THIS ARTICLE IS THE SECOND IN OUR SERIES REGARDING HOW to achieve optimal results in resolving certain types of state tax and incentive disputes. We are dedicating Part 2 of this series towards sales and use tax audits and appeals. State Tax & Incentive Defense Protocol In Part 1 of this series, we discussed that, in resolving any state tax and incentive dispute, we follow a certain tax resolution protocol we’ve developed over many years. This helps to ensure that we have considered all potential defenses and taken other actions that help achieve optimal resolution of the dispute. The main components of this protocol were referenced in Issue 2, 2023 of the Nebraska CPA magazine. We apply this protocol in resolving sales and use tax audits, protests, and appeals and many of the common issues in those audits, protests, and appeals that we see. Key Issues in Sales & Use Tax Audits & Appeals While each company’s situation is different and has something unique about its business and business model, our experience in handling sales and use tax audits and appeals over many years has highlighted certain issues that arise in many audits, protests, and appeals. We are focusing on several of the key issues we have seen arise in multiple situations, so you can help your clients address these issues and prepare for the potential that the Nebraska Department of Revenue will audit, or assess tax, based on these types of issues. The first step in resolving an issue is to plan ahead to avoid it. While these certainly do not represent all the issues we are seeing, these are among the most common—and apply to multiple industries. We are not addressing here the sales tax issues that arise under Nebraska’s tax incentive projects. Issue: Taxable Nexus The most fundamental question for any company is whether that company has sufficient presence in a state to be subject to that state’s laws. Issue: Sales Tax on Software Development The Department of Revenue often questions whether sales tax is due on custom software developed by outside consultants, normally in staff augmentation projects. Issue: Software Used in Multiple States The Department of Revenue has often taken the position that, if software meant to be used by company personnel across the country is first delivered to Nebraska, the amount spent on such software is wholly subject to Nebraska tax. Issue: Where a Transaction Is Sourced The place at which a transaction is sourced comes up especially in direct mail, telecommunications, and export sales. Issue: Tax on Cloud Computing/Data Center Services The taxation of cloud computing and data center services is often being challenged—in Nebraska as well as in other states. Issue: Tax on Digital Goods & Services The tax law is developing, along with the technology and new business models, on how a transaction involving digital goods or services is classified for tax purposes. Issue: Bundled Transaction Rules An improperly structured purchase transaction, in which a purchaser receives multiple goods or services for one, non-itemized price, can cause tax to be imposed on the purchase of otherwise nontaxable goods or services. Issue: Classification as Taxable Goods or Nontaxable Services Whether a purchase transaction is taxable tangible personal property or nontaxable services, is based on a multiple-factor test. Issue: Manufacturing Sales Tax Exemption Purchase of manufacturing equipment is exempt from sales/use tax if purchased direct by a manufacturer. It needs to be clear whether equipment is purchased directly by a company (versus a contractor) and whether the company qualifies as a manufacturer. Issue: Business Buyer’s Liability for the Seller’s Unpaid Taxes In certain cases, Nebraska tax law can require the purchaser of a business to pay the unpaid taxes of the predecessor owner. Issue: Use-Based Exemptions These types of exemptions depend on the scope and nature of the specified use of the product by the purchasers. STATE TAX BRIEFING RESOLVING STATE TAX & INCENTIVE DISPUTES PART 2: SALES & USE TAX AUDITS & APPEALS BY NICK NIEMANN & MATT OTTEMANN, MCGRATH NORTH LAW FIRM 26 Nebraska CPA
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