Ohio Tax Ohio Sales & Use Tax In-depth Review of Major - - PDF document

27th Annual

Tuesday & Wednesday, January 23‐24, 2018

Hya Regency Columbus, Columbus, Ohio

Ohio Tax

Workshop CC

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

Wednesday, January 24, 2018 11:00 a.m. to 12:30 p.m.

Biographical Information

Edward J. ("Ted") Bernert, Partner, Baker & Hostetler LLP 65 E. State Street, Suite 2100, Columbus, Ohio 43215 ebernert@bakerlaw.com 614.462.2687 Fax 614.228.1541 Edward J. (“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. Mr. Bernert regularly deals with various tax department officials upon audit or administrative appeals. He has an active tax litigation practice before the Ohio Board of Tax Appeals and upon appeal to the courts, including the Supreme Court of Ohio.

• Mr. Bernert is a member of the Executive Committee of the American Bar Association’s State and Local

Tax Committee and is a past chair of the Ohio State Bar Association Taxation Committee and the State and Local Tax Section of the Columbus Bar Association. Mr. Bernert 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. Mr. Bernert 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 an “Ohio Super Lawyer” in the area of Taxation and holds an AV rating by Martindale-Hubbell. 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 of 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.

Biographical Information

Marshall C. Stranburg, Deputy Executive Director, Multistate Tax Commission 444 North Capitol Street NW, Suite 425, Washington, D.C. 20001 202-650-0300 mstranburg@mtc.gov Marshall C. Stranburg became Deputy Executive Director of the Multistate Tax Commission on April 1, 2016. Previously Marshall had served as Executive Director of the Florida Department of Revenue since being named to that position on April 23, 2013, by the Governor and Florida Cabinet. Marshall had been appointed Interim Executive Director of the Florida Department of Revenue effective July 1, 2012. Prior to this appointment, he had been named Deputy Executive Director for the Department on December 1, 2011. Marshall had previously been the Department’s General Counsel since October 2007. Since first joining the Department in 1991, he also served as Deputy General Counsel, Chief Assistant General Counsel for General Tax Administration, and Assistant General Counsel. In addition to serving as a legal advisor to the Department for many years, he made numerous presentations and has been known and respected nationally in matters of state taxation. Marshall was selected by State Tax Notes as a Top 10 Tax Administrator for 2011. While with the Department, his work primarily was related to Florida’s corporate income tax, sales and use tax, nexus questions, voluntary disclosures, and on many other topics and issues. He received his J.D. from the University of Tulsa and LL.M. in Taxation from the University of

• Florida. Marshall is a member of the Florida Bar and the Oklahoma Bar. In 2015, he received the

Marvin C. Gutter Outstanding Public Service Award from the Tax Section of the Florida Bar.

A L L A N R . T H O M P S O N M A R S H A L L C . S T R A N B U R G A K S T E E L C O R P O R A T I O N M U L T I S T A T E T A X C O M M I S S I O N A L L A N . T H O M P S O N @ A K S T E E L . C O M M S T R A N B U R G @ M T C . G O V ( 5 1 3 ) 4 2 5 - 2 6 8 5 ( 2 0 2 ) 6 2 4 - 8 6 9 9 T E D B E R N E R T B A K E R H O S T E T L E R L L P E B E R N E R T @ B A K E R L A W . C O M ( 6 1 4 ) 4 6 2 - 2 6 8 7

Workshop CC Ohio Sales and Use Tax Major Developments

Agenda

2

• Conduct of audits
• Refunds
• Avoiding audits
• Defending employment service audits

Conduct of Audit

3



New method in Ohio for selection of audit candidates:

• Less based on auditor initiation
• Less based on geographic location
• Less based on recurring audits

Conduct of Audit

4



Selection of audit candidates

• Department’s in-house software is more

analytical and based on public sources, e.g. Dun & Bradstreet.

• Department evaluates other filings, e.g.

withholding returns, especially for detecting non-filing of consumer use tax returns.

Conduct of Audit

5

How candidates are selected for Multistate Tax Commission audits.

Conduct of Audit

6

• Widely-used methods for selecting audits
• Audits of other taxpayers;
• Filing with agencies, e.g. Federal Aviation

Administration for aircraft hangered in Ohio;

• Customs filings; and
• Contracts with state agencies.

Conduct of Audit

7

• Audit Software
• Replacing OFAST with BRUTUS
• Used in Pennsylvania and other states.
• Current audits are still being conducted

using OFAST.

Conduct of Audit

8

 Audit software

• New software will be better at

isolating tax implications of individual items for samples.

• New software will be better at

isolating interest.

Conduct of Audit

9

Penalty

• History of penalty in Ohio
• Four phases
• Mandatory addition of penalty and taxpayer was required to seek

remission.

• After a statutory change, the addition of penalty became

permissive rather than mandatory.

• Thereafter, the penalty worksheet was employed-never

promulgated as a rule.

• Current system.

Conduct of Audit

10

Penalty

Current system

 Statute makes addition of penalty permissive and not mandatory.

Compare provisions of R.C. 5739.133 for addition of penalty versus interest:

• A penalty m ay be added to every amount assessed…

.

• All assessments…

shall include preassessment interest. Emphasis added.

Conduct of Audit

11

Penalty

• Under the current system, penalty is routinely

added.

• Tax Department decides whether to remove and not

whether to impose penalty.

Conduct of Audit

12

Penalty

• Decision is not left to the auditor.
• Department is trying to become more uniform in

the treatment of penalty by having a group of senior staff look at penalties: the “Gang of Five.”

Conduct of Audit

13

Penalty

• The treatment of penalty is not supposed to be

mechanical, even if the compliance meets an acceptable percentage but if consistently underpaying, could still have penalty.

Conduct of Audit

14

Penalty

• Taxpayer/ representative should ask for

penalty rem ission before assessm ent.

• If penalty is not removed, can appeal that decision

to Tax Appeals Division.

Conduct of Audit

15

Penalty

• It appears that if the tax agents expect an appeal,

the penalty will be left intact and the taxpayer must seek removal of the penalty at Tax Appeals Division.

Conduct of Audit

16

Penalty

• Current penalty system lacks transparency—a black

box.

• Traditionally, the Tax Commissioner has been

accorded wide deference in determination to add and not remove penalty.

Conduct of Audit

17

Penalty

• Because the provision for penalty is not transparent

and the file normally does not explain any basis for the decision to impose penalty, perhaps the Board

• f Tax Appeals and courts will be more inclined to

consider whether the penalty is appropriate.

Conduct of Audit

18

Assessments

• Vital that the audit does not result in an assessment

that is overlooked.

• Department may use a different address for

assessment than was used to contact the taxpayer during audit.

Conduct of Audit

19

Assessments

• If assessment is not contested, then amount is

certified.

• More difficult to deal with the potential liability

after certification because the Ohio Attorney General and perhaps outside debt collector is involved.

Conduct of Audit

20

Assessments

• Once certified, collection fees that exceed 10% are

added.

• These fees are used to fund the Attorney General’s
• ffice!

Conduct of Audit

21

Assessments In Thompson v. General Revenue Corporation, Southern District Ohio No. 2:16-cv-734, 2017 WL 3276018, *7 (August 2, 2017), Federal District Court Judge Smith found that “[R.C.]§ 131.02 does not authorize the Attorney General to charge an unlimited and unreviewable amount of collection costs and to seek remittance for those costs from the debtor.”

Conduct of Audit

22

Assessments

The defendant’s motion in Thompson to certify the decision for interlocutory appeal is pending.

Refunds

23

Ohio Tax Department Policy:

• See the Tax Commissioner’s Rule, Ohio Adm. Code

5703-9-07.

• Consistent with what seems like a national trend

toward “toughening” the standards for refunds.

• Must prove that tax was actually paid.

Refunds

24

Tax agencies’ pet peeves:

• Over-inclusive refund claims with insufficient

analysis before filing.

• Dealing with refunds that will pose financial

hardships to counties because of the size of refund.

Refunds

25

Tax agencies’ pet peeves:

• Refund claims that do not “tick and tie.”
• Providing only spreadsheets rather than

documentation.

• Providing extensive documentation that is not

tied to individual transactions.

Refunds

26

Concerns of taxpayers:

• Process takes too long.
• Can be difficult to determine why the claims are

being denied.

• Taxpayer must overcome skepticism even on

“obvious” issues.

Refunds

27

Seeking refunds related to multiple points of usage (MPUs).

• See enclosed MPU worksheet.
• Note also that unused seat licenses are taxed as

Ohio licenses.

• Worksheet reflects the concern that tax is not

being paid in any state.

Refunds

28

The refund process affirms the conclusion expressed by the late Paul Frankel that the three most important rules of state and local taxation are: Don’t pay! Don’t pay! Don’t pay!

Avoiding Assessm ents

29

Filing consumer use tax returns

• Surprising how often taxpayers that file other

returns like withholding or sales tax, fail to register for and file consumer use tax returns.

• Filing consumers use tax returns results in

shortened period of limitations.

• Department of Taxation uses failure to file use tax

returns as basis for imposing penalty.

Avoiding Assessm ents

30

Registering for consumer use tax or

• ther taxes when activities have occurred

in the state for some time-

• One question that arises frequently: If

I register with a state, will that simply trigger an audit for prior periods?

Avoiding Assessm ents

31

Amnesties

• Ohio has an amnesty
• No penalties and half of the interest are forgiven.
• Taxes due on May 1, 2017 and not contacted by Department
• f Taxation.
• Amnesty period from January 1, 2018 through February 15,

2018.

• Includes sales and use taxes.
• Go to OhioTaxAmnesty.gov

Avoiding Assessm ents

32

Amnesties

Other states

• The Council on State Taxation website has a list of

pending amnesties:

 COST.org  Connecticut, Rhode Island and Texas are having or

will have amnesties.

Avoiding Assessm ents

33

Voluntary disclosure agreements

• Voluntary disclosure agreements (VDAs)

generally available only if the taxpayer has not previously been contacted--but look at the requirements for an individual state.

• VDAs always available and not just applicable to

certain periods like amnesties.

• A voluntary disclosure may present better terms

than the amnesty.

Avoiding Assessm ents

34

Voluntary disclosure agreements

• Be careful: if one applies for a VDA and it

is rejected, then the taxpayer arguably is subject to full look-back to prior periods.

• What do states actually do when a taxpayer

is denied VDA status?

Avoiding Assessm ents

35

Multistate agreements

• MTC Multistate Voluntary Disclosure

Program

• Can work with multiple states using MTC

as an intermediary.

• See MTC.gov

Avoiding Assessm ents

36

Special MTC project

• Report of the Multistate Tax Commission’s

National Nexus Program (NNP)

Avoiding Assessm ents

37

U.S. Supreme Court accepted cert. in Wayfair:

• How does the acceptance of the Wayfair case

affect the decisions whether to file voluntary disclosures—especially for remote sellers?

• Would the states apply a state-favorable decision

in Wayfair retroactively?

Avoiding Assessm ents

38

Inconsistent sourcing determinations by multiple states.

• Will the MTC assist taxpayers by mediating in

situations where transactions are being sourced to multiple states?

Avoiding Assessm ents

39

Alternatives to audits

• Managed audit and participatory audits

designed to streamline the audit process.

• Alternatives take penalty off the table.
• Under Ohio Tax Department audit guidelines,

managed and participatory audits are limited to when the taxpayer was previously audited.

Defending employment service tax audits

40

Permanent placement exemption:



“Assigning an employee on a permanent basis means assigning the employee with an indefinite end date, not as a substitute for a current employee who is on leave and not to meet seasonal needs, or short term workload conditions.”



H.R. Options, Inc. v. Zaino, 100 Ohio St. 3d 373, 2004-Ohio-1 ¶ 21.

Defending employment service tax audits

41

Permanent placement

• Contract must extend for a least one year.
• Contract need not be in writing but always

preferable to have a writing.

• Contract need not specify that employees will be

permanently assigned.

Defending employment service tax audits

42

Permanent placement

• If it is not spelled out in the contract, need testimony

that parties intended the workers to be permanently assigned.

• Not enough that in fact workers ultimately did stay for a

long time.

• Workers can be permanently assigned if in fact they do

not stay for a long time especially when the job is such that there is high attrition.

Defending employment service tax audits

43

Permanent placement

• Do not confuse one-year test with permanent

placement– a contract for one year with each worker assigned for one year would not be indefinite.

• What about where job is permanent but workers

turn over?

Defending employment service tax audits

44

Permanent placement

Recent cases have undermined audit positions of the Tax Department:

• ACCEL, Inc. v. Testa, Slip Opinion No. 2017-Ohio-

8798, decided December 6, 2017; and

• A.M. Castle & Com pany v. Testa, BTA No. 2013-5851,

March 9, 2015; appeal to the Supreme Court, Case No. 2015-0551; dismissed on application of Appellant Tax Commissioner on February 18, 2016.

Defending employment service tax audits

45

Permanent placement

• Cases reject the argument that the absence of magic

language in the agreement about permanent placement is fatal.

• While contract terms remain important, Court seems

more interested in what actual practice is compared with language.

• Remains important to remember that it is the intention of

the parties upon contracting or engaging workers and not what actually transpires.

Defending employment service tax audits

46

Permanent placement

• The Ohio BTA and Supreme Court have not

embraced the idea that a fluctuation of the numbers

• f workers needed means that the workers are not

permanent.

• In Accel, the Court was influenced by the

taxpayer’s practice of cutting hours and not employees when reduction in hours were needed.

Defending employment service tax audits

47

Permanent placement

• It is a good fact when the workers are not assigned

to another customer when the customer does not have a need that day.

• The Court’s conclusion could have been different if

the workers were assigned by their employer to

• ther customers on days when the workers were not

assigned to the customer.

Refund Checklist Multiple Points of Usage (5739.033) The following documents must be supplied when a Multiple Points of Usage (MPU) claim is filed.

• 1. A completed Application for Sales/Use Tax Refund (Ohio form STAR). The original and one copy
• f the STAR must be provided. Only one set of back-up documents is needed.
• 2. Copies of original invoices or similar documents
• 3. Contracts between the taxpayer and software vendors.
• 4. Copies of canceled checks or some other proof that the invoices were paid in full, including the

tax. Note: In the event the check is payment for multiple invoices, copies of invoices paid by said check

• r a copy of the check remittance is required to prove the invoices claimed for refund were paid in

full, including the tax.

• 5. A computer disc containing a Microsoft Excel of Microsoft-compatible spreadsheet set up like the

example on page 4 for all claims containing 25 or more invoices. The spreadsheet must list every invoice separately and the total should equal the amount requested on the refund application. Note: To expedite the refund process you may also supply the spreadsheet on a disc for claims containing less the 25 invoices, but it is not required

O 6. A list of employee names along with their employee position description at the time of purchase for each license. O 7. The location, city and state, where the licenses wi II be used for each license.

Note: This information may be provided to other state or federal tax jurisdictions.

• 8. A product descriptk1n for each license type.

28