MEDIA MANUFACTURING FIRM AVOIDS $1.2 MILLION SALES TAX ASSESSMENT
Highlights
- Cummins & White, LLP, successfully represented a manufacturer of DVDs and CDs in a California State Board of Equalization sales tax audit and Appeals Conference involving the acquisition of manufacturing equipment as part of a complex merger transaction with an out-of-state company.
- Cummins & White’s in-depth knowledge of Board of Equalization procedures and sales and use tax regulations, including occasional sales rules, saved the Client $1.1 million in sales tax.
- The firm also helped the Client successfully claim that certain products it purchased (e.g., mercury) were incorporated into the finished products and, therefore, not subject to sales or use tax.
- At the same time, Cummins & White worked with the Client to successfully resolve a separate federal income tax audit, appeal, and Tax Court case that also had potential negative financial implications for the Client.
Attorneys
Case Study
Cummins & White, LLP, worked with a manufacturer of DVDs and CDs, on a California State Board of Equalization sales tax audit. The tax board was reviewing the company’s sales tax returns for 2005 and 2006 during which the company was involved in a complex merger transaction and acquired substantial valuable equipment. The tax board claimed that the company had “purchased” the equipment valued at approximately $11 million and subsequently owed $1.2 million in sales tax. Attorneys for Cummins & White worked for two years with the Client’s in-house accounting department organizing documentation and successfully showed that the equipment had been acquired through a merger transaction and was not subject to sales or use tax. At the end of the proceedings, the Client’s sales tax bill was reduced from $1.2 million to $130,000.
Background
Our client manufactures DVDs and CDs on behalf of publication companies that market them for sale or rental. In 2005 and 2006, the company was involved in a complex merger transaction that included the acquisition of valuable manufacturing equipment from an out-of-state company.
Subsequently, the California State Board of Equalization (SBE) audited the Client’s sales tax returns for 2005 and 2006 and issued a preliminary audit report, ruling that the Client had, in fact, “purchased” $11 million worth of equipment from an out-of-state vendors and was required to pay the state use tax on 100 percent of the purchase price. (The SBE assumed that the asset purchases did not qualify for a partial use tax exemption.) The tax bill totaled more than $1.2 million. The Client’s ability to deal with the SBE sales tax audit was further complicated by a simultaneous federal income tax audit.
Legal Strategy
The company retained Partner, Robert Lamm of Cummins & White, LLP, to assist its accountant in responding to the sales tax audit. The attorneys worked closely with the Client’s in-house accounting department to review and organize financial records that were in disarray. Their strategy was to present a case that:
- Unequivocally demonstrated that the equipment in question was acquired as part of a complex merger transaction and so was not subject to use tax.
- Convinced the SBE that other items purchased out of state, such as mercury, were incorporated into Client’s final product, and therefore not subject to sales or use tax (because the end products are sold to wholesale customers).
- Established that certain manufacturing equipment purchased by the client from foreign sellers qualified for an industry-based partial sales tax exemption, further reducing the Client’s sales tax obligation.
Result/Implication
After a two-year process, Mr. Lamm presented a detailed and persuasive case to the auditors working for the tax board. Based on their expertise with the California State Board of Equalization procedures, sales and use tax regulations, and knowledge about consumable goods, the attorneys negotiated a favorable decision for the Client, with the proposed sales tax deficiency liability dropping from $1.2 million to $130,000.
