Non Profit Report - November 2012
Is Your Organization Required to Pay DC Use Tax?
By: Eileen Morgan Johnson, Esq.
We have been contacted by clients who are confused by the new District of Columbia 2013 Budget Support Act and its requirement that DC employers file an annual use tax return if they are not currently filing a sales tax return. This article is intended to answer some of the questions your organization might have about the DC use tax.
What is a use tax?
Every jurisdiction that imposes a sales tax also imposes a “compensating use tax” for items bought out of state on which no sales tax was paid. The tax is literally imposed on the “use” of an item that was purchased tax-free outside of the state but used within the state. The use tax has its origins in the theory that every sale should be taxed by someone. If you already paid sales tax to one state when the item was purchased, then you are not required to pay a use tax. But if you bought the item tax-free, then your home jurisdiction wants to impose a use tax on it. The use tax rate is the same as the sales tax rate which for DC is 6%.
Is this a new tax?
Surprisingly, no. DC has imposed a use tax since 1949. What is new is the enforcement method. DC has found a new way to enforce an existing tax that most residents and businesses ignore. Any internet sales or other purchases from vendors outside of DC where sales tax was not paid are supposed to be tracked, and then the taxpayer pays a compensating use tax to DC for those purchases.
There are two unusual facets to what DC is doing. First, it is unusual to single out a class of taxpayers (employers) for enforcement efforts. Second, this new requirement for employers to file annual use tax returns just went into effect and is retroactive to Oct. 1, 2011. This will create an administrative hassle for businesses to review all of their purchases in the past 12 months (including services, which are taxable in some cases), identify those on which no tax was paid, and then calculate and remit the compensating use tax to DC. Once businesses know that use tax reporting is required, it is fairly easy with most accounting software now to track those expenditures on which a use tax should be paid. But going back and recreating records for the past year will take time.
What is the reporting requirement?
Employers in the District who are required to file a DC employer withholding tax return must also now file an annual use tax return if they are not already required to collect and remit sales tax. The initial return is due October 20, 2012, for the period October 1, 2011, through September 30, 2012. Thereafter, a return must be filed on or before October 20th each year. Any use taxes due must be remitted with the return.
What sales are subject to the use tax?
Unless your organization has an exemption certificate for paying DC sales and use tax (more on that later), transactions that are likely to be subject to the use tax would be any purchases made online or made to vendors outside of DC who do not charge either DC or some other state’s sales tax.
Aren’t internet sales tax-free?
No, not unless the customer has a sales and use tax exemption certificate. Internet sales are subject to sales tax where there is “nexus” for taxation. Internet sellers with a brick and mortar presence in a state are required to collect that state’s tax on their internet sales. Some companies – like Best Buy and Barnes & Noble – tried setting up separate companies for their internet sales in an attempt to avoid nexus and sales tax collection obligations, but that did not work. Even Amazon collects sales taxes in states where it has a physical presence (New York, Texas, and California).
The 1998 Internet Tax Freedom Act prohibits federal, state and local governments from taxing internet access and from imposing discriminatory internet-only taxes such as taxes on bandwidth or emails. It does not prohibit the imposition of sales and use taxes.
The Multistate Tax Commission has been trying for years to come up with uniform tax rates and definitions to implement a uniform sales tax nationally and make it easier to calculate and collect sales taxes. The member states agree to the concept in principal, but they don’t agree when it means cutting their state’s rates or changing their definitions. Without a simplified national standard, small retailers can spend more on the tax collection process than they collect and remit in sales taxes.
If our organization is exempt from sales tax, do we have to pay the use tax?
DC Code § 47-2206 states that the use tax is not imposed on sales that are exempt from the sales tax. However, the exemption from paying sales and use tax only applies to purchases that are made in furtherance of the organization’s tax-exempt purpose. If an organization conducts an unrelated activity, it might have to comply with the use tax reporting requirement.
How do we know if our organization has to pay the use tax?
The Office of Tax and Revenue (OTR) was supposed to distribute to all affected businesses information about their new use tax accounts and reporting requirements by October 1, 2012. Those employers who want to file electronically and who are not already registered for electronic filings will need to submit an electronic Taxpayer Service Center Business Registration Application to the OTR. These applications are available online at www.taxpayerservicecenter.com.
Do all DC corporations have to pay use tax and file the report?
The requirement to pay use tax applies to everyone, but the new reporting obligation is only imposed on businesses that file employment tax returns with the District.
Are employers located outside of DC but with employees who are residents of DC required to file the report?
Yes. Employers who are located outside of DC but who have employees residing in DC should report their use tax on Form 800A which can be filed electronically. The use tax return must be filed even if there is no use tax due.
Please contact us if you have additional questions about reporting District use taxes.
Five Legal Considerations When Negotiating Technology Contracts
By: J. Bradley Aaron, Esq.
Whether buying new hardware, upgrading software or implementing a million-dollar association management system solution, at some point each association is going to confront a technology contract. And whether you are drafting your own agreement or, more typically, starting with the vendor’s form of contract, there are certain key legal provisions the management of every association should consider before signing on the dotted line. In addition to completing a robust due diligence effort to ensure your association picks the right AMS vendor - such as through a comprehensive request for proposal process in which you lay out your needs and expected contract rights - here are five key considerations:
SLAs. If you are going to receive services in the “cloud” – the increasingly common arrangement where your association stores and/or accesses software and data through the Internet instead of through your own computers and servers – look for a Service Level Agreement or “SLA.” An SLA is a guarantee by the vendor that its customers can access any software and data during certain specific times (with certain exceptions). An SLA also can be a vendor agreement to answer the phone and fix problems in accordance with a pre-agreed upon schedule. Sometimes SLAs include a remedy like a credit if the vendor does not meet its SLA obligations. Vendors do not typically offer an SLA upfront, so ask for it.
Escrow as insurance. What happens if a vendor stops performing its obligations? Maybe the provider no longer makes software bug fixes or simply goes out of business. If the software or service being provided is critical to an association’s operations or cannot be easily replaced (and especially if the vendor is small or financially shaky), the association should push for a software escrow agreement. An escrow agreement allows a customer to access the source code – the secret sauce of the product – upon the occurrence of certain triggering events and use the code to support its continued use of the vendor’s product. It’s an insurance policy that a customer can continue to use a product even if the vendor disappears from the picture.
Protect your data. With frequent reports of data breaches – usually involving the unauthorized access of personal data like credit card information and Social Security numbers - that can paralyze an organization and cost millions of dollars, it is vital that an organization understands and is comfortable with how its vendors protect its information and that of its members. Whether it’s a cloud service or a self-hosted solution, the association customer, as part of its due diligence of potential vendors, needs to ask each vendor candidate for its data security plan and back up the plan with contract-based compliance guarantees.
Indemnification, indemnification, indemnification. In the technology world, a company (think Apple) will sue another organization (or individual!) if it believes that the organization is using its product or service without proper authorization. Therefore, it is almost without exception a non-negotiable requirement that the vendor agree to indemnify a customer (i.e., pay the customer’s legal fees or provide a legal defense and pay related customer damages) against any lawsuits alleging that the customer’s use of the vendor’s technology is violating a third party’s rights in the same technology. Fortunately, indemnification is standard (although not always freely offered) in practically all technology contracts. And absent a compelling explanation and some alternate protection, vendor refusal to provide this protection is a giant red flag from which a potential customer needs to run.
Get the right rights. Of course, any technology contract is only as good as the rights the vendor gives the customer to use the product or service. So make sure the contract spells out all of the anticipated uses. For example, is use limited to specific individuals or a limited number of users at any one time? Will the product or service be accessed only by employees or will association members use it as well? And does the association customer want to allow an affiliated organization or another association to use the product or service? Finally, make sure your association has whatever copyright rights are necessary to implement the AMS solution, whether a license or assignment so the association will own rights that it pays to develop.
While this is not a comprehensive checklist, the discussion of these considerations with a prospective vendor can be the basis of an agreement that more fully protects the interests of the customer.
©2012 Association TRENDS. This article first appeared in the November 2012 issue of Association TRENDS.