Biographical Information Allan R. Thompson, Manager - Corporate - - PDF document

Tuesday & Wednesday, January 28‐29, 2020

Hya Regency Columbus, Columbus, Ohio

Workshop DD

Ohio Sales & Use Tax – In-depth Review of Major Developments including Recent Ohio Supreme Court & Ohio Board of Tax Appeals (BTA) Decisions & Audit Policies

Wednesday, January 29, 2020 11:00 a.m. to 12:30 p.m.

Biographical Information

Allan R. Thompson, Manager - Corporate Taxes, AK Steel 9227 Centre Pointe Drive, West Chester, OH 45069 513-425-2685 Fax: 513-425-5251 allan.thompson@aksteel.com

• Mr. Thompson is a graduate of the University of Toledo (1977 - B.B.A., Accounting) and

Cleveland-Marshall College of Law at Cleveland State University (1980 - J.D., Taxation). He has 9 years of tax consulting experience in public accounting and over 25 years in tax management positions at several, large multistate manufacturers that are domiciled in Ohio.

• Mr. Thompson has over 30 years of experience with Federal, state and local tax audits - much
• f it involving Ohio taxes. During this time, he has achieved equitable resolutions of compliance

audits with representatives of taxing jurisdictions ranging from field auditors to tax commissioners, crafted voluntary disclosure agreements and presented at administrative appeal and litigation proceedings.

• Mr. Thompson has made numerous presentations for the Manufacturers’ Education Council,

Lorman Education Services, the Ohio Society of CPAs and Institute for Professionals in

• Taxation. His primary subjects are the Ohio sales & use tax exemptions affecting manufacturers

and best practices for managing compliance audits. His career includes two tours of duty as Chairman - Tax Committee of the Ohio Manufacturers’ Association. Edward J. ("Ted") Bernert, Partner, Baker & Hostetler LLP 200 Civic Center Dr. Ste. 1200, Columbus, OH 43215-4138 ebernert@bakerlaw.com 614.462.2687 Fax 614.228.1541 Ted Bernert concentrates his practice in the area of state and local taxes, with a particular emphasis on the major Ohio taxes affecting businesses and business owners – sales and use, financial institution, personal income, commercial activity and real property taxes. He represents national companies concerning Ohio tax matters related to compliance, planning and tax legislation. Ted is chair of the State and Local Tax Committee of the American Bar Association Tax Section, and is a past chair of both the Ohio State Bar Association Taxation Committee and the State and Local Tax Section of the Columbus Bar Association. Ted was appointed by the governor to the Ohio Business Gateway Steering Committee to address the continued development of an electronic link for filing taxes and other matters affecting business. He also serves as a member of the Ohio Chamber of Commerce Taxation Committee. Ted is an adjunct professor of state and local taxes at the Capital University Law and Graduate Center, and served as chief editor of Ohio Tax Review, formerly published by the center. He currently serves as the co-editor of the Guidebook to Ohio Taxes, published by Commerce Clearing House. He has repeatedly been named a “Super Lawyer” in the area of taxation and holds an AV rating by Martindale-Hubbell.

Biographical Information

Laura M. Stanley, Esq., Supervising Legal Counsel and Legal Counsel – Sales & Use Taxes, Ohio Department of Taxation 4485 Northland Ridge Blvd., Columbus Ohio 43229 Laura.Stanley@tax.state.oh.us 614.644.5764 Fax: 614.644.9641 Currently, Laura Stanley serves in a supervisory role for the other Division Counsels. Additionally, Laura is Legal Counsel for sales and use taxes for the Ohio Department of Taxation, within the Business Tax Division. In the later position, Laura is responsible for drafting final determinations, legal ruling requests, administrative rules, information releases, and reviewing proposed legislation, as well as advising the Administrators of the Business Tax Division and Commissioner’s Office on legal

• matters. Previously, Laura served as Legal Counsel for various taxes, including the commercial

activity and petroleum activity taxes within the Business Tax Division and the excise taxes within the Excise & Energy Tax Division. Prior to becoming Legal Counsel, Laura worked as a Management Analyst Supervisor in the Commercial Activity Tax Division and was instrumental in several projects, including the Voluntary Disclosure Program. Additionally, Laura assisted her predecessor in her capacity as Legal Counsel for the Commercial Activity, Motor Fuel, and Excise Tax Divisions. Laura enjoys the presentation circuit and looks forward to building relationships through interaction with the public. Laura graduated from The University of Akron in Akron, Ohio with a Bachelor’s of Science in Political Science & Criminal Justice and an Associate of Applied Science in Criminal Justice

• Technology. Additionally, Laura earned her J.D. from Capital University School of Law in

Columbus, Ohio. Gabriel (Gabe) Tomlin, Administrator – Audit Division, Ohio Department of Taxation 4485 Northland Ridge Blvd. Columbus, OH 43229 Gabriel.Tomlin@tax.state.oh.us 614.387.2044 Gabe began his career with the Ohio Department of Taxation as a sales and use tax auditor and has auditing experience in the manufacturing, construction, oil and gas, and retail industries. Gabe currently serves as one of the administrators of the Ohio Department of Taxation’s Audit

• Division. In recent years, Gabe has testified before the Senate Ways and Means Committee

regarding pending legislation as well as at the Board of Tax Appeals. One of Gabe’s primary responsibilities as Administrator includes coordinating the increased compliance of Ohio’s Taxpayers through the educational efforts of our audits while providing high quality customer service. Gabe is a graduate of The Ohio State University with a degree in Business Administration. Gabe has also received an MBA from Capital University.

29th Annual Ohio Tax Conference Workshop DD Ohio Sales and Use Tax – In-depth Review of Major Developments including Recent Ohio Supreme Court & Ohio Board of Tax Appeals (BTA) Decisions & Audit Policies

Allan Thompson, Manager, Corporate Taxes, AK Steel Corp. Ted Bernert, Partner, Baker & Hostetler, LLP Laura Stanley, Counsel for Sales Tax, Ohio Department of Taxation Gabe Tomlin, Administrator, Audit, Ohio Department of Taxation

Agenda

• Marketplace Facilitators
• ITFA
• Cleaning Services and Manufacturing
• Oil and Gas Rule
• Multiple Points of Use
• Resales
• Computer Cabling
• Audit Division Updates

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Marketplace Facilitators

Likely to be one of the most important developments in SALT. Very important to get the Ohio Tax Department’s view on how this works in Ohio, which also can help us understand how other states might implement their new laws. The states seem to be gravitating toward similar concepts when considering marketplace facilitator legislation but the states are not uniform in their rules. Ohio is one of the states that includes receipts from services when evaluating the amount of activity and requiring reporting and payment by the marketplace. This adds an additional element of complexity not present in many states. Ohio employs a broad approach requiring marketplaces that handle the money only indirectly to be responsible.

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Marketplace Facilitators (Cont.)

How should a marketplace report its own sales when it is also reporting sales for sellers? Under what circumstances will marketplaces avoid liability when mistakes are made:

• When sellers provide inadequate

information?

• Because marketplaces are not liable for

class actions?

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Marketplace Facilitators (Cont.)

When will marketplace sellers be liable when marketplace facilitators make mistakes? What can sellers do to protect themselves against mistakes by the marketplaces?

• Contractually
• Through a certification process

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Marketplace Facilitators (Cont.)

Because so many states are passing this type of legislation, some amount

• f uniformity would be very helpful.

The Multistate Tax Commission Wayfair Implementation and Marketplace Facilitator Work Group issued a white paper on December 13, 2019 setting forth the 13 priority issues:

1. Definition of marketplace facilitator/provider. 2. Who is the retailer? 3. Remote seller and marketplace seller vs. marketplace facilitator/ provider recordkeeping, audit exposure and liability protection. 4. Marketplace seller-marketplace facilitator/provider information requirements. 5. Collection responsibility/ determination. 6. Marketplace seller economic nexus threshold calculation. 7. Remote seller sales/use tax economic nexus threshold issues. 8. Certification requirements. 9. Information sharing.

• 10. Taxability determination.
• 11. Return simplification.
• 12. Foreign sellers
• 13. Local sales/use taxes.

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Marketplace Facilitators (Cont.)

Some states, e.g. Louisiana and South Carolina, have asserted that a marketplace could be liable to collect tax even in the absence of (and before) the enactment of the marketplace facilitator statute. Ohio’s rule applicable to third party sellers such as consignment sellers, Ohio Adm. Code 5703-9-40, is broad: Persons engaged in the business of selling tangible personal property who are authorized, engaged or employed to sell tangible personal property belonging to another are the vendors of such tangible personal property and shall be responsible for the proper collection and remittance of the sales tax with respect to such sales. Persons engaged in the business of selling tangible personal property shall include persons who hold themselves out to the public as conducting a business regardless of whether the merchandise sold is owned by them or by other persons who have authorized, engaged or employed them to sell tangible personal property, e.g. consignment sales.

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Electronic Information Services and Automatic Data Processing

• R.C. 5739.01(Y)
• "Automatic data processing" means processing of
• thers' data, including keypunching or similar data

entry services together with verification thereof, or providing access to computer equipment for the purpose of processing data.

• "Electronic information services" means providing

access to computer equipment by means of telecommunications equipment for the purpose of either of the following:

– Examining or acquiring data stored in or accessible to the computer equipment; – Placing data into the computer equipment to be retrieved by designated recipients with access to the computer equipment.

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The Internet Tax Freedom Act (ITFA)

• Sec. 1101. Moratorium.

(a) Moratorium.—No State or political subdivision thereof shall impose any of the following taxes (1) taxes on Internet access; and (2) multiple or discriminatory taxes on electronic commerce. ***

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Internet Tax Freedom Act (ITFA)

Ohio has been permitted to tax Internet access despite ITFA because Ohio was grandfathered against the prohibition in ITFA. Note: Internet access is taxable only when used in a business context; not for personal use. Businesses should have a system to stop paying the tax on Internet access on July 1, 2020. ITFA prohibits the tax on an Internet access service, which is defined as a “service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services,

• ffered to consumers.”

Does ITFA protect transactions other than pure Internet access?

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Internet Access

• A service that enables users to connect to

the Internet to access:

– content, – information, or – other services offered over the Internet.

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Discriminatory Tax

• Not generally imposed and legally

collectible by such State or such political subdivision on transactions involving similar property, goods, services, or information accomplished through other means.

12

Electronic Commerce

• Any transaction conducted over the

Internet or through Internet access, comprising the sale, lease, license, offer,

• r delivery of property, goods, services, or

information, whether or not for consideration, and includes the provision

• f Internet access.

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Cleaning Services and Manufacturing

• Effective October 1, 2019 – An

exemption for equipment and supplies used to clean processing equipment that is part

• f a continuous manufacturing
• peration to produce food for

human consumption – R.C. 5739.011(B)(13).

– Expands an existing exemption for equipment and supplies used to clean dairy equipment. – Note: For purposes of 5739.011(B)(13) and per R.C. 5739.011(A)(7), “food” is defined in R.C. 3717.01 – Exemption does not extend to cleaning services.

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Cleaning Services and Manufacturing

• “Building maintenance and janitorial

services” under R.C. 5739.01(B)(3)(j) is a taxable service.

• Cleaning of manufacturing equipment =

building maintenance and janitorial service?

• Does Great Lakes Bar Control, Inc. v.

Testa, 156 Ohio St.3d 199, 2018-Ohio- 5207 change anything?

15

H.B. 430 Changes to Oil and Gas Exemption?

• H.B. 430 required the Department to

promulgate a rule to amplify RC 5739.02(B)(42)(q).

• Simply because an item is an enumerated

thing transferred under division (B)(42)(q)

• f section 5739.02 of the Revised Code

does not automatically mean that the item is directly used or consumed in the production of crude oil and natural gas for sale and therefore exempt.

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Multiple Points of Use

• R.C. 5739.033 (D)
• The purchase of a digital good, computer

software, or a service, and that knows at the time

• f purchase that such digital good, software, or

service will be concurrently available for use in more than one taxing jurisdiction.

• Exemption certificate to a vendor relieves the

vendor of its obligation to collect, pay, or remit the tax.

• A business consumer that delivers the exemption

certificate claiming multiple points of use to a vendor may use any reasonable, consistent, and uniform method of apportioning the tax due on the digital good, computer software, or service that is supported by the consumer's business records as they existed at the time of the sale.

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Multiple Points of Use

Taxpayer can claim use in multiple states although software or service is “received” or “first used” in Ohio. Can seek refund if claim is not made at time of sale. Expect the Tax Department to demand certain elements of proof.

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Multiple Points of Use

• Invoices
• Contracts between taxpayer and the software

vendor

• A listing of employee names at the time of

purchase with:

– Position Descriptions – Locations (City/State)

• Description of the software
• Contract addendums/amendments (if

applicable)

• 19

Multiple Points of Use (Cont.)

The BTA decided Environmental Quality Management, Inc.

• v. McClain, Ohio BTA No. 2018-1194 (August 8, 2019) on a

failure of proof but the BTA set forth the requests from the auditing agent that were not met by the Taxpayer:

• contracts with software vendors,
• copies of canceled checks to prove that the invoices

were paid in full (including the tax),

• a list of employee names along with their position

descriptions at the time of the purchase for each license,

• the location where the licenses will be used and product

descriptions of each license type. An issue may exist as to whether documents generated after the transaction can be used to source the sale.

20

Multiple Points of Use

• Concurrent licenses vs. seat licenses?
• Excess licenses purchased?
• Information above is relevant for both audit and

refund scenarios

• Reciprocity/Information-sharing agreements with
• ther states
• 21

Resale in the Construction Contract Context

In Karvo, the Board of Tax Appeals (BTA) and Court of Appeals found that Karvo did not “use” traffic maintenance equipment (barriers and messaging equipment) in its paving operations. Factors cited by the BTA: − Ohio Department of Taxation (“ODOT”) engineers placed the equipment; − ODOT was responsible for traffic maintenance; − The equipment was used even when Karvo was not onsite; and − Karvo would have preferred to use different equipment and altered the method of operation.

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Resale in the Construction Contract Context (Cont.) Resale is a good result for Karvo because ODOT, as the contractee, could purchase exempt as a government agency. What of a private contractee for which the contractor would have to collect tax if items are sold to the contractee? Would be better for the parties to provide expressly by contract whether contractor is using or reselling (leasing) items to contractee. It was important in Karvo that the BTA found as a matter of fact that Karvo did not use the traffic maintenance equipment.

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Computer Cabling

In Nationwide Mutual Insurance Company v. McClain, BTA Nos. 2018-313-318 (October 22, 2019), the BTA found that the installation of CAT-5 and CAT-6 computer cabling for VoIP and Internet was a construction contract. This was in contrast to the BTA’s earlier decision in Newcome Corp. v. Tracy, BTA No. 97-M-320 (December 11, 1998), which had found computer cabling to remain personal property. After the Nationwide decision, the Tax Commissioner issued a new Information Release updating the treatment of computer cabling.

24

Computer Cabling (Cont.)

The Nationwide case represents a dramatic change from the Newcome decision. There had been speculation for years that technology might have made the 1998 Newcome decision obsolete.

25

Computer Cabling (Cont.)

In Nationwide, the BTA focused on certain facts:

• Cabling was for Voice over Internet Protocol (“VoIP”) and

for Internet;

• Cabling was standard CAT-5 and CAT-6 cabling, which is

common to office and other commercial buildings;

• Cabling was installed underneath the floors, above the

ceilings, and in the walls, affixed to the building in the same way as are telephone lines and electric lines;

• In 1998, when the BTA decided Newcome, existing cable

was rarely used when systems were updated but was designed to meet the technical requirements of the individual business consumer and thus was not common to the building;

26

Computer Cabling (Cont.)

• Per the parties’ stipulation, if Nationwide were to

abandon the building, the business relocating to the space could use this cabling for the new

• ccupant’s VoIP or Internet;
• The cabling was not designed to meet the specific

business needs of Nationwide;

• Cabling of this type has become ubiquitous and is

the industry standard cabling; and

• The BTA left open the question of when cabling

would constitute a specialized network of computer cabling thus qualifying as a business fixture and personal property.

27

Computer Cabling (Cont.)

For refunds, applicants will need to show that the cabling being installed was industry standard cabling. What is the impact on construction contractors that collected tax on the installed cabling and did not pay tax on the property, when the property became part of the real estate?

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Audit Initiative - Audit Selection

• Predictive Analytical Models & Trending Models

– Cross tax comparisons – Peer group comparisons – Tax filing trends

• Leads are analyzed and assigned, if taxpayer appears to be non-

compliant.

• Leads involve various tax types, industry sectors and geographic

locations.

• Selection process is objective, efficient, fair and equitable.
• Ultimate goal is increased taxpayer compliance.

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Audit Initiative - Direct Payment Permit Audits/Reviews

– ODT contacting all DPP holders (Began May 2015)

• More than 90% of the review has been started and/or

completed

• 30% of the original accounts were deemed unnecessary

and/or cancelled

• Consideration being given as to whether DPP is

the optimal reporting method.

• Goal: Increase accuracy of compliance of DPP

holders

• Significant over or underpayments of tax can result in

revocation of one’s DP authority.

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Audit Initiative - Direct Payment Permit Audits/Reviews

• ODT intends to conduct follow-up reviews on all DPP

holders moving forward to verify procedures have not changed.

• TP is responsible for determining the correct tax liability under

the sales and use tax laws and rules.

• TP must communicate to ODT any changes in accordance

with the agreement within 30 days including changes in

• rganization such as mergers, acquisitions, accounting

systems, business models, locations, etc.

• Direct Payment authority for paying Sales & Use tax

is a privilege granted to businesses to promote the efficient administration of Ohio’s sales & use tax law pursuant to R.C. 5739.031.

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Audit Initiative - Direct Payment Permit Audits/Reviews

• Tax paid to vendors for which an

exception is not documented in the DP agreement shall be considered an error and held taxable within an audit.

• A refund must be filed to receive back the

tax paid directly to the vendor.

32

Audit Initiative - Audit Penalties

• Application of statutory penalty on

audits that result in a tax liability.

• Reduces subjectivity of penalty application.
• Increases consistency in treatment of

taxpayers.

• Penalty Reduction
• Penalty group within the audit division

reviews all requests for penalty reduction prior to assessment.

• Reviews TP request, facts and findings of the audit, audit history,

cooperation during the audit and other items to make fair and consistent decisions.

• Moves penalty decision to the administrative level.

33

Audit Initiative - Credit vs Refund

• Tax paid directly to vendor will always require a

refund to be filed with the Department.

• Credit for erroneous use tax accrued, within an

audit, are only considered within Statistical Samples.

– Statistical Sample Agreements

• Must be the same scope of accounts within sample.
• If the net offset language is not included within

the agreement, a refund will need to be filed with the Department for use tax accrued in error.

• Tax accruals will need to be verified.

34

Audit Initiative - Line Item Credit vs Bulk Credit

• Line Item Credit – Direct transactional credit.
• Bulk Credit – Credit for all tax accrued.

– Can separate credit types such as comprehensive (Capital) from sample (Expenses).

• Preferred and more accurate method is line

item credit over bulk credit.

• Facts will determine the appropriate

methodology.

• Focus is on Accuracy.

35

Audit Initiative - Statute Dates

• SUT – 4 years
• Use Tax – Unregistered -

7 years

• Sales Tax – Unregistered

– 10 years

• Sales – Tax collected not

remitted, there is no statute

36

Audit Initiative - Waivers

• Reviewed by Audit Administration.
• Waivers are not always approved.
• Extends the statute of limitations.
• Usually extends the audit period to bring

the taxpayer as current as possible.

• Able to use a PARSA in order to get to

the most current year possible (Prior Audit Representative Sample Analysis).

• Both the Department and taxpayer must

complete and agree to an audit completion plan.

• Extends the statute for refunds.

37

Audit Initiative - Participatory Audits (Use Tax)

• A Participatory Audit is an audit where the department and

taxpayer agree to perform the steps of an audit together. An agreement along with a Participatory Audit Project Plan is created stating the basis for the participatory audit, who will complete what tasks and when.

• A Participatory Audit Agreement establishes the basis for

conducting a participatory audit and is agreed to and signed by the department and taxpayer.

• The Participatory Audit Project Plan is a document that is

used to identify: (i) the steps of the audit that will be conducted, (ii) who will be conducting those steps (auditor or taxpayer/representative) and (iii) when those steps need to be completed.

38

Audit Initiative - Participatory Audits (Use Tax)

• Requirements:

– Written agreement and audit project plan must be approved by Audit Administration. – Cannot be taxpayer’s first audit. – A written audit project plan will be agreed to by both parties. – Taxpayer is required to do at least 50% of the work. – The Department and Taxpayer must conduct mandatory periodic meetings as outlined in the audit project plan. – There will be no penalty if a reasonable effort to follow the audit project plan. – Two, consecutive Participatory Audits may NOT be conducted on the same taxpayer.

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QUESTIONS?

• 40

Contact Information

Allan Thompson Manager, Corporate Taxes, AK Steel Corp. (513) 425-2685 allan.thompson@aksteel.com Ted Bernert Partner, Baker & Hostetler, LLP Phone: (614) 462-2687 ebernert@bakerlaw.com Gabe Tomlin Administrator, Audit Division, Ohio Department of Taxation Phone: (614) 387-2044 Gabriel.Tomlin@tax.state.oh.us Laura M. Stanley, Esq. Division Counsel, Sales and Use Taxes P: 614.644.5764 Laura.Stanley@tax.state.oh.us

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