Sales and Use Tax

1
Sales and Use Tax

• Erica Fernandez
• UC Merced Tax Manager

2
Sales vs. Use Tax

• Sales tax
• Imposed on every retailer (seller/merchant) for
  the privilege of making retail sales of tangible
  personal property (TPP) in California
• Use tax
• Imposed on the purchaser for the storage, use or
  consumption of TPP in California

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Tangible Personal Property

• TPP is personal property which can be
• Seen, weighed, measured, felt, touched etc.
• Non-TPP property includes
• Real property (land)
• Intangible property (e.g. goodwill)
• Property rights (e.g. licensing of trademarks or
  software if no TPP is transferred)

4
Tax Compliance as a Purchaser

• Determine and pay the proper amount of sales
  and/or use tax due
• Essentials for good tax decisions
• What is UC Merceds sales and use tax obligation?
• What is the item being purchased and for what
  use?
• What are the available exemptions?
• What is the taxable sales price?

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Sales Use Tax Obligation CA Vendors vs.
Out-of-State Vendor

• Two classifications of sellers
• CA retailers (generally SALES tax)
• Sellers of TPP with business locations in
  California
• Out-of-state retailers (generally USE tax)
• Sellers physically located outside California
• May be registered to collect CA tax based on
  nexus with CA (physical presence through
  employees, warehouse, etc.)
• If out-of-state vendor charges tax, confirm CA
  sellers permit number

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Sales and Use Tax ObligationCalifornia vs.
Out-of-State Vendor (cont)

• The purchase of TPP from a retailer (not
  registered to collect CA taxes) for use in CA is
  subject to use tax
• Identifying use tax transactions
• Vendor has non-CA address
• Invoice is for tangible property
• Charge for shipping indicating something was
  shipped
• Note purchases from other states or their
  instrumentalities, including state universities
  are not subject to sales and use tax.

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Common Scenarios

• Example 1 UCM and Vendor are in the same State
  
• What tax is applicable?
• Who has the obligation to report?
• Example 2 UC Merced and Vendor are in
  different States
• What is applicable?
• Who has the obligations to report?
• Example 3 Property shipped to a different
  state (e.g. New Mexico)
• Is California tax applicable?
• If yes, what tax and who has the obligation?
• Is New Mexico tax applicable?

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Property Being Purchased

• Keys to accurate tax decisions include
• What is the item being purchased?
• How will the item be used (e.g. will it be
  resold?)
• Does the purchase include services (e.g. repair
  or installation)?

9
Taxable Gross Receipts (Sales Price)

• General rule sales price (gross receipts) is
  subject to tax unless an exemption applies.
• Gross Receipts exclude
• Cash discounts, amounts charged for returned
  merchandise (Note that the value of a trade-in
  does not reduce the sales price)
• Price for labor and services for installing
  property
• Separately stated charges for transportation
  (retailer to customer)
• Some taxes (federal retailer or consumer tax,
  local sales and use tax)
• Intangible property under a technology transfer
  agreement.

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Exemptions

• Common exemptions include
• Property shipped outside of California
• Purchase for resale
• Services and labor unrelated to the sale of TPP
• Freight / Shipping
• Software delivered electronically
• Original works of art
• Occasional sales
• Newspapers and periodicals
• Printed sales messages
• Prescription medicines

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Common Exemptions Property Shipped Outside of
California

• Property purchase for use outside of California
  is not subject to California use tax
• Keys to indentifying property for use outside
  California
• Shippers to location on invoice is outside of
  California
• Information on purchase order
• A copy of the shipping documents or other support
  should be retained to document out-of-state
  shipment.

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Common Exemptions Purchase for Resale

• Property purchased for resale is excluded from
  the definition of retail sale and is therefore
  exempt.
• A resale certificate should be issued to the
  vendor. This transfers the liability for the
  collection and remittance of sales tax from the
  vendor to UC Merced.
• Resale certificates are issued by Tax Services,
  please email tax_at_ucmerced.edu.

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Common Exemption Services / Labor

• Services where no TPP is transferred, or where
  the transfer of TPP is incidental, are exempt.
• Professional services such as accounting,
  medical, legal etc.
• Labor unrelated to the sale of TPP is exempt
• Repairs
• Installations
• Labor related to the sale of TPP is taxable
• Fabrication creating TPP
• Assembly changes for assembling new products

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Common Exemptions Shipping / Freight

• Shipping / freight charges are exempt if
• Separately stated on the invoice
• Delivery is by common carrier
• Note that handling charges are taxable (unless
  the transaction is exempt)
• If shipping and handling charges are combined,
  the combined charge is taxable. However, if the
  vendor has not assessed tax, and UCM needs to
  accrue it
• 80 of the combined charge can be allocated to
  shipping and 20 to handling
• Use tax should be accrued on the 20 allocated to
  handling

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Common Exemption - Software

• Canned (off-the-shelf) software is exempt if it
  is delivered electronically and no tangible
  property is shipped
• Shipping / handling charges on the invoice
  indicate that TPP (such as DVD) was shipped)
• Custom software (developed specifically for the
  user)
• More than 50 custom exempt
• Less than 50 custom partially exempt

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Common Exemption newspapers and Periodicals

• Newspapers and periodicals are exempt if the
  publication are
• Regularly issued at stated intervals more than
  3 time but less than 60 times per year and are
• Distributed without charge
• An exemption certificate should be issued to the
  vendor see Tax Services

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Common Exemptions Occasional Sales

• A sale by (and purchase from) a person who is not
  engaged in business and not required to hold a
  California sellers permit is exempt if the
  seller makes less than 3 sales of TPP in a
  12-month period
• An affidavit signed by the seller and approved by
  Tax Services is required.

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Common Exemptions Printed Sales Messages

• Printed sales messages are exempt if the printed
  material
• Advertises a good or service
• Is delivered directly to the user by the vendor
  or mailing house, by common carrier or mail, at
  no cost to the user
• Examples are Medical Center pamphlets regarding
  medical services or UNEX postcards regarding
  course announcements.
• An exemption certificate should be issued to the
  vendor contact Tax Services

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Common Exemptions Original Works of Arts

• An original work of art purchased for display in
  a museum or public place
• Must be TPP which is created as a unique object
• Includes visual arts, crafts and mixed media
• Must be purchased for display in a museum or
  other place which is open to the public without
  charge for at least 20 hours per week, and for at
  least 35 weeks of the calendar year.
• Example original artwork purchased by the
  Fowler Museum for display

20
Maintenance Contracts

• Hardware parts / materials / services etc.
• Mandatory contract (required to purchase as a
  condition of sale of the property) is taxable
• Optional (not required to purchase as a condition
  of sale of the property
• Exempt
• Change must be separately stated
• Canned software updates / upgrades / fixes etc.
• Mandatory exempt only if both original software
  and maintenance is delivered electronically
• Optional
• 50 exempt if with TPP
• 100 exempt if no TPP

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Medicine

• Exempt medicine means any substance or
  preparation intended for use by external or
  internal application to the human body
• Must be used for the diagnosis, cure, mitigation,
  treatment or prevention of disease
• Commonly recognized as intended for that use
• Must be prescribed or
• Furnished by a health care facility

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Medicine (cont.)

• Medical laboratory items - taxable
• Animals for research
• Liquids
• Exempt medicine
• Prescription medicine
• Implants
• Medical gases (used for patient treatment)
• Gases
• Vitamins (supplements)
• Generally taxable unless furnished under
  qualifying criteria

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Measure C District Tax UCM Purchases

• Generally vendors are required to collect
  district taxes only in districts where they do
  business
• If TPP is purchased from a California vendor who
  is not required to collect City of Merced
  district tax (0.50), the vendor charges the
  8.25 state-wide rate.
• Accrue the 0.50 difference (8.75 minus 8.25)
• If TPP is purchased at a lower district rate
  (e.g. in Atwater where the rate is 8.25) for use
  in Fresno
• Accrue the 0.725 difference (8.975 minus 8.25)

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Miscellaneous Fees and Charges

• Fully taxable, partially taxable or exempt
  depending on the taxability of the items(s)
  purchased
• Dry ice
• Hazardous material charge
• Heat surcharge
• Ice surcharge
• Fuel surcharge
• Packaging and handling
• Not taxable
• E-Waste recycling fee
• Insurance
• UPS and Fed Ex delivery charges

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Where to Go for Help

• Websites
• http//www.tax_at_ucmerced.edu/ - UCM Tax Portal
• http//www.tax.ucla.edu UCLA Tax Portal
• http//map.ais.ucla.edu/go/100447 - Sales and Use
  Tax at UCLA
• http//www.boe.ca.gov State Board of
  Equalization
• UC Sales Use Tax Manual
• UC AMC T-182-73
• Emails and Telephone Numbers Tax Contacts
• Jennifer Chhoeung for Accounts Payable
• jchhoeung_at_finance.ucla.edu 310-794-0317
• All other transactions
• Erica Fernandez efernandez2_at_ucmerced.edu
  209-228-4075

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Sales Use Tax Case Studies
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Case Study 1

• The Math Department received the following
  invoice from Computer Corporation in Kansas
• Notebook computer 996
• Consulting services 200
• Shipping and Handling 20
• CA sales tax 0
• Total
  1,216
• What is the total non-taxable amount (before
  shipping and handling)?
• Does an exemption apply? If so, which one?
• What amounts should be entered on the P-card
  screen and where?
• What is the tax due on this invoice?

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Solution to Case Study 1

• The total non-taxable amount before shipping and
  handling is 200 (for consulting services)
• The exemption for services where no TPP is
  provided applies
• Entries on P-Card screen
• Enter 20 in the box labeled Enter shipping /
  handling charge if it is combined
• Enter 200 in the box labeled Enter Total
  Non-Taxable Amount
• Select the code for exempt services from the
  drop-down list in the box labeled Exempt Reason

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Solution to Case Study 1 (cont.)

• 4. The tax due is calculated as follows
• Notebook computer 996
• Consulting services
  0
• Shipping and Handling (20) 4
• Total subject to tax
  1,000
• Tax rate
  8.25
• Total tax
  82.50

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Case Study 2

• The Events Office purchased canned
  (off-the-shelf) software from a vendor in Texas
  to track the number of film permits issued
  annually. The software was delivered via CD and
  installed on the Departments server. The
  purchase includes mandatory maintenance (i.e.
  upgrades, updates and fixes) to be delivered
  electronically over the period of the contract.
  The following invoice was received
• Software 800
• Maintenance (1/1/11 12/31/11) 200
• Shipping 10
• CA sales tax
  0
• Total
  1,010
• What is the total non-taxable amount (before
  shipping and handling)?
• Does an exemption apply? If so, which one?
• What is the tax due on this invoice?
• How would your answers to questions 1-3 change if
  the software was delivered electronically?
  

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Solution to Case Study 2

• The total non-taxable amount (before shipping and
  handling) is 0
• No exemption applies to the software since it was
  delivered via media (CD). Although the
  maintenance is delivered electronically, no
  exemption applies because the original software
  is taxable (mandatory maintenance is considered
  to be a part of the sale of the original
  software. If the software is taxable, the
  mandatory maintenance is taxable)
• The taxable amount is 1,000 (800 200) and
  the tax due is 82.50 (1,000 X 8.25)
• If both the software and the mandatory
  maintenance are delivered electronically, both
  are exempt. The total non-taxable amount (before
  shipping and handling) would be 1,000. No tax
  would be due.