Sales and Use Tax Update

Blog Post by: Mark W. Siler

Wisconsin is continuing to modify its sales and use tax regime to conform to the Streamlined Sales and Use Tax Project. Recent legislation included the changes set forth below.

Direct Mail

The definitions and sourcing rules have been created for two types of direct mail, “advertising and promotional direct mail” and “other direct mail.”  “Advertising and promotional direct mail” is defined as direct mail for the primary purpose of attracting public attention to a product, person, business or organization or for the primary purpose of attempting to sell, popularize or secure financial support for a product, person, business or organization. “Other direct mail” is therefore defined as any direct mail that does not fall under the above definition.

The sourcing of advertising and promotional direct mail is determined as follows: if the purchaser of advertising and promotional direct mail does not provide the seller with a direct pay permit, an exemption certificate claiming direct mail or other information indicating the appropriate taxing jurisdiction where the mail is delivered to the ultimate recipients, the sale of the advertising and promotional direct mail is sourced to the location from which it is shipped. If the purchaser does provide an exemption certificate claiming direct mail or a direct pay permit to the seller, the purchaser must source the sales to the jurisdictions to which the mail is delivered. The seller, absent bad faith, is relieved of all obligations to collect, pay or remit the tax on any transaction to which the direct pay permit or exemption certificate applies. If the purchaser provides the delivery addresses indicating the jurisdictions to which the mail is to be delivered, the seller must source the sale for those jurisdictions and collect/remit tax accordingly.

The sourcing of other direct mail is determined as follows: if the purchaser does not provide a direct pay permit or an exemption certificate claiming direct mail to the seller, the sale is sourced to the purchaser’s address as indicated by the seller’s business records. If the purchaser does provide an exemption certificate claiming direct mail or a direct pay permit to the seller, the purchaser must source the sale to the jurisdictions to which the mail is to be delivered to its ultimate recipients. The seller, again, will be relieved of all obligations to collect, pay and remit tax on any transaction to which a direct pay permit or an exemption certificate claiming direct mail applies absent bad faith.

Exemption Certificates

The legislation also sets forth the standards for exemption certificates. An exemption certificate is considered to be received by a seller in good faith if the certificate claims an exemption for which all of the following apply:

  • It was an exemption authorized by law on the date of the transaction in the jurisdiction where the transaction is sourced;
  • It could be applicable to the property, item, good or service being purchased; and
  • It is reasonable for the purchaser’s type of business.

If a seller obtains the information above on an exemption certificate, the seller is relieved of any liability for the tax on the transaction unless it is discovered during audit that the seller knew or had reason to know that the information relating to the exemption was materially false or the seller intended to purposefully evade the tax.

Local Exposition District Tax

Alcoholic beverages are now included in the local exposition district tax on candy, prepaid food and soft drinks. Also, with respect to the local exposition district tax, the definition of the word “premises” will be broadly construed and will include seating, aisles and parking areas of any arena, rink or stadium or the lobby, aisles, and auditorium of a theater. Also, the “premises” as applied to a caterer are those places where the meals or beverages are served. These provisions apply retroactively to sales occurring on and after October 1, 2009.

Prepaid Calling Services

The legislation also clarified that prepaid calling services are taxable communication services.

Bad Debts

The bad debt deduction has been amended to clarify that the deduction applies only to bad debt for which the seller has paid the tax.

Hobby Losses: Background

Blog Post by: Robert B. Teuber

As most business owners will tell you, the Internal Revenue Code allows a business to deduct expenses which are incurred in a trade or business or for the production or collection of income. However, for these expenses to be fully deductible the activity must be engaged in with the intention of making a profit. That is, the activity must be a business and not a hobby.

Internal Revenue Code Section 183 contains the general principle of the hobby loss rule. Section 183 limits expense deductions if the business under scrutiny is determined not be engaged in for profit. An “activity not engaged in for profit” means “any activity, other than one with respect to which expense deductions are normally allowed.” This unhelpful definition does little to tell a business owner what they need to do to avoid being classified as a hobby. One must turn to the related Treasury Regulations to understand how this rule is applied.

Later posts to this blog will shed more light on the factors used in considering the hobby issue. Before discussing the factors, however, it is helpful to know the impact of a business being reclassified as a hobby. In general, if a business is determined to be a hobby, any deductible expenses of the activity will be limited to the amount of income from the activity. This means that the activity cannot generate losses to offset other income shown on a tax return.

As an example, assume that a taxpayer has a day job and a side business. The side business has yet to be successful and has suffered losses for the last 5 years. Those losses were reported on a tax return and reduced the overall taxable income of the taxpayer such that he/she receives a substantial tax refund year after year. If the IRS determines that the side business is really a hobby, all of those losses will be denied. This means that the day job income will no longer be reduced by the losses and the previously offset income will be subject to tax…and penalties…and interest.

“Hobby Losses” thread continues here.

Disclaimer

The comments and opinions expressed in this blog are intended for informational purposes only and do not constitute legal advice. Reading or using the information in this blog does not create the existence of an attorney-client privilege. Due to the changing nature of the law, the blog posts may contain dated material. For an update on the current law and the application of the law to your particular facts and circumstances, consult a legal advisor. The information contained herein is not a substitute for obtaining legal advice from a qualified attorney licensed in your state.