Transcript UC Tax Issues

UC Tax Issues
Office of the Controller
Financial Management
Certificate Program
December 2014
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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 must do non-payroll income tax
information reporting (1099) and nonresident
withholding
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Agenda
 Sales
& Use Tax
 Unrelated Business Income
 Employee vs. Non-employee Relations
 Employee Fringe Benefits
 Taxable Payments through the A/P System
 Tax Treatment of Moving Expenses
 Tax Treatment of Travel Expenses
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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.
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University Departments:
Bookstore, food services,
medical center, student
health services, library
services, registrar, etc.
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Customer
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Indicates the flow of tangible personal property
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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)
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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 CA,
tangible personal property purchased from an out-of-state
retailer, unless permitted to collect CA sales tax
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Applies to the cost (cash, trade-in, and other consideration)

Applies to taxable transactions that “escape” sales tax

University is liable for self-assessing and paying the tax
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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 1/1/2013)
County
Local (City)
6.25%
.25%
1.00%
Combined Statewide Sales and Use Tax Rate*
7.50%
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
8.00%
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* The combined statewide tax rate (7.50%) applies to all sales or purchases in California
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District Tax Adjustments
 Rate is 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 proper
allocation of District Tax if adjustment is required
 Remove “foreign” district tax if any
 Accrue .50% Santa Barbara district tax
 Accounting does the adjustments, but not for minor
differences
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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 (persons) 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”
 Other
exempt 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 UCSB for resale is
only one of several possible exemptions:
– Exempt “persons”, government entities, etc.
– Retailer will ask for a resale certificate to
support the exemption >>CAUTION<<
– Provide exemption per individual purchase
order to prevent exempting all of UCSB
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– 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
Contracts on taxable purchases
– 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.
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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
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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/financial-accounting/_files/sutm.pdf
http://policy.ucop.edu/doc/3410313/AM-T182-73
– Call Steve Kriz, x3480
[email protected]
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Sales and Use Tax
DISCUSSION ITEMS
yellow handouts
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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
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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
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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
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Federal (IRS Code) and state laws (Unemployment
Insurance Code) govern use of independent contractors
Significant consequences of incorrectly classifying
workers
Use the 11 Questions of the Pre-Hire Worksheet, Exhibit
D, BUS-77*
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*Business & Finance Bulletins, BUS-77: Independent Contractor Guidelines
http://policy.ucop.edu/doc/3220483/BFB-BUS-77
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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 issued/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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more information about
Conflict of Interest,
Successor Contracts,
Employee Vendors,
Contractors Who Are Former Employees:
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http://www.bfs.ucsb.edu/contracts-property
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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
Business and Finance Bulletins library at:
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http://policy.ucop.edu/manuals/business-and-finance-bulletins.html
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Nonresident Alien
Independent Contractors

Determination of independent contractor or employee
is the same for a U.S. resident and nonresident alien
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Federal income taxation, reporting and withholding
for nonresident alien independent contractors,
depends on:
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–
–
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
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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 in doubt whether an individual is a contractor or
an employee, contact
– Contracts & Property:
• http://www.bfs.ucsb.edu/contracts-property
– Other resources:
• Business & Financial Services: 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 $245/month reported as pre-tax income
– Van Pool/Transportation - up to $245/month reported as
pre-tax income
– 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
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Taxation of Scholarship and Fellowship Grants and
Educational Assistance — AMC* T-182-77
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Federal Taxation of Aliens — AMC* T-182-27
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*Accounting Manual Chapters:
http://policy.ucop.edu/manuals/accounting-manual.html
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Accounting for and Tax Reporting of
Payments Made Through the Vendor System
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: http://policy.ucop.edu/manuals/accounting-manual.html
Chapter D-371-12.1
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State Withholding from Non-Wage Payments
to Nonresidents of California

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



Who is 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: http://policy.ucop.edu/manuals/accounting-manual.html
Chapter D-371-77
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Taxation of Scholarship and Fellowship
Grants and Educational Assistance



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
– 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: http://policy.ucop.edu/manuals/accounting-manual.html
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Chapter T-182-77
Federal Taxation of Aliens
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Chapter discusses issues relevant to both payroll
and non-payroll payments
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Residency rules, definitions, calculations
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Terms and conditions of nonresident visas
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Withholding and reporting obligations
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See Exhibits and Appendices
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Accounting Manual: http://policy.ucop.edu/manuals/accounting-manual.html
Chapter T-182-27
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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:
– Cannot exceed nine days at a single institution
– Cannot 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 as long
as associated with “usual academic activity”.
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Nonresident Alien Issues
UC
system now uses GLACIER online software for
documenting nonresident alien visitors
Different rules, procedures, and US TINs
–Employees: must apply for SSNs
–Students: must apply for ITIN if not employed
–Visitors: often subjected to withholding if no US TIN
Information
at Business & Financial Services web page:
http://www.bfs.ucsb.edu/accounts-payable/non-resident-alien-information
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Procedures for international graduate students
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–OISS: http://oiss.sa.ucsb.edu/Home/OISSForms.aspx
–Graduate Division: http://www.graddiv.ucsb.edu/financial/taxinformation.aspx
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Tax Treatment of
Moving Expenses

Moving expenses are excludable from income 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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Business and Finance Bulletin: http://policy.ucop.edu/doc/3420347/BFB-G-13
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Nontaxable Moving Expenses
 Cost
of moving household goods
 Expenses
incurred in traveling from former
residence to new residence (excluding
meals)
See pink handout
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Taxable Moving Expenses
 Examples
(see pink handout):
– 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 24.0
cents/mile as of 1/1/2013
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Business & Finance Bulletin: http://policy.ucop.edu/doc/3420365/BFB-G-28
Appendix A
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Tax Treatment of Some Travel
Expenses

Timely Claiming Expenses and Clearing Advances:
– Failure by the employee to substantiate expenses and
return any unused advances within 60 days after the
completion of a trip obligates the University, under IRS
regulations, to consider the unsubstantiated amounts as
income to the employee
– At 120 days unsubstantiated expenses/advances are
transferred to payroll as part of the employee’s income
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Business & Finance Bulletin: http://policy.ucop.edu/doc/3420365/BFB-G-28
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Tax Treatment of Some Travel
Expenses
 Claiming
expenses—missing receipts:
When receipts are required but cannot be
obtained or have been lost, the reimbursement of these expenses may be taxable
Business & Finance Bulletins: G-28, Policy and Regulations Governing Travel
http://policy.ucop.edu/doc/3420365/BFB-G-28
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Travel Subsistence: Indefinite
assignments that exceed one year

Under the IRS rules, 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 of
income and social security taxes
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Business & Finance Bulletin: http://policy.ucop.edu/doc/3420365/BFB-G-28
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Travel—Special Situations
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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Business & Finance Bulletin: http://policy.ucop.edu/doc/3420365/BFB-G-28
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Travel Status vs. Residency
 Employees
who reside outside the SB area
(for example 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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Business & Finance Bulletin: http://policy.ucop.edu/doc/3420365/BFB-G-28
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Recruitment Travel
 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 valid business purpose there
is no tax issue
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Business & Finance Bulletin: http://policy.ucop.edu/doc/3420365/BFB-G-28
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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 56.5* cents/mile
(an 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 4/17/2012
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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
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Asger Pedersen, x3919
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UC Tax Issues
Office of the Controller
Financial Management Certificate Program
Questions?
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