Transcript UC Tax Issues

UC Tax Issues
Accounting Services & Controls
October 2011
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Is UC “Tax Exempt”?
 UC
is an exempt organization for income
tax purposes only under Section
501(c)(3) of the Internal Revenue Code
 CA BOE considers UC subject to
Sales/Use Tax
 UC also has non-payroll income tax
withholding and information reporting
responsibilities
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Agenda
 Sales
& Use Tax
 Unrelated Business Income
 Employee vs. Non-employee Relations
 Employee Fringe Benefits
 Taxable Payments through the Vendor System
 Tax Treatment of Moving Expenses
 Travel
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Most Common Sales/Use 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
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Other Common Sales/Use Tax
Accrual Overpayments
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Tax paid by vendor in
audit
Accrual & tax calculation
errors
Software
Maintenance/service
agreements
Repair, installation, &
training labor
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Qualified periodicals
Resale inventory
Food for human
consumption
Printed sales messages
Mailing lists
Human body parts
Source: Deloitte audit data from four campuses
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Overview
University as a Seller
Collects Sales Tax
Supplier
The University
University as a Purchaser
Pays Sales Tax or SelfAssesses Use Tax
University Departments:
Accounts payable,
purchasing, procurement,
medical center, cafeteria, etc.
Indicates
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the flow of tangible personal property
University Departments:
Bookstore, food services,
medical center, student
health services, library
services, registrar, etc.
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Sales Tax – Retail Perspective

Imposed on retailers for the privilege of making retail sales
of tangible personal property in California

Based on gross receipts from the sale of tangible personal
property (cash, trade-in, and other consideration)

Sales tax applies to intrastate transactions (within
California)

Retailer is liable for collecting and paying sales tax

Services - generally exempt unless related to the sale of
tangible personal property (“true object test”)
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Use Tax – User Perspective

Imposed on every person who stores, uses, or consumes in the
state, tangible personal property purchased from an out-of-state
retailer

Applies to the cost (cash, trade-in, and other consideration)

Applies to taxable transactions that are not subject to sales tax

Some out-of-state retailers are “permitized” to collect

University is liable for self-assessing and paying the tax

Use outside California may be exempt
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Sales and Use Tax Rate
The combined Sales and Use Tax Rate includes the following components:
State (effective 7/1/2011)
County
Local (City)
6.00%
.25%
1.00%
Combined Statewide Sales and Use Tax Rate*
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—Santa
Barbara County rate is 0.5%)
0.50%
Total Combined rate for Santa Barbara County
7.75%
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* The combined statewide tax rate (7.25%) applies to all sales or purchases in California
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District Taxes
 Based on the district where the retailer is located or where
the property is first delivered (by retailer)
 As a purchaser, the University is responsible for the
payment of district tax if Sales Tax is adjusted because
of rate differences
 Remove “foreign” district tax down to 7.25%
 Accrue .5% Santa Barbara district tax
 Our practice is to ignore immaterial adjustments
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Sale vs. Use Tax
(Sale vs. Purchase)
A transaction, not otherwise exempt, must include
the following elements to be subject to sales/use tax:

Sales Tax

Use Tax
– Sale of Tangible Personal
Property
– Purchase of Tangible Personal
Property
– At Retail
– At Retail
– For consideration
– For consideration
– Sale by a Retailer
– Purchase from a Retailer
– Take possession in
California
– Take possession out of state,
but used in California
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“Person” for Tax Purpose
 Entities subject to tax
– Individuals, various types of business organizations
– Trusts, estates, and social organizations
– California State government agencies (U.C. campuses)
 US
government is an exempt “person”
 Entities
(“persons”) on whom no tax can be
imposed:
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– Non-Californian State governments and their institutions
– Foreign governments/provinces and their institutions
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Using a Resale Certificate
 Property
purchased by the University for
resale is exempt from sales and use tax:
– Resale status must be properly documented
– Provide a resale certificate to support the
exemption
– Or provide certification on the purchase order
– Contact Accounting for guidance
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The University of California
Sales/Use Tax Decision Chart for Purchases
Tangible personal property (TPP)?
NO
Maintenance agreement?
YES
On computer hardware - exempt. (if optional)
On computer software - generally taxable.
Construction contract?
YES
Construction contractor is responsible for tax if
lump sum or time and material.
Labor or consulting?
YES
Labor is taxable if for new assembly or
fabrication of TPP. Exempt if repair, installation,
or consulting unrelated to the purchase of TPP.
YES
Accrue sales tax and report on sales and use
return in the period of purchase.
NO
Do not issue a resale certificate or accrue use tax.
Seller is responsible for collection and payment
of state tax.
YES
Remit tax with payment to the vendor.
Retain invoice as a receipt for tax paid.
YES
For resale?
YES
Issue a resale certificate or resale P.O.
to your vendor.
YES
Has a resale certificate been issued to
the seller?
NO
Purchased from a California seller for the
University’s use with delivery and title
transferring in California?
NO
Purchased from out-of-state vendor?
YES
Has seller charged California tax?
YES
Was the correct California tax rate
charged?
NO
NO
Has seller charged another state’s tax?
YES
Do not remit the tax billed on the
invoice and accrue use tax and report
on sales and use tax return
NO
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TPP:
Tangible personal property.
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Items to exclude from the measure of tax:
Items to include 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.
1. Handling charges.
2. Freight-in to seller’s location.
Note:
Accrue and pay use tax on SBE return in
the period of purchase.
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Remit tax billed with payment to the vendor.
Accrue difference and report use tax on return in
the period of purchase (calendar quarter).
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Specific Purchases
 Labor
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Charges on original purchase
Installation: Exempt, if separately stated
Repair: Exempt, if separately stated
Fabrication: Taxable
Assembly: Taxable
 Maintenance
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Contracts on taxable purchases
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– Taxable if mandatory
– Exempt if optional and separately stated
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“Canned” Software Purchase
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Software itself
– “100% taxable” if involving transfer of tangible
personal property
– Including charges for license fees, site licensing, and
other end user fees
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Optional maintenance contracts @ 50%
– The lump-sum charge for an optional software
maintenance agreement is 50 percent taxable when the
purchaser receives tangible personal property during
the term of the agreement (such as software updates on
CD)
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“Canned” Software Purchase
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Exempt if no transfer of tangible personal property is
involved
– Transferred by remote telecommunications to the purchaser’s
computer
– Transferred by vendor via “load and leave”
– OPTIONAL maintenance contracts, unbundled telephone
support, updates, etc.

Mandatory maintenance contracts including consulting
services purchased with “canned” software take on
characteristic of original purchase—exempt or taxable
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Custom Software
 Custom
Software is exempt:
– If created and tailored specifically for a particular
customer application
– If modification of “canned” software amounts to 50%
or more of its purchase price
 Exemption
Includes:
– Purchase of custom software
– Optional maintenance contract
– Mandatory maintenance contract
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Printed Sales Messages

The University may avoid sales or use tax on purchases of
catalogs, letters, circulars, brochures, and pamphlets
provided that such “printed sales messages” meet all of the
following requirements:
– Printed for the primary purpose of advertising/selling, thus
should include an order or response form
– 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
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– Received by any other person, other than the University,
at no cost to that person
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University as a Seller
California law holds University responsible for
collecting sales tax
 Departments need to collect sales tax when selling
any tangible personal property
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Bookstore sales, used furniture, catalogues
Including student organization fund raising (sale of lab
notebooks, candy-filled coffee mugs, etc.)
Maintain proper records
Deposit tax collected into proper liability account
Contact Accounting for guidance
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Sales and Use Tax
 Where
to go for help?
– UC Sales and Use Tax Manual (243 pages)
http://www.ucop.edu/ucophome/policies/sutm/
– Call Asger Pedersen, x3919
[email protected]
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Discussion #1
SALES/USE TAX QUIZ
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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)
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Examples of
Unrelated Business Income

Recreation:
– Sale of recreation membership cards to the general
public and alumni
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Athletics:
– Sale of advertising space in sporting event programs

Scanning Transmission Electron Microscope
(STEM) Facility:
– Sale of STEM services to non-University users
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Other?:
– Name one more
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Activities Exempt from Tax
 General
Rule = Income from an unrelated
business activity is taxable unless it meets one
of several specific exemptions:
–
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Convenience of members
Passive income
Research
Real estate rents
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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
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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
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What is an Independent
Contractor/Consultant?
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A Person who:
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Is in business for themselves
Is hired to perform specific, one-time tasks
Is NOT a University employee
Is ineligible for employee benefits
Signs a contract/agreement issues/authorized by
Contracts & Property
The University determines the final result, but
does not direct how the work is to be
accomplished
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Can a Student Employee Also Be
an Independent Contractor?
 YES—law
allows IC status for activities
traditionally provided by independent
contractors, for example event
performances
 NO— student employees performing
services under the direction and supervision
of the University must be compensated
through Payroll, even for onetime services
unrelated to regular work.
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What is an Independent
Contractor/Consultant?
 For
–
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–
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more information about
Conflict of Interest,
Successor Contracts,
Employee Vendors,
Contractors Who Are Former Employees:
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http://www.busserv.ucsb.edu/contractsproperty/
index.htm
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Independent Contractor
 UC
Business and Finance Bulletins, BUS34 and BUS-77, outline the University’s
policies and procedures with respect to
retention of independent contractors
http://www.ucop.edu/ucophome/policies/bfb/
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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
– immigration status
– worker’s residency status for U.S. tax purposes
– availability of tax treaty benefits
– etc.
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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
– Violation of state financial conflict of interest rules
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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
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Contractor vs. Employee

If ever in doubt whether an individual is a
contractor or an employee, contact Contracts &
Property:
– Kimberly Tapia, x5836
– http://www.busserv.ucsb.edu/contractsproperty/index.htm

Other resources:
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– Accounting Services & Controls: Jim Corkill, x5882
– Human Resources: Melinda Crawford, x5781
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Independent Contractor
Scenario #1
Tom Jones works 100% for Biology as a word processor.
In his free time, he has a graphic design business.
Professor Newton, from Chemistry, has asked Tom to do
a small graphic design job. Professor Newton would like
to pay him by a non-payroll Form 5. Is this ok? If not,
what steps should you take to get him paid?
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Independent Contractor
Scenario #2
Harmony works 10 hour per week as a student employee
at the UCEN. Occasionally this music major also sings
with jazz and rock bands.
Harmony performs at an alumni event during All Gaucho
Reunion. Can she be paid by a non-payroll Form 5 or
should she be set up as an employee of Alumni
Association as well?
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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
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Employee Fringe Benefits
 Examples
of potentially taxable benefits:
– Parking - up to $230/month is tax free
– Van Pool/Transportation - up to $230/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
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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
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*Accounting Manual Chapter—
http://www.ucop.edu/ucophome/coordrev/ucpolicies/
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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
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*Accounting Manual Chapter
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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
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*Accounting Manual Chapter
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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 under a grant is payroll

Qualified employee educational assistance
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– 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
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*Accounting Manual Chapter
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Federal Taxation of Aliens
AMC* T-182-27
 Chapter
discusses issues relevant to both
payroll and non-payroll payments
 Residency
 Terms
rules, definitions, calculations
and conditions of nonresident visas
 Withholding
 See
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and reporting obligations
Exhibits and Appendices
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*Accounting Manual Chapter
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Nonresident Alien Issues
Honoraria and/or Associated Incidental Expenses
associated with usual academic activity:
 Restrictions on such payments to B-1, B-2, WB,
and WT visas holders:
– Can not exceed nine days at a single institution
– Can not have accepted honoraria from more than five
institutions in the previous six months

Exception—no restrictions apply to travel
reimbursements for B-1, WB visa holders
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Nonresident Alien Issues
UC
system now uses GLACIER online software for
documenting nonresident alien visitors
For more information see Accounting’s web page:
Nonresident Alien and International Visitor Information Glacier
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http://accounting.ucsb.edu/forms/formsinfo/ap-nonresident-alien-visitorinfo-glacier/index.cfm
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Tax Treatment of
Moving Expenses

Moving expenses are excludable if they meet all
three requirements:
– Related to the start of work, i.e. in connection with
commencement of work and incurred within 1 year
– 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
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Nontaxable Moving Expenses
 Cost
of moving household goods
 Expenses
incurred in traveling from former
residence to new residence (excluding
meals)
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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 23.5
cents/mile as of 7/1/2011
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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
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Reporting Travel Expenses
 When
receipts are required but cannot be
obtained or have been lost, the
reimbursement of these expenses may be
taxable
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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
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Travel-Special Situation
 Inbound
travelers* hired by UCSB for
temporary assignments that do not exceed
one year are considered nontaxable expense
 Inbound
travel assignments that exceed one
year are taxable and require exception
approval
*Includes employees, independent contractors,
and consultants at UCSB
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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
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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
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Taxable Moving Expenses
Scenario #3
A professor moves from New York to Santa Barbara. He submits
a travel voucher for the following expenses:
- Private Car mileage: 3000 miles at 55.5* 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?
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* as of 7/1/2011
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Tax Issues – In General
 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
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Pedersen, x3919
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Questions?
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