S TAT E TA X B R I E F I N G BY NICK NIEMANN & MATT OTTEMANN, MCGRATH NORTH LAW FIRM WHEN IS A DUCK NOT A DUCK? RECLASSIFICATIONS IN THE WORLD OF STATE TAXES & INCENTIVES While we work on a variety of state and local tax and incentive scenarios, one common thread between many of these is that the Nebraska Department of Revenue or Economic Development will often reclassify a business transaction or type of business based on its view of the economic, business, or legal reality. This can have significant and unwanted tax and incentive effects. Some of the common examples of such reclassifications occur in the following areas: Tangible Personal Property Versus Service (Sales & Income Tax) A critical question for both sales and income tax purposes is whether a transaction constitutes the sale of services or tangible personal property. For many transactions, this distinction is unclear, particularly when a customer receives some tangible personal property combined with significant services. To aid in addressing this question, in addition to some prevailing cases, the Nebraska Department of Revenue issued Rev. Rul. 1-08-6, which provides a test for making this distinction. However, the result even under the ruling can be unclear. This reclassification most commonly affects: a) whether the transaction is subject to sales tax as the sale of tangible personal property; and b) for multistate businesses, how their income is apportioned for state income tax purposes. Bundled Transaction (Sales Tax) 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. This is known as a bundled transaction, in which the Department of Revenue reclassifies nontaxable goods or services into taxable ones. Stock Sale Versus Asset Sale (Sales Tax, Income Tax & Property Tax) Designing the sale of a business as the sale of assets or the sale of stock can have several significant tax effects for sales tax, income I S S U E 4 , 2 0 2 2 18 nebraska cpas
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