UC Tax Issues

1. UC Tax Issues Office of the Controller Financial Management Certificate Program December 2014

2. Is UC “Tax Exempt”? • UC is an exempt organization for income tax purposes only under Section 501(c)(3) of the Internal Revenue Code • CA BOE considers UC subject to Sales/Use Tax • UC also must do non-payroll income tax information reporting (1099) and nonresident withholding

3. Agenda • Sales & Use Tax • Unrelated Business Income • Employee vs. Non-employee Relations • Employee Fringe Benefits • Taxable Payments through the A/P System • Tax Treatment of Moving Expenses • Tax Treatment of Travel Expenses

4. By dollar amount: Invoice with tax Goods used/shipped outside CA Services Medicines Construction contracts By frequency: Freight Medicines Invoice with tax Services Goods used/shipped outside CA Most Common Sales/Use TaxAccrual Overpayments Source: Deloitte audit data from four campuses

5. Tax paid by vendor in audit Accrual & tax calculation errors Software Maintenance/service agreements Repair, installation, & training labor Qualified periodicals Resale inventory Food for human consumption Printed sales messages Mailing lists Human body parts Other Common Sales/Use TaxAccrual Overpayments Source: Deloitte audit data from four campuses

6. Overview University as a Seller Collects Sales Tax University Departments: Bookstore, food services, medical center, student health services, library services, registrar, etc. Supplier The University University as a Purchaser Pays Sales Tax or Self-Assesses Use Tax University Departments: Accounts payable, purchasing, procurement, medical center, cafeteria, etc. Customer Indicates the flow of tangible personal property

7. Sales Tax – Retail Perspective • Imposed on retailers for the privilege of making retail sales of tangible personal property in California • Based on gross receipts from the sale of tangible personal property (cash, trade-in, and other consideration) • Sales tax applies to intrastate transactions (within California) • Retailer is liable for collecting and paying sales tax • Services - generally exempt unless related to the sale of tangible personal property (“true object test”)

8. Use Tax – User Perspective • Imposed on every person who stores, uses, or consumes in CA, tangible personal property purchased from an out-of-state retailer, unless permitted to collect CA sales tax • Applies to the cost(cash, trade-in, and other consideration) • Applies to taxable transactions that “escape” sales tax • University is liable for self-assessing and paying the tax • Use outside California may be exempt

9. Sales and Use Tax Rate The combined Sales and Use Tax Rate includes the following components: State (effective 1/1/2013) County Local (City) Combined Statewide Sales and Use Tax Rate* 6.25% .25% 1.00% 7.50% District Transaction and Use Tax (Generally, the applicable district tax rate is based on taxes imposed in the district where the property is first used—Santa Barbara County rate is 0.5%) 0.50% Total Combined rate for Santa Barbara County 8.00% * The combined statewide tax rate (7.50%) applies to all sales or purchases in California

10. District Tax Adjustments • Rate is based on the district where the retailer is located or where the property is first delivered (by retailer) • As a purchaser, the University is responsible for the proper allocation of District Tax if adjustment is required • Remove “foreign” district tax if any • Accrue .50% Santa Barbara district tax • Accounting does the adjustments, but not for minor differences

11. Sale vs. Use Tax(Sale vs. Purchase) A transaction, not otherwise exempt, must include the following elements to be subject to sales/use tax: • Sales Tax • Sale of Tangible Personal Property • At Retail • For consideration • Sale by a Retailer • Take possession in California • Use Tax • Purchase of Tangible Personal Property • At Retail • For consideration • Purchase from a Retailer • Take possession out of state, but used in California

12. “Person” for Tax Purpose • Entities (persons) subject to tax • Individuals, various types of business organizations • Trusts, estates, and social organizations • California State government agencies (U.C. campuses) • US government is an exempt “person” • Other exempt entities (persons) on whom no tax can be imposed: • Non-Californian State governments and their institutions • Foreign governments/provinces and their institutions

13. Using a Resale Certificate • Property purchased by UCSB for resaleis only one of several possible exemptions: • Exempt “persons”, government entities, etc. • Retailer will ask for a resale certificate to support the exemption >>CAUTION<< • Provide exemption per individual purchase order to prevent exempting all of UCSB • Contact Accounting for guidance

14. The University of CaliforniaSales/Use Tax Decision Chart for Purchases Tangible personal property (TPP)? NO Maintenance agreement? YES On computer hardware - exempt. (if optional) On computer software - generally taxable. Construction contractor is responsible for tax if lump sum or time and material. Construction contract? YES Labor is taxable if for new assembly or fabrication of TPP. Exempt if repair, installation, or consulting unrelated to the purchase of TPP. Labor or consulting? YES YES YES For resale? Issue a resale certificate or resale P.O. to your vendor. NO Purchased from a California seller for the University’s use with delivery and title transferring in California? Has a resale certificate been issued to the seller? YES Accrue sales tax and report on sales and use return in the period of purchase. YES NO Do not issue a resale certificate or accrue use tax. Seller is responsible for collection and payment of state tax. NO Purchased from out-of-state vendor? YES YES Has seller charged California tax? Was the correct California tax rate charged? YES Remit tax with payment to the vendor.Retain invoice as a receipt for tax paid. NO NO Remit tax billed with payment to the vendor.Accrue difference and report use tax on return in the period of purchase (calendar quarter). Do not remit the tax billed on the invoice and accrue use tax and report on sales and use tax return YES Has seller charged another state’s tax? NO Items to exclude from the measure of tax: 1. Common carrier freight charges to the University. 2. Repair and installation labor. 3. Services not related to the purchase of TPP. Items to include from the measure of tax: 1. Handling charges. 2. Freight-in to seller’s location. Note: TPP: Tangible personal property. Accrue and pay use tax on SBE return in the period of purchase.

15. Specific Purchases • Labor Charges on original purchase • Installation: Exempt, if separately stated • Repair: Exempt, if separately stated • Fabrication: Taxable • Assembly: Taxable • Maintenance Contracts on taxable purchases • Taxable if mandatory • Exempt if optional and separately stated

16. “Canned” Software Purchase • Software itself • “100% taxable” if involving transfer of tangible personal property • Including charges for license fees, site licensing, and other end user fees • Optional maintenance contracts @ 50% • The lump-sum charge for an optional software maintenance agreement is 50 percent taxable when the purchaser receives tangible personal property during the term of the agreement (such as software updates on CD)

17. “Canned” Software Purchase • Exempt if no transfer of tangible personal property is involved • Transferred by remote telecommunications to the purchaser’s computer • Transferred by vendor via “load and leave” • OPTIONAL maintenance contracts, unbundled telephone support, updates, etc. • Mandatory maintenance contracts including consulting services purchased with “canned” software take on characteristic of original purchase—exempt or taxable

18. Custom Software • Custom Software is exempt: • If created and tailored specifically for a particular customer application • If modification of “canned” software amounts to 50% or more of its purchase price • Exemption Includes: • Purchase of custom software • Optional maintenance contract • Mandatory maintenance contract

19. Printed Sales Messages • The University may avoid sales or use tax on purchases of catalogs, letters, circulars, brochures, and pamphlets provided that such “printed sales messages” meet all of the following requirements: • Printed for the primary purpose of advertising/selling, thus should include an order or response form • Printed to the special order of the University • Mailed or delivered by the seller, the seller’s agent, or a mailing house acting as the agent for the University, through the United States Postal Service or by common carrier • Received by any other person, other than the University, at no cost to that person

20. University as a Seller • California law holds University responsible for collecting sales tax • Departments need to collect sales tax when selling any tangible personal property • Bookstore sales, used furniture, catalogues • Including student organization fund raising (sale of lab notebooks, candy-filled coffee mugs, etc.) • Maintain proper records • Deposit tax collected into proper liability account • Contact Accounting for guidance

21. Sales and Use Tax • Where to go for help? • UC Sales and Use Tax Manual (243 pages) http://www.ucop.edu/financial-accounting/_files/sutm.pdf http://policy.ucop.edu/doc/3410313/AM-T182-73 • Call Steve Kriz, x3480 steve.kriz@bfs.ucsb.edu

22. Sales and Use Tax DISCUSSION ITEMS yellow handouts

23. Unrelated Business Income • Unrelated Business Activity: • If the activity is a trade or business • Regularly carried on • Not substantially related to exempt purpose (i.e. education, research, public service, or patient care)

24. Examples ofUnrelated Business Income • Recreation: • Sale of recreation membership cards to the general public and alumni • Athletics: • Sale of advertising space in sporting event programs • Scanning Transmission Electron Microscope (STEM) Facility: • Sale of STEM services to non-University users • Other?: • Name one more

25. Activities Exempt from Tax • General Rule = Income from an unrelated business activity is taxable unless it meets one of several specific exemptions: • Convenience of members • Passive income • Research • Real estate rents

26. Determining Unrelated Business • Contact General Accounting • Complete a non-financial questionnaire describing your activity • If it is unrelated business, UCOP will send a financial worksheet to be completed by the department

27. Employee vs.Non-Employee Relations • Federal (IRS Code) and state laws (Unemployment Insurance Code) govern use of independent contractors • Significant consequences of incorrectly classifying workers • Use the 11 Questions of the Pre-Hire Worksheet, Exhibit D, BUS-77* *Business & Finance Bulletins, BUS-77: Independent Contractor Guidelines http://policy.ucop.edu/doc/3220483/BFB-BUS-77

28. What is an Independent Contractor/Consultant? • A Person who: • Is in business for themselves • Is hired to perform specific, one-time tasks • Is NOT a University employee • Is ineligible for employee benefits • Signs a contract/agreement issued/authorized by Contracts & Property • The University determines the final result, but does not direct how the work is to be accomplished

29. Can a Student Employee Also Be an Independent Contractor? • YES—law allows IC status for activities traditionally provided by independent contractors, for example event performances • NO— student employees performing services under the direction and supervision of the University must be compensated through Payroll, even for onetime services unrelated to regular work.

30. What is an Independent Contractor/Consultant? • For more information about • Conflict of Interest, • Successor Contracts, • Employee Vendors, • Contractors Who Are Former Employees: http://www.bfs.ucsb.edu/contracts-property

31. Independent Contractor • UC Business and Finance Bulletins, BUS-34 and BUS-77, outline the University’s policies and procedures with respect to retention of independent contractors Business and Finance Bulletins library at: http://policy.ucop.edu/manuals/business-and-finance-bulletins.html

32. Nonresident AlienIndependent Contractors • Determination of independent contractor or employee is the same for a U.S. resident and nonresident alien • Federal income taxation, reporting and withholding for nonresident alien independent contractors, depends on: • worker’s visa type • immigration status • worker’s residency status for U.S. tax purposes • availability of tax treaty benefits, etc.

33. Independent Contractor Status • Incorrectly classifying employees can result in University-specific consequences, such as: • Possible loss of reimbursement from Contract and Grant funds • Failure to comply with patent agreement requirements • Violation of state financial conflict of interest rules

34. Independent Contractor Status • Tax consequences: • Assessed back state and federal employment taxes, income tax withholding, interest, and penalties • Penalties can be assessed for not paying minimum wage and mandated benefits

35. Contractor vs. Employee • If in doubt whether an individual is a contractor or an employee, contact • Contracts & Property: • http://www.bfs.ucsb.edu/contracts-property • Other resources: • Business & Financial Services: Jim Corkill, x5882 • Human Resources: Melinda Crawford, x5781

36. Independent Contractor Scenario #1 Tom Jones works 100% for Biology as a word processor. In his free time, he has a graphic design business. Professor Newton, from Chemistry, has asked Tom to do a small graphic design job. Professor Newton would like to pay him by a non-payroll Form 5. Is this ok? If not, what steps should you take to get him paid?

37. Independent Contractor Scenario #2 Harmony works 10 hour per week as a student employee at the UCEN. Occasionally this music major also sings with jazz and rock bands. Harmony performs at an alumni event during All Gaucho Reunion. Can she be paid by a non-payroll Form 5 or should she be set up as an employee of Alumni Association as well?

38. Employee Fringe Benefits • The fair market value of a fringe benefit must be included in an employee’s income unless excluded under a specific exception

39. Employee Fringe Benefits • Examples of potentially taxable benefits: • Parking - up to $245/month reported as pre-tax income • Van Pool/Transportation - up to $245/month reported as pre-tax income • Housing - unless employee is required to live on or nearby campus • Loans - forgone interest is taxable unless exempt loan • Discounts - taxable if more than 20% of price offered to public

40. Payments Subject to Tax and Information Reporting • Accounting for and Tax Reporting of Payments Made Through the Vendor System — AMC* D-371-12.1 • State Withholding from Non-Wage Payments to Nonresidents of California — AMC* D-371-77 • Taxation of Scholarship and Fellowship Grants and Educational Assistance — AMC* T-182-77 • Federal Taxation of Aliens — AMC* T-182-27 *Accounting Manual Chapters: http://policy.ucop.edu/manuals/accounting-manual.html

41. Accounting for and Tax Reporting of Payments Made Through the Vendor System • Chapter provides overview including table of payments subject to tax reporting • Generally payments to corporations are exempt from reporting • Payment to legal and medical corporations are reportable • Tax coding is Accounting’s responsibility, but departments must supply Form-5 data Accounting Manual: http://policy.ucop.edu/manuals/accounting-manual.html Chapter D-371-12.1

42. State Withholding from Non-Wage Payments to Nonresidents of California • California nonresident individuals and corporations are subject to 7% withholding • On total when annual amount exceeds $1,500 • California does not recognize foreign tax treaties, nonresident alien IRS rules • Who is resident: generally, individual in state more than 9 months or corporation registered with state • See procedures for requesting waivers or reduced rate withholding in policy • OBSERVATION: Pre-contract negotiations should anticipate tax issues, especially withholding Accounting Manual: http://policy.ucop.edu/manuals/accounting-manual.html Chapter D-371-77

43. Taxation of Scholarship and Fellowship Grants and Educational Assistance • Definitions, tables, appendices, and exhibits • Qualifying vs. non-qualifying S&F grants • U.S. Residents vs. nonresident aliens (NRA’s) • Taxation of NRA’s non-qualifying grant • Degree vs. non-degree candidates • Compensation for services under a grant is Payroll • Qualified Employee Educational Assistance • Qualified fee or tuition reduction—graduate students • General Educational Assistance—$5,250 annual limit • Educational assistance related to current job: • reimburse as employee business expense Accounting Manual: http://policy.ucop.edu/manuals/accounting-manual.html Chapter T-182-77

44. Federal Taxation of Aliens • Chapter discusses issues relevant to both payroll and non-payroll payments • Residency rules, definitions, calculations • Terms and conditions of nonresident visas • Withholding and reporting obligations • See Exhibits and Appendices Accounting Manual: http://policy.ucop.edu/manuals/accounting-manual.html Chapter T-182-27

45. Nonresident Alien Issues Honoraria and/or Associated Incidental Expenses associated with “usual academic activity”: • Restrictions on such payments to B-1, B-2, WB, and WT visas holders: • Cannot exceed nine days at a single institution • Cannot have accepted honoraria from more than five institutions in the previous six months • Exception—no restrictions apply to travel reimbursements for B-1, WB visa holders as long as associated with “usual academic activity”.

46. Nonresident Alien Issues • UC system now uses GLACIER online software for documenting nonresident alien visitors • Different rules, procedures, and US TINs • Employees: must apply for SSNs • Students: must apply for ITIN if not employed • Visitors: often subjected to withholding if no US TIN • Information at Business & Financial Services web page: http://www.bfs.ucsb.edu/accounts-payable/non-resident-alien-information • Procedures for international graduate students • OISS: http://oiss.sa.ucsb.edu/Home/OISSForms.aspx • Graduate Division: http://www.graddiv.ucsb.edu/financial/tax-information.aspx

47. Tax Treatment ofMoving Expenses • Moving expenses are excludable from income if they meet all three requirements: • Related to the start of work, i.e. in connection with commencement of work and incurred within 1 year • Distance test - new job location must be at least 50 miles farther than former principal job location • Time test - must be employed full time for at least 39 weeks in 12 month period immediately following the move Business and Finance Bulletin: http://policy.ucop.edu/doc/3420347/BFB-G-13

48. Nontaxable Moving Expenses • Cost of moving household goods • Expenses incurred in traveling from former residence to new residence (excluding meals) See pink handout

49. Taxable Moving Expenses • Examples (see pink handout): • Meals, lodging, expenses for pre-move house hunting trips • Meal reimbursements during travel from former residence to work location • Temporary lodging and meals at work location • Mileage reimbursement in excess of 24.0 cents/mile as of 1/1/2013 Business & Finance Bulletin: http://policy.ucop.edu/doc/3420365/BFB-G-28 Appendix A

50. Tax Treatment of Some Travel Expenses • Timely Claiming Expenses and Clearing Advances: • Failure by the employee to substantiate expenses and return any unused advances within 60 days after the completion of a trip obligates the University, under IRS regulations, to consider the unsubstantiated amounts as income to the employee • At 120 days unsubstantiated expenses/advances are transferred to payroll as part of the employee’s income Business & Finance Bulletin: http://policy.ucop.edu/doc/3420365/BFB-G-28