IPT 2016 Sales Tax Symposium Indianapolis, Indiana

September 18-21

FOB? What Did You Call Me?

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Presenters

– Jeff Greene Transaction Tax Attorney, LLC Jeff.greene@transactiontaxattorney.com (317) 225-1464

– Andre B. Burvant, Partner, Jones Walker, LP aburvant@joneswalker.com (504) 582-8466

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Introduction

Why should we care about shipping terms? – “Sale” is a transfer of title or possession of TPP

– Where does that “transfer” take place?

– Is it where the TPP is received by the purchaser?

– Where is the TPP “received” by the purchaser?

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Historical Perspective

North America – FOB means freight on board or free on board

– The term originated from maritime laws

– The crossing of the rail of the ship signified when

the freight was on board

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Historical Perspective

North America – The significance of the term was magnified in the

early days of oceanic shipping when risks were very high

– Determining who had the risk of losing the cargo often determined whether cargo would ship

– Insurance obligations were also tied to FOB terms

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Historical Perspective

North America – The Uniform Commercial Code (UCC) was written

to codify shipping terms

– UCC broadened application of FOB terms to all shipping

– FOB terms determined several key contract elements in the absence of a written bill of sale

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Historical Perspective

North America – The UCC provides that FOB terms indicate where

title passes Title means legal ownership

– The UCC also provides that risk of loss is

determined by FOB terms The party bearing the risk of loss will have to pay for the

cargo in the event of a total loss

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Historical Perspective

Common Shipping Terms – “FOB Origin” (“FOB Shipping Point” /“FOB

Seller’s Dock”) transfer occurs at seller’s location

– “FOB Destination” (“FOB Buyer’s Dock”/”FOB [Insert Location]”) transfer complete at time and place of delivery

Evolution of the Law

Indiana’s sales tax law evolved from its Gross Receipts tax.

Under Gross Receipts tax law in Indiana, the rate applied to retail sales was less than one third the rate that applied to service income

Thus the issue of whether income was service income or income from selling at retail became critical

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Evolution of a Law

Several cases dealt with the distinction between selling at retail and services

When Indiana enacted its sales and use tax laws, the law piggy-backed on the gross receipts definitions subject all income from selling at retail to sales tax

Thus the issue of whether delivery was a sale at retail or a service became critical

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Evolution of a Law

Indiana law under both the sales tax and the use tax keyed off of FOB terms to solve the dilemma

Under old Indiana sales tax law, the taxability of freight charges depended on the FOB terms

FOB origin was not taxable, but FOB destination was taxable

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Evolution of a Law

The rule works fabulously when there is clear documentation of the FOB terms.

Before any court cases on the matter, Indiana would presume that if there were no FOB terms, then they would treat the terms as if the terms were FOB destination

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Evolution of a Law

Indiana lost several court cases where the courts determined that if there were no established FOB terms that the sale was FOB origin

Matters were complicated when Indiana recodified the sales tax and made the dividing line between service and selling at retail the point of transfer.

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Evolution of a Law

The point of transfer was not defined in Indiana law, thus most practitioners relied on the FOB language to determine the point of transfer

Indiana did not like that result and changed the law to define the point of transfer as delivery to settle any confusion

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Taxability Matrix – Separately Stated Freight Charges

State Taxability State Taxability AL Nontaxable* AZ Nontaxable AR Taxable CA Nontaxable* CO Nontaxable CT Taxable DC Nontaxable FL Nontaxable GA Taxable HI Taxable ID Nontaxable IL Nontaxable* IN Taxable IA Nontaxable* KS Taxable KY Taxable LA Nontaxable ME Nontaxable* MI Taxable MN Taxable MS Taxable MO Taxable 15

Taxability Matrix – Separately Stated Freight Charges

State Taxability State Taxability NE Taxable NV Nontaxable** NJ Taxable NM Taxable NY Taxable NC Taxable ND Taxable OH Taxable OK Taxable PA Taxable RI Taxable SC Taxable SD Taxable TN Taxable TX Taxable UT Nontaxable VT Taxable VA Nontaxable WA Taxable WV Taxable WI Taxable WY Nontaxable 16

Taxability Matrix – Disclaimer and Footnotes

Consult your tax advisor and do not rely on the determinations provided herein as these are based on a general determination of taxability and may not apply to your specific situation. Jurisdictions marked with an asterisk have significant or potentially significant limitations to the nontaxability of shipping charges.

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Modern Perspective

Incoterms – The International Chamber of Commerce

promulgated terms that govern international shipping

– Incoterms have replaced FOB terms in international trade The 2010 Incoterms limits the use of FOB solely to non- containerised sea freight

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Modern Perspective

Understanding Incoterms – Incoterms are grouped into four categories. Group E- Seller only makes goods available to buyer at seller’s premises

Example- Ex Works (EXW)-Seller required to make goods ready for pickup at its place of business. All other costs and risks are assumed by buyer.

Group F-seller delivers the goods to a carrier or place appointed by buyer

Group C- seller has to contract at his cost for carriage (and sometimes insurance)

Group D- seller must assume all costs, obligations and risks needed to bring goods to the place of destination (except important customs clearance and un-loading at final destination)

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Modern Perspective

Understanding Incoterms-Transfer of Risk • EXW- When the goods are at the disposal of the buyer • FCA- When the goods have been delivered to the carrier at the named

place • FAS- When the goods have been placed alongside the ship • FOB- When the goods pass the ship’s rail, at the port of export (origin) • CFR- When the goods pass the ship’s rail, at the port of export (origin) • CIF- When the goods pass the ship’s rail, at the port of export (origin) • CIP- When the goods have been delivered to the main carrier, at the port

of export (origin)

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Modern Perspective

Understanding Incoterms-Transfer of Risk • CPT When the goods have been delivered to the main carrier, at the port

of export (origin) • DAF- When the goods have been delivered to the carrier • DES- When the goods are placed at the disposal of the buyer on board the

ship • DEQ-When the goods are placed at the disposal of the buyer on the quay • DDU- When the goods are placed at the disposal of the buyer • DDP- When the goods are placed at the disposal of the buyer

Modern Perspective

As a practical matter, many financial accounting systems drive invoicing decisions based on incoterms

If a business wants to automate their taxability determinations, then the sales and use tax system may have to address different billing scenarios

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Sourcing Examples

Lowe’s Home Center, Inc v. Kennedy, 744 So. 2d 711 (La. App. 2nd Cir. 1999)

– Goods (Store fixtures) Purchased from New Jersey vendor – Delivered to Louisiana- “FOB-Seller’s Dock” – New Jersey sales tax paid to vendor – Delivered via Contract Carrier – State assesses use tax – Taxpayer claimed credit for taxes paid to New Jersey

vendor

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Sourcing Examples

Lowe’s Home Center, Inc v. Kennedy, 744 So. 2d 711 (La. App. 2nd Cir. 1999)

– Court held: Taxes were properly paid to New Jersey because seller’s obligations ended at its dock

– Contract Carrier was agent of Taxpayer – Taxpayer was entitled to credit

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Sourcing Examples

Vermillion Parish School Board v. Weaver Exploration, 474 So. 2d 1032 (La. App 3rd Cir. 1985)

– Goods purchased from Texas vendor – “FOB-Houston” – Texas sales tax paid to Vendor – Goods delivered by Common Carrier – Louisiana parish assessed use tax – Taxpayer claimed credit for Texas sales tax paid to vendor

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Sourcing Examples

Vermillion Parish School Board v. Weaver Exploration, 474 So. 2d 1032 (La. App 3rd Cir. 1985)

– Appellate Court held that Texas taxes were invalid taxes b/c not legally owed

– Court reasoned that the selling of goods in one state which are then shipped by the vendor to the purchaser in another state is interstate commerce

– The taxing of such sales by a state is an illegal interference with interstate commerce

– Thus, Weaver not entitled to a credit for the tax paid – Weaver owed tax in Vermilion Parish

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