Presentation on theme: "Illinois Sales Tax Issues for Veterinary Businesses Presented by: JD Michael LLC January 2007."— Presentation transcript:
Illinois Sales Tax Issues for Veterinary Businesses Presented by: JD Michael LLC January 2007
There are Two Relevant Laws Applicable to Veterinary Businesses Service Occupation Tax (SOT) SOT Applies to Tangible Personal Property that is Transferred or Sold Incident to Performing a Service Retailers Occupation Tax (ROT) Applies to Tangible Personal Property that is Sold at Retail
Today’s Presentation Will Attempt to Provide Information as to: Service Occupation Tax When does a veterinary business incur an SOT liability? How is the amount of SOT due calculated? What are the various options a veterinary business has in paying SOT? Retailers’ Occupation Tax When does a veterinary business owe ROT? How do you pay taxes when you owe both SOT & ROT?
When does a Veterinary Business Owe Service Occupation Tax ? Veterinary practices are subject to the Service Occupation Tax Act when they transfer or sell tangible personal property in conjunction with providing professional veterinary services. Every veterinary practice will owe SOT.
Service Occupation Tax Transactions Include: 1. Medicines, drugs and other products having medicinal purposes that are directly applied and/or administered during a veterinary exam or procedure 2. Medicines, drugs and other products having medicinal purposes that are recommended or prescribed as a result of a veterinary exam 3. Medicines, drugs and other products having medicinal purposes that are sold as a part of a continuing plan for the health and well being of an animal under the care of the veterinarian.
How Do You Determine What Qualifies as Having Medicinal Purposes? Must have a written claim on the label or packaging indicating: 1. the product is intended to cure or treat disease, illness, injury, or pain 2. or to mitigate the symptoms of such disease, illness, injury or pain.
Examples of Products Having Medicinal Purpose 1. Topical Flea and Tick Products (but not flea & tick collars) 2. Medicated Shampoos 3. Prescription Animal Foods that are Sold Only to Licensed Veterinarians
Criteria for a continuing plan for health and well being of an animal means: 1. Having a valid Veterinarian-Client-Patient Relationship (VCPR) established in accordance with the Veterinary Medicine and Surgery Practice Act 2. Maintaining appropriate information within patient records to indicate that an animal was examined regularly (yearly) and the selling or transferring of drugs or medicines was made in conjunction with providing veterinary services under a valid VCPR.
What is the SOT Base for Veterinary Businesses? Veterinary businesses are considered to be deminimus servicemen per the Service Occupation Tax Act. The tax base for transactions subject to SOT is the cost price of the medicines, drugs and other products having medicinal purposes transferred or sold incident to providing services. The state tax rate is 6.25%. There may also be a local SOT due. Local rate will depend upon the business location.
When does a Veterinary Business Owe Retailers’ Occupation Tax ? When Veterinarians sell items of tangible personal property to clients or to the general public outside the scope of the service transactions discussed in the previous slides, they are considered to be retailers engaged in the business of selling tangible personal property at retail and will incur Retailers’ Occupation Tax liability on such sales.
What are some examples of Retail Sales applicable to veterinarians? Non-prescription medicines sold outside the scope of a VCPR, Non-prescription foods that can be purchased from other than a licensed veterinarian, Behavioral training equipment like harnesses, leashes and collars, Grooming supplies such as combs, brushes and non-medicated shampoos, Chew toys, and Pet waste handling products
What is the ROT Base for Veterinary Businesses? The taxable base for transactions subject to Retailers’ Occupation Tax is the selling price of items sold at retail. The state tax rate is 6.25%. There may also be a local ROT due. Local rate will depend upon the business location. Veterinary businesses must reimburse themselves for the tax they owe by charging and collecting state and local taxes from their customers on all retail sales.
Application of These Laws to Veterinary Businesses: This is not a one-size fits all determination. Application of tax laws is dependant on nature and scope of each business. There are choices available to veterinary businesses – choices will require business decisions
Tax Obligations for Veterinary Businesses - Generally There are two basic scenarios that are applicable in determining how a veterinary business will satisfy its tax obligations. For each scenario there are two options available for paying the tax due. Scenarios and options will depend on the nature and scope of the business and decisions made by each business that is best for their market situation.
What Are the Two Scenarios Applicable to Veterinary Businesses? Scenario # 1 Veterinary Practice with No Retail Activity Scenario # 2 Veterinary Practice with Retail Activity
What Are the Options Available for Businesses with No Retail Activity? Option # 1 Pay Tax to Suppliers When Purchasing Medicines, Drugs, and Other Products That Will Be Transferred or Sold Option # 2 Purchase All Drugs and Medicines Tax- Free and Account for and Pay SOT Due Directly to the Department of Revenue as These Items Are Transferred or Sold.
The Advantages of Non-Retailing Businesses Selecting Option #1 Easiest in terms of tax compliance for the veterinary business. If all suppliers are registered and collect Illinois tax, no registration with the Department of Revenue is necessary. This option will be the most applicable to small animal veterinary practices that do not make retail sales.
What if Suppliers Are Out-of-State and not Registered to Collect Illinois Tax? Ask them to become registered - the IDOR will allow out-of-state businesses to become voluntary registrants in order to collect and pay over tax. If getting them registered is not possible – veterinary businesses will be required to be registered in order to pay Use Tax directly to the Department of Revenue on items purchased from out-of-state unregistered suppliers.
When Would Option # 2 Be Recommended? Option #1 may not be best for non-retailing businesses that treat farm animals being raised for producing food or involved in breeding animals for food (i.e. livestock). Medicines and drugs transferred incident to performing veterinary services on livestock are exempt from ROT & SOT. Option #2 may be best when a portion of a veterinary practice is treating livestock.
What Are the Tax Requirements in Choosing Option #2? SOT will be due on medicines and drugs transferred in treating small animals but will not be due when treating livestock. The tax base will be the cost price of medicines and drugs transferred in treating small animals The business must be registered with the Department of Revenue and file returns to pay the SOT due.
What is the basic difference between these 2 options? The state tax base and rate is the same under both options (Cost Price). The major difference in tax affect between the two differing options involves the payment of local option taxes. Under Option #1 any local option Retailers’ Occupation Tax will be based on the suppliers selling location. Under Option #2 the local option Service Occupation Tax due will be based on the veterinarian’s location.
What Are the Requirements for Businesses with Retail Activity? A veterinary business that makes retail sales in addition to providing veterinary services must become registered as a retailer in order to pay the ROT due on such sales. Under the Service Occupation Tax Act a veterinary business that in addition to providing services also makes retail sales cannot choose to satisfy their SOT liability by paying tax to suppliers.
Say Again ???? Put In Another Way !!! Under the law, if a veterinary business makes even one retail sale, they cannot satisfy their tax liability on medicines and drugs administered in the practice by paying the tax to suppliers. Rather, they must purchase medicines and drugs tax-free and pay the Service Occupation Tax directly to the Department of Revenue as medicines and drugs are transferred to clients.
What Are the SOT Requirements for Vet Businesses that also Retails? The tax base will be the cost price of medicines and drugs transferred incident to providing veterinary services. The state tax rate will be 6.25% and any local option SOT due will be based on the veterinarian’s location. Where a portion of a veterinary practice is treating farm animals, the SOT will be due on medicines and drugs transferred in treating small animals but will not be due on treating livestock.
SOT Requirements for retailing veterinary businesses continued …. The veterinary business must be registered with the Department of Revenue and file returns to pay the SOT due. The Department of Revenue allows the payment of SOT (on the cost of medicines and drugs transferred) and ROT (on the selling price of retail items) on the same return.
Can a Veterinary Business Charge SOT to Its Customers? Yes, SOT can be charged to the customers. The tax base can be the cost of the medicines or drugs transferred or the selling price of such items. However, the selling price charged the customers cannot be less than the cost. Any tax collected must be paid over to the Department of Revenue.
Is there another option available for Retailing Veterinary Businesses? Yes, there is another option for a veterinary business that wants to continue to make retail sales and also would like to continue to pay tax to suppliers on drugs and medicines. The Department of Revenue has historically allowed business entities to have separate registrations and separate tax reporting for differing business operations (i.e. divisions) within the entity.
Tell me more about how a Veterinary Business would do this…? Businesses that elect this option must segregate their retail activity from their service transactions. They will not need to create two distinct legal entities but will need to create different divisions within the existing business entity. They must sufficiently segregate business activities in their accounting records and financial reporting as to create a distinguishable separation.
Give me some examples of what you mean regarding segregation…..? 1. Create separate revenue accounts to distinguish retail sales made by the retail division from service transactions made by the service division. 2. Invoice retail sales and service transactions separately, especially if made to the same customer on the same day. 3. Create separate inventory accounts to distinguish purchases of items that will be resold at retail from items that will be transferred incident to service transactions.
Examples of what you mean regarding segregation….. (continued) 4. Create separate asset, liability and/or expense accounts in their records to record transactions attributable to retail selling activities from veterinary service activities. 5. Create separate financial reporting (balance sheet and income statement) for each division. 6. File separate sales tax returns for each division.
Does Separation Mean Obtaining Two Registration Numbers from DOR? The Department of Revenue will normally require separate registration numbers. However, under this option the service division would qualify as a Veterinary Practice with No Retail Activity (as discussed earlier) This portion of the business could avoid having to secure a second registration number if they paid tax to suppliers on all items of tangible personal property transferred incident to services.