May 11, 2021

Increase Cash Flow and Identify Overpayments with a Sales and Use Tax Review for Construction Contractors

In a time where cash flow is more important than ever, companies are looking for opportunities to find money left on the table. One way to do this is by understanding your tax liability and obligation when it comes to sales and use tax. We’ve talked about how contractors can avoid overpaying sales and use tax, but what if it’s too late? How do you know if you overpaid, and how can you recoup that money to increase cash flow?

How do I know if I overpaid sales and use tax?

The rules around sales and use tax are complicated and vary by state. State statutes and interpretations are changing constantly, causing businesses to sometimes pay more than necessary just to be compliant. When working on tax-exempt projects, if there isn’t a dedicated team identifying tax incentives, sometimes sales and use tax can be paid unnecessarily without knowing it. A professional sales and use tax review can help identify the exact amount you owe for certain projects and if you are eligible for any refund caused by overpaying.

What is a sales and use tax review?

Sales and use tax reviews provide companies with a benchmark of their current sales and use tax underpayment and overpayment status, as well as associated planning opportunities. These reviews identify where the company potentially overpaid sales and use tax, often times on items applied to tax-exempt projects.

How do contractors benefit from sales and use tax reviews?

General contractors and subcontractors performing work in multiple states typically fall victim to overpaying sales and use tax, sometimes to the tune of six-figures. There’s a big opportunity for contractors who work on tax-exempt construction projects such as schools, government buildings, hospitals, and municipalities. Sometimes these types of projects don’t have the time or resources to stay on top of applicable tax incentives and compliance, so that’s where a sales and use tax review can come into play after the project.

Missouri statutorily has extended the sales and use tax refund review to a 10-year window from its traditional 3-years. As a result, refunds are typically being identified on projects over seven additional years, extrapolating the total refund considerably.

How can I get started with a sales and use tax review?

Anders has State and Local Tax advisors that specialize in performing sales and use tax reviews, making the process seamless. Our sales and use tax reviews are performed on a contingency fee basis, meaning there are no fees unless a refund is identified and collected. A percentage is paid only if we find a refund. Learn more about Sales and Use Tax Reviews or contact an Anders advisor below to find out if a sales and use tax review would benefit you.

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February 21, 2021

2021 Anders Tax Pocket Guide

December 8, 2020

How Working from Home Affects State Taxes in Missouri and Illinois

With many companies having a remote workforce for most of 2020, there are a lot of questions around the state tax treatment for employees working from home. Each state handles their withholding differently, but below we discuss how Illinois, Missouri and St. Louis income tax withholding is currently treated at the state and local level.

Illinois Income Tax Treatment

In general, Illinois withholding is based on where the employee is working. Below is an outline of common questions and answers around Illinois income tax withholding, according to the Illinois Department of Revenue (DOR) Publication 130.

When are companies required to withhold Illinois income tax from an employee’s paycheck?

Employers must withhold Illinois income tax when federal income tax is withheld from compensation. Compensation is paid in Illinois when the employee’s services are “localized” in Illinois. This statement applies to all individuals except qualifying residents of Iowa, Kentucky, Michigan, and Wisconsin and military spouses.

When is compensation considered paid in Illinois?

The following are general rules for when compensation is paid in Illinois for tax reasons.

  • If all of an employee’s services are performed in Illinois, then compensation is considered paid in Illinois and subject to Illinois income tax withholding.
  • If some of the employee’s services are performed outside Illinois, but the services outside Illinois are incidental to the services performed inside Illinois, then compensation is considered paid in Illinois and subject to Illinois income tax withholding.
  • If the employee is an Illinois resident and neither of the rules above apply and no other state’s taxes are withheld, then compensation is considered paid in Illinois and is subject to Illinois income tax withholding.
  • If the employee’s compensation is not localized to any state under any of the rules above and the employee performs significant service within Illinois for more than 30 working days, and the service performed within Illinois is nonincidental to the employee’s service performed outside Illinois, then a portion of compensation is considered paid in Illinois and subject to Illinois income tax withholding. The portion of compensation subject to Illinois withholding equals the total compensation paid to the employee multiplied by a fraction equal to the number of working days the employee spent within Illinois during the year divided by the total working days of the year.

What is considered incidental?

The Illinois DOR defines “incidental” as any service which is necessary to or supportive of the primary service performed by the employee or which is temporary or transitory in nature or consists of isolated transactions. The incidental service may or may not be similar to the individual’s normal occupation as long as it is performed within the same employer-employee relationship.

An employee who normally performs all of their service in Illinois may be sent by their employer to another state to perform services which differ from their usual work, or they may be sent to do similar work. As long as the service is temporary or consists merely of isolated transactions, it will be considered to be incidental.

What is considered a working day?

The Illinois DOR defines “working days” as all days during the tax year in which the individual performs duties on behalf of his or her employer. Days in which the individual performs no duties on behalf of his or her employer, such as weekends, vacation days, sick days, and holidays, are not working days.

A working day is spent within Illinois if:

• The individual spends a greater amount of the day performing services on behalf of the employer within Illinois rather than not, without regard to time spent traveling, or

• The only service the individual performs on behalf of the employer on that day is traveling to a destination within Illinois, and the individual arrives on that day.

Example: Jane is a Missouri resident who earned $70,000 in wages from her employer for the tax year. During the year, she performed services for her employer for 40 days in Illinois out of 250 total working days for the year. Accordingly, 16% (40 working days divided by 250) of Jane’s wages, or $11,200, was paid in Illinois and is subject to Illinois income tax withholding.

When are employers not required to withhold Illinois income tax?

According to the Illinois DOR, unless you enter into a voluntary withholding income tax agreement, you are not required to withhold Illinois income tax from the following:

  • Compensation paid to residents of Iowa, Kentucky, Michigan, and Wisconsin, due to reciprocal agreements with each of these states, and certain military spouses;
  • Compensation paid to a non-resident employee who has performed less than 31 days of service in Illinois and whose compensation is not localized in Illinois
  • Compensation paid to a non-resident employee whose service is performed entirely in another state;
  • Compensation paid to an Illinois resident whose service is performed entirely in another state, and the compensation is subject to withholding in another state;
  • Other specific situations as described in Illinois Department of Revenue Publication 130

If an employee lives in another state, are employers required to withhold income tax for that state?

If your employee is “paid in Illinois” and is a resident of Iowa, Kentucky, Michigan, or Wisconsin, you may, but are not required by Illinois law, withhold income tax for the other state. If your employee is a resident of a state with whom Illinois does not have a reciprocal agreement (i.e., Missouri), you must withhold Illinois income tax on all income that is paid in Illinois. You may be required to withhold tax for another state in which the employee works or resides. Contact those states to determine if you are required to register as a withholding agent.

Missouri Income Tax Treatment

Missouri income tax treatment is a bit simpler for remote employees than Illinois. According to the Missouri Department of Revenue (DOR), any time an employee is performing services for an employer in exchange for wages in Missouri, those wages are subject to Missouri withholding. This applies to remote workers where an employee is located in Missouri. This rule also applies when the employer instructs the employee not to work but the employee is still being paid.

If you have employees performing services for wages in Missouri, those wages are subject to Missouri withholding, regardless of where you as the employer are located.

Earnings Tax Treatment in St. Louis

According to the St. Louis Collector of Revenue, employees who have been working remotely due to COVID-19 or in conjunction with the acting City of St. Louis Health Commissioner’s Order should be treated as working at their original, principal place of work for earnings tax purposes.

The acting Health Commissioner’s Order required all non-exempt City of St. Louis employers to “facilitate employees working remotely” but is completely neutral to the location of the remote work site. It does not order employees to work outside the City nor require any individual who is employed outside the City, to work remotely in their City Home.

Employers in the city of St. Louis should continue to withhold on those employees in the same manner as they did prior to the temporary relocation of their employees.

Under these circumstances, days worked out of the city due to a temporary reassignment caused by COVID-19 or the acting Health Commissioner’s Order may not be included in the Non-Residency Deduction formula on Form E-1R when claiming a refund for tax year 2020.

Due to the COVID-19 remote working environment, state and local tax withholding is complicated and changes or clarifications can be made at any time. Contact an Anders advisor below to discuss your specific tax situation.  

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November 24, 2020

Regan E. Goldasich

November 3, 2020

Blues Captain Leaves for Sin City: How State Income Taxes Played a Role in Alex Pietrangelo’s Departure

On January 3, 2019, no one could have predicted that the then St. Louis Blues captain, Alex Pietrangelo, would be hoisting the Stanley Cup at the end of the 2019 season. In early January 2019, the Blues were in last place in the NHL, but the team turned their season around with the help of the song “Gloria”. A little over a year later, Blues fans could not imagine Alex Pietrangelo wearing anything but a Blue Note as he headed towards unrestricted free agency. But in October 2020, the former Blues captain inked a seven-year, $61.6 million contract with the Vegas Golden Knights.

NHL Salary Cap Takes a Hit

It is presumed that one of the major sticking points in the Blues negotiation with Pietrangelo was the amount of signing bonuses included in any potential contract. The ongoing pandemic has limited the cash flow of many businesses throughout the world, and the NHL is not immune to that reality. Before the pandemic hit, the NHL salary cap was anticipated to increase substantially for the upcoming season, but the league decided to keep the salary cap flat for the foreseeable future. The flat salary cap put the Blues in a bind when it came to fitting Pietrangelo in under the salary cap for the upcoming season, which further complicated negotiations. In his deal with Vegas, he will receive $35 million of signing bonuses throughout the life of the seven-year contract, which likely has major tax benefits for the former Blue.

State Income Tax Comes into Play

Nevada is one of nine states that does not have any state income tax. Athletes’ are generally subject to a “jock tax” in states and cities in which they work.  The athletes’ salaries are commonly apportioned to various states and cities using the “duty days” method. This jock tax is levied by states and cities on athletes who play or practice while in town. Assuming Pietrangelo becomes a Nevada resident rather than remaining a Missouri resident, the structure of his contract provides major tax benefits. This means that half of Pietrangelo’s games will be allocated to Nevada, a no income tax state. In addition, signing bonuses are exempt from the Duty Day calculation provided certain criteria are met. Instead, signing bonuses are allocated to an athlete’s resident state. In this case, all of the $35 million in signing bonuses will be allocated to Nevada and not be subject to state income taxes. If he had remained a Missouri resident and signed a similar contact with the Blues, Pietrangelo’s signing bonus would result in Missouri state income taxes of roughly $1.9 million.

For professional athletes, tax compliance and planning can be an issue when it comes to filing in the proper tax authorities. The Anders Sports, Arts and Entertainment Group has the knowledge to help athletes with tax compliance and planning. Contact an Anders advisor below to learn more.

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October 20, 2020

How Real Estate and Construction Contractors Can Avoid Overpaying Sales and Use Tax

Whether you’re a real estate broker and independent contractor or a general or sub-contractor working in construction, sales tax for contractors can be complex and difficult to understand. There are many factors that affect taxability, and real estate and construction contractors may also be subject to exemptions based on the customer and the property’s function. In this time of uncertainty with the COVID-19 pandemic affecting many businesses, sales tax refunds can help recoup over-paid sales tax and put more money in your pocket.

Are contractors exempt from sales tax?

There are many circumstances where exemptions are allowed but understanding sales tax liability for a construction contractor can be a challenge. States generally do not consider contractors to be making taxable sales, but providing tax exempt services. Contractors are typically treated as the final users and consumers of materials and supplies they use on construction contracts and are liable for sales tax on purchases of those materials and supplies used in a contract. However, many states provide special treatment for construction contracts with exempt organizations if the purchases are related to the entities’ exempt functions and activities.

When can an exemption certificate be used?

In both Missouri and Illinois, a contractor’s purchases of tangible personal property can be exempt with a flow-through exemption, provided a contractor is contracting with an exempt organization. The contractor can obtain an exemption certificatefor purchases of tangible personal property and materials used for a specific contract for the exempt entity. In Missouri, a project exemption certificate is typically needed from the exempt entity and provided to the vendor when making such purchases. Not all states allow a flow-through exemption from exempt organizations, and each state’s rules need to be reviewed individually.

In Missouri, contractors are exempt on purchases of tangible personal property for use out-of-state on a construction contract with an entity authorized to issue an exemption certificate under that state’s law. In Illinois, tangible personal property sold to contractors who resell it as tangible personal property can be treated as a purchase for resale.

Are all contracts treated the same?

Determining the structure of the contract can also impact the taxability. A lump-sum contract will generally leave the contractor responsible for the tax on materials. Whereas, with a separated contract or a cost plus contract the sale may be deemed as part property and part sale of service which may be treated differently on the contractor’s sale to their customer.

These are just a few sales tax nuances and opportunities available to contractors. A clear answer to specific questions on a state-by-state basis will need to be determined by reviewing each state’s rules and regulations. Anders has the resources and expertise to quickly help determine opportunities for you.

A sales and use tax refund review can help find overpayments to keep more money in your business’ pocket during this tough time. Anders State and Local Tax advisors have the expertise to pursue these refunds and can do so on a contingent basis. Contact an Anders advisor below for more information on reverse audits.

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October 13, 2020

Economic Nexus by State Following South Dakota v. Wayfair

The decision of South Dakota v. Wayfair is causing states to enforce economic nexus laws to collect sales tax from out-of-state sellers with a connection to the state. These laws affect online retailers and multi-state businesses who collect revenue up to the threshold amount in a state.

To understand which states your business may be liable to pay sales and use tax in, we compiled a chart with each state’s economic nexus threshold, criteria and enforcement date. The chart is updated regularly as states adjust their requirements.

Complete the form below to download the latest version of the Economic Nexus by State chart.

Learn more about the South Dakota v. Wayfair decision.

Updated 10/13/2020

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September 29, 2020

What Not-for-Profits Need to Know About Sales and Use Tax

When it comes to not-for-profit organizations, each state may treat them differently from a tax perspective. Some not-for-profit organizations may be nontaxable on their purchases and taxable for their sales, or vice versa. Some states will tax both sales and purchases or treat both as nontaxable. It’s important to know that being exempt from federal income tax does not always translate to being exempt from sales tax. There are many factors that come into play when a not-for-profit organization is paying or collecting sales tax.

WHAT IS SALES TAX AND WHAT DETERMINES IF I OWE?

Sales tax is a tax on the retail sale of tangible personable property and enumerated taxable services. For not-for-profit entities, where they are located, their main activities or functions, and type of entity can determine whether they pay or collect sales tax.

JEOPARDIZING YOUR EXEMPTION

Pursuant to federal law, there are certain activities that can cause an organization to lose its tax exemption. For example, the following activities can endanger exempt status of an organization:

  1. Activity that results in private benefit or inurement to a private shareholder or individual
  2. Lobbying activity, if it constitutes a substantial part of the organization’s overall activities or if it exceeds a predetermined dollar amount
  3. Activities that are illegal or violate fundamental public policy
  4. Failure to comply with annual filing requirements
  5. Any political campaign activity
  6. Unrelated business activity that is substantial when compared to the organization’s exempt function activities

SALES AND USE TAX FOR ILLINOIS NOT-FOR-PROFITS

Purchasing

Under Illinois law, purchases by not-for-profit organizations are generally exempt from sales and use tax in Illinois, but the organization must have and provide their active state exemption certificate. Nevertheless, there are factors that can cause organizations to pay sales and use tax. If the organization is not operating “exclusively for charitable, religious or educational purposes,” it may not be exempt from paying sales tax on purchases.

Pursuant to Ill. Admin. Code 130.2005(n), “exclusively” has not been given its literal interpretation by the Supreme Court regarding not-for-profit organizations. It means that an organization’s primary activity or function must be charitable, religious or educational. Purchases made by the organization must relate to the primary activity or function of the not-for-profit organization to be exempt. If a substantial activity or function of an organization is not operating exclusively, it will not be considered exempt.

Selling

Sales by exclusively charitable, religious and educational organizations are taxable, unless specifically exempt. Tax exempt sales in Illinois for not-for-profits are:

  • Sales to members, students in the case of schools, or patients in the case of qualifying hospitals, of tangible personal property to be used primarily for the purposes of the selling organization
  • Sales that are noncompetitive with businesses; or occasional dinners, socials and similar activities, whether they are open to the public or not.

For a sale to be considered noncompetitive all proceeds must go to the organization, transactions must be handled through the organization’s members, sales cannot be continuous and the main purpose is to make a charitable donation. Only two “occasional” dinners or similar activities may be exempt per calendar year.

SALES AND USE TAX FOR MISSOURI NOT-FOR-PROFITS

Purchasing

Under Missouri law, sales and use taxes are not applicable to sales made to any religious and charitable organizations and institutions provided they are acting within their religious, charitable or educational functions and activities. For not-for-profit civic, social, service or fraternal organizations to be exempt from tax, the net proceeds must be designated for civic or charitable functions or activities. All purchases must be solely in their civic or charitable functions or activities. Not-for-profit organizations must have and provide their active state exemption certificate. Out of state not-for-profit organizations may purchase or sell exempt, as stated above, if their home state exempts such transaction in that state.

Selling

For the most part, the same guidelines for purchasing apply to sales by the not-for-profit organization.

If you have any questions, our State and Local Tax team is here to help. Contact your Anders advisor below to learn more about how any taxes apply to your not-for-profit organization.

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September 3, 2020

Consumer Use Tax – The “Tax” That Can Bite Dentists Unaware

Read the Dental Arch article written by Robert V. Willeford, Jr., Anders State and Local Tax Director.

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August 14, 2020

Robert Willeford Warns Dentists of Consumer Use Tax in the Dental Arch

Many dentists are aware that dental services are generally exempt from sales tax. But when dentists sell tangible personal property to customers, this can be taxable on the sale to the patient or insurance company. Anders Director + State and Local Tax Robert V. Willeford, Jr., CPA, Esq. discusses the consumer use tax and how it impacts dental practices in the Dental Arch.

In the article, Robert and Anders tax senior Claire E. Rogers, CPA go into detail about what items are taxable and how Missouri and Illinois handle sales and use tax for qualifying items.

Read Consumer Use Tax – The “Tax” That Can Bite Dentists Unaware or learn more about how we help with State and Local Tax.

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