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Purchasing entities can simplify sales and use taxes.

The basic purchasing entity concept is to establish an affiliate entity to act as a primary supplier to an operating company for the purchase of plant expansion equipment and other appropriate consumables. In essence, the purchasing function for major equipment (or even routine supply items) would be dropped from the operating company and picked up by the purchasing company. The purchasing company would establish sales tax and other necessary registrations and enter into standard purchasing agreements with a corporation's usual suppliers. As a result, the purchasing company would issue resale certificates to the outside suppliers and purchase its inventory without sales tax. The purchasing company would then resell the equipment and supplies to the operating company and collect the appropriate sales tax. With careful planning, the purchasing company can be established with minimal or no effect on a corporation's overall sales tax cost. The internal cost of establishing and maintaining the formalities of the separate legal entity is likely to be the determining factor in analyzing whether this planning technique should be used.

Structure Should Not Cause State Concern

A purchasing entity structure should not cause any concern from the states' perspective, because sales and use taxes are form-driven; the states will subject inter-company transactions to sales tax to the same extent as transactions between unrelated entities. Further, recent cases on affiliate nexus have reaffirmed the legitimacy of the separate entity structure. Provided the purchasing entity has reasonable substance and adheres to ordinary corporate for realities, there should be little risk that a state, under its sales and use tax authority, would challenge a purchasing entity's purpose or existence.

Meeting Corporate Objectives

Purchasing entities are set up for a number of reasons and typically satisfy more than one corporate objective.

Control of the sales and use tax function.

Companies can avoid paying tax in multiple jurisdictions on the same tangible personal property. For example, a multistate taxpayer can purchase all of its fixtures and equipment in one state, consolidate those items and then ship them out of state. This prevents the company from paying sales tax on all of its purchases in one state, then paying a use tax in the final destination state. The company can also set up a purchasing entity, buy all items pursuant to resale certificates and sell the items to the parent F.O.B. the destination state; the result is that the company pays tax on the items only once. The same approach can work to minimize the tax when the state of ultimate use may have a lower use tax rate than the state of origin's sales tax rate.

Vendor filing discounts. Many states offer a discount (varying from 1% to 3%) for the timely filing of tax returns. In some states, this discount is not subject to caps or limits. For example, in Illinois, there is a 1.75% discount with no limits.

Samples and promotional items. Many states consider samples and other promotional items to be consumed for use tax purposes when they are removed from inventory or come into the possession of the company within the state. As a result, these items are subject to tax; the fact they are subsequently shipped to customers or others across state lines is irrelevant. Setting up a purchasing entity can effectively eliminate the in-state use, resulting in an exempt interstate sale. (However, tax generally may be due in the state of ultimate destination.)

Local tax minimization. In some states, the local tax is measured by the retailer's location. Under these circumstances, companies have set up purchasing entities in local jurisdictions with low taxes and then resold property to the parent or related entity in a higher tax jurisdiction, thereby saving the local tax.

Local tax inclusion. In some cases, companies have entered into tax forbearance agreements with the local government as part of a forbearance agreement as to other taxes.

Purchasing discounts. Consolidating purchases for all affiliated entities into a single purchasing company can generate significant savings from quantity discounts and lower prices charged to large purchasers.

Tracking purchases of certain items. A tracking system can be easily created to track the purchases of certain items, such as computer software or hardware or items that qualify for a credit (such as the manufacturer's purchase credit in Illinois).

Other business reasons. There are many other business reasons for taking advantage of the controls and centralization that purchasing companies offer. For example, centralized control of advertising, information systems and other types of cost centers common among multi-entity organizations can benefit from a purchasing entity structure. Establishing and operating a purchasing entity offers several tax advantages to a corporation, while additional benefits noted may make setting up such an entity attractive in its own right.

FROM BRUCE H. DAVIS, CPA, CHICAGO, IL, AND ROBERT C. SASH, CPA, NEW YORK, NY
COPYRIGHT 1999 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1999, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Sash, Robert C.
Publication:The Tax Adviser
Geographic Code:0JSTA
Date:Nov 1, 1999
Words:804
Previous Article:When may a taxpayer's agent sign returns?
Next Article:Abbreviations Commonly Used in The Tax Adviser.
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