicate and negotiate refund claim with taxing authorities
Adjust policies and procedures to minimize liabilities move forward

The utility study process requires careful documentation and adherence to tax regulations to support any claims for exemptions or refunds. It is advisable for businesses to work with tax professionals or consultants who specialize in sales and use tax matters to ensure that the study is conducted accurately and in compliance with applicable laws.

Have a question? Want to be introduced to Kamal Shaw? Contact Eric Larson, Source Advisors.

Written by TaxConnections Admin | Posted in Sales/Use Tax • Utility Study

07 Feb 2024

A Closer Look At Florida’s Sales Tax Exemptions

Most of the state sales tax (89.7 percent) goes into the General Revenue (GR) Fund, providing three-quarters of total GR funds. Ninety percent of GR goes to education, human services, and public safety. In short, the sales tax is critical to the operation of Florida government. While the sales tax and use tax is responsible for raising the majority of the state’s tax revenue, there are 281 exemptions in law worth billions of dollars more in tax revenue. One of Florida House Speaker Paul Renner’s priorities for the 2023 Session is a review of the sales tax and the sales tax exemptions currently in law. The Speaker asked for Florida TaxWatch’s input in this effort. Florida TaxWatch has performed a thorough review of current sales tax exemptions, not to develop a list of specific exemptions that should be repealed, but rather to identify exemptions that must be retained and those that for which the Legislature could further analyze if it wanted to eliminate exemptions. This report highlights exemptions that are necessary to maintain the nature and structure of the sales tax as a tax on the final retail sale of tangible personal property, such as those that avoid pyramiding. It also highlights exemptions that are required by the Constitution or other controlling law, or those that apply to life’s necessities (e.g., groceries, prescription drugs, residential utilities, etc.). For the others, beauty is in the eye of the beholder. Exemptions do not generally fare well when measured against the generally accepted characteristics of good tax policy (neutrality, fairness, simplicity, visibility), although individually they can remediate inequities among subsets of taxpayers and can avoid taxing items that would require an overly complex system for which the cost to administer and collect outweigh the minor amount of revenue raised. Some view sales tax exemptions as a good way to keep taxes on families and businesses low, promote economic development, and support the good work of Florida’s non-profit organizations. Others see them as “loopholes,” “giveaways,” or lost opportunities to raise revenue for government services. Past Florida TaxWatch research on sales tax exemptions has shown that most have at least some justification and some are even essential, but a periodic review of tax breaks is a valuable exercise.

A Closer Look At Florida’s Tax Exemptions

Written by TaxConnections Admin | Posted in Florida • Sales Tax Exemption

25 Jan 2024

IRS Alert: A Limited Group Of Tax Exempt Organizations Will Not Be Able To File Electronically Form 990-T

IRS: Update for Form 990-T, Form 1120-POL filers with upcoming deadlines; e-file unavailable for small number of organizations with earlier due dates

An extension can be filed for both forms or paper file with Form 1120-POL

The Internal Revenue Service alerted a limited group of tax exempt organizations that they won’t be able to electronically file Form 990-T, Exempt Organization Business Income Tax Return, orForm 1120-POL, U.S. Income Tax Return for Certain Political Organizations, until March 17, 2024.

IRS system upgrades mean e-filing of Forms 990-T and Forms 1120-POL (including returns on extension) with due dates from Jan. 15, 2024, to March 15, 2024, are currently unavailable.The IRS notes previous filing data show only about 2,000 Forms 990-T and 1120-POL were electronically filed during this time period, with the vast majority of those involving 990-T. Entities needing to file in this timeframe should follow the below instructions.

Taxpayers with due dates on April 15, 2024, and later will be able to e-file Forms 990-T and Forms 1120-POL on time.

Returns due from Jan. 15, 2024, to March 15, 2024:

Form 990-T, Exempt Organization Business Income Tax Return
A relatively small number of 990-T filers are affected by this.
Organizations subject tounrelated business income tax (UBIT)are required by law to file Form 990-T electronically. An organization with a Form 990-T due from Jan.15, to March 15, 2024, should request an automatic six-month extension of time to file by submittingForm 8868, Application for Extension of Time To File an Exempt Organization Return, by the due date of the return. The IRS estimates only about 2,000 of the 200,000 Form 990-T filers have a due date in this time period and are affected by this.
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Written by TaxConnections Admin | Posted in TaxConnections

15 Nov 2023

Michigan Sales Tax Exemption For Implants

The Michigan sales tax exemption for implants was expanded when the Michigan Governor signed into lawPublic Act #46with an effective date of 3/3/2020. This law modified the definition of prosthetic devices that qualify for exemption when purchased by a Hospital, or Freestanding Surgical Outpatient Facilities that are licensed underPart 208 of Michigan’s Public Health Code. The tax professionals at Agile Consulting Group recently filed a request for a Technical Advice Letter to obtain additional clarification as to what will qualify for exemption.

Prosthetic Implant Exemption: Prior To March 2020 Law Change

Prior to this law change in March 2020, the Michigan sales tax exemption for implants was limited to purchases of prosthetic devices that were “resold” to patients of Hospitals and Freestanding Surgical Outpatient Facilities. Prosthetic devices are defined inMich. Comp. Laws Ann. Sec. 205.51a(q)as a “replacement, corrective, or supportive device, other than contact lenses and dental prosthesis, dispensed pursuant to a prescription, including repair or replacement parts for that device worn on or in the body” that does one or more of the following:

Artificially replace a missing portion of the body;
Prevent or correct a physical deformity or malfunction of the body; or
Support a weak or deformed portion of the body.

The prior rule stated that implantable prosthetic devices were only “dispensed” when sold to a patient. Consequently, the implantable prosthetic devices needed to be administered contemporaneously with, or prior to, the transaction for which the exemption is claimed, rather than some future transaction for the exemption to apply.Michigan Letter Ruling 2019-2offers a more detailed explanation of the exemption requirements prior to 3/3/2020.

Prosthetic Implant Exemption: After March 2020 Law Change

Written by Aaron Giles | Posted in Michigan

04 Oct 2022

Learn Sales Tax Exemptions In 50 States (Part 2 of 2 Part Blog Post)

Montana Sales And Use Tax Exemptions

The state of Montana has no sales tax at the state or local levels. It is one of five states in the U.S. that does not charge a state sales tax.

Nebraska Sales And Use Tax Exemptions

The state of Nebraska levies a 5.5% state sales tax on the retail sale, lease or rental of most goods and some services. Local jurisdictions impose additional sales taxes up to 2%. The range of total sales tax rates within the state of Nebraska is between 5.5% and 7.5%.

Use tax is also collected on the consumption, use or storage of goods in Nebraska if sales tax was not paid on the purchase of the goods. The use tax rate is the same as the sales tax rate. Returns are to be filed on or before the 25th day of the month following the month in which the purchases were made. For example, purchases made in the month of January should be reported to the state of Nebraska on or before February 25th.

Visit https://revenue.nebraska.gov/

Nevada Sales And Use Tax Exemptions

Written by Aaron Giles | Posted in Sales Tax Exemptions - 50 States

29 Sep 2022

Learn Sales Tax Exemptions In 50 States (Part I of 2 Part Blog Post)

Alabama Sales Tax Exemptions

Alabama levies a 4% state sales tax on all purchases of tangible personal property unless the transaction is specifically exempted. There are more than 200 city and county sales taxes imposed in addition to the 4% state sales tax rate. Alabama’s range of sales tax rates is between 4% and 11%.

The consumer’s use tax is imposed on tangible personal property brought into Alabama for storage, use, or consumption in the state when the seller did not collect seller’s use tax on the sale of the property. The tax rates due are the same rates as for sales tax. Returns are to be filed on or before the 20th day of the month following the month in which the purchases were made. For example, purchases made in the month of January should be reported to the state of Alabama on or before February 20th. For more information on Alabama sales tax exemptions visit
https://www.revenue.alabama.gov/sales-use/sales-tax/

Alaska Sales Tax Exemptions

The state of Alaska is one of five states in the U.S. that does not charge a state sales tax. At the local level over 100 municipalities do collect a sales tax, with rates ranging between 1% to 7.5%. For more information on Alaska sales tax exemptions please visit http://www.tax.alaska.gov/programs/programs/index.aspx?10002

Written by Aaron Giles | Posted in Sales Tax Exemptions - 50 States

24 Jun 2022

Update To The California Partial Manufacturing Sales And Use Tax Exemption

Since 2014, qualified companies have been eligible for a partial exemption from sales tax for purchases of machinery and equipment used in qualified manufacturing and research and development activities. California was late to the table, as most states have long had exemptions for such purchases. The exemption has also been unique in that it has been a partial exemption, and allowable only on the first $200 million of qualified purchases.

Now, Assembly Bill 1951 would expand the exemption to a full exemption (rather than partial). According to the legislative language, “This bill would on and after January 1, 2023, and before January 1, 2028make this a full exemption for purchases not exceeding $200,000,000.The bill would repeal these provisions on January 1, 2028 and would revert to the above-described partial exemption on that date.”

So, why make these changes now? As the bill points out:

Written by Monika Miles | Posted in California • Sales And Use Tax • Sales And Use Tax Manufacturing Exemption

08 Jun 2022

Tax Exemption And Unrelated Business Income Rules (UBIT): “Substantially Related” (Part 3 of 3)

ThisInsightsblog is Part 3 of a 3-Part series focused on the unrelated business income tax rules for the nonprofit organization that is tax-exempt pursuant to section 501(c)(3) of the Internal Revenue Code (the “Code”).

Part 1—Tax Exemption and the Framework for the Unrelated Business Income Rules—provided an overview of the organizational and operational tests of section 501(c)(3) of the Code and alluded to the trigger for unrelated business income rules. Part 2–Unrelated Business Income Tax Rules, Modifications, and Exceptions—dived deeper into, well, the specific rules, modifications, and exceptions.

This Part 3 will dive deeper into the meaning of a trade or business that is “substantially related” to an exempt purpose of the tax-exempt organization.

“Substantially Related.”

Written by Cory Halliburton | Posted in UBIT (Unrelated Business Income)

07 Jun 2022

Tax Exemption And Unrelated Business Income Tax (UBIT): Rules, Modifications and Exceptions (Part 2 of 3)

ThisInsightsblog is Part 2 of a 3-Part series focused on the unrelated business income tax rules for the nonprofit organization that is tax-exempt pursuant to section 501(c)(3) of the Internal Revenue Code (the “Code”).

Part 1—Tax Exemption and Unrelated Business Income Tax (UBIT): The Framework—provided an overview of the organizational and operational tests of section 501(c)(3) of the Code and alluded to the trigger for unrelated business income rules.

This Part 2 dives deeper into the unrelated business income tax rules.

Summary of Unrelated Business Income Tax Laws and Regulations.

Generally, a tax-exempt organization must pay income tax on income classified as unrelated business income. 26 U.S.C. § 511(a). An unrelated trade or business is any trade or business, regularly carried on, the conduct of which is not substantially related to the organization’s exempt purpose. 26 U.S.C. § 513(a). Modifications, exclusions, and exceptions exist.

Written by Cory Halliburton | Posted in TaxConnections

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