Tax Planning for Sales Tax Savings

Corporate offices and data centers do not normally enjoy exemptions or exclusions from the sales or use tax; however, there are opportunities to minimize sales tax expenses on a daily basis by taking advantage of exclusions and being aware of when vendors should and should not charge tax.

Software issues

South Carolina

South Carolina's base of taxable items is the term "tangible personal property" as defined by SC Code Section 12-36-60. This consists of the obvious as well as certain services defined to be included in the term. As time and technology progress, items considered taxable expand as the Department of Revenue becomes creative and applies the tax to intangibles. Presently, software delivered electronically is not subject to South Carolina sales or use tax. Similarly, licenses, renewal of licenses and software maintenance agreements are not taxable where the supplier does not provide physical copies of the software, updates or patches. Many software vendors choose to tax and report sales of software delivered electronically although it has been well established that no tax is due in South Carolina. Large national software suppliers often make this mistake and customers, not aware of the exclusion, pay the tax as a routine part of doing business. The sales tax paid in error can be recovered if acted upon with three years of the date of the purchase.

When conducting an internal review for this type of taxation error, look at the purchase invoice(s) for shipping charges or a clear indication the software was electronically delivered. Renewal of software licenses may not include any new software or updates but still could be taxable if the original software was physically delivered. Preparing a spreadsheet of all large corporate software purchases with an indicator field for "Delivery Method" will aid in the decision process when subsequent licensing or maintenance agreements are entered into.

When considering new software purchases, one should mandate electronic delivery. (See South Carolina Revenue Ruling 12-1 for the most current guidance on this issue.)

North Carolina

In North Carolina, the once established way to purchase software tax free was to receive the software by electronic means. The exclusion from the tax was replaced by the 2013 Legislative Session which provided an exemption from the tax. North Carolina Code Section 105-164.13(43a)a was amended to exempt software "purchased to run on an enterprise server".

The exemptions state:

(43) Custom computer software. - Custom computer software and the portion of prewritten computer software that is modified or enhanced if the modification or enhancement is designed and developed to the specifications of a specific purchaser and the charges for the modification or enhancement are separately stated.

(43a) Computer software that meets any of the following descriptions:

(43b) Computer software or digital property that becomes a component part of other computer software or digital property that is offered for sale or of a service that is offered for sale.

Most software purchased for use by large corporations for use on their local area network meet the requirement of being "purchased to run on an enterprise server". Paragraph 43(b) provides a broad exemption although its original intent was to hit Google and Apple data centers. Paragraph 43(c) was intended for Time Warner's home office located in Charlotte.

Most business laptop and home software users will now owe the sales tax on their software purchases. Again keeping a spreadsheet of the software being purchased and details of its use will be beneficial in substantiating a claim of the exemptions. In North Carolina, a purchaser must issue Form E-595E, Streamlined Sales and Use Tax Agreement Certificate of Exemption, to claim a qualifying exemption for computer software purchased to run on an enterprise server operating system

SC Labor

In South Carolina, labor, which is a part of the seller's cost of making the sale, is a part of the sales price of the goods sold and is taxable whether stated separately or not. Labor which occurs after a sale is made is not subject to the tax as long as it is separated on the invoice to the customer and on the seller's books and records. Fabrication labor is taxable while installation or service labor is not. Labor charges must also be reasonable in relation to the materials sold and services being provided. Shifting cost to a "labor" charge in order to reduce the tax charged is unacceptable!

NC Labor

Beginning March 1st, 2016, installation, repair and service labor charges made by a retailer are subject to sales tax. Persons which provide service contracts or maintenance agreements are considered a "retailer". Charges for providing service contracts, maintenance contracts or their renewal charges are subjec to sales tax after March 1st, 2016. In North Carolina, labor, which is a part of the seller's cost of making the sale, is a part of the sales price of the goods sold and is taxable whether stated separately or not.

Shipping & Freight

North Carolina looks upon the "sales price" of an item to include all costs involved to acquire the property and thus taxes all freight. South Carolina looks upon freight as a service charge but relies on the FOB status to determine if the freight service was rendered to the seller or to the purchaser. In South Carolina, FOB Origin Freight is a service rendered to the purchaser and not a taxable part of the "gross proceeds of sale" for the seller. On the other hand, if the goods are shipped FOB Destination, the shipping charges are a part of the seller's cost of making the sale and are considered taxable.

Some South Carolina auditors "nickel and dime" the taxpayer during a field audit when a sales invoice has a combined block called "Shipping & Handling". Handling charges are considered a seller's cost of making the sale and are thus taxable. In the absence of a distinction, some auditors will schedule combined charges, however trivial, for inclusion within their assessment. Should this happen to your business, prepare a spreadsheet of the charges by invoice date and number and submit the information to the sellers in question along with a request for explanation or separation. You will find most vendors having a common "Shipping & Handling" block on their invoice purchased stock invoices and have never charged a "Handling" fee. You may also find some vendors charge a fixed minimal amount even where there was no extra effort exerted in making the sale; such as a $2.00 fee. This extra $2.00 fee would be taxable as opposed to the entire shipping charge. Most auditors who schedule such charges will adjust their schedules when faced with supporting documents from vendors.