Internet Sales and Use Taxes: A Growing Concern for Small Businesses and Consumers

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Are you a small business owner who frequently sells goods or services over the Internet, or a consumer who purchases expensive products online? Then you may be responsible for charging sales taxes as a seller, or reporting unpaid use taxes as a consumer under new laws that have been passed by various states. As states look for ways to reduce budget deficits, merchants and consumers should expect to see collection of sales and use taxes become a top priority, and this may require sound tax advice.

Sales and Use Tax Defined

Sales taxes

Sales taxes are state or local taxes based upon a set percentage of the sales price of a product or service. Almost all states have sales taxes, except Alaska, Delaware, Montana, New Hampshire and Oregon. Likewise, most states charge sales tax for Internet purchases made in the state. Certain types of products may be exempt from sales taxes, such as clothing, prescription drugs and some foods and beverages in Minnesota.

Where sales taxes are applicable, merchants who sell via the Internet charge the appropriate sales tax rate for the location of the buyer. For example, a California merchants selling a product to a Minnesota consumer online, would charge the appropriate Minnesota sales tax rate, and then remit the collected tax amount to the state of Minnesota. (Certain exemptions may be applicable in some states depending upon whether the buyer is a consumer or a reseller.)

Use taxes

Use taxes for Internet or mail order purchases, apply when consumers located in a state with a sales tax, purchase goods or services for use in their home state, but are not charged a sales tax (or are taxed at a lower rate than in their home state) by the merchant. In such transactions, the consumer still owes a tax to their home state. Use taxes, unlike sales taxes however, are paid by the consumer. Use taxes that were not paid at the time of sale may be reported on a taxpayer’s state income tax form. Nearly half the states, including California and New York, include a line on individual state income tax forms for taxpayers to voluntarily calculate their use tax liability amount.

Difficulties with Collection of Internet Sales and Use Taxes

A 1992 Supreme Court decision, Quill vs. North Dakota, held that mail order retailers do not need to collect sales taxes unless they have a physical presence in the state of the customer purchasing its product or service. Physical presence may include a store, office, warehouse, or similar facility.

This decision was subsequently applied to exempt Internet retailers that met the requirements. Even though sales taxes are still legally due in circumstances in which an online merchant does not have a physical presence in a customer’s state, such taxes however are rarely reported by customers. Because of the difficulties in tracking online purchases, states often resorted to attempting to collect online sales taxes for expensive items (often requiring licenses to use the good), such as an automobile. In Minnesota, for example, residents are required to pay sales taxes on any online purchases that total $770 over the course of a year.

As many individuals increasingly began using the Internet to purchase goods and services however, states looked for new ways to collect sales taxes. In 2002, 40 states and the District of Columbia joined together to create an initiative called the Streamlined Sales and Use Tax Agreement (SSUTA) to simplify sales tax collection efforts. Although compliance with SSUTA is non-binding, according to recent numbers, nearly 1,200 online retailers now voluntarily collect sales taxes.

Future of Sales and Use Taxes: Collections Likely to Increase

Sales taxes make up the second largest source of state revenue, following individual income taxes. Thus, with many states facing widening budget deficits, the trend is for states to increasingly pursue collection efforts for unpaid sales and use taxes. Recently, state legislatures in New York, North Carolina, and Rhode Island have enacted laws requiring online retailers to collect sales taxes if the retailer operates an ‘affiliate program’ with payments to individuals in return for customer referrals. Similar legislation has been proposed in at least fifteen other states. In Colorado, a new law requires online retailers that run affiliate programs to notify customers of applicable use taxes that must be paid.

The fate of state efforts to increase collection of online sales and use taxes may hinge in part on lawsuits brought by online retailer Amazon.com challenging some of these laws. In challenging the constitutionality of New York’s law, Amazon argued that sending referral payments to its customers through an affiliate program does not constitute a physical presence in a state. Amazon however lost a case in trial court, and has since appealed. Additionally, the company recently filed a lawsuit in federal court challenging North Carolina’s law. States have also filed lawsuits against certain online retailers in an effort to collect unpaid sales taxes and enforce existing state laws.

In addition to the various state laws and pending proposals, federal legislation has been proposed to require most online retailers to collect sales taxes in any states that have joined the Streamlined Sales Tax Project and have passed legislation complying with SSUTA. If the proposed federal legislation eventually becomes law, it would thus override the physical presence requirement. Twenty-three states are members or associate members of this project: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. The proposed law may also allow retailers to retain as an allowance, a small percentage of the sales tax collected, in order to cover reasonable expense for their sales tax collection efforts and tax return filings, as well as other associated costs.

Conclusion

All of the various state and federal legislative initiatives indicate that the states are stepping up their efforts to collect sales and use taxes. This will likely produce an increased complexity of the Internet tax laws with which both, Internet retailers and consumers, will have to comply. Remember, a tax-collection mistake may become very expensive for the involved partes since the unpaid taxes may be subject to penalties and interest.

Sherayzen Law Office can help you navigate this ever-changing tax landscape. Call NOW to discuss your case with an experienced tax attorney!

Minnesota Unemployment Insurance Appeal Hearing: Top Five Preparation Strategies

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Minnesota Unemployment Insurance Appeal Hearing (“UI hearing”) is a serious legal event for many small- and mid-size businesses that may have far-reaching tax and employment law consequences for these businesses, especially when the hearing is about such a delicate and important issue as classification of workers as independent contractors. Yet too many business owners are completely ignorant of the rules and procedures of the UI hearings. Too often they think that it is enough to just show up and tell their story. As a consequence, these business owners often lose a case even when the facts seemed mostly favorable to the employer.

In this essay, I will list and discuss top five strategies that business owners should adopt in order to adequately prepare for their UI hearings.

1. Accept the Need to Prepare for the Hearing.

Too many business owners (and even some inexperienced attorneys) accept the wrong myth that the UI hearings are so straightforward that there is no need to prepare for them. It is very convenient for a busy business owner to believe that he needs not spend any time preparing for the hearing.

This is exactly the attitude that results in so many lost cases. Indeed the UI hearings are conducted in a manner less formal and more flexible than a district court trial. Yet, these are hearings conducted by an unemployment insurance judge, usually a lawyer with specialized knowledge in this area; there are rules and procedures that must be followed; there is a direct and cross-examination of witnesses; physical and testimonial evidence is presented; and there is a ruling by the judge that determines whether you lose or win.

If this were not enough, the UI hearing is the last opportunity for you to enter your evidence into the record of the proceedings. If you decide to appeal the unemployment insurance judge’s ruling, the Court of Appeal will almost always only consider the evidence on record for the UI hearing; you will not be able to enter new evidence into the record.

This is why your first strategy is to accept the reality of spending time, perhaps significant amount of time, on the preparation for the UI hearing.

2. Hire an Attorney.

There can be no downside to hiring a legal professional to represent you and help you properly prepare for the hearing. While you will know the facts (especially at the beginning of the representation) better than any outsider, your attorney should have the general legal knowledge about and specialized experience in the administrative appeal proceedings. Moreover, your attorney is likely to take advantage of the pre-hearing rules and procedures to better your case. Finally, even a business owner who has had experience in relevant areas of law will be no match for a lawyer’s deeper understanding of the law and procedure.

There is a notion that a cost-benefit analysis shows that an attorney just costs too much money for a business owner to spend on the unemployment insurance hearing. Usually, this analysis is wrong because it compares how much money you would spend on the hearing if you hire an attorney versus how much money you would spend on a hearing without one – the issue at stake is completely ignored in these calculations. The proper comparison would be between the importance of the issue to your business and the higher chance of winning the UI hearing with an attorney on the one side versus the costs of losing the UI hearing. Usually, if you deemed the issue important enough to file an appeal, this means that you assessed the cost of losing the UI hearing higher than the legal representation expenses necessary to properly prepare for the UI hearing.

3. Know and Be Able to State the Facts of Your Case.

There are two sides to this strategy. First, you need to know every relevant fact of your case: remember the exact dates and relevant events, construct a time-line of events, and know what the relevant documents say. Second, you should be able to state the facts of your case in court in a way that the judge understands and using the “verbiage” that clarifies your argument. For example, if the appeal is about classification of workers as independent contractors, you should use the word “contractor” and not “employee” to describe your workers. Your lawyer should educate you in the legal meaning and implications of each relevant term.

4. Submit Relevant Exhibits and Other Records into Evidence

It is almost impossible to over-estimate the importance of having good records and timely submitting them into evidence. Most cases are won on complete favorable documentation that supports a well-prepared testimony.

Your lawyer can help you identify the relevant records, present them in the most favorable manner and timely submit them into evidence. Remember that, pursuant to Minn. Rules pt. 3310.2912, the exhibits for a telephone hearing must be submitted no later than five calendar days prior to the hearing.

There is one more advantage to submitting your own records for the hearing. By the time of the hearing, there is usually already an adverse written report made by the UI auditors that supports their findings. Therefore, by entering your own exhibits into evidence (even better if it is supported by your lawyer’s written brief detailing the legal arguments), you are countering the already written evidence that supports the other side of the argument.

5. Learn the Hearing Etiquette

It is important that your behavior during the hearing leaves the impression of you as a law-abiding, responsible, and courteous human being. Knowing the hearing etiquette is crucial to creating this image. Your lawyer should be able to educate you about how to behave in front of the judge, listen to the testimony of the other side, and general rules of the court etiquette.
Conclusion

Obviously, these five factors described above do not constitute a conclusive list of strategies for a successful preparation and conduct of the UI hearing. There are many other important tactics that may be employed during the hearing. However, these fivw top strategies are designed to provide you with the most basic structure for how to move forward in your preparation for the Minnesota Unemployment Insurance Appeal Hearing.

Sherayzen Law Office has the necessary experience and knowledge to help you prepare for and conduct the UI hearing. We will lead you every step of the way and offer you a vigorous ethical representation during the hearing.

Call NOW to discuss your case with a Minnesota unemployment insurance business lawyer!

Business License Denial Appeals and Office of Administrative Hearings

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If your business license was denied by a government agency in Minnesota, you need to act immediately to secure an administrative appeals lawyer to analyze the facts of your case from a legal perspective. In almost all cases, a license denial by a government agency can be appealed for additional review. This right to appeal, however, usually has a definite time limitation. Most Minnesota government agencies give you as little as thirty (30) days to appeal the denial of your business license, and it is very rare to have more than sixty (60) days to appeal an administrative determination.

In Minnesota, most of the business license denial cases are appealed to the State of Minnesota Office of Administrative Hearings. The Office of Administrative Hearings is an independent agency which should conduct impartial hearings for other state agencies. Once you appeal your business license denial, you will become part of what is known as a “contested hearing” – basically, this means that there will be a trial-like hearing. An administrative law judge will preside over a hearing while both sides have an opportunity to present their evidence and cross-examine each other’s witnesses.

Indeed, even though this is supposed to be an administrative hearing with much more relaxed procedures than those adopted by the civil courts, the Office of Administrative Hearings follows a set of rules which partially adopt and/or resemble the Minnesota Rules of Civil Procedure. This means that a skilled lawyer may take full advantage of the prehearing motion practice to benefit his client’s case.

A major drawback of the contested hearings conducted by the Office of Administrative Hearings is the fact that, in most cases, an administrative law judge is only able to issue a recommendation which may be rejected or accepted by a government agency that originally denied the license. This means that, if the government agency persists in its denial and ignores a contrary ruling by an administrative judge, you will have to appeal the case further to the district court. This is not common, but it happens.

As you can see, the appeal of a business license denial is not an easy task and may require a detailed knowledge of laws and administrative procedures. This is why it is important to secure the help of a Minnesota administrative appeals business attorney as soon as possible.

Sherayzen Law Office has the necessary administrative appeals experience and knowledge of the rules and procedures of the Office of Administrative Hearings to mount an effective and vigorous representation of your interests.

Call NOW to talk with an experienced administrative appeals lawyer!

October 15 Deadline for Extension Filers and Certain Non-Profit Organizations

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If you filed Form 4868 to request a six-month extension to file your tax return, beware that October 15, 2010 is the fast-approaching deadline to file your tax returns. The IRS expects to receive as many as ten million tax returns from such extension filers.

The other important group of filers are small nonprofit organizations at risk of losing their tax-exempt status because they failed to file the required tax returns for the past three tax years (2007, 2008, and 2009). Their one-time chance to preserve their tax-exempt status is to file the appropriate variation of the Form 990 with the IRS.

The IRS has posted on a special page on its website listing the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance. The organizations on the list have return due dates between May 17, 2010 and October 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.

Click here for more information about this unique one-time relief program.

This essay is provided as a courtesy notice by Sherayzen Law Office, Minnesota tax law firm for businesses and individuals.

Employee vs. Independent Contractor: Common-Law Test in Minnesota

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One of the most crucial distinctions in employment and tax law is one made between employees and independent contractors. The applicability of a whole host of labor and tax provisions hinges on how the worker is classified. In Minnesota, most statutory provisions that deal with these issues (including Minnesota Unemployment Insurance) incorporate in one way or another the common-law test factors adopted by the courts to classify workers. In this essay, I will list and explain each of the five factors for determining whether a worker is an employee or an independent contractor.

Common-Law Test

The common-law test consists of five factors. The two most important factors are: the right to control the means and manner of performance and the right to discharge a worker. The presence of one factor is insufficient to find employment relationship if such factor is countered by other factors. Instead, the courts look at the overall relationship between the parties in order to determine whether a master-servant – this is the so-called “totality of circumstances” approach.

Let us review each of the five factors in more detail.

1. The Right to Control the Means and Manner of Performance

This is one of the two most important factors (right to discharge is another) in the test. If the employer has the right to control how a worker performs his job, then the worker is likely to be classified as an employee. In Minnesota, it is important to distinguish between control over “means and manner” versus control over the “end-product.” In the latter case, the employer control the end result of the worker’s product, not the manner in which the worker was able to achieve this result. Therefore, such control does not evince a master-servant relationship, but, rather, is characteristic of an independent contractor status.

2. The Mode of Payment

The most important issue here is whether the worker is paid on a per job basis or on a basis more akin to an employer-employee relationship (such as payment per hour or fixed salary). Payment based on a job evinces an independent contractor relationship, whereas payment per hour indicates an existence of a master-servant contract.

3. Furnishing of Materials and Tools

An employer-employee relationship is more likely where the employer furnishes all materials and tools necessary for the worker to do his job. On the contrary, if the worker supplies all of his tools and materials, then the court will be inclined to rule that this factor indicates that an independent contractor relationship exists.

4. Control of Premises Where Work Is Performed

Where the services are performed on the premises controlled by the employer, a court may adopt a position that this situation implies that employer exercises control over worker (though, there exceptions). On the other hand, if the worker controls the premises where the work is performed , it is usually indicative that the worker enjoys at least some freedom from the employer’s control. It is important to point out, however, that in some professions where the work is necessarily done outside of the employer’s premises, the worker’s control of the place of work loses its importance.

5. Right of Employer to Hire and Discharge

The right to discharge is the other most important factor in determining whether there is an employer-employee relationship. Where a worker may be terminated by the employer with little notice, without cause, or for failure to follow specified rules or methods, and the employer does not incur any liability as a result of such termination, the court is likely to find that a master-servant relationship exists. On the other hand, if the worker cannot be terminated without the employer being liable for damages (assuming the worker is producing according to his contract specifications), the court is more likely to determine that there is an independent contractor relationship between the parties.

The foregoing is a very simplified overview of the common-law test. The actual analysis may be much more complex, especially when applied to a specific set of facts. Remember, the common-law test emphasizes the “totality of circumstances” approach which is necessarily involves a fact-driven analysis.

Codification of the Common-Law Test

It is also important to emphasize that, in most areas of law, the Minnesota legislature codified the common-law test with significant alterations, adding and deleting various factors. For example, Minnesota Unemployment Insurance administrative rules list more than a dozen factors just to determine whether there is a right to control the means and manner of performance. Moreover, the Rules detail eight factors to consider in addition to the modified common-law test.

Often, the common-law test is modified according to specific circumstances of a relevant industry. For example, the specific factors for the construction and trucking industries will vary significantly from the rules that apply to non-emergency medical transportation, even though the common-law test still constitutes the basis for the divergent rules.

Furthermore, one should remember that several different tests may apply to the same situation depending on the government agency that makes the determination of an employment relationship. For example, the IRS applies a different test than the Minnesota Department of Commerce (the “DOR”), and, in turn, the DOR’s rules differ from the factors adopted by the Minnesota Unemployment Insurance. Yet, all three agencies are trying to find an answer to the same question – whether a worker should be classified as an employee or an independent contractor.

Conclusion

In applying the common-law test, whether modified or not, you should hire an attorney familiar with these rules. Lawyers usually have the necessary familiarity with the rules, training in legal research, and experience in dealing with the government agencies.

Sherayzen Law Office is a law firm with a tested experience in the area of worker classification. We can help you make sure that you are in compliance with existing laws and regulations, draft the necessary documents (such as an Independent Contractor Agreement), and defend your interests in the administrative and judicial courts.

Call NOW to speak with an experienced business attorney!