UC Tax Issues: UC Tax Issues Accounting Services & Controls October 2003


Agenda: Agenda Sales & Use Tax Taxable Payments through the Vendor System Unrelated Business Income Employee vs. Non-employee Relations Employee Fringe Benefits Tax Treatment of Moving Expenses Travel


Sales/Use Tax AUDITS: Sales/Use Tax AUDITS Total BOE audit assessments $198,538 Largest departmental recharge failure to self-assess use tax $62,907 Total recovery audit findings $126,183 Largest departmental refunds Exempt database services $6,355 Exempt software installation travel and training $6,755 See Audit Findings and Issues on Accounting’s web page for further discussions


Most CommonTax Accrual Overpayments: Most Common Tax Accrual Overpayments By dollar amount: Invoice with tax Goods used/shipped outside CA Services Medicines Construction contracts By frequency Freight Medicines Invoice with tax Services Goods used/shipped outside CA Source: Deloitte audit data from four campuses


Other CommonTax Accrual Overpayments: Other Common Tax Accrual Overpayments Tax paid by vendor in audit Accrual & tax calculation errors Software Maintenance/service agreements Repair, installation & training labor Qualified periodicals Resale inventory Food for human consumption Printed sales messages Mailing lists Human body parts Source: Deloitte audit data from four campuses


Overview: Overview The University University’s Supplier University’s Customer University as a Purchaser Pays Sales Tax or Self-Assesses Use Tax University Departments: Accounts payable, purchasing, procurement, medical center, cafeteria, etc. University as a Seller Collects Sales Tax University Departments: Bookstore, food services, medical center, student health services, library services, registrar, etc. Indicates the flow of tangible personal property


Sales Tax: Sales Tax Imposed on retailers for the privilege of making retail sales of tangible personal property in California. Tax applies to the gross receipts from the sale of tangible personal property (cash, trade-in and other consideration). Services - generally not subject to sales tax, unless services related to the sale of tangible personal property (“true object test”). Sales tax applies to intrastate transactions (within California). Retailer is liable for collecting and paying sales tax


Use Tax: Use Tax California imposes use tax on every person who stores, uses, or consumes in the state tangible personal property purchased from an out-of-state retailer. Use tax applies to the cost of the tangible personal property (cash, trade-in and other consideration). Generally, use tax applies to taxable transactions that are not subject to sales tax. Some out-of-state retailers are “permitized” by California’s BOE to collect use tax. University is liable for self-assessing use tax and paying state directly.


Sales and Use Tax Rate: Sales and Use Tax Rate State County Local (City) Combined Statewide Sales and Use Tax Rate* * The combined statewide tax rate (7.25%) applies to all sales or purchases in California. 6.00% .25% 1.00% 7.25% District Transaction and Use Tax (Generally, the applicable district tax rate is based on taxes imposed in the district where the property is first used) 0.0 to 1.25% 7.25% to 8.5% Total Combined Sales and Use Tax Rate The combined Sales and Use Tax Rate includes the following components:


Slide10: In general, the rate of district tax is determined based on the district where retailer’s place of business is located or where the property is first delivered (shipped by retailer). As a purchaser, the University is responsible for the payment of the district taxes if adjustments are needed because of rate differences. Remove “foreign” district tax by adjusting invoice down to 7.25% sales tax. Accrue .5% Santa Barbara district rate as a financial journal transaction. District Taxes


Definitions: Definitions A Sale or Purchase, not otherwise exempt, must include the following elements to be subject to sales or use tax: Sales Tax Sale Sale of Tangible Personal Property At Retail For consideration Sale by a Retailer Take possession in California Use Tax Purchase Purchase of Tangible Personal Property At Retail For consideration Purchase from a Retailer Take possession out of state, but used in California


Definitions: Definitions A person (and indirectly a retailer) includes the following: Individuals, various types of business organizations Trusts, estates and social organizations California State government agencies US government is an exempt “person” A non-person on whom California imposes no Sales or Use Tax includes the following: Non-Californian State governments and their institutions Foreign governments/provinces and their institutions A retailer is defined as every seller who makes any retail sale. A seller includes every person engaged in the business of selling tangible personal property.


Using a Resale Certificate: Using a Resale Certificate Property purchased by the University for resale is exempt from sales and use tax. Purchases must be properly documented. The University may provide a resale certificate to support the exemption. The University prefers to provide the resale certification on the purchase order. Contact Accounting for guidance


Using a Resale Certificate: Using a Resale Certificate Elements of a valid resale certificate or purchase order for goods for resale: Name and address of UCSB purchaser or Accounting UCSB’s BOE account number Description of the property to be purchased Certificate must contain words that state the property “will be resold” or “for resale” Date of the document Signature of the purchaser’s agent Good faith


The University of CaliforniaSales/Use Tax Decision Chart for Purchases: The University of California Sales/Use Tax Decision Chart for Purchases Accrue sales tax and report on sales and use return in the period of purchase. YES YES On computer hardware - exempt. (if optional) On computer software - generally taxable. Construction contractor is responsible for tax if lump sum or time and material. Labor is taxable if for new assembly or fabrication of TPP. Exempt if repair, installation, or consulting unrelated to the purchase of TPP. Tangible personal property (TPP)? NO Maintenance agreement? Construction contract? Labor or consulting? YES For resale? Purchased from a California seller for the University’s use with delivery and title transferring in California? Purchased from out-of-state vendor? YES NO YES YES NO Has seller charged California tax? Has seller charged another state’s tax? Accrue and pay use tax on SBE return in the period of purchase. YES NO NO Note: TPP: Tangible personal property. YES Issue a resale certificate or resale P.O. to your vendor. Has a resale certificate been issued to the seller? Was the correct California tax rate charged? Items to exclude from the measure of tax: 1. Common carrier freight charges to the University. 2. Repair and installation labor. 3. Services not related to the purchase of TPP. Do not issue a resale certificate or accrue use tax. Seller is responsible for collection and payment of state tax. NO Remit tax with payment to the vendor. Retain invoice as a receipt for tax paid. YES Remit tax billed with payment to the vendor. Accrue difference and report use tax on return in the period of purchase (calendar quarter). NO Items to include from the measure of tax: 1. Handling charges. 2. Freight-in to seller’s location. YES YES Do not remit the tax billed on the invoice and accrue use tax and report on sales and use tax return


Specific Purchases: Specific Purchases Labor Charges Installation: Exempt Repair: Exempt Fabrication: Taxable Assembly: Taxable Maintenance Contracts Mandatory: Taxable Optional: Exempt, if separately stated


“Canned” Software: “Canned” Software “100% taxable” if involving transfer of tangible personal property Purchases of “canned” software including charges for license fees, site licensing and other end user fees Mandatory maintenance contracts including consulting services purchased with “canned” software take on characteristic of original purchase “50% taxable” with tangible personal property Optional maintenance contracts for “canned” software


“Canned” Software: “Canned” Software Exempt—no transfer of tangible personal property involved Purchases of “canned software” transferred by remote telecommunications to the purchaser’s computer. Purchases of “canned software” transferred by vendor via “load and leave”. Purchases of OPTIONAL maintenance contracts, unbundled telephone support, updates, etc. Mandatory maintenance contracts including consulting services purchased with “canned” software take on characteristic of original purchase


Custom Software: Custom Software Custom Software Software created and tailored specifically for a particular customer application. Includes modification of “canned” software at a charge of 50% or more of its purchase price. Exempt: Purchase of custom software Optional maintenance contract Mandatory maintenance contract Separately stated modification charge


Printed Sales Messages: Printed Sales Messages The University may avoid sales or use tax on purchases of catalogs, letter, circulars, brochures and pamphlets provided that such “printed sales messages” meet all of the following requirements: Printed for the primary purpose of advertising. Printed to the special order of the University. Mailed or delivered by the seller, the seller’s agent, or a mailing house acting as the agent for the University, through the United States Postal Service or by common carrier. Received by any other person, other than the University, at no cost to that person.


University as a Seller: University as a Seller Consider tax implications when the University is a seller as California holds sellers primarily responsible for sales tax. Generally departments need to collect sales tax when selling any tangible personal property, including student organization fund raising (sale of lab notebooks, candy-filled coffee mugs). Maintain proper records Deposit tax collected into proper liability account Contact Accounting for guidance


Discussion #1: Discussion #1 SALES/USE TAX QUIZ


Sales and Use Tax: Sales and Use Tax Where to go for help? UC Sales and Use Tax Manual (243 pages) http://www.ucop.edu/ucophome/policies/sutm/ OR Call Asger Pedersen, x3919 asger.pedersen@accounting.ucsb.edu


Payments Subject to Tax and Information Reporting: Payments Subject to Tax and Information Reporting Accounting for and Tax Reporting of Payments Made Through the Vendor System — AMC* D-371-12.1 State Withholding from Non-Wage Payments to Nonresidents of California — AMC* D-371-77 Taxation of Scholarship and Fellowship Grants and Educational Assistance — AMC* T-182-77 Federal Taxation of Aliens — AMC* T-182-27 *Accounting Manual Chapter


Accounting for and Tax Reporting of Payments Made Through the Vendor System — AMC* D-371-12.1: Accounting for and Tax Reporting of Payments Made Through the Vendor System — AMC* D-371-12.1 Chapter provides overview including table of payments subject to tax reporting Generally payments to corporations are exempt from reporting Payment to legal and medical corporations are reportable Tax coding is Accounting’s responsibility, but departments must supply Form-5 data *Accounting Manual Chapter


State Withholding from Non-Wage Payments to Nonresidents of California — AMC* D-371-77: State Withholding from Non-Wage Payments to Nonresidents of California — AMC* D-371-77 California nonresident individuals and corporations are subject to 7% withholding. On total when annual amount exceeds $1,500 California does not recognize foreign tax treaties, nonresident alien IRS rules Resident: generally individual in state more than 9 months or corporation registered with state. See procedures for requesting waivers or reduced rate withholding in policy. OBSERVATION: Pre-contract negotiations should anticipate tax issues, especially withholding *Accounting Manual Chapter


Taxation of Scholarship and Fellowship Grants and Educational Assistance — AMC* T-182-77: Taxation of Scholarship and Fellowship Grants and Educational Assistance — AMC* T-182-77 Definitions, tables, appendices and exhibits Qualifying vs. non-qualifying s & f grants U.S. Residents vs. nonresident aliens (NRA’s) Taxation of NRA’s non-qualifying grant Degree vs. non-degree candidates Compensation for services Qualified employee educational assistance Qualified fee or tuition reduction—graduate students General educational assistance—$5,250 annual limit Educational assistance related to current job—reimburse as employee business expense *Accounting Manual Chapter


Federal Taxation of Aliens — AMC* T-182-27: Federal Taxation of Aliens — AMC* T-182-27 Chapter discusses issues relevant to both payroll and non-payroll payments Residency rules, definitions, calculations Terms and conditions of nonresident visas Withholding and reporting obligations More exhibits and appendices *Accounting Manual Chapter


Nonresident Alien Issues: Nonresident Alien Issues Honoraria and/or Associated Incidental Expenses Holders of B-1, B-2, WB, and WT visas may be paid for usual academic activity Can not exceed nine days at a single institution Can not have accepted honoraria from more than five institutions in the previous six months


Nonresident Alien Issues: Nonresident Alien Issues Honoraria and/or Associated Incidental Expenses _______________ AN INTRODUCTION TO NONRESIDENT ALIEN (NRA) DOCUMENTATION AND VARIOUS NRA PAYMENT ISSUES using the web form NRA Guide, Questionnaire & Forms—HONORARIUM


Tax Issues: Tax Issues Be aware of tax implications of various payments. Anticipate tax issues in contracts, agreements, and invitations. Don’t wait for the issue to come up when processing payment requests. Call Asger Pedersen, x3919


Unrelated Business Income : Unrelated Business Income Unrelated Business Activity If the activity is a trade or business Regularly carried on Not substantially related to exempt purpose (i.e. education, research, public service or patient care) General Rule: Income from an unrelated business activity is taxable unless it meets one of several specific exemptions.


Activities Exempt from Tax : Activities Exempt from Tax Volunteer labor Donated merchandise Convenience of members (faculty, staff, students & patients) Passive income (royalties, interest, dividends) Research (excluding testing) Real estate rents (except if services are provided to occupant)


Determining Unrelated Business: Determining Unrelated Business Contact General Accounting. Complete a non-financial questionnaire describing your activity. If it is unrelated business, UCOP will send a financial worksheet to be completed by the department to determine whether activity is exempt or nonexempt. UCOP then determines what needs to be reported to the IRS.


Examples ofUnrelated Business Income: Examples of Unrelated Business Income Recreation: Sale of recreation membership cards to the general public and alumni. Athletics: Sale of advertising space in sporting event programs. Scanning Transmission Electron Microscope (STEM) Facility: Sale of STEM services to non-University users.


Employee vs.Non-employee Relations: Employee vs. Non-employee Relations Federal (IRS Code) and state laws (Unemployment Insurance Code) govern use of independent contractors. Significant consequences of incorrectly classifying workers.


What is an Independent Contractor/Consultant?: What is an Independent Contractor/Consultant? http://www.busserv.ucsb.edu/campusnews.htm#SB1 Person in business for themselves Hired to perform specific, one-time tasks Not University employees University determines the final result, but does not direct how the work is to be accomplished. Ineligible for employee benefits Signed agreement by Business Services


Independent Contractor: Independent Contractor http://www.busserv.ucsb.edu/purchasing/goods_services/indepcontractors_psa.htm IRS 20 Factor Test A compilation of court cases and IRS rulings to assist in determining if a worker is an independent contractor or an employee. California 11 Common Law Factors


Independent Contractor : Independent Contractor UC Business and Finance Bulletins BUS-34 and BUS-77 outline the University’s policies and procedures with respect to retention of independent contractors for personal or professional services and classification of current University employees as independent contractors.


Nonresident AlienIndependent Contractors: Nonresident Alien Independent Contractors Determination of independent contractor or employee is the same for a U.S. citizen or resident. Federal income taxation, reporting and withholding for nonresident alien independent contractors, depends on worker’s visa type and immigration status, worker’s residency status for US tax purposes, availability of tax treaty benefits, etc.


Independent Contractor Status: Independent Contractor Status Incorrectly classifying employees can result in University specific consequences such as possible loss of reimbursement from Contract and Grant funds, failure to comply with patent agreement requirements, or violation of state financial conflict of interest rules.


Independent Contractor Status: Independent Contractor Status Tax consequences Assessed back state and federal employment taxes, income tax withholding, interest and penalties Penalties can be assessed for not paying minimum wage and mandated benefits


Contractor vs. Employee: Contractor vs. Employee If ever in doubt whether an individual is a contractor or an employee, contact Business Services, 893-3001. Other resources: Accounting Services & Controls Human Resources


Independent Contractor: Independent Contractor Scenario #1A Janet Reno works 100% for Biology as a word processor. Professor Smith from Chemistry, who knows of Janet's good work, has asked her to do a small word processing job. Professor Smith would like to pay her by a Form 5. Is this ok? If not, how would you pay her?


Independent Contractor: Independent Contractor Scenario #1B Janet Reno works 100% for Biology as a word processor. In her free time, she has a graphic design business. Professor Smith from Chemistry has asked Janet to do a small graphic design job. Professor Smith would like to pay her by a Form 5. Is this ok? If not, what steps should you take to get her paid?


Employee Fringe Benefits: Employee Fringe Benefits The fair market value of a fringe benefit must be included in an employee’s income unless excluded under a specific exception.


Employee Fringe Benefits: Employee Fringe Benefits Examples Parking - up to $175/month is tax free Housing - unless employee is required to live on or nearby campus Loans - forgone interest is taxable unless exempt loan Discounts - taxable if more than 20% of price offered to public


Tax Treatment ofMoving Expenses: Tax Treatment of Moving Expenses Moving expenses are excludable if they meet all three requirements Related to the start of work Distance test - new job location must be at least 50 miles farther than former principal job location Time test - must be employed full time for at least 39 weeks in 12 month period immediately following the move


Nontaxable Moving Expenses: Nontaxable Moving Expenses Cost of moving household goods. Expenses incurred in traveling from former residence to new residence (excluding meals).


Taxable Moving Expenses: Taxable Moving Expenses Examples Meals, lodging, expenses for pre-move house hunting trips Meal reimbursements during travel from former residence to work location Temporary lodging and meals at work location Mileage reimbursement in excess of 12 cents/mile


Travel: Travel Travel Advances Failure by the employee to substantiate expenses and to return unused amounts of travel advances within 120 days after the completion of a trip obligates the University under IRS regulations to consider the unsubstantiated amounts as income to the employee.


Reporting Travel Expenses: Reporting Travel Expenses When receipts are required but cannot be obtained or have been lost, the reimbursement of these expenses may be taxable.


Travel Subsistence-Indefinite Assignments that exceed one year: Travel Subsistence-Indefinite Assignments that exceed one year Under the IRS rule, travel away from home that lasts more than one year in a single location is considered indefinite. Any travel expenses reimbursed during that period must be treated as taxable income, subject to withholding for income and social security taxes.


Travel-Special Situation: Travel-Special Situation Inbound travelers* are hired by UCSB for temporary assignments that do not exceed one year. Inbound travel assignments that exceed a year are taxable and require exception approval. *Includes employees, independent contractors and consultants at UCSB


Travel - Residence: Travel - Residence Employees who reside outside the SB area (i.e. Bay Area). If they travel to Santa Barbara, the reimbursement for travel expenses is taxable. If the University asked you to work on a project outside SB, then those reimbursable expenses are not taxable.


Travel - Recruitment: Travel - Recruitment On the first visit to campus, if a candidate’s spouse is given approval to travel to UCSB, the spouse’s expenses will be considered taxable income. If the spouse has a bonafide business purpose there is no tax issue.


Taxable Moving Expenses: Taxable Moving Expenses Scenario #2 A professor moves from New York to Santa Barbara. He submits a travel voucher for the following expenses: Private Car mileage: 3000 miles at 36 cents/mile (Approved Exception) All lodging and meals for family (spouse and child) en route Temporary meals and lodging in SB for 5 days (Approved Exception) Which expenses are taxable?


Questions?: Questions?