Alabama Sales and Use Tax Seminar slides.

1. How To Understand & ManageHow To Understand & Manage
Sales and Use TaxSales and Use Tax
Presented By
Pamela Shull
1
Any tax advice included in this written or electronic communication is not intended or written to
be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that
may be imposed on taxpayer by any governmental taxing authority or agency.

2. 2
The Theory of Tax
The Nature of Tax
The Application of Tax
The Measure of Tax
Authority to Tax
Definitions
Exemptions and Exclusions
Administrative Issues
The Basics of Sales and UseThe Basics of Sales and Use
TaxTax

3. 3
What is being sold/purchased?
Who is the seller?
Who is the buyer?
Where is the order being shipped?
How is the order being shipped?
When does the sale occur?
Where does the sale occur?
What industry are the buyer and seller engaged
In?
Factors that Influence the TaxFactors that Influence the Tax
Consequences of a Business TransactionConsequences of a Business Transaction

4. 4
At seller’s place of business, or
The point of delivery, or
The purchaser’s domicile
• Generally, tax is imposed at the point at
which title, possession or control passes.
• When the buyer becomes the owner
When Is The TaxWhen Is The Tax
Imposed?Imposed?

5. 5
No Sales TaxNo Sales Tax
No broad-based, statewide, general
sales tax is imposed in:
• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

6. 6
 Sales and Use taxes are excise taxes
imposed on the sale or use of tangible
personal property (TPP) at retail and
some services
 The tax is defined by the transaction
or sale
Introduction to Sales andIntroduction to Sales and
Use TaxUse Tax

7. 7
The Nature of Sales and Use TaxesThe Nature of Sales and Use Taxes
 Sales taxes are excise taxes.
◦ Purpose: Generate revenue for
specified services.
 Use taxes are imposed on the
privilege of ownership,
possession, use, storage or
consumption. Supplemental
to the sales tax.
◦ Purpose: to prevent sales tax evasion by
out-of-state purchases and
◦ To make an equitable adjustment between
local and interstate businesses and
◦ Prevent discrimination
WB-1

8. 8
Definitions You Must Be Aware of toDefinitions You Must Be Aware of to
Understand LegislationUnderstand Legislation
Sale and Purchase
– Transfer of title or possession or both, exchange or barter,
license to use, license to consume, conditional or
otherwise, for a consideration, including the rendering of
specified services
Sale at retail (retailer/seller/dealer)
– A sale of tangible personal property to the consumer or
user of it for any purpose other than for resale
Use or consumption
– Found to mean destruction by use
Person
– Includes individuals, partnerships, societies, associations,
joint stock companies, corporations, estates, receivers,
trustees, assignees, referees and any other persons acting
in a fiduciary capacity
Tangible personal property
– Something you can see, touch, feel, etc.

9. 9
UCC – Article IIUCC – Article II
 Contract
 Takes precedence
 Outlines all terms
 Determines liability
 Purchase Order
 In absence of contract – next in line
 Determines liability - FOB
 Invoice
 Determines liability – FOB destination unless
otherwise stated

10. 10
Audit ToolsAudit Tools
 Administrative and Compliance Guides
 Give specific guides to administration of
state specific regulations
 Policy and Procedures Manual
 Tells auditor you know what you are doing
 Allows you to monitor other personnel for
compliance
 Proves to auditor you have “done it right” and
a pattern of being in compliance

11. Decision Making
Taxable
Or
Exempt?
Rate?
Tangible
Personal
Property?
Nexus?
What state due
the tax?
Sales Tax? Use Tax?

12. 12
Alabama Web-sitesAlabama Web-sites
 http://www.revenue.alabama.gov
• Pitney Bowes Tax Tables by address
• www.geotax.com

13. 13
APPLYING SALES TAXAPPLYING SALES TAX
Section 1
Workbook Page 2

14. 14
 Sales tax is an excise tax imposed on the
transaction of retail sale of tangible
personal property.
 Some services are taxable in many states.
 Sales tax applies to intrastate
transactions
 A sales tax accrues when a sale occurs
 When the buyer becomes the owner
The Theory of Sales TaxThe Theory of Sales Tax

15. 15
Seller Privilege Tax:
Seller has liability
Consumer
Levy/Privilege Tax:
Buyer has liability =
AL
Transaction Tax: Both
parties have liability
Gross Receipts: Seller
has liability
Types of Sales TaxesTypes of Sales Taxes

16. 16
CharacteristicsCharacteristics
1. Shifting
 the economic burden of the tax is shifted
from the seller to the buyer
1. Absorption
• the seller including any tax in the selling
price
1. Separation
 the tax must appear separately on the
invoice or receipt

17. 17
Yes, buyer must pay the tax. = AL
No, seller may ask buyer for reimbursement.
Optional
Shifting RequiredShifting Required

18. 18
Yes, seller may market to pay tax
No, seller may “not” market to pay tax = AL
Optional
Absorption AllowedAbsorption Allowed

19. 19
Yes, tax must be a separate line item = AL
No, stated price includes tax
Optional
Separation RequiredSeparation Required

20. 20
 Sales tax is based on purchase price
or gross receipts.
 Exclusions vary from state to state
 Alabama uses “gross sales” as the
basis for sales tax, with specified
deductions (Sec 40-12-222, Sec. 40-23-
2(1) and 2(2)
The Measure of Sales TaxThe Measure of Sales Tax

21. 21
General RuleGeneral Rule
Seller Privilege and Gross Receipts states
usually permit absorption and do not
require shifting and separation.
Generally, Consumer Privilege and
Transaction states are just the opposite
of the above.

22. 22
Seller PrivilegeSeller Privilege
States operating as seller privilege
include:
California, Michigan, Nevada, South
Carolina, South Dakota, Tennessee,
and Wisconsin

23. 23
Consumer PrivilegeConsumer Privilege
States which operate generally as
consumer privilege include:
Alabama, Connecticut, Louisiana, Maine,
Maryland, Mississippi, Nebraska, New
York, North Carolina, North Dakota, Ohio,
Oklahoma, Pennsylvania, Rhode Island,
Utah, Vermont, Washington, West
Virginia, and Wyoming

24. 24
TransactionTransaction
Jurisdictions which operate generally
as transaction include:
Arkansas, Arizona, Colorado, District
of Columbia, Florida, Georgia, Idaho,
Illinois, Indiana, Iowa, Kansas,
Kentucky, Massachusetts,
Minnesota, Missouri, New Jersey,
Texas, and Virginia

25. 25
Gross ReceiptsGross Receipts
States which operate generally as gross
receipts (for sales taxes, not for gross
receipts taxes) include:
Hawaii and New Mexico

26. 26
Exercise 1Exercise 1
Consider the Issue of Sales Tax From the Purchaser’s
Perspective
1. On a taxable sales tax transaction in a seller privilege tax
state or a gross receipts tax state, where shifting is not
required, absorption is allowed, separation is not
required and there is no exemption certificate, the
buyer should accrue and pay tax directly to the state on
invoices where the seller failed to charge the tax on the
invoice.
True or False

27. 27
Exercise 2Exercise 2
Sales tax not billed by the seller on a
taxable sale in a consumer levy tax state
should be added to the invoice by the
purchaser, thereby voluntarily paying the
sales tax to the seller.
True or False
Explain your answer

28. 28
Exercise 3Exercise 3
I have decided to buy a new $20,000 car.
The dealership has agreed to give me
$5,000 as a trade-in value for my old car.
The sales tax will be measured on:
– a) $20,000
– b) $15,000
– c) Depends on the taxing state’s
jurisdiction

29. 29
Exercise 4Exercise 4
Buyer and seller are located in a consumer levy
tax state. The buyer is set up in the seller’s
records as a resale exempt customer. The buyer
orders tangible personal property which will not
be for resale and tells the seller to charge tax.
(Salesperson forgets to tell A/R to charge the tax)
When the A/R invoices the buyer, sales tax is not
charged.
How should accounts payable handle this
situation?

30. 30
APPLYING USE TAXAPPLYING USE TAX
Section 2
Workbook Page 3

31. 31
Sometimes called a consumption tax
 Use tax is imposed on the privilege of
ownership, possession, storage or use of
tangible personal property
 Compliments the sales tax
The Theory of Use TaxThe Theory of Use Tax

32. 32
Nature of Use TaxNature of Use Tax
• Complimentary or supplemental to sales
tax
• To ensure everything taxable is indeed
taxed
• Prevent tax evasion
• Even the playing field for in-state and
out-of-state sellers
• Catch taxable use of untaxed items like
withdrawals of stock

33. 33
Interstate Transaction
Change of intention
The Nature of Use TaxThe Nature of Use Tax

34. 34
Use Tax ExamplesUse Tax Examples
• Catalog or internet purchases
• Consumption of resale property, usage
of stock
• Using self-constructed assets
• Transfers
• Rentals from out-of-state

35. 35
Self AssesmentSelf Assesment
Procedure - InvoiceProcedure - Invoice
1. Accounts Payable examines invoice
against PO for taxation billed
2. A/P makes a note on the invoice for the
taxation due
3. Journal entry is generated into the tax
account in the general journal as a
liability
4. Tax is paid when return is filed –
satisfying the liability account and
paying the appropriate tax.

36. 36
Self Assessment ProcedureSelf Assessment Procedure
for Change of Intentfor Change of Intent
1. Documentation is generated by
appropriate personnel regarding the
change of intent and sent to accounting
or tax department
2. Journal entry is generated into the tax
account in the general journal as a
liability
3. Tax is paid when return is filed –
satisfying the liability account and
paying the appropriate tax.

37. 37
Use TaxUse Tax
 Use tax liability is not a question of
gross receipts, but a question of
sales price, purchase price or
taxable measure.
 Alabama basis of use tax is the
sales price (Sec. 40-23-60(10))

38. 38
1. Material cost – value of raw materials at
purchased cost
2. Inventory or standard cost – direct cost
of placing the property into inventory
3. Full retail – price at which the property is
sold to your customers
4. Fair market value
5. Fair rental value – rental value of the
property in the open market
Bases for Measuring Use Tax –Bases for Measuring Use Tax –
varies from state to statevaries from state to state

39. 39
Exercise 1Exercise 1
A reseller of television sets in state A
purchases its televisions from a vendor in
state B. The sets are delivered FOB
destination. Subsequently, the customer
decides to put one of the televisions in
their corporate office. Which tax would
apply?
– a) Sales tax
– b) Use tax

40. 40
Exercise 2Exercise 2
A grocery store ordered paper towels for resale.
One day an employee of the grocery store
opened a case of paper towels for the grocery
store’s own internal use. How would the grocery
store value the case of paper towels to accrue
the use tax?
– a) Cost
– b) Retail value
– c) Fair market value
– d) Depends on the state

41. 41
Exercise 3Exercise 3
A sales representative sells computers to a buyer in Texas for
general office use. The computer company’s corporate office is
located in California. The buyer has the invoice mailed to an
address in Texas but wants the computers shipped FOB
destination to their office in Mexico. The computer company
has nexus and is registered in Texas and California. How should
the computer company tax this invoice?
– a) Texas sales tax
– b) Texas use tax
– c) California sales tax
– d) California use tax
– e) No tax

42. 42
AnswerAnswer
No tax.
– Foreign commerce. No tax is required.

43. 43
NEXUS ANDNEXUS AND
INTERSTATEINTERSTATE
COMMERCECOMMERCE
Section 3
Workbook Pages 4-5

44. 44
NexusNexus
A connection that requires registration and
compliance with another state tax code.
S U B S T A N T IA L P H Y S IC A L
P R E S E N C E
F R E Q U E N T &
C O N T IN O U S
N E X U S
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45. 45
A. Ownership of property in another state
1. Maintain inventory or equipment
2. Own a billboard
B. A business presence in another state
1. Maintain a building (office, warehouse, retail store,
etc.)
2. Lease or rent facilities
3. Have an affiliate (parent, subsidiary, brother or
sister)
4. Participate in trade shows
C. Employees (or agents) in another state
1. Selling, consulting, installing, training, repairing
Physical Presence TestsPhysical Presence Tests

46. 46
Physical Presence TestsPhysical Presence Tests
4. Delivering goods in another state using the
seller’s own vehicles or employees
1. A taxicab company offers services across state lines
2. An employee delivers repair parts to a customer across
state lines
3. The seller sends its trucks across state lines to repair
customer equipment.
4. Telephone, advertising, banking, Internet
Web pages in another state
1. A business advertises in the yellow pages
2. A company maintains a banking relationship in another
state
3. A firm stores its Web page in a system in another state.

47. 47
How Nexus WorksHow Nexus Works
Computer, Inc. sets up a display booth at a national computer
conference in Las Vegas, NV. Mr. Smith from Amarillo, TX, has shown
significant interest in a $100,000 system over the past several months,
thanks to the efforts of your SVP of Sales, Max Jones. Max has only
spoken with Smith over the phone and mailed him some sales literature.
Smith is attending the trade show. Late Thursday evening, Smith is
visiting with Jones in the company’s hospitality suite. All of the
remaining issues have been settled, and Smith is ready to sign the
contract to purchase the system. Jones hands Smith the documents,
which he quickly signs. Jones starts to put the documents back in his
briefcase saying, something about reviews and approvals to be done
early next week back in the home office in St. Louis. Smith takes
exception to the delay and presses Jones to execute the contract or he’s
going to revoke his signature. Jones agrees and signs the contract.

48. 48
How Nexus WorksHow Nexus Works
• Has Nexus been triggered?
Yes — in Nevada
• If so, explain why and how:
Binding contract — SVP signed
• What responsibilities exist for tax
collection and remittance?
Seller must register in NV.
• Identify which state(s) are entitled to tax:
Unclear

49. 49
How Nexus WorksHow Nexus Works
In the above case, everyone has now
returned home. Computer, Inc ships the
equipment from St. Louis to Amarillo.
Computer, Inc does not have nexus in
Texas. The equipment is shipped FOB
destination.
 Has nexus been triggered?
 No
 What responsibilities exist for tax collection and remittance?
 Customer self-assesses.
 Identify which state(s) are entitled to tax:
 Texas

50. 50
Nexus and Interstate CommerceNexus and Interstate Commerce
The Federal Constitution, Federal Law, and
the Federal Courts are the ultimate
authority in regards to all things relating
to interstate commerce.
WB-5

51. 51
Theory of InterstateTheory of Interstate
Commerce TaxationCommerce Taxation
• The US Constitution and all state
constitutions contain restrictions on the
nature and scope of state and local
taxation. Currently, the two most
important US constitutional restrictions
on state and local tax are the Due Process
and Commerce Clauses.
– The Due Process Clause concerns itself with
questions of fundamental fairness between a
government and those over whom the
government seeks jurisdiction.
– The Commerce Clause imposes restrictions on
states with regard to interstate commerce. The
Commerce Clause is one of the specific
constitutional powers assigned to Congress.

52. 52
Interstate CommerceInterstate Commerce
ExemptionExemption
 No taxation may be imposed on sales made in commerce
between a state and any other state, or between a state and
any foreign country unless:
1. A break in transit occurs, the property may come to rest within a state
and become subject to the power of the state to impose a sales or use
tax
2. If interstate movement has not begun – contemplation of movement
does not prevent a state from taxing the property
3. Immune from taxation despite temporary interruptions due to
necessities or for the purpose of safety
4. Formalities, i.e. form of billing and changes in method of
transportation
• When property has come to rest within a state and is held
there at the pleasure of the owner for disposal or use – thus
subject to the state’s taxing power.

53. 53
OTHER ISSUES YOUOTHER ISSUES YOU
NEED TO KNOW ABOUTNEED TO KNOW ABOUT
SALES AND USE TAXSALES AND USE TAX
Section 4
Workbook Pages 6 - 16

54. 54
At seller’s place of business, or
The point of delivery, or
The purchaser’s domicile
• Generally, tax is imposed at the point at
which title, possession or control passes.
• Most states follow the destination rule:
– Sales or use tax apply at point of
destination.
When Is The TaxWhen Is The Tax
Imposed?Imposed?
WB-6

55. 55
Use tax measure should not include
amounts upon which the buyer has
already paid sales tax to the state in
which the property will reside
Use tax measure need not include
amounts upon which the buyer was
legally required to pay sales tax to
another state.
Application of CreditsApplication of Credits

56. 56
• Caution is required not to extend the
assumption of reciprocity to local taxes that do
not offer it
• Careful attention must be paid to what is
defined as “first use”
– Reciprocity does not usually apply if the item is
purchased and used in one state and then
subsequently moved to and used in another state.
– The second state has a right to assess use tax on used
property, although some do not assess it, and some
only assess use tax on the diminished (fair market
value) or depreciated value of used property.
ReciprocityReciprocity

57. 57
• Property is purchased from a supplier in North
Carolina (which has a sales and use tax), but
delivery occurs in Oregon (which does not
have a sales and use tax). It is not for resale
but for internal use by company.
• The tangible personal property is then shipped
to California, where another company modifies
the property, after which it is shipped to
Arizona, where the property is used for its
intended purpose.
• Absent any exemption certificates, the sales
and use tax ramifications are????
Example:Example:

58. 58
North Carolina
– No sales or use tax should be paid or
liability incurred because the delivery
occurs out-of-state
Oregon
– No sales or use tax liability should be
incurred because the state does not
have sales and use tax.
Answer:Answer:

59. 59
If the tax was paid in Arizona first:
California
– California might assess a use tax and refuse to provide
a credit against the tax already paid to Arizona on the
grounds that because the property was first used in
California, California had jurisdictional priority.
Arizona
– Because Arizona has already collected the tax, the
only question is whether Arizona would refund any of
the tax based on a subsequent assessment by
California. Arizona may or may not refund a creditable
portion of the tax depending on whether it recognizes
California’s jurisdictional priority.
Answer (continued):Answer (continued):

60. 60
If the Tax Was Paid in California
First:
California
– Because California has already collected the
tax and arguable, has jurisdictional priority, it
is doubtful that California would provide a
credit for a subsequent assessment by
Arizona.
Arizona
– Generally, Arizona would assess its tax,
offsetting it by a credit for the tax paid to
California, because California had
jurisdictional priority.
Answer (continued):Answer (continued):

61. 61
Contract IssuesContract Issues
FOB
– Destination or Origin
Date and Location of Sale
Liability for sales tax
What special terms of
contract exist
Shipping instructions
What the
salesperson
needs to be sure
is covered in the
contract.
Why are each of
these issues
important?

62. 62
Nexus Is WhatNexus Is What
Connects UsConnects Us
Overland Express Warehouse
(located in California has sold
their product to Juno
Enterprises (located in
Alabama).
Juno Enterprises contracted to
buy the product through a
salesperson representing
Overland Express when the
salesperson came to Juno’s
offices – contract was signed by
both parties. The cost was
$150,000.
Overland Express ships the
product FOB origin to Juno.
• Has nexus
been
triggered?
• If so, what
was the
trigger?
• What needs to
happen next?
• Which state
gets the tax?
• Is it sales or
use tax?

63. 63
SituationSituation
ABC Company orders a copy
machine from Copy America.
Copy America is located in New
Mexico.
ABC Company is located in
Huntsville, Alabama.
FOB is destination.
Copy America ships the copy
machine from it’s warehouse
in Alabama.
6 months later ABC Company
moves the copy machine to
their Birmingham office.
Which state is
owed the sales
or use tax?
Is it sales or
use tax?
What other tax
issues arise
from this
situation?

64. 64
InvoicesInvoices
Accounts
Payable:
What
issues do
you have
to
consider
with this
invoice?
ABC Supply Company
5555 Any Street
Milwaukee, WI 12345
Phone 555-55555
INVOICE
INVOICE #2850
DATE: MARCH 31, 2013
TO:
Smith Manufacturing Inc.
456 W 56th
St
Milwaukee, WI 12345
Phone 666-6666
SHIP TO:
Smith Manufacturing Inc.
456 W 56th
St
Milwaukee, WI 12345
Phone 666-6666[Recipient Name]
SALESPERSON
P.O.
NUMBER
REQUISITIONER
SHIPPED
VIA
F.O.B.
POINT
TERMS
Gary Smith 49382 Jim Boles UPS Destination
Net 30
days
QUANTITY DESCRIPTION
UNIT
PRICE
TOTAL
12 Reams of 8 x 11 Paper 4.99 59.88
8 Cartons of Pens 6.99 55.92
4 HP 359 Black Ink Cartridges 21.95 87.80
4 HP 374 Color Ink Cartridges 34.99 139.96
12 Boxes - #10 Envelopes 5.99 71.88
TOTAL 415.44
Make all checks payable to ABC Supply Co.
THANK YOU FOR YOUR BUSINESS!

65. 65
Uniform definitions for all states
Consistent tax rates
Central administration for all sales and
use taxes.
Sourcing all sales at point of destination
Limit the scope of audits to one
consistent model.
Alabama is a member of the SSTP
65
Goals of the Streamlined Sales TaxGoals of the Streamlined Sales Tax
ProjectProject
WB-7

66. 66
Example: Drop ShipmentsExample: Drop Shipments
• A seller in Alabama accepts an order
from a buyer in California
• The seller in Alabama places an order
with a third party (i.e. manufacturer,
etc) in Louisiana
• The third party in Louisiana ships
directly to the buyer in California and
invoices the seller in Alabama.
• The Seller in Alabama invoices the
buyer in California

67. 67
If seller does not have nexus and is not
voluntarily registered in the state
where the sale occurs but…
The third party drop shipper does have
nexus and is registered in the state
where the sale occurs, then……
Results in conflict between some states
exemption processing laws.
67
Drop Shipment – What Is theDrop Shipment – What Is the
Problem?Problem?

68. 68
 Seller C, located in Alabama, does not have a
nexus in California and is not registered to collect
California sales or use tax
 Seller C receives an order from California
Customer X for construction equipment
 Seller C’s retail selling price of the equipment is
$50,000.
 Seller C places an order to buy this equipment for
$45,000 with Third Party J, a manufacturer that
has a nexus in California and is registered to
collect California sales tax.
 Seller directs Third Party J to drop ship the
equipment to Customer X’s California location
where the sale occurs.
Example: States Allowing ResaleExample: States Allowing Resale
Certificate to Drop ShipperCertificate to Drop Shipper

69. 69
 In the case of drop shipment sales, SSTP
member states must allow the third party
supplier to accept a resale exemption
certificate from the seller regardless of whether
the seller is registered to collect and remit
sales and use tax in the state where the sale is
made
 The customer is subject to use tax if the seller
does not collect the appropriate sales tax due
on the sale unless the customer can claim an
exemption.
Streamlined Sales Tax ProjectStreamlined Sales Tax Project
Drop Shipments RecommendationDrop Shipments Recommendation

70. 70
• The sale by Third Party J to Seller C is
not subject to sales or use tax because
it is for resale.
• Customer X is subject to use tax on the
$50,000 purchase price, unless an
exemption applies.
AnswerAnswer

71. 71
Multistate Tax CompactMultistate Tax Compact
 Facilitates
determination of tax
liability.
 Promotes uniformity
of tax systems.
 Addresses the issue of
reciprocity.
Joint agency of state governments established to improve the
fairness, efficiency, and effectiveness of state tax systems
as they apply to interstate and international commerce and
to preserve state tax sovereignty.
WB-8

72. 72
Taxable BasisTaxable Basis
Taxable basis is the amount on your Sales
and Use Tax return from which you figure
your sales and use taxes.
Factors influence whether that figure goes
up or down.
WB 9 - 13

73. 73
Tax TreatmentTax Treatment
Transaction or
Property
Taxable Non
Taxabl
e
Comments
Manufacturing
Machinery and Equipment
used in production of TPP
X Reduced rate of tax – Sec.
40-23-2(3), Sec. 40-23-61(b)
Repair or replacement parts
for production machinery
X Same as above
Ingredients and component
parts that enter directly into or
become a part of the products
produced
x Same as above
Other material used or
consumed directly in
production
x Same as above
Materials otherwise used or
consumed in manufacturing
x Same as above

74. 74
Transaction or
Property
Taxable Non
Taxabl
e
Comments
Manufacturing
Tools
Same as previous slide
Fuels Same as previous slide
Containers, packing material,
labels, wrappers, etc.
x Sec 40-23-1(a)(9c), Sec 40-23-
60(4c), Ala Admin Code r.810-6-
1-.69
Construction
Building materials
Tools and Equipment
Computer and
Software
Computer hardware
x Equipment used for manufacturing
TPP is non taxable under
manufacturing exemption

75. 75
Transaction or
Property
Taxable Non
Taxabl
e
Comments
Computer and
Software
Prewritten or canned software
sold with tangible personal
property
Sold without tangible personal
property
Downloaded
X
x
x
Ala Admin Code r.810-6-1.37(4)
Ala Admin Code r 810-6-1-81
Ala Admin Code r.810-6-1.37(4)
Custom software x Admin Code r 810-6-1.37(6)
Services
Professional services
x Entertainment services are taxable
Services with respect to real
property
x Janitorial services are nontaxable –
ode 40-23-2Ala C
In relation to TPP x Movable TPP is taxable. If
unmovable – nontaxable.

76. 76
Transaction or
Property
Taxable Non
Taxabl
e
Comments
Seller’s transportation or
shipping
x
Shipping and handling x Shipping charges must be
separately stated and delivered
by common carrier or US Postal
Service. Ala Admin Code 810-
6-1-.178
Third party delivery x See above
Repair labor only x Ala Admin Code r,810-6-1-.84(2)(b)
Installation charges for TPP x Must be separately stated. Ala
Admin Code r, 810-6-1-81
Leases x Ala Code 40-12-222, Ala Admin
Code r, 810-6-5-.09
Rentals x Ala Code 40-12-222, Ala Admin
Code r, 810-6-5-.09
Maintenance agreements x

77. 77
Taxable BasisTaxable Basis
Bad Debts
– This recovery may be by credit, deduction, or refund,
depending on the state. AL allows refund or credit.
– To qualify for sales tax recovery, the debt must usually be
written-off for income tax purposes or qualify as an expense
under generally accepted accounting principles.
Finance, Interest and Carrying
Charges
– To qualify, these charges must usually be a reasonable
separate and distinct charge. Some states further require the
charges be optional or not be used as a means of avoiding
sales tax on the property being sold. AL excludes from
taxable measure as long as separately stated.
WB 11

78. 78
Coupons and Cash DiscountsCoupons and Cash Discounts
and Trade-In Allowancesand Trade-In Allowances
• Discounts and retailers (dealers) coupons are
excluded from taxable measure.
• Manufacturer’s coupons and rebates are
included in taxable measure
• Trade-ins allowances are included in taxable
measure. Some exclusions are allowed for
certain items, e.g. parts, vehicles, trailers, and
agricultural machinery.

79. 79
Returns andReturns and
RepossessionsRepossessions
• Returns: Deductible if full sales price
refunded.
• Repossessions: Deduction is allowed for
the unpaid purchase price of repossessed
property
• AL Code 40-23-1

80. 80
WarrantiesWarranties
• Mandatory - No option is given to the buyer of the
TPP. Most manufacturers’ warranties are “built in” to new
articles of TPP and fall into this category. The value of a
mandatory warranty, even if separately stated, is included
in the price of the article sold and taxed accordingly.
Optional - Some dealers offer warranties with additional
coverage or beyond the original manufacturer’s warranty
period (if any) at the buyer’s option. This is often referred
to as an “extended warranty.” The states are split on the
tax treatment of optional warranties.
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81. 81
Resale (Retail) ExemptionResale (Retail) Exemption
• All sales are taxable unless the
seller receives an exemption
certificate from the buyer.
• Alabama recommends updating
every 3 years or according to
expiration date.
• The certificate allows you to buy
without paying taxes.
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82. 82
Economic ConsiderationEconomic Consideration
 Reduced rates for certain investments
Example:
Machinery and equipment used in
manufacturing

83. 83
Social ConsiderationSocial Consideration
 Provision of exempt tax status
Example:
Charitable, educational and religious
organizations

84. 84
Equitable ConsiderationEquitable Consideration
 Humane exemptions
Example:
Food (not prepared and sold in bulk),
prescription medicines and medical
products

85. 85
Exempt BuyersExempt Buyers
Buyer Taxable Non
Taxabl
e
Comments
Federal government x Sec 40-23-4(a), (17), Sec. 40-
23-62(24)
State government X Same as above
Political subdivision x Same as above
Public Schools x Same as above
Other educational
institutions
x Same as above
Religious organizations x Same as above
Charitable organizations X Same as above
Scientific organizations X Same as above
Philanthropic organizations x Same as above

86. 86
Buyer Taxable Non
Taxabl
e
Comments
For profit hospitals X
Not-for-profit hospitals x Same as above
Other organizations
exempt from federal and
state taxes
x Same as above
Agricultural x For use in normal course of
business – Sec 40-23-4 and Sec
40-23-62

87. 87
• Allows buyer to pay tax directly to the
state instead of the retailer
(seller/dealer)
• Receipt of the permit discharges
retailer (seller/dealer) from any duty to
collect or liability for the taxes
Direct Pay PermitDirect Pay Permit

88. 88
CAN YOU SHOW ACAN YOU SHOW A
“PATTERN OF BEING IN“PATTERN OF BEING IN
COMPLIANCE”COMPLIANCE”
Section 4
Workbook Pages 17 - 19

89. 89
Audit PreparationAudit Preparation
• Good records lead to good audits
• Preparing good records begins before the
taxpayer receives an audit notice
• Keeping good records is an on-going task
WB-17 - 19

90. 90
AL PenaltiesAL Penalties
• Failure to file
• 10% of tax due or $50
• Failure to pay
• 10% of tax due
• Intent to Evade
• Up to 100% of tax due
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91. 91
Accounts Receivable
• Invoices and contracts
Accounts Payable
• Purchases, bills of
lading, payments
General Ledger
• Cash disbursements
• Cash receipts
Audits—Areas of ConcernAudits—Areas of Concern
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92. 92
Ensure commerce is always continuous
Never store property, materials, or
equipment in a foreign state.
Always use freight forwarder for
exporting out of country.
Tax TipsTax Tips

93. 93
10 Steps to Audit10 Steps to Audit
1. Be prepared
2. Treat the auditor as
a professional
3. Keep the audit
under control
4. Be consistent in
answers
5. Convince auditor
you are doing it
right
6. Watch for
overpayments
7. Negotiate
8. Get help
9. Climb the ladder
10.Never lie.
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94. 94
 Request a letter of documentation.
 Provide only required documentation.
 Establish proposed time to complete the
audit
 Audit the auditor when necessary.
 Request informal meeting with auditor’s
boss.
 Don’t be afraid of challenging the auditor.
 You are the expert in your business
elements
Proven Audit TipsProven Audit Tips

95. 95
Any tax advice included in this written or electronic
communication was not intended or written to be used, and
it cannot be used by the taxpayer, for the purpose of
avoiding any penalties that may be imposed on taxpayer by
any governmental taxing authority or agency.
Seminar DisclaimerSeminar Disclaimer