Sales Tax, Use Tax, and Excise Tax in the COINS Environment This document is an introduction to Sales and Use Tax for construction/service related work and highlights features in COINS® and COINS Ti™ that facilitate compliance with Sales and Use Tax regulations. It is divided into the following sections: Background and Definitions ...........................................................1 File Maintenance Defaults ..............................................................4 Customer File ............................................................................ 4 Job File ..................................................................................... 4 Service Site File ......................................................................... 4 S/M Contract File Maintenance>Add.............................................. 5 S/M Enter Work Orders ............................................................... 5 Enter Purchase Orders and Cost Transactions ................................. 5 Tax Jurisdiction File .......................................................................6 Automatic Use Tax Accruals ...........................................................7 Example of Accruing Use Tax ....................................................... 7 Tax Reports....................................................................................9 Sample Reports ............................................................................10

Background and Definitions The subject of Sales Tax/Use Tax can be confusing. This document was prepared as a primer on the subject in an effort to simplify this issue for construction/service related work. As described below, COINS® was designed to assist the user comply with Sales and Use Tax regulations. 1. Most states and many city and county governments have enacted Sales and Use Tax statutes. 2. Sales Tax/Use Tax generally is imposed on tangible personal property and is usually not imposed until a sale is consummated with the ultimate consumer. For construction related work, there is no simple definition for either “tangible personal

12/07/07 Copyright 2007 Construction Industry Solutions (Shaker) Corporation c:\documents and settings\kimber.scms\my documents\sales use and excise tax\sales use and excise tax.doc

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

property” or “ultimate consumer” – these terms are interrelated and their meaning varies from tax jurisdiction to tax jurisdiction. 3. The tax jurisdiction is generally, but not always, the jurisdiction in which possession takes place. 4. The terms Sales Tax and Use Tax are used together or interchangeably because they are levied at the same rate and on the same transaction. The difference between them is that the seller collects Sales Tax while Use Tax is self assessed and paid to the taxing jurisdiction by the buyer. •

Sales Tax is tax charged to a customer and remitted to a taxing jurisdiction, or Sales Tax paid to a vendor on an accounts payable invoice.

•

Use Tax is tax equivalent to the Sales Tax that would be paid to a vendor on an accounts payable check; however, the tax is accrued and paid directly to the taxing jurisdiction instead of paying it to the vendor. Use Tax comes into play primarily if a vendor omits Sales Tax on an invoice, or because the contractor has a Sales Tax exemption certificate (i.e., a Direct Pay Permit or Resale Certificate). COINS terminology uses Direct Pay and Use Tax interchangeably.

5. For construction activities where the ultimate product can be classified as a capital improvement (i.e., not tangible personal property), taxable work is typically taxable at cost and is paid as Sales Tax to vendors or as Use Tax to the appropriate taxing jurisdiction. The tax jurisdiction is typically based on where the taxable item is transferred from the vendor to the contractor. Items subject to tax (Labor, Equipment, Material, Subcontract, Other Costs, etc.) vary greatly from tax jurisdiction to tax jurisdiction. 6. For construction activities where the ultimate product furnished can be considered service or tangible personal property, taxable work is typically taxable at the billing amount and is paid to the appropriate taxing jurisdiction. The taxing jurisdiction is usually based upon where the taxable item is transferred from the contractor to the customer. Items subject to tax (i.e., Labor, Equipment, Material, Subcontract, Other Costs, etc.) vary greatly from tax jurisdiction to tax jurisdiction. 7. The COINS Service Management Module also supports Excise Tax for work not covered under a service contract. Excise taxes applied to construction work are few and far between. One example is in South Dakota, where the contractors' Excise Tax is a 2% tax imposed upon the gross receipts of contractors who are engaged in construction services or realty improvements in South Dakota. The contractors' Excise Tax and the contractors' Sales and Use Taxes are part of the contractor's total bill and are collectible from all entities, both public and private. State law allows contractors to list their tax expense as a separate line item on all contracts and bills. The contractors' Excise Tax applies to work classified as a capital improvement, whereas Sales Tax is collected when a work order reflects maintenance/repair work. Depending on the type of work performed on a work order, the invoices it produces may contain Sales Tax, Use Tax and Excise Tax. Due to the infrequent use of Excise Tax in the construction industry, and the individual nature of each taxing entity’s Excise Tax regulations, additional detail regarding Excise Taxes is not be covered in this document.

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8. For work that is tax exempt, such as work performed for a municipality, there is no Sales Tax on materials purchased or on billings. However, Excise Tax may apply as described in item 7. 9. In addition to U.S. Sales, Use and Excise Taxes, COINS supports the Canadian Goods & Services Tax (GST), a national tax, and the Canadian Provincial Sales Tax (PST), a provincial tax. The PST is exactly like Use Tax in the USA, based on cost and paid directly to the taxing authority. The GST is somewhat more complicated in that it is paid to the vendor (based on the vendor’s invoice amount) and also charged to the customer (based on the amount billed to the customer). The amount paid to the vendor is available as an offset against the amount due to the taxing authority based on the amount billed to the customer. A memorandum titled “Canadian Goods & Services Tax (GST) & Provincial Sales Tax (PST)” dated April 18, 1997 is available from COINS USA for more information on these taxes. 10. At the end of the period, the total amount payable to the taxing entities by the COINS client consists of: a. The amount of Sales Tax collected via billings b. The amount of tax due on goods either purchased or installed that was not previously paid at the time of purchase (i.e., Use Tax) c. The amount of Excise Tax collected via billings (i.e., Service Management invoices) 11. For contractors a very effective way to handle these taxes is to obtain a Direct Pay Permit or Resale Certificate where taxes on purchases can be paid as Use Taxes and taxes on inventory do not need to be accrued until the inventory is transferred to the site where it will be installed. Without such a permit, if the goods are delivered to the office location, the contractor should pay the taxes based on that location’s tax jurisdiction. Then when the goods are transferred to the final destination, the tax paid should be adjusted to the final destination‘s tax jurisdiction. This is a very laborious process. In COINS, tax jurisdictions, associated data, reports, and processing are all designed to automate and simplify the process of accounting for and reporting Sales and Use Tax in the complex construction environment.

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

File Maintenance Defaults Whenever a user enters accounts receivable invoices or costs of any type into COINS, taxability data defaults to the transaction based on settings in the Job File, the Equipment File, the Work Order, etc., as appropriate for the applicable cost category and tax jurisdiction.

Customer File When you add a customer to the Customer File: •

Taxable Status defaults to S (based on sales).

•

Default Tax Jurisdiction is a required field.

•

There is no Direct Pay Tax Indicator field.

Note: The tax information in the Customer File is used for transactions that are not related to a job, S/M contract, work order, or equipment.

Job File When you add a job to the Job File: •

Taxable Status defaults to S (sales).

•

Tax Jurisdiction is a required field.

•

Direct Pay Tax indicator defaults to N (i.e., blank).

When you set up a new job using the Copy function in the Job File: •

Taxable Status defaults from the source Job.

•

Tax Jurisdiction defaults from the source Job but can be changed by using one of the Copy prompts.

•

Direct Pay Tax indicator defaults from the source Job.

Service Site File When you add a site to the Service Site File: •

Taxable Status defaults from the Customer.

•

Tax Jurisdiction defaults from the Customer.

•

The default Direct Pay Tax indicator depends on the customer’s Tax Status.

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If the customer’s Taxable Status is C (based on cost), the site’s Direct Pay Tax indicator defaults to Y.

o

If the customer’s Taxable Status is S (based on sales) or N (non taxable), the site’s Direct Pay Tax indicator defaults to N.

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

S/M Contract File Maintenance>Add When you add a contract to the Contract File: •

Taxable Status defaults from the Service Site or S/M Tailoring according to an S/M Tailoring option: Default Tax Status From Site. If this flag is N, the Taxable Status defaults from S/M Tailoring.

•

If the contract’s Taxable Status is S (based on sales), the default Sales Taxable % is 100.

•

Tax Jurisdiction defaults from the Service Site.

•

Direct Pay Indicator defaults from the Service Site.

•

The default Taxable Cost Category settings come from the Tax Jurisdiction.

S/M Enter Work Orders When work orders are created either automatically or by using Enter Work Orders > Add: •

If a Service Contract is referenced on a work order line, the Contract Covered Taxable Status, Tax Jurisdiction with associated attributes, and Direct Pay Indicator come from the Service Contract.

•

The Contract Extra and Noncontract Taxable Status, Tax Jurisdiction with associated attributes, and Direct Pay Indicator default from the Service Site to the Work Order header.

Because you may not know the classification of work until the work is actually done, COINS includes an S/M Module Utility program (Recalculate Work Order’s Tax Status) that lets you change the overall tax situation for a work order.

Enter Purchase Orders and Cost Transactions When the Taxable Status is “C” (based on cost) when entering Purchase Orders or cost transactions such as accounts payable invoice distribution lines, inventory transfers, etc.: •

When referencing a Job, the Taxable Status, Tax Jurisdiction and Direct Pay Indicator default from the Job.

•

When referencing a Work Order, the Taxable Status, Tax Jurisdiction and Direct Pay Indicator default from the Work Order based on the Contract Covered, Contract Extras or Noncontract state of the transaction.

•

When referencing Equipment, the Taxable Status, Direct Pay indicator, and Tax Jurisdiction default from the files within the Equipment Module depending on the type of work being performed on the equipment (labor/non-labor), the equipment’s location and the specific piece of equipment.,

•

For inventory transactions not referencing a job, work order or piece of equipment, the default Taxable Status, Tax Jurisdiction and Direct Pay Indicator default from Purchase Order/Inventory Tailoring.

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

However, when entering a Purchase Order that states that the items should be shipped to the Office, the Taxable Status, Tax Jurisdiction and Direct Pay Indicator default from Purchase Order/Inventory Tailoring rather than from the referenced Job, Work Order or piece of Equipment.

Tax Jurisdiction File The Tax Jurisdiction File contains information about tax jurisdictions (each with up to 5 taxing entities) for Sales, Use and Excise Tax, such as the tax rate, G/L accounts for Sales Tax and Use Tax, and vendor code for tax payments. The Tax Jurisdiction File (see Figure 1) is available on the File Maintenance menu of the following modules, where Sales or Use Tax is typically entered: Accounts Payable, Accounts Receivable, Billing, and Purchase Order/Inventory. (Note that there is a separate Tax Code File in the Payroll module, used for the specialized information required for payroll related taxes.) Figure 1: Taxing Entity in COINS Ti Tax Jurisdiction File

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

Automatic Use Tax Accruals General Ledger Tailoring can be set to accrue Use Tax automatically, as shown in Figure 2: G/L Tailoring screen. This means that G/L can accrue the Use Tax amount to the General Ledger as well as to the costing module. Figure 2: G/L Tailoring screen 11/12/07 G/L Tailoring d61/1/02 ┌───────────────────────── Screen 1 of 4 ─────────────────────────┐ │ Number of Fiscal Periods (12/13): 13 │ │ Use Divisions (Y/N): Y │ │ Use Profit Centers (Y/N): Y │ │ Allow Inter-company Transactions (Y/N): Y │ │ Are Balance Sheets divisionalized (Y/N): N │ │ Inter-company Due From Major Account: 55│ │ Inter-company Due To Major Account: 55│ │ Use Co # or Div Minor Acct for Due to/From Minor Acct(C/D): C │ │ Inter-divisional Due From Major Account: 47│ │ Inter-divisional Due To Major Account: 47│ │ Allow exiting from General Journal Entry in │ │ unbalanced condition (Y/N): N │ │ Force All Companies to close a period concurrently: N │ │ Accrue Use Tax (Y/N): Y │ │ In Journal Entry, switch type fields from D to C (Y/N): N │ │ Default 'Allow General Journal Entries' to Y or N: N │ │ Define Natural Accounts at the profit center level: Y │ └─────────────────────────────────────────────────────────────────┘

•

If Accrue Use Tax = Y, COINS accrues the amount of the Use Tax to the General Ledger and to the appropriate costing module.

•

If Accrue Use Tax = N, COINS calculates and displays Use Tax amounts on invoice screens and on the Tax Report but the amounts do not accrue to either G/L or the costing module. Users must make journal entries in G/L to update the G/L Use Tax account and make manual cost entries in the Job Status, Equipment, and Service Management to apply Use Tax amounts as costs to a job, work order, or equipment.

Example of Accruing Use Tax You purchased a 30-ton Carrier rooftop unit for $7,500 for a job. The rate for the tax jurisdiction is 5% and you elect to use your Direct Pay permit. When you enter the A/P invoice for this purchase into COINS, you enter Y for Taxable and Direct Pay on the detail line. After you specify the tax jurisdiction, COINS calculates and displays the Use Tax Amount of $375 as shown in Figure 3: Direct Pay Use Tax on an A/P Invoice.

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

Figure 3: Direct Pay Use Tax on an A/P Invoice

When the invoice is posted, COINS applies a cost of $7,875 to the job and creates the following G/L journal entries. See Figure 6 on page 12 for an example of the posting report related to this example. Account

Debit

AP-TRADE CURRENT

7500.00

USE TAX PAYABLE MATERIALS & EQUIPMENT

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Credit 375.00

7875.00

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

Tax Reports The Tax Report shows Sales and Use Tax information posted to the General Ledger from invoices, inventory transactions, and billings during COINS processing. The Tax Report is the most useful report and is the report to use as backup for Sales and Use Tax accrued to various tax jurisdictions. See Figure 4: Tax Report for an example of this report. The G/L Report Menu also includes the AP Invoice Sales and Use Tax Report. This report is of much more limited use and is used primarily to verify what Sales/Use Taxes are associated with Accounts Payable invoices. See Figure 5: AP Invoice Sales and Use Tax Report for an example of this report. In order for Sales Taxes to appear on this report they must be broken out during AP Invoice entry.

COINS is a registered trademark of Construction Industry Solutions (Shaker) Corporation. COINS Ti is a trademark of Construction Industry Solutions (Shaker) Corporation.

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

Sample Reports

Figure 4: Tax Report RUN DATE 12/07/07 QA M1 DB v97c2.cut STARTING FISCAL DATE: 01/01/06 ENDING FISCAL DATE: 12/31/06 COMPANY:

COINS GENERAL LEDGER MODULE TAX REPORT SALES TAX & USE TAX DETAIL

PAGE

1

STARTING TAX JURISDICTION: MA ENDING TAX JURISDICTION: MA

10 COMPANY 10

TAX JURISDICTION: MA

MASS SALES TAX

JOB NUM COST CAT SOURCE INV/CHK # UC1000 MA AP-INV 09877 USE TAX TOTALS FOR COST CATEGORY MA TOTALS FOR JOB

UC1000

CUST/VEND ALHA

INVOICE AMOUNT 7,500.00 7,500.00

TAXABLE AMOUNT 7,500.00 7,500.00

USE TAX 375.00 375.00

SALES TAX

7,500.00

7,500.00

375.00

0.00

-----------------------------------------------------------------------------------------------------------------------------TOTALS FOR ALL JOBS 7,500.00 7,500.00 375.00 0.00 -----------------------------------------------------------------------------------------------------------------------------TOTALS FOR TAX JURISDICTION MA SALES TAX: 7,500.00 0.00 USE TAX: 7,500.00 Tax Entity: MA 375.00 0.00 MA 0.00 0.00 MA 0.00 0.00 -------------- -------------375.00 0.00

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

Figure 5: AP Invoice Sales and Use Tax Report

RUN DATE 12/07/07 10:30:01 QA M1 DB v97c2.cut TAX JURIS

VENDOR / ADDRESS JOB:

UC1000

COINS JOB STATUS MODULE AP INVOICE SALES AND USE TAX REPORT FOR FISCAL PERIOD 01/01/06 THROUGH 12/31/06 INVOICE NUMBER

INVOICE DATE

INVOICE AMOUNT

ENTITY 1

ENTITY 2

ENTITY 3

ENTITY 4

ENTITY 5

TOTAL TAX

7,500.00

375.00

0.00

0.00

0.00

0.00

375.00 U

7,500.00

375.00

0.00

0.00

0.00

0.00

375.00

7,500.00

375.00

0.00

0.00

0.00

0.00

375.00

7,500.00

375.00

0.00

0.00

0.00

0.00

375.00

DOWNTOWN CONVENTION CENTER

ALHAMBRA BUILDING COMPANY 1981 BROAD STREET CRANSTON, RI 02905

MA

09877

12/02/06

Totals for Vendor ALHA Totals for County MA Totals for Job UC1000

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PAGE

(

5.000 )

11

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Sales Tax, Use Tax and Excise Tax in the COINS Environment

Figure 6: A/P Invoice Posting Report for Use Tax Example RUN DATE 11/12/07 16:40:46 QA M1 DB v97c2.cut BATCH: KE2

COINS ACCOUNTS PAYABLE MODULE INVOICE POSTING REPORT

PAGE

1

POSTED TO G/L POSTED TO J/S POSTED TO SM

Y Y Y

POSTING DATE: 11/12/07 INVOICE POST: 3714 VENDOR JOB CONTRACT

VENDOR NAME/

ALHA

ALHAMBRA BUILDING COMPANY I

UC1000

1981 BROAD STREET

TYPE INVOICE

CRANSTON

RI

09877

PAYABLES/ INV DATE DUE DATE CO DIV RETAINAGE FISC DT DISC DT PAY REQ ACCOUNT

DISC AMT

12/02/06 01/16/07

0.00

10

15

1201

12/31/06 01/16/07

1203

02905 DOCUMENT ID:

COST PH CODE 3100

LN JOB 1 UC1000

CAT MA

TOTALS VENDORS SUBCONTRACTORS TOTALS

AVAILABLE DISCOUNTS 0.00 0.00 0.00

USE TAX AMOUNT 375.00

SALES TAX 0.00

FREIGHT 0.00

0.00

0.00

CO

DIV

CTR

ACCOUNT

10 10 10

15 15 15

0 0 0

1201 1249 1505

DESCRIPTION

G/L CO DIV CTR ACCOUNT 10 15 0 1505

INVOICES 7500.00 0.00 7500.00

7500.00

SALES TAX:

0.00

FREIGHT:

0.00

INVOICE AMT:

QUANTITY 0.000

USE TAX 375.00 0.00 375.00

UNIT COST 0.00000

7500.00

AMOUNT 7500.00

FORCED INVOICE AFTER DISCOUNT FORCED DISC 0.00 7500.00 0.00 0.00 0.00 7500.00

DEBITS

CREDITS

NET

SUMMARY FOR COMPANY

0.00 0.00 7875.00 -----------7875.00

7500.00 375.00 0.00 -----------7875.00

-7500.00 -375.00 7875.00 -----------0.00

SUMMARY FOR FISCAL DATE

-----------7875.00

-----------7875.00

-----------0.00

REPORT SUMMARY

============ 7875.00

============ 7875.00

============ 0.00

FISCAL DATE

12/07/07

RETAINAGE 0.00 0.00 0.00

TAX/ INST DIR TAX QUANT PAY JURIS 0.00 Y/Y MA ROOFTOP UNIT

AMOUNT:

12/31/06 AP-TRADE CURRENT SALES TAX PAYABLE MATERIALS & EQUIPMENT

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