Tax-on-Tax: A “Hall of Mirrors”? Contact:

Tax-on-Tax: A “Hall of Mirrors”? Contact: Brent.Reeves@SureTax.com
888/

PRESENTERS David Rubenstein
Managing Editor, Telecommunications & Utilities Tax CCH, a Wolters Kluwer business Moshe Weingarten Senior Technical Specialist- Corporate Professional Services Mike Sanders Chief Technology Strategist - SureTax

TAX-ON-TAX SEMINAR Overview/Theoretical Framework Standard Practice
TOPICAL OUTLINE Overview/Theoretical Framework Standard Practice Streamlined Sales Tax Case Studies Calculation Module Demonstration

CCH, a Wolters Kluwer business - 2012
OVERVIEW Cutting Edge Issues Q: What is tax-on-tax? Q: What are the basic variations of tax-on-tax? Q: What are its practical implications? Q: How can tax managers develop a systematic method for making reliable tax-on-tax decisions? Q: How reliable are a set of default application rules? Q: What mathematical tools or formulas are available to simplify & streamline the calculation process? CCH, a Wolters Kluwer business 4

I. OVERVIEW Query: What is the legal authority for ‘tax on tax”?
We are best served to answer this question with a question as follows: Question: What is the generally accepted meaning of the term “gross revenues”? The legal definition is as follows: “All amounts received from operation of a business without diminution or deduction (unless specifically exempted)”. Source: Black’s Law Dictionary Explanation: (by way of FASB) [Commercial Practice] “As per standard industry accounting practices, $ collected to pay franchise fees [for example] are routinely included within the measure of gross revenue.” Implication: tax is included in gross revenues a matter of standard industry practice. CCH, a Wolters Kluwer business 5

TAX-ON-TAX: FACT OR FICTION?
Practical Implications Tax literature has traditionally been silent regarding the rules & system of application to calculate tax-on-tax Nevertheless, a matter of practice, tax authorities require vendors to include tax amounts collected from subscribers within the tax base of a given tax Consequently, tax managers need to develop an effective methodology to determine (A) when tax-on-tax applies and (B) how to calculate the amount of tax actually owed to the government CCH, a Wolters Kluwer business 6

I. OVERVIEW BASIC CONCEPTS The pass-through amount appearing on a consumer's invoice must be included in the amount of Total Taxable Revenue reported to the taxing authority on the company's tax return. If a company charges the consumer only the initial sum resulting from the 1st calculation of tax on the service, it will fail to collect the entire amount of tax owed to the taxing authority. As a result, the company will wind up paying tax on the amount of the tax passed-through to the consumer - even if this extra increment of tax is NOT collected from the consumer! SOLUTION: The company must calculate a “grossed-up” tax rate in order to assure that the amount of tax collected and the amount of tax owed are the same CCH, a Wolters Kluwer business 7

OVERVIEW Working Definition Q: What is tax-on-tax? A: Tax-on-tax represents a process by which telecommunications providers must factor the additional dollar amount attributable to either the same tax or a different tax invoiced to consumers into their adjusted tax remittance calculations. CCH, a Wolters Kluwer business 8

BASIC VARIATIONS OF TAX-ON-TAX
OVERVIEW BASIC VARIATIONS OF TAX-ON-TAX 1. Example of tax-on-Tax for purposes of the same tax Example: ME Service Provider Tax Query: Are charges for the ME Service Provider Tax included within the base of the ME Service Provider Tax (itself)? 2. Example of tax-on-Tax between multiple taxes Example: ME Service Provider Tax & ME USF Surcharge Query: Are charges for the ME Service Provider Tax included within the tax base of the ME USF? Query: Are charges for the ME USF included within the tax base of the ME Service Provider Tax? CCH, a Wolters Kluwer business 9

SAMPLE CALCULATION 10 CCH, a Wolters Kluwer business - 2012
CALCULATION #1: Amounts listed on the Consumer's Invoice TAX-ON-TAX Gross Sale: $400 $20.00 Tax Rate listed on consumer invoice: 5.00% 5.25% Amount billed to consumer: $1.00 $21.00 CALCULATION #2: Amounts listed on the Company's Tax Return Tax billed on consumer invoice: 21.00 TOTAL TAXABLE REVENUE: $420.00 $421.00 Tax Rate: Amount of tax owed by Company: $21.05* *RESULT: After 1 tax-on-tax cycles, the Company collects $21.00 from consumer but owes $21.05 to the taxing authority! (If company stops here, it will sustain a loss of $0.05) CCH, a Wolters Kluwer business 10

II. FLOW-CHART ANALYSIS DECISION-MAKING FACTORS
Issue: What factors do tax managers need to consider in order to determine whether tax-on-tax applies? FACTORS Does any statutory exclusion exist for tax-on-tax? Incidence of the tax – Is the tax (A) Consumer-Based or (B) Provider-Based? Tax Base Measurement – Is the tax levied as: (A) a Flat Fee or (B) a Percentage of Gross Receipts? Pass-Through Rules – Is the pass-through of the tax: (A) Prohibited, (B) Optional, or (C) Required? CCH, a Wolters Kluwer business 11

II. FLOW-CHART ANALYSIS
KEY POINT: In cases where multiple taxes apply, two sides of the equation must be analyzed independently 1 = EXPORT SIDE For purposes of TAX A, in what other taxes’ revenue base is TAX A included? (Example: Are charges for the ME USF included in the tax base of the ME Service Provider Tax, the ME PUC Fee, etc?) 2 = IMPORT SIDE For purposes of TAX A, what other taxes are included in the revenue base of TAX A? (Example: Are charges for the ME Service Provider Tax, ME PUC Fee, etc., included in the tax base of the ME USF?) CCH, a Wolters Kluwer business 12

II. FLOW-CHART: EXPORT ANALYSIS
YES STATUTORY EXCLUSION? NO CONTINUE CONSUMER-BASED INCIDENCE OF THE TAX PROVIDER-BASED CONTINUE PROHIBITED OPTIONAL PASS-THROUGH RULE APPLY TAX-ON-TAX REQUIRED CCH, a Wolters Kluwer business 13

II. FLOW-CHART: IMPORT ANALYSIS
FLAT FEE TAX BASE (TAX A) % OF GROSS RECEIPTS CONTINUE YES STATUTORY EXCLUSION? (TAX B WITHIN TAX A) CONTINUE NO CONSUMER-BASED INCIDENCE OF TAX B PROVIDER-BASED CONTINUE PROHIBITED PASS-THROUGH RULE (TAX B) OPTIONAL APPLY TAX-ON-TAX REQUIRED 14

Default Liability Rules
II. STANDARD PRACTICE Default Liability Rules * Identify any exclusions to tax-on-tax contained within governing legal sources (statutes, regulations, letter rulings, etc.) NOTE: Exemptions for “taxes” may not necessarily encompass surcharges or assessments that are imposed on providers * Assessments imposed in the form of “flat fees” will exclude other taxes from their own tax base * As a general rule – consumer-based taxes will be excluded from the tax base of other gross receipts-based taxes * As a general rule – provider-based taxes featuring an optional pass-through rule will be included within their own tax base as well as in the tax base of other gross receipts-based taxes * Taxes with a prohibited pass-through rule will generally be excluded from the tax base of other gross receipts-based taxes CCH, a Wolters Kluwer business 15

Summary of Default Liability Rules
II. STANDARD PRACTICE Summary of Default Liability Rules General Rule: Consumer-based taxes are excluded from the base of other gross receipts-based taxes Conforming Example = Nebraska Sales Tax REG D: Gross receipts do NOT include: * Any Local 911 (Landline) Surcharge * The NE Enhanced Wireless 911 Surcharge * The NE Telecom Relay Service (TRS) Surcharge * The NE Universal Service Fund (USF) Surcharge CCH, a Wolters Kluwer business 16

Summary of Default Liability Rules
II. STANDARD PRACTICE Summary of Default Liability Rules General Rule: Consumer-based taxes are excluded from the base of other gross receipts-based taxes Non-Conforming Example (Exception) = Colorado Sales Tax FYI Sales 80 (publication of Colorado DOR): The following are listed as “Taxable Miscellaneous Charges”: * TDD Charges (a/k/a CO Telecom Relay Service Fund) * Local 911 Charges NOTE: CO is not a member of Streamlined Sales Tax CCH, a Wolters Kluwer business 17

III. STREAMLINED SALES TAX
LIST OF MEMBER STATES 1. Arkansas 9. Nebraska South Dakota 2. Georgia Nevada Tennessee* 3. Indiana New Jersey 19. Utah* 4. Iowa North Carolina 20. Vermont 5. Kansas North Dakota 21. Washington 6. Kentucky Ohio* West Virginia 7. Michigan Oklahoma Wisconsin 8. Minnesota Rhode Island Wyoming * = Associate Member CCH, a Wolters Kluwer business 18

ISSUE: Has the Streamlined Sales Tax Project (SSTP) adopted any official policies regarding tax-on-tax? ANSWER: YES! In both the Agreement itself (SSUTA) and the accompanying “Rules & Procedures” (which interpret the actual text of the Agreement), specific provisions have been adopted informing: 1. Taxpayers when tax-on-tax needs to be collected 2. Taxing authorities as to the situations where laws or regulations may be enacted to replace the default guidelines with a customized set of rules, as well as the conditions that must be satisfied in order to implement such state-specific policy “overrides” CCH, a Wolters Kluwer business 19

CONSUMER-BASED TAXES GENERAL RULE: “Sales price shall not include any taxes imposed directly on the consumer that are separately stated on the invoice, bill of sale or similar document given to the purchaser” IMPACT: Pure consumer-based taxes are automatically excluded from the tax base of a state or local sales tax adopted by a Streamlined Agreement member state NOTE: Per Rule 327.9, any “consumer-based tax” that is NOT separately stated on the invoice to the consumer is treated as a cost to the seller and is therefore included in the measure of “sales price” subject to sales tax CCH, a Wolters Kluwer business 20

CONSUMER-BASED TAXES ISSUE: What conditions must an imposition meet in order to qualify as “a tax that is legally imposed directly on the consumer”? ANSWER: The tax must satisfy one of three alternative conditions – i.e., the imposition statute must specify that the tax is either: (A) Imposed on the consumer OR (B) Required to be collected from the consumer by the seller OR (C) Required to be paid by the consumer NOTE: Any tax that fails to meet this test = a tax on the seller CCH, a Wolters Kluwer business 21

PROVIDER-BASED TAXES “Sales price” = “the total amount of consideration for which property or services are sold, leased, or rented without any deduction for … all taxes imposed on the seller [or] any other expense of the seller” [SSUTA Library of Definitions - Definition of “Sales price”] IMPACT: Provider-based taxes are generally included within the tax base of sales tax unless specifically exempted OVERRIDE OPTION: States may exclude from the sales tax base any state or local tax imposed on a seller if the authorizing or imposition statute provides for an optional rather than compulsory collection of the tax. CCH, a Wolters Kluwer business 22

PROVIDER-BASED TAXES OVERRIDE OPTION – ADDITIONAL REQUIREMENTS 1. The “optional collection” feature of a local tax is determined by the state authorizing statute or by local ordinance 2. A state that desires to establish an exclusion from taxability must implement it through either statute or regulation 3. Only passed-through taxes that are separately stated on the invoice to the consumer qualify for exclusion 4. Exclusions from sales tax for specific taxes cannot be based on the status of the consumer or the type of product sold 5. The state must record the tax exclusion from the measure of sales price on the state’s individual taxability matrix CCH, a Wolters Kluwer business 23

RULES CONCERNING FEDERAL TAXES 1. Any federal tax that is directly imposed upon a consumer (based upon the same set of rules governing state or local taxes) are excluded from “sales price” when separately stated on the invoice given to the consumer Example: Federal Excise Tax on Communications (FET) 2. Federal taxes/surcharges that are imposed upon the seller or treated as a “cost of doing business” to the seller are included within the sales price, regardless of whether such taxes are separately stated on the consumer invoice Example: Federal Universal Service Fund (FUSF) Surcharge [Streamlined Sales Tax Rules and Procedures – Rule 327.9] CCH, a Wolters Kluwer business 24

IV. CASE STUDY #1 (PA GRT Decision)
PA GROSS RECEIPTS TAX KEY QUESTIONS 1. What accounting methodology and sources should a PA telco rely upon in order to calculate the amount of its “gross receipts” subject to tax? 2. Should a PA telco exclude $ collected from subscribers in the form of “consumer-based” collect-and-remit taxes? (Examples: PA Sales Tax, 911 Surcharges, etc.) OBSERVATIONS 1. Statute contains no definition of “gross receipts” 2. PA DOR has never enacted administrative regulations to guide taxpayers concerning how “gross receipts” are calculated CCH, a Wolters Kluwer business 25

PA GROSS RECEIPTS TAX STATUTES STATUTE #1: “Every telephone company or provider of mobile telecomm services doing business in PA shall pay a tax of 50 mills [5%] upon each dollar of the gross receipts of the company received from telephone messages transmitted wholly within PA or in interstate commerce billed to a PA service address” [72 Pennsylvania Statutes § 8101] STATUTE #2: “Every corporation liable to pay a tax upon the gross receipts derived from any business done wholly within PA shall transmit to the PA DOR a statement of the amount of such corporation’s gross receipts from all sources … during the preceding 12-month period. At the time of making such report, every corporation shall compute and pay the tax due upon its gross receipts for the period for which such report is made” [72 Pennsylvania Statutes § 710] CCH, a Wolters Kluwer business 26

“COMPANY X” DECISION* ACTUAL FACT PATTERN * Company X = an out-of-state telco doing business in PA * DOR issued an assessment against Company X for unpaid tax due to the company’s errant classification of certain receipts * Company X appealed assessment to the PA Board of Appeals * Board of Appeals denied Company X’s appeal * Company X filed an appeal with the PA Board of Finance and Revenue CCH, a Wolters Kluwer business 27

“COMPANY X” DECISION COMPANY X’s POSITION: * Receipts classified as taxable by the DOR fell into 3 purely non-taxable categories: (1) consumer-based taxes, (2) tax-exempt services, and (3) tax-exempt customers * Category #1 (Taxes) = various taxes and surcharges, such as PA State and Local Sales Tax, Federal Excise Tax, and 911 Fees BOARD OF APPEALS: We disagree – such tax receipts are taxable REASONING: Disputed taxes and surcharges = a “cost of doing business” that a telco is only allowed to recover from customers pursuant to state PUC regulations and tariffs CCH, a Wolters Kluwer business 28

“COMPANY X” DECISION RESOLUTION: * PA Board of Finance and Revenue upheld the decision of the Board of Appeals, denying Company X’s petition for relief * Company X is not entitled to exclude consumer-based tax receipts grouped under Category #1 (Taxes) from the measure of gross receipts subject to the PA Gross Receipts Tax THEORY: PA Gross Receipts Tax contains only 2 statutory exemptions – (1) sales of Internet access and (2) sales for resale Since money collected in the form of taxes and surcharges falls into neither category, such receipts are implicitly taxable! *NOTE: Recent developments suggest PA DOR is now distancing itself from the tax-related implications of this decision CCH, a Wolters Kluwer business 29

IV. CASE STUDY #2: TX Cable Franchise Fee
City of Dallas v. FCC Landmark Case: U.S. Court of Appeals, 5th Circuit, 1997 FACT PATTERN BY SEQUENCE OF EVENTS: * The City of Baltimore charged a local cable company a franchise fee = 5% of its “gross revenues” * The cable company excluded $$$ collected from subscribers in payment of the franchise fee from its calculation of gross revenues * Baltimore adopted a resolution requiring the cable company to include the $$$ collected from subscribers designated to pay the fee * The cable company filed a petition with the FCC, claiming the resolution violates federal statutory law [47 U.S.C. § 542(b)] * The FCC sided with the cable company and negated Baltimore’s resolution CCH, a Wolters Kluwer business 30

City of Dallas v. FCC FCC PROCEDURAL HISTORY * FCC Order: FCC issued an Order stating that amounts collected for franchise fees are NOT to be included within the measure of “gross revenues” * Cities of Dallas and Laredo, TX asked the FCC to reconsider * FCC Memorandum: Cities petition for reconsideration was denied and original Order of Cable Services Bureau was upheld Reasoning: Intent of Congress was to exclude franchise fee collections from calculation of operators’ gross revenues Theory: Franchise fee = a tax levied by the municipality Texas cities appeal FCC’s ruling to the U.S. Court of Appeals 31

City of Dallas v. FCC Overview of Federal Authorizing Statute = 47 U.S.C. § 542 Governing Provisions (a) Franchising authorities can require cable operators to pay an annual franchise fee (b) Maximum amount of any franchise fee = 5% of “a cable operator’s gross revenues derived from operation of the operator’s cable system to provide cable services” (c) Cable operators may identify the amount of the franchise fee as a separate line item on the subscriber’s bill CCH, a Wolters Kluwer business 32

City of Dallas v. FCC * The City of Dallas filed suit against the FCC, claiming that the a franchise fee should be included in the tax base ISSUE: Does the phrase “a cable operator’s gross revenues derived from operation of the operator’s cable system” unambiguously include $$$ collected from subscribers towards payment of a franchise fee? U.S. COURT OF APPEALS HOLDING: YES – “Gross revenues” clearly include $$$ received from subscribers dedicated to payment of franchise fees CCH, a Wolters Kluwer business 33

City of Dallas v. FCC FCC Counter-Argument to the Court #1: Including franchise fees within the measure of “gross revenues” produces “peculiar results” unintended by Congress Theory: Applying the cities’ definition leads to an endless cycle of calculations (the mathematical equivalent of a “hall of mirrors”) Circuit Court Holding: We disagree – Application of a simple algebraic formula results in a calculation whereby the total amount billed to the subscriber exactly equals the amount of charges plus the franchise fee paid to the franchising authority (so no infinite series of loops) CCH, a Wolters Kluwer business 34

City of Dallas v. FCC FCC Counter-Argument to the Court #2: Gross Revenues cannot include franchise fees, since such fees represent consumer-based taxes that must be excluded from the dollar amount upon which they are calculated Theory: Cable operators serve merely as “collection agents” Circuit Court Holding: We disagree – A franchise fee is not a tax on the consumer – instead it is a form of rent (a “cost of doing business”) Conclusion: All $ collected from subscribers (including funds designated to pay franchise fees) are included within a cable operator’s overall measure of gross revenues upon which the actual amount of the franchise fee is calculated CCH, a Wolters Kluwer business 35

IV. CASE STUDY #3 (Federal Excise Tax (FET))
IMPOSITION STATUTE: “A tax equal to 3% of the amounts paid for communications service is hereby imposed” STATUTORY DEFINITION: Communications service = (A) Local telephone service, (B) Toll telephone service, and (C) Teletypewriter service [26 U.S.C. § 4251] IRS NOTICE NO : Going forward, only “local-only service” is taxable, as opposed to a “Nontaxable service” Nontaxable service = Bundled local and long distance service CCH, a Wolters Kluwer business 36

ADDITIONAL PROVISIONS INCIDENCE OF TAXATION Tax is paid by the consumer and collected by the provider SOURCE: 26 U.S.C. § 4251(a)(2) and 26 U.S.C. § 4291 STATUTORY EXCLUSION: “Charges for state or local tax are excluded from the amounts paid for communications services if such charges are separately stated on the customer’s bill SOURCE: 26 U.S.C. § 4254(c) [Added 1977, effective Jan. 1, 1978] CCH, a Wolters Kluwer business 37

FET – TAX-ON-TAX ISSUES ISSUE #1: What kinds of taxes or surcharges (if any) are included in the tax base of the Federal Excise Tax? ISSUE #2: Can a general set of tax-on-tax rules be developed, or does the outcome vary on a case-by-case basis? ISSUE #3: What factors or variables does the IRS consider in determining whether a particular levy or surcharge qualifies as an “excluded tax” under 26 § U.S.C. 4254(c)? CCH, a Wolters Kluwer business 38

“EXCLUDED TAX” ANALYSIS – DETERMINING FACTORS 1. Is the levy or surcharge “separately stated” on the invoice? 2. Is the fee levied in connection with taxable local-only service or non-taxable bundled or long distance service? 3. Is the levy considered a “fee” or a “tax”? (apply the Valero* test) Three-Part Test 1. What entity imposes the charge? 2. What population is subject to the charge? 3. What purposes are served by the revenue generated? *Valero v. Caffrey – U.S. Circuit Court of Appeals, 4th Cir. (2000) CCH, a Wolters Kluwer business 39

Examples of Impositions Potentially Included Within the FET: A. State and Local Sales Tax B. Federal Universal Service Fund C. Regulatory Assessments D. Municipal Right-of-Way Fees E Surcharges CCH, a Wolters Kluwer business 40

IV. FET – Tax-on-Tax Rules (Example A)
IRS Revenue Ruling (January 1978) GENERAL RULE: A sales tax that is imposed in the form of a transactional charge that either: is levied directly upon the consumer, or is passed through to the consumer, qualifies as an excluded tax SUB-CATEGORIES: 1. Taxes levied upon providers but passed through to consumers 2. Taxes required to be added to sales price, and which thus become part of the amount charged for phone service 3. “Collect-and-remit” charges levied directly upon the consumer RATIONALE: Sales tax is imposed purely as a revenue-raising measure designed to benefit the community at large CCH, a Wolters Kluwer business 41

IV. FET – Tax-on-Tax Rules (Example B)
IRS Notice (December 2006) ISSUE: Are separately stated charges billed by providers to recover their contributions to Federal Universal Service programs included within the tax base of the FET? FACTS: The FUSF is a federally mandated contribution (i.e., a provider-based assessment) that is optionally allowed to be recovered from subscribers as a separate line item RULING: FUSF recovery charges are NOT subject to the FET REASONING: Separately stated FUSF charges are not treated as “amounts paid for local-only service,” since providers charge the FUSF in connection with long distance service, which is non-taxable service for purposes of the FET CCH, a Wolters Kluwer business 42

IV. FET – Tax-on-Tax Rules (Example C)
IRS Memorandum (March 2011) ISSUE: Are regulatory assessments subject to the FET? FACTS: Regulatory assessments are imposed by state and local governments as a means of funding various programs GENERAL RULE: Regulatory fees ARE subject to FET liability REASONING: 1. Regulatory fees are amounts that are generally billed in connection with taxable local telephone service 2. Such fees are imposed upon telecom providers in the form of administrative expenses, to fund narrow regulatory agendas and programs rather than as a means of raising general revenue CCH, a Wolters Kluwer business 43

IV. FET – Tax-on-Tax Rules (Example D)
IRS Memorandum (March 2011) FACT PATTERN: ROW Fees = Mandatory charges levied by municipalities on residential or business phone lines as a means of recovering the cost of managing the public rights-of-way ISSUE: Does a ROW Fee meet the definition of a state or local tax, thus rendering it an excluded tax under 26 § 4254(c)? RULING: YES – Local ROW Fees do meet the definition of taxes that are excluded from the FET under § 4254(c) REASONING: ROW fees qualify as excluded taxes rather than fees because they provide a benefit to the general public CCH, a Wolters Kluwer business 44

IV. FET – Tax-on-Tax Rules (Example E)
IRS Memorandum (Sept. 2010) 911 Fees are typically levied upon consumers, as either an amount per phone line or as a percentage of revenue, to finance emergency responder services ISSUE: Does a 911 Fee meet the definition of a state or local tax, rendering it an “excluded tax” under 26 § 4254(c)? RULING: YES! Both a standard 911 Fee and an E911 Fee do meet the definition of a tax that is excluded from FET computation REASONING: 911 fees more closely resemble taxes than fees, because they are widely imposed and benefit the community CCH, a Wolters Kluwer business 45

IV. FET – Tax-on-Tax Rules (Summary)
SUMMARY OF TAX-ON-TAX RULES ∙ FEDERAL EXCISE TAX TYPE OF IMPOSITION TAX-ON-TAX RULE STATE & LOCAL SALES TAX NON-TAXABLE FEDERAL UNIVERSAL SERVICE FUND REGULATORY ASSESSMENTS TAXABLE MUNICIPAL ROW FEES 911 SURCHARGES CCH, a Wolters Kluwer business 46

V. CALCULATION MODULE DEMONSTRATION
Tax-on-Tax: System Implementation NOTE: Calculation module systems can be designed in one of two ways: System Design #1 = Open Architecture System Design #2 = Closed Architecture (i.e., black box) KEY DISTINCTION: In a closed system architectural model, the method of calculation is completely invisible to the user, i.e., the user feeds the data into the system which generates an output – the user has no clue as to the processes that occur beneath the surface to produce that result In an open system architectural model, the user can visibly see the exact process by which monetary sums are calculated CCH, a Wolters Kluwer business 47

Tax-on-Tax: Importance of System Architecture Advantages of an Open System Architecture * Users enjoy more security, knowing they are getting the calculations right because the process is visible * The value of an open architecture environment is enhanced in the case of tax-on-tax due to the sheer complexity of the transactions * In the event of an audit, carriers will be in a much better position to justify their remittance reports, since they are more familiar with how the sums were calculated CCH, a Wolters Kluwer business 48

Basic Calculation Formula Methodologies A. Algebraic Formula (Single Tax) Grossed-Up Rate = Original Rate 1 – Original Rate Grossed-Up Charge = Original Charge X Grossed-Up Rate B. “Cycling” Method * Calculate 1st amount of tax owed (Sum #1 X Tax Rate) * Add the calculated amount (Tax #1) to the original tax base * Multiply the new sum (Sum #1 + Tax #1) by the tax rate * Compare the new amount of tax to the previous amount * Continue process until the marginal amount is less than 1¢ CCH, a Wolters Kluwer business 49

Demonstration of Open System Calculations Tax-on Tax Local basis service provided in: - Pittsburgh, Pennsylvania - New York, New York ***Note the change to the rate of the taxes, resulting in grossed up effective tax rate considerably greater than the original CCH, a Wolters Kluwer business 50

QUESTIONS? Contact: Brent.Reeves@SureTax.com 888.910.3466 51
CCH, a Wolters Kluwer business 51

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