In bankruptcy cases that involve discharge of tax liabilities, one of the criteria for consideration is a filed tax return. Various appeals courts have held that a late return is not a return for discharge purposes unless it is filed pursuant to IRC 6020(a). This section provides that if a taxpayer fails to file a return but gives the IRS all information necessary for it to prepare one; the IRS-prepared return signed by the taxpayer will constitute a valid return.
In the case In Re: Johnson, the U.S. Bankruptcy Court indicated that it would be following the above holding with respect to late returns. The rationale behind this stance is with the fourth element of the Beard test. In order for a filing to qualify as a valid return, it must meet all four elements:
A properly prepared late return done using the prescribed IRS forms would meet the first three elements. But filing a return late, especially filing one in response to an IRS notice, on its surface does not constitute an honest and reasonable attempt to comply with the tax law, thus failing the fourth element. It is this aspect that the Court had difficulty with in its determination of whether a late filed return is considered a valid return for bankruptcy purposes.
Absent compelling reasons as to why a return is being filed late (such as health or some other issue beyond the taxpayer’s control which prevented the taxpayer from filing on time), it may be a better course of action to have the IRS involved in the preparation of a late return, if there is a contemplation of pulling the tax due into a future bankruptcy proceeding. In such circumstances, consulting with a qualified attorney and knowledgeable tax advisor prior to taking any action would be the wise path to take.
To discuss your particular situation, or for any other matters, please contact Aronson’s Tax Controversy Lead Partner Laurence C. Rubin, CPA at 301-222-8212.
This week is Maryland’s back-to-school sales tax holiday, which allows consumers to purchase qualifying clothing and footwear tax-free, so long as the purchase price for the items are $100 or less. It’s not necessarily marketed by the Comptroller as being a “back-to-school event,” but many shoppers will take advantage of the tax-free week to purchase items such as new sneakers and jeans for their kids’ upcoming school year. Sales tax holidays have been around for over 30 years, but many question whether these temporary tax respites are sound tax policy.
Proponents of sales tax holidays claim that the programs provide benefits to low-income consumers and provide a stimulus to the economy through increased sales. Clearly, low-income consumers are getting a tax break, albeit temporarily, but wealthier consumers making qualified purchases receive the same benefit. In addition, low-income shoppers may not have the necessary cash on hand to time their purchases to occur during a small time period. Further, after perusing the list of exempt items in Maryland’s program, it’s easy to find one item that most families will need to buy this time of year that is not exempt from tax under the program. For example, backpacks are not exempt during the sales tax holiday, but you’re in luck if you looking for a new fishing vest or some lingerie, which are exempt during the holiday. Virginia’s recent holiday did provide for an exemption for backpacks, but only if the price was $20 or less. Good luck finding a backpack for $20.
As stated by the Tax Foundation in a report it released last year, “if a state must offer a ‘holiday’ from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.” The Tax Foundation argues that if the goal is to help needy consumers purchase supplies during the back-to-school season, then the states should distribute sales tax vouchers for those citizens or implement some other targeted program.
With respect to sales tax holidays stimulating economic growth, the Washington Post recently cited a study that suggests otherwise. Rather than increasing purchases, the study found that sales tax holidays merely change the timing of purchases that consumers were going to make anyway. Thus, there may be an increase in retail activity during the holiday, but the periods before and after the holiday reveal a decrease in sales. Further, although many retailers support sales tax holidays, these programs can create added costs for businesses such as additional tax compliance costs associated with reprogramming their sales tax systems and added complexity with respect to managing their inventory and workforce allocation.
Still, sales tax holidays remain very popular among the public – likely because it is a highly visible tax break. So long as retailers and consumers continue to support the programs, we will have to endure a marathon of shopping for one weekend per year. Of course, if you are shopping in Maryland, remember that the one of the most expensive items on the back-to-school shopping list, the backpack, is still subject to tax.
A detailed list of items that are exempt during Maryland’s sales tax holiday can be found here.
If you have any questions about sales and use tax please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
About the Author: Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.
Q. How do you file for a refund in Maryland for sales tax paid on purchases for exempt jobs in the District of Columbia?
A. Maryland requires contractors to pay sales tax on all purchases of materials that will be incorporated into real property as part of a construction contract. However, Maryland allows contractors to apply for a refund if the materials will be used for a contract in another jurisdiction where the same purchase would not have been subject to tax (e.g., a contract with a government agency in the District of Columbia). Virginia has a similar rule; however, the contractor can prequalify for an exemption from tax, rather than having to pay the tax upfront and apply for a refund after the fact.
Maryland has a standard refund application that is required when claiming a refund of sales and/or use tax; claimants are required to describe the reason for the claimed refund, including exemptions. Claimants must provide substantiation for the requested refund by attaching the receipts/invoices reflecting the tax paid, the contract to perform the work in the exempt area, and support for the exemption (e.g., sales tax exemption certificate of the customer).
Q. Where can I download the Maryland application for refund?
A. Maryland’s sales and use tax refund application (Form ST205) can be found on the Comptroller’s website.
Q. What are the time limitations on claiming a refund?
A. Every state has rules that limit the time for the filing of a refund claim. Typically, states allow refund claims to be filed for taxes paid within a three to four year period, depending on the state. Maryland, Virginia, and the District of Columbia all have three year limitation periods for the filing of a claim for refund. It’s important to keep in mind that if you have not paid use tax in a state and have never filed a use tax return that it is likely that there will be limitations on the years for which they can issue an assessment. The period of limitation for assessment purposes is only triggered once a return is filed.
Q. Does sales tax apply to repair services in Virginia and Maryland?
A. Most states only impose sales tax on services that are specifically listed as a service subject to tax. Neither Virginia nor Maryland imposes sales tax on repair services performed on real property. For repairs to tangible personal property, Maryland does not impose a tax on the labor. However, if separate charges are made for the materials incorporated in the property being repaired, Maryland requires that sales tax be collected on the charges for the materials. Under these circumstances, purchases of materials transferred to customers in connection with the repair work can be purchased tax-free by presenting the supplier a resale certificate.
Similarly, Virginia does not tax repair services. However, sales tax must be collected for materials and parts used to perform the repair. In order for the labor charges to remain exempt from tax, the contractor needs to separately itemize such charges on the customer’s invoice. If the contractor does not separately state the labor, then Virginia requires sales tax to be collected on the entire charge.
Q. Does sales tax apply to freight/shipping charges?
A. The taxability of freight varies from state to state. A number of states base the taxability of an item on the tax rules of its final destination. In these states, the shipping charge is considered part of the price of the taxable item. Further, many states do not tax shipping charges when the service is provided by a third party (i.e., not the seller of the items being shipping). Contractors are typically considered the consumer of goods purchased for incorporation in their construction projects.
Aronson recently held a webinar on sales and use tax for construction companies, highlighting the above topics and more. To view a recording of the webinar and ask more questions, please click here and fill out the brief registration form for instant access. For a review and analysis of your specific situation, contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200 or firstname.lastname@example.org.
State sales tax rules vary significantly for construction contractors doing business in the DC region, and can substantially affect the final cost on a contract. For instance, a Virginia-based contractor bids on two separate construction contracts for a federal government agency. Both of the contracts are for the construction of a building, one contract will be performed in the District of Columbia and the other in Maryland. If all necessary materials and supplies for each contract are purchased in Virginia and subsequently transferred to the job site, a number of potential sales and use tax implications may arise.
First, the contractor should recognize that it may be eligible for exemptions because the customers are both government entities, which are relieved from state sales tax. However, just because a contractor’s customer can make tax-free purchases does not necessarily mean that the contractor can do the same when incorporating the materials into that customer’s real property. The sales tax rules in this area vary significantly from state-to-state.
The potential sales tax exemption for government construction contracts create an exception to the general rule followed in most states (including DC, MD, and VA), which is that a construction contractor is considered the consumer of materials that will be incorporated into real property. Thus, a contractor generally pays sales tax when purchasing those materials.
In our example, the Virginia contractor will temporarily store the materials at its Virginia location but use them at job sites in the District and Maryland. Our fictitious contractor should be aware that Virginia’s regulations allows the purchase of materials tax-free from Virginia if those materials are stored temporarily to be used in an exempt construction project in another state. Thus, the contractor will need to refer to the sales tax rules in DC and Maryland when determining if it can purchase the materials free from Virginia sales tax.
The District allows a contractor to make tax-free purchases of materials that will be incorporated in and become part of the real property of the United States or DC government. Therefore, the contractor can claim the Virginia exemption for the materials temporarily stored in Virginia that will be used in the contract in the District. However, in order to do so, it must make a written request to the Department of Taxation for a certificate of exemption.
Maryland also has an exemption for construction materials purchased for contracts performed for certain tax exempt entities, but the exemption is limited to private charitable, educational, and religious nonprofit organizations. The exemption does not apply to materials purchased for a government construction contract. Therefore, our contractor should factor in Virginia sales tax when bidding on the Maryland contract.
Further, the contractor has a potential use tax liability on the materials that will be used in Maryland. Maryland will not require use tax to be paid if the contractor paid at least a 6% sales tax in the state where the materials were purchased. Differing sales tax rates throughout Virginia locales adds another dimension to this complex issue, so contractors should pay special attention to these details when making its bid.
Contractors face myriad issues when dealing with sales tax. In addition to the example above other challenges may include bonding requirements, rules regarding fabricated materials, and varying treatment of time and materials contracts.
To learn more about the intricacies of sales and use tax laws, please join us on Thursday, July 24th for a complimentary webinar that addresses these important issues in greater detail. To register, click here.
For a review and analysis of your specific situation, contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
On May 27, 2014, the Supreme Court of the United States agreed to hear the Comptroller’s appeal regarding the constitutionality of Maryland’s credit for taxes paid to other states. The Supreme Court’s decision to hear the case comes a little over a year after the Maryland Court of Appeals denied the Comptroller’s motion for reconsideration of the state court’s taxpayer-favorable decision in Wynne v. Comptroller (431 Md. 147, 64 A.3d 453, 01/28/2013).
For those of you not following the case, it involves a taxpayer challenging Maryland’s limitation to its credit as only applying to the state portion of the income tax. This limitation results in residents not receiving a credit for the county portion of the income tax. The Maryland Court of Appeals held that the resident credit must