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Would Broader Sales Tax Base Deliver Savings?



Annette Nellen

A review of a few recent sales tax advisory opinions, issued by the New York State Department of Taxation and Finance, reminds us of the complexities of sales tax exemptions and special definitions of taxed items.

This is an issue in most states with a sales tax. For example, you likely have heard of recent issues as to whether hot coffee to go is subject to sale tax and litigation on this issue in some states. New York makes its advisory opinions easily accessible on its website, which makes it easy to “pick” on New York as an example of sales tax complexity. New York also taxes more than tangible personal property which increases the likelihood of tax base questions. For example, New York taxes furnishing of information and some services.
The following are brief summaries of four rulings issued in April and May 2016:

  • TSB-A-16(13)S (4/26/16) – Sales tax applies to taxpayer’s fees charged for high intensity interval training fitness classes, as well as fees to enter weight loss challenges, offered at facilities in NYC. While the taxpayer is not selling taxable dues or membership fees to an athletic club or taxable personal training services, it is selling services of a weight control or health salon which is taxable in NYC.
  • TSB-A-16(14)S (4/27/16) – Sales tax applies to cookies sold in any of three ways: (1) for immediate consumption, (2) in to-go boxes holding rout to a few dozen cookies, and (3) cookies to be delivered. “Whether Petitioner sells cookies in small quantities in its stores, in larger quantities in to-go boxes or delivers cookies to customers, the cookies are always sold in a heated state. Thus, pursuant to Tax Law § 1105(d) and 20 NYCRR § 527.8, Petitioner’s receipts from the sales of cookies are taxable, whether sold for on-premises or off-premises consumption.”
  • TSB-A-16(19)S (5/20/16) – Data storage services found not subject to sales tax. This is not the sale of software or an information service or storage of tangible personal property. Thus, it doesn’t fall under the taxing statute.
  • TSB-A-16(17)S (5/2/16) – This involves an uncommon fact pattern. A Florida LLC entered a purchase agreement with a New York art dealer to purchase a sculpture being created in Germany. Taxpayer also entered an agreement with a NYC museum, an exempt taxpayer, to display the sculpture and arrange for its transportation from Germany. The museum would cover transportation and insurance. While that constitutes consideration to the taxpayer, no sales tax was owed because the taxpayer is a nonresident and the museum has an exempt organization certificate. Also, taxpayer took possession of the sculpture in Germany so there was no transfer in New York.

This is just a few of the rulings released in April and May involving sales tax. These rulings indicate that the New York sales tax law does not meet the certainty or simple principles of good tax policy. Clearly, the taxpayers asked for rulings because the law was not clear. Each ruling involved a few statutory definitional provisions where it was not obvious how they applied.

A possible solution to the certainty and complexity issues is to follow an approach more common to VAT. Apply sales tax to every transaction where some type of compensation is received from a customer for the acquisition of goods or services, as broadly defined. If the buyer is a business, when they file their sales tax form, they also list the sales tax they paid and it offsets the sales tax the business collected. The difference is submitted to the government. If the business paid more sales tax than it collected, the government sends a refund of the difference.

The law would be easier to apply because no definitions would be needed for the sales tax base because everything sold would be taxed. Rules would be needed to define business and business use, sourcing (to determine, for example, where the sale of the sculpture took place), and administrative/compliance procedures. Also, the base would be broader than we have today enabling states to lower their sales tax rate making the tax less regressive.

What do you think?

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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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