Workshop Y Highly Competitive Transportation & Logistics - - PDF document

28th Annual

Tuesday & Wednesday, January 29‐30, 2019

Hya Regency Columbus, Columbus, Ohio

Workshop Y

Highly Competitive Transportation & Logistics Industry … Major Income & Sales Tax Issues

Tuesday, January 29, 2019 4:15 p.m. to 5:15 p.m.

Biographical Information Timothy D. Adams, Shareholder State and Local Tax Schneider Downs & Co., Inc. One PPG Place, Suite 1700, Pittsburgh, PA 15222 (412) 697-5250 Fax (412) 261-4876 tadams@schneiderdowns.com Tim has more than 20 years of experience in public accounting, including more than 10 years with a national accounting firm. His focus is in state and local tax matters, including multi-state income and franchise tax, sales and use tax, gross receipts tax, incentives/credits and unclaimed property. Tim has successfully represented or assisted clients in state and local tax matters in nearly every state across the country, including audit representation and appeals, refund reviews, and multi-state consulting and planning that have yielded significant value to his clients.  Member- PICPA State Tax Committee  The Ohio Society of CPAs - Ohio Tax Reform Task Force  Member – American and Pennsylvania Institutes of Certified Public Accountants  Board Member – National Aviary  Past Chair – Western Pennsylvania Tax Conference Committee  Executive Committee Member – PICPA Pittsburgh Chapter  Past President – Economic Club of Pittsburgh Tim is a graduate of Grove City College with a B.S. in Accounting. Emery (Jack) Stewart, Senior Manager State and Local Tax Schneider Downs & Co., Inc. One PPG Place, Suite 1700, Pittsburgh, PA 15222 (412) 697-5443 Fax (412) 261-4876 estewart@schneiderdowns.com Jack began his sales and use tax career with Chartwell Advisory Group in 1998 specializing in sales and use tax refund reviews for construction projects with exempt entities in Pennsylvania. In 2001 Jack joined the state and local tax practice of PricewaterhouseCoopers in Pittsburgh, where he specialized in sales and use taxes providing services such as nexus analysis, compliance and refund reviews, audit defense, taxability matrixes managed compliance agreements, and various tax appeals before various state agencies. Jack joined the state and local tax practice of Schneider Downs and Co., Inc. in Pittsburgh, Pennsylvania in 2005. Jack continues to specialize in sales and use tax matters for a wide range of industries including construction, manufacturing, gas and oil as well as transportation. Jack is a graduate of Rollins College with a B.A. in History and received a Post Baccalaureate in Accounting from Robert Morris University in Pittsburgh, Pennsylvania.

Highly Competitive Transportation & Logistics Industry…Major Income & Sales/Use Tax Issues

Ohio Tax Conference January 29, 2019

Agenda

• State Tax Filings and Compliance

Considerations.

• Income Tax Nexus – What creates income

tax nexus for transportation companies?

• Apportionment Methodologies for Income

Tax Nexus.

• Sales and Use Tax Matters.
• Sales and Use Tax Audit Issues.
• Due Diligence and Successor Liability

Matters.

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State Tax Filings and Compliance Considerations

• State Income and Sales & Use Tax Filings

– Income Tax – Indiana, Kentucky, Michigan and Pennsylvania. – Commercial Activity Tax (CAT) – Ohio – Sales and Use Tax – Indiana, Kentucky, Michigan, Ohio and Pennsylvania.

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Income Tax Nexus –What creates income tax nexus for transportation companies?

• General Activities that Can Create Nexus for

Income Tax.

– Property in the state, owned or leased, real or personal. – Employees in the state. – Relationships with independent contractors in state. – Using company vehicles to make deliveries and pick-ups in the state. – Using company vehicles to pass through the state to make deliveries or pick-ups in other states. – Sales or meeting the definition of “doing business” in the state.

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Income Tax Nexus –What creates income tax nexus for transportation companies?

• Trucking activities that may create nexus for

income tax.

– Indiana Indiana – Back-hauling goods originating in the state and/or delivery or picking-up goods in the State. – Ke Kentucky – Back-hauling goods originating in the state and/or delivering or picking-up goods in the state.

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Income Tax Nexus –What creates income tax nexus for transportation companies?

• Trucking activities that may create nexus for

income tax.

– Michigan Michigan – Being physically present in the state for 2 or more days. Back-hauling goods originating in the state and/or delivering or picking-up goods in the state. – Pennsylv nnsylvania ania – Having deliveries or pick-ups in the state creates a reporting requirement if either the trucking company makes one trip with a pick-up or delivery and has 50,000 loaded annual Pennsylvania miles or makes more than 12 trips with pick-up or deliveries and has a Pennsylvania mileage apportionment factor greater than 5%.

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Activities that Create Nexus for Ohio’s Commercial Activity Tax

• Bright Line Nexus Activities (CAT)

– Has at anytime during the calendar year property in Ohio with an aggregate value of at least $50,000. – Has during the calendar year payroll in Ohio of at least $50,000. – Has during the calendar year taxable gross receipts of at least $500,000. – Has at any time during the calendar year within Ohio at least 25 percent of the person’s total property, total payroll, or total gross receipts. – Is domiciled in Ohio as an individual, or for corporate, or

• ther business purpose.

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Activities that Create Nexus for Ohio’s Commercial Activity Tax

• Trucking activities that can create bight line nexus

for the CAT.

– Application of the property test to highway transportation services.

• Persons providing highway transportation services will presume

to have at least fifty thousand dollars of property in the aggregate during the calendar year if the person has property of such value in this state for more than thirteen days, which need not be consecutive. (Information Release CAT 2006-05)

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Apportionment Methodologies for Income Tax

• Indiana – Uses a three factor formula. Moveable

equipment, interstate employees and revenue from transportation is assigned to Indiana on the basis of total miles traveled in Indiana over total miles traveled everywhere.

• Kentucky – Uses a three factor formula. Sales factor is

determined by the mileage driven in state divided by total miles driven. Property factor is determined by the value of property in the state divided by the value of all

• property. However, the value of over-the-road

equipment is excluded from the computation.

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Apportionment Methodologies for Income Tax

• Michigan – Determines Michigan receipts by applying a

ratio of revenue miles in Michigan to the revenue miles everywhere.

• Ohio (CAT) - Gross receipts are situs in proportion to

miles traveled within the state compared to miles traveled everywhere.

– Even if a taxpayer has bright line nexus, the taxpayer must also have at least one hundred fifty thousand dollars in taxable gross receipts to be liable for the CAT. – The threshold applies to a person who would otherwise be a separate taxpayer or to a group of persons who would

• therwise be members of a combined taxpayer group, but

does not apply to members of a consolidated elected group.

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Apportionment Methodologies for Income Tax

• Pennsylvania – Business income of trucking

companies is apportioned by multiplying the income by a fraction. The numerator is the taxpayer’s total revenue miles in Pennsylvania, and the denominator is the total revenue miles of the taxpayer everywhere. “Revenue mile” means the average receipts derived from transportation of persons or property one mile. Nonbusiness income is allocated under the standard allocation provisions.

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Sales and Use Tax Exemptions for Transportation Companies

• Indiana

– Provides an exemption for purchases of tangible personal property that is consumed and is necessary for providing “public transportation services”. – “Public transportation” is moving, transporting or carrying persons and/or property for consideration, when the transportation is done by a common carrier, contract carrier, household goods carrier, carrier of exempt commodities, or other specialized carrier performing public transportation services.

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Sales and Use Tax Exemptions for Transportation Companies

• Indiana

– Relevant factors the Department looks at to determine whether or not a carrier is engaged in “public transportation”.

• Carrier must be hauling property of another.
• Carrier must maintain all relevant shipping/transportation

documentation.

• Carrier must receive compensation for the services it provides.
• Carrier must hold and pay for the appropriate public

transportation insurance.

• Carrier must be fully and independently authorized by federal

and/or state authorities to provide public transportation services.

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Sales and Use Tax Exemptions for Transportation Companies

• Indiana

– Examples of “necessary” exempt items include:

• Vehicles used for public transportation, repair and replacement

parts and materials consumed by exempt equipment. (Trucks and truck tractors with a gross GVWR of 10,001 or greater; trailers or semi-trailers.)

• Machinery, tools, equipment and facilities used for repair and

maintenance of tangible personal property used in public transportation.

• Storage facilities including temporary storage of property being

transported.

• Cleaning supplies.
• Employee uniforms.
• Garage supplies.
• Equipment related to the construction and operation of terminals.

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Sales and Use Tax Exemptions for Transportation Companies

• Indiana

– Examples of items not directly used or consumed in “public transportation”.

• Property used in pre- and post-transportation activities.
• Promotional expenses.
• Sales expenses.
• Office equipment and supplies for sales executives.
• Heating and air conditioning for separate off site executive

headquarters.

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Sales and Use Tax Exemptions for Transportation Companies

• Kentucky

– An exemption exists for common carriers using over-the road equipment or floating equipment exclusively in interstate commerce thereafter, nominal use in intrastate commerce withstanding. – The exemption applies to “goose neck” or “fifth-wheel” (tractor trailer) trailers designed for mounting on the back of a truck to carry freight or merchandise weighing more than 1,000 pounds. – Repair and replacement parts for trucks are exempt if the vehicle is licensed for highway use at a declared weight with any towed unit of 44,001

• r more, driven exclusively in interstate routes involving more than one

state, and used for the conveyance of property or passengers for hire. – To exercise the exemption carriers must file an Application for Truck Direct Pay Authorization (Form 51A160) demonstrating that the carrier is designated as an interstate motor carrier with the Federal Motor Carrier Safety Administration and the Kentucky Transportation Cabinet. They must also be registered with a Kentucky sales and use tax account number and

• perating one or more vehicles exclusively in interstate commerce.

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Sales and Use Tax Exemptions for Transportation Companies

• Michigan

– Provides an exemption for the purchase, rental or lease of rolling stock to an interstate motor carrier if the rolling stock is used in interstate commerce.

• Rolling stock means a qualified truck, and/or a trailer designed to

be drawn behind a qualified truck. It also includes parts or other tangible personal property affixed to and directly used in the

• peration of the truck or trailer.
• Qualified truck means a commercial motor vehicle power unit that

has 2 axels and a gross weight rating in excess of 10,000 pounds

• r has 3 or more axels.
• Interstate motor carrier means a person that carries persons or

property, other than itself, its employees, or its own property for hire across state lines and whose fleet mileage was driven at least 10%

• utside Michigan in the preceding tax year.

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Sales and Use Tax Exemptions for Transportation Companies

• Ohio

– Highway Transportation for Hire Exemption

• Highway transportation for hire means transportation over the

highways, roadways, streets, or any similar public thoroughfare or personal property belonging to others for consideration by any of the following: – The holder of a permit or certificate issued by the state or the federal government authorizing the holder to engage in transportation of personal property belonging to others for consideration; – A person who engages in the transportation of personal property belonging to others for consideration, but who could not have engaged in such transportation on the effective date

• f Ohio H.B. 335, Laws 1985 (December 11, 1985) unless the

person was a holder of such a permit; or – A person who leases a motor vehicle to and operates it for a person described in one of the above.

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Sales and Use Tax Exemptions for Transportation Companies

• Ohio

– The exemption applies to the sale, lease, repair and maintenance of motor vehicles (including parts and accessories) that are used primarily for transporting tangible personal property for others or household goods by a person engaged in highway transportation for hire. – Also includes equipment attached to or incorporated in the motor vehicle, such as:

• Spring loaded logistic straps,
• Decking bars,
• Auto tie downs,
• Tie down straps,
• Walk-boards,
• Padlocks and seal locks.

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Sales and Use Tax Exemptions for Transportation Companies

• Ohio

– Examples of items that are not considered attached or incorporated into motor vehicles.

• Pads,
• Dollies and carts,
• Piano boards,
• Ladders,
• Refrigerator covers,
• Rug runners,
• Rubber bands and bungie cords.

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Sales and Use Tax Exemptions for Transportation Companies

• Pennsylvania

– Provides an exemption under the public utility exemption to common carriers. – To qualify for the common carrier exemption, a motor carrier must hold a certificate issued by either the PUC

• r the Federal Department of Transportation and must

predominantly perform services of the traditional common carrier. – Traditional common carrier services should include carriers that hold themselves out to the public to transport property belonging to others (except household goods) for compensation.

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Sales and Use Tax Exemptions for Transportation Companies

• Pennsylvania

– The exemption applies to tangible personal property or services that are predominately used directly by it in producing delivering, or rendering of a public utility service. – Direct use is determined through consideration of the following factors;

• The physical proximity of the item.
• The casual relationship between the use of the item and the

delivery of the service.

• The character of the item.

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Sales and Use Tax Exemptions for Transportation Companies

• Pennsylvania

– Examples of exempt property include:

• Equipment consisting of motor vehicles, straight truck, tractor,

semitrailer, full-trailer, combination tractor-and–semitrailer, combination straight truck and full trailer and other types of equipment used in the transportation of property for hire.

• Replacement and repair parts for machinery and equipment

directly and predominantly used in public utility services.

• Pollution control devices. Equipment, machinery and supplies

used to control or abate, or prevent air, water, or noise pollution generated in rendering a public utility service.

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Sales and Use Tax Exemptions for Transportation Companies

• Pennsylvania

– Examples of non-exempt property include:

• Maintenance tools and equipment.
• Property used in managerial, sales or other non-operational

activities.

• Property used in administrative activities.
• Property used for safety and fire.
• Property used for employee personal comfort or convenience.
• Property used in pre- and post-common carrier activities.

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Sales and Use Tax Audit Issues

• As most states do not tax transportation services, sales

tax is generally not an issue.

• Most assessments involve underpaid use tax.
• Common use tax errors include:

– Not having a use tax account. – Not having a use tax procedure in place. – Missing purchase invoices. – Statements in place of invoices that do not separately state sales tax. – Not properly classifying purchases. – Not understanding how to apply applicable exemptions.

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Due Diligence and Successor Liability Issues

• When acquiring another business, due diligence

should include all relevant tax matters, especially state income, withholding and sales/use taxes.

• Due diligence should include securing all relevant

tax clearance certificates. Failure to obtain the certificates could lead to successor liability issues.

• While having indemnity language in an agreement

is good, it does not protect the purchaser from successor liability matters.

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Due Diligence and Successor Liability Issues

• The process of obtaining tax clearance certificates

should be started as soon as possible, as the process can take months.

• If tax clearance certificates cannot be obtained

prior to the close of the transaction, the seller should hold a portion of the payment in an amount to adequately cover any potential tax liabilities, penalties and interest.

• Indiana, Michigan, Kentucky, Ohio and

Pennsylvania, all have successor liability provisions.

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Questions

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Contact Information

Timothy D. Adams Shareholder Schneider Downs & Co., Inc. tadams@schneiderdowns.com Emery (Jack) Stewart Senior Manager Schneider Downs & Co., Inc. estewart@schneiderdowns.com

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