Sales and Use Tax

Erica FernandezUC Merced Tax Manager

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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)

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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 Merced’s 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 seller’s 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)?

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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@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 seller’s 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

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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@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@finance.ucla.edu 310-794-0317

– All other transactions:• Erica Fernandez– efernandez2@ucmerced.edu 209-228-4075

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Sales & Use Tax Case Studies

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Case Study 1The 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

1. What is the total non-taxable amount (before shipping and handling)?2. Does an exemption apply? If so, which one?3. What amounts should be entered on the P-card screen and where? 4. What is the tax due on this invoice?

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Solution to Case Study 1 1. The total non-taxable amount before shipping and handling

is $200 (for consulting services)

2. The exemption for services where no TPP is provided applies

3. 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 2The 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 Department’s 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

1. What is the total non-taxable amount (before shipping and handling)?2. Does an exemption apply? If so, which one?3. What is the tax due on this invoice? 4. How would your answers to questions 1-3 change if the software was

delivered electronically?

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Solution to Case Study 21. The total non-taxable amount (before shipping and

handling) is $0

2. 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)

3. The taxable amount is $1,000 ($800 + $200) and the tax due is $82.50 ($1,000 X 8.25%)

4. 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.

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