FAQ: Do I have to pay sales tax on property taxes?

In states where lease and rental payments are taxable, then the question comes up as to whether or not there's sales and use taxes on the property taxes paid by the lessee.

The answer, usually, is yes, you pay taxes.

It's not that you're paying taxes on taxes. It's because your agreement with the lessor is that you'll pay rent, plus the property taxes. Essentially the property taxes are "rent". Since the rental payment is taxable, the property taxes are taxable too. But they’re not taxable as taxes, they’re taxable as part of the rental payment. In other words, if the lessor paid the property taxes himself, there would be no sales or use tax .

It's worth taking a look at the rental agreement to make sure that the property taxes ARE part of the rent, just to make sure.

In particular, this is the rule for commercial real estate rental in Florida. The real estate taxes that the lessee pays as part of their lease agreement is considered taxable. The rest of you who aren't in Florida are supposed to be amazed that commercial real estate rental is taxable there.

Sales Tax Guy

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Some recent news

Just a couple of items I picked up in my reading:

Florida - sales tax holiday for clothing, school supplies, etc. with a price of less than $50 beginning 7/23/05 to 7/31/05.

Ohio - delays implementation of destination based sourcing from 7/1 to 5/1/06 and for some, 2008. This has been a big issue in Ohio and further complicates SSTP.

Massachusetts - Happy Meal toys are considered to be purchased for resale as part of the meals and therefore the restaurant doesn't have to pay tax on them. I know you're all breathing a sigh of relief on that one.

And from the "Felony Watch"

Restaurant owner in Florida charged with tax theft

Car dealer sentenced to 2 years

Car dealer OK's plea deal

It seems like it's always car dealers and restaurants that get in the serious trouble on sales tax issues.

STG

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FAQ: Why are smokers getting letters demanding sales tax?

Why are smokers getting letters demanding sales tax? Moreover, how can states get smokers' names and addresses from out of state resellers who don't have nexus in the smokers' states?

This is because of a Federal law passed in 1949 called the Jenkins Act which requires out of state cigarette sellers to file monthly reports on their buyers with states to which they ship cigarettes. Most of the cheap Web-based tobacco sellers don't comply with this law, and they are starting to get subpoenas for their records. Using this information, states are going after the buyers of the cigarettes.

This is not a sale tax issue so much as a cigarette issue. As near as I can tell, it wouldn't bleed over to other types of out of state purchases short of an audit by the destination state of the seller's books.

Heres a link to the Jenkins Act. And here's one short article on the topic.

STG

Sales and Use Tax Decision Factors

This post has been replaced

Getting Answers - Part 1

Where do you find the answers to your questions; or proof for a customer or vendor who disagrees with your handling of a tax issue; or proof for your boss or co-workers about how to deal with a certain situation? To me, the biggest single challenge for any tax research is the abundance of sources of the law. The need is to be able to consolidate the various laws and interpret them specifically for your situation.

Here's my take on the various resources available to you.

1. Lawyer or accountant - Using a professional is probably the best single resource, particularly if you get the answer from them in writing. Those written responses, which will cost big bucks, will generally be well researched, carefully cited, and customized to your situation. When the auditor asks "Why did you do it this way?", you'll be able to show them the report from your professional. The odds are that the auditor will take a look at it, ask if he can show it to his supervisor, and you'll never hear about it again. That may be money well spent. But the best part of all is that you let the professionals do the legal research. Which if you're not into it, is a pain. I enjoy this kind of thing, but I am admittedly a little out in left field.

Of course, you can't assume that your existing lawyer or accountant is an expert. That is a big assumption. They didn't learn sales and use tax in law school or accounting school. They learned about income taxes of course, but sales and use taxes just never get covered (unless they happened to get an instructor who had lived through a sales tax audit recently). So make sure they're an expert. Here's a previous post about finding such a creature.

2. Associations - This is one of those resources that you probably didn't think about. The state chamber of commerce may have some useful information for you and be able to guide you to someone who can help. Don't bother with local chambers and associations. They're usually more oriented towards boosterism and networking than providing technical information.

Even more useful, if it exists, is a state association (or maybe a national association) for your type of business. Often sales and use tax exceptions are industry specific and your association may be intimately familiar with them since they lobbied for the exemption in the first place or have already fought a court case. They may have publications and seminars available for you as well.

The other benefits to checking out the association are that:

1. It'll save your company money. One woman told me that her association actually has lawyers available that she can consult for free. But even if they're not free, remember that if the association has already figured out the answer, you don't have to spend time and money re-inventing the proverbial wheel.

2. It'll impress your management. I can tell you from my own management days that operational executives in most organizations are frustrated by the lack of interest that the administrative staff has in the business itself. Purchasing, accounting, HR, etc. generally don't go to industry meetings, read the industry magazines, or ask to be on the industry mailing list. If you do all of these things, even if it's only to pick up the occasional SUT pointer, you'll do some serious career enhancement.

More resources in a future post

STG

Don't trust research information in tables

One of the things that I've come to mistrust when I look things up is material presented in tabular format. My concern isn't that the format is necessarily wrong, because I myself often use tables, but they lend themselves to short-cuts which make them unreliable.

The primary problem is that they often heavily summarize the information to the point where the table can be, depending on your underlying interpretations, downright wrong. In addition, particularly in the world of sales and use tax, there are so many exceptions, exceptions to the exceptions, exceptions to the exceptions' exceptions, etc. that the tables just don't show enough detail to be useable.

For example, there's one table that I often have to deal with that summarizes absorption laws essentially by saying whether it's allowed are not. That's it - OK or NOT OK. Anyone who has reviewed those things knows that the rules are often just a tad more complicated.

On the other hand, I've seen tables with lots of text in each cell. The author really only uses the tables to present the information in a little more readable format. That, to me, carries a little more authority.

So in summary, beware of simple answers presented in a table. But if the author puts complicated answers in a table, that's better. At least if you're trying to get the right answer.

Here's a later article on the same subject
 

FAQ: Where can I find industry specific seminars?

At almost every one of my general sales tax seminars, someone will ask about where they can find seminars for their industries. It's usually manufacturers and sometimes contractors. But I'll get very specific requests too. Like one person this week who was interested in a seminar for the floor covering industry.

While I'm developing my own seminar for manufacturers and contractors, doing one for floor covering folks is, unfortunately, not on my immediate agenda. The problem is one of marketing to that narrow of an audience. This applies, not only for myself, but for any seminar organization.

But there is hope. If your industry has an association, particularly at the state level, check to see if they have any training available, or are making plans. And if they do, but haven't gotten anything going yet, mention my name!

STG

More wierd exemptions MN, ND, WI

Minnesota

“From April 1, 2002 through December 31, 2004, construction materials used or consumed in the construction of a meat-packing or meat-processing facility that replaces a facility that was destroyed by fire and costs more than $75,000,000”

I'm guessing someone knew a guy who knew a guy.

North Dakota

“Tangible personal property consisting of flight simulators or mechanical or electronic equipment for use in association with a flight simulator”

There's a big flight school in ND. Nothing to run into when you crash.

Wisconsin

“Snowmobile trail groomers and attachments for a snowmobile club that: “(a) meets at least three times a year, (b) has at least 10 members, (c) promotes snowmobiling and (d) participates in the snowmobile program under state law”

And the folks in Michigan and Minnesota are ticked off that they don't have this one.

Wierd exemptions - IN and NY

Almost every state has wierd exemptions and I collect them (mostly since I use them as examples in my seminars). I classify these types of exemptions into a couple of categories:

Favored industries: These are exemptions meant to help out industries that the state is known for and that the state wants to help out.

Silly, but make sense: These are exemptions that are frivolous, and politicians should be embarrassed about, but still make a certain amount of sense.

Huh?: These are exemptions that just are off the wall and make no obvious sense, at least to me. And since I'm writing this, I get to decide.

Here are a couple of in the favored industries category. They're so obvious that they don't even require comment by yours truly:

Indiana

"Sales of engines or chassis, or spare, replacement, or rebuilding parts or components for engines or chassis, that are leased, owned, or operated by professional racing teams are exempt."

New York

"Tangible personal property for use or consumption directly and predominantly in the production of live dramatic or musical arts performances."


More later

STG

Sources of SUT law

If you're trying to figure out where to find the law governing a particular issue, consider that all of these sources should be considered:

US Constitution

US Statutes

US Courts

State Constitutions

State Statutes

State Regulations

State Administrative Statements (bulletins, rulings, pronouncements, etc)
Unpublished enforcement positions (what the auditor learned about in training)

State Courts

Parish/County/District/City Laws

So the message here is that if you're just relying on a reading of state statutes and regulations off of the Web site, you're missing out on a whole bunch of important stuff.


STG

Litmus tests for choosing a professional

Not every CPA or lawyer knows about SUT. In fact, most of them pretty much have heard about it, but that's it. The ones that have some expertise didn't learn it in school - they learned about it on the street. They either got assigned to it at a job or lived through a few audits. From there they started reading about it, going to seminars, etc.

Here are a few litmus tests to see if YOUR auditor knows more than you do about this topic:

1. Ask them what they think of Quill. This is one of the biggest court cases involving SUT. They should have heard of it.
2. Ask them what they think the chances are of the SSTP becoming a reality.
3. Ask them what SUT newsletters they regularly read.
4. Ask them what books and online resources they use to research SUT.
5. Are they also an expert in income taxes? Good SUT experts are almost always specialists to the exclusion of Federal Income Tax. Their primary practice should be sales and use taxes, or a little more generally, state taxes.
6. Ask about the drop ship laws in your state.


Sales Tax Guy

When do you obey the sales and use tax laws?

When do you obey the sales and use tax laws?  All the time, of course.

But realistically, the fundamental question is simply whether or not the issue you're dealing with is worth the effort to fix. There are going to be some things that you may be doing wrong, but are just not that big of a deal. As I often tell people in my seminars, "if that is the only problem you've got when you walk out of here, then you're in good shape."

So, here is a test to determine if something is worth addressing.  And I didn't come up with it.  I went to a payroll seminar a long time ago.  The speaker, who was the payroll manager for a very famous restaurant chain, made this statement:

"If the cost to comply with a law is greater than the potential cost of violating it, then you may wish to consider not complying."

The cost of compliance includes the taxes you'll have to start paying that you haven't been paying before, along with interest, fines and back taxes.  And it also means you'll have to develop systems, policies, procedures and training to support the new efforts to comply.

For example, you may be looking at a problem that would require so much reprogramming of your accounting system, along with the training of your people, that you'd rather take your chance on an audit.  You may wind up paying $100,000 in fines and back taxes.  But if it would have cost you $2,000,000 to fix it, well, there's your answer.

There is also the possible loss of any competitive advantage you have in not charging your customers tax. Suppose you realize that you have nexus in Maine and you haven't been collecting and remitting their tax. If you register, you might lose customers because you're now charging tax. They may decide to buy from someone who doesn't charge tax.  Your cost is the lost sales.  Your risk is Maine auditing you.  

You might decide, after weighing all of the factors, including the odds of Maine catching you, that you'd rather take your chances with Maine. You're choosing NOT to obey the law. Not that I'm recommending this, you realize. I expect all of you to obey the law all the time. OK?

There is the moral and ethical issue of not complying. You should always comply with the law regardless of whether or not you're going to get caught or how much it costs. But we ALL make this decision every day. Do you report ALL of your taxable income to the IRS? Do you always drive within the speed limit and obey all the traffic laws? Do you follow ALL of the OSHA rules, all of the time? "Hey, where are your safety glasses?" 

We are constantly making decisions about whether or not to obey laws and weighing the costs and risks. I've just analyzed it for you. But remember, I do expect absolute compliance from all of you!  No funny business!

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details that haven't been discussed, and every state is different.  Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: any images above are hosted on Flickr. If you'd like to see more, click on the photo.

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How do I find sales tax software?

This question came up twice today in a seminar...about how to pick software. I rarely get that question, so with two in one day, I figured I better use that as blog-fodder.

While I don't recommend a specific sales tax package, I can give you some pointers about choosing solutions. I used to sell software, particularly accounting systems, in a previous life, so I know the mistakes that buyers can make.

Determine your true needs. This involves research, talking to vendors, more research, more specifications, more vendor research until you get down to a refined set of objectives that you can use for your request for proposal. Do not be swayed by a good sales representative, a professional proposal, or a snazzy demo.

Remember that the sales rep is not motivated by helping you find the right solution. They'll say that, but coincidentally, their software is the right solution. Amazing, isn't it? Don't base your decisions on what the sales rep says without supporting information. They are not looking out for you. Ask them how much they'll make in commissions, spiffs, bonus rankings, etc. if they make the sale. That will give you some perspective.

Maintain control of the process by constantly working off your specifications list (which will evolve as you learn more about the available software). The side benefit here is that you'll drive the sales reps crazy. And that is worth the trouble right there.  (grin)

Need to find find software? Try typing "sales tax software" into Google or Yahoo. Here's google's directory of sales tax software as well. And there are usually ads on this blog for sales tax software. Hint. Hint.

Finally, ask for three references! And these should be references in your industry, similar in size to your organization, and with similar SUT issues. Make sure vendors know early in the process that you'll be requiring these kinds of references. That'll screen out weak vendors that you shouldn't be wasting your time with.

Visit those references. Don't call them. VISIT them. Invest a couple of dollars in travel to be able to sit down, face-to-face with the reference. Take them out to lunch, tour their operations, plan your questions, discuss your specifications, ask about problems they've had, what they'd do differently, support, quality, and anything else that springs to mind.

The benefit of visiting the reference is that you can look 'em in the eyes, spend more time with them, develop a relationship, and also build an alternate source of support when things get nutty. Plus it forces you to have a more comprehensive experience as opposed to a 5 minute conversation on the phone.

Another option is to go to the software's user conference, if you can.

Remember, it's not the cost of the software you have to worry about. It's the costs associated with the conversion, installation and training that are big and painful. By making the right software choice initially, you'll minimize your pain, get the most out of your investment, and make only ONE investment...if you catch my drift.

And, like I said. You'll drive the sales reps crazy. Which is nice.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details that haven't been discussed, and every state is different.  Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Another example of a bad information source

A seminar participant recently mentioned that her controller said he had called the state a couple of years ago and they said a particular item was taxable.

Oh, there are so many things wrong with this!

1. Controllers aren't necessary experts at sales and use tax.
2. CALLED the state? If you're going to contact them, email them so you get the answer in writing and get some supporting information.
3. It was a couple of years ago!
4. What do you think the state is GOING to say?

Sales Tax Guy

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FAQ: How do I find a sales tax professional?

I get a fair amount of questions from people who are in need of a sales and use tax professional, particularly one who can handle multiple states. I don't do that type of work, so I give these suggestions:

Talk to your current tax firm.  They're probably more oriented towards Federal income tax than sales and use taxes, but they can refer you.  By letting them make the referral, they can then stay in the loop.  But don't let them take on the work themselves unless you're comfortable that they ARE sales and use tax specialists.  Most SUT folks don't do much Federal income tax and vice versa.

By the way, while there are sales and use tax specialists, you'll also see consultants who are SALT experts.  SALT stands for "State and Local Taxes."  They're cool too.

Go to a BIG CPA or law firm.  They'll probably have folks on staff who are multi-state experts and can deal with your issues in most, if not all states.

Check your industry association. 

To find specialists in any given state, another source is the American Bar Association Sales and Use Tax Deskbook. Each state chapter is written by an attorney specializing in SUT in that state, so obviously we're talking about serious expertise. The authors, and their contact information, are listed in the front of the book.

Contact the state bar association or the state CPA society for a referral.

You can take potluck and do a Google search on "sales tax" and the state you're interested in and see what pops up.  Take a look at the sales tax articles they've posted on their web site.  If there are many such articles, and they seem to be in depth, the firm is probably be worth an email.

Finally, drop me a line.  I know people.   

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details that haven't been discussed, and every state is different.  Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: any images above are hosted on Flickr. If you'd like to see more, click on the photo. 

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obg

Internal SUT training

At the risk of sounding self-serving, I'd like to discuss the kinds of training that most organizations need on SUT. Each department will have different needs, but each department does need some education.

All departments: Basics of sales and use tax

Accounts payable: Pretty much everything everyone else needs because they are often the go-to folks in an organization on this topic. And they need to make decisions about what is taxable on every purchase.

Purchasing: What purchases are taxable. Largely the same kind of training as AP

Billing: What sales are taxable, drop-ship rules, nexus issues

Sales and marketing: What sales are taxable, drop-ship rules, nexus issues

And what a surprise...we can do this training for you!

Sales Tax Guy

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Audit tip: Review the paperwork

A taxpayer in Indiana claimed that he paid Ohio sales tax on a purchase he made in 1995. When he showed the purchase order showing delivery to Ohio, the auditor pointed out that the PO was from 1997. Uh....

I'm guessing that the taxpayer wasn't paying particularly close attention to the paperwork that he was showing to the auditor.

Bottom line: Review every piece of paper going to an auditor to make sure it makes sense and doesn't make you look like complete idiots. And so that the information you're giving the auditor answers the question and doesn't open up another can of worms without you having some warning.

Sales Tax Guy

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FAQ: When does nexus go away?

So you have nexus in a state, perhaps because you have a sales rep visiting the state regularly. Then you fire him and decide not to pursue any additional business in that state. When can you stop filing returns?

There are generally no clear answers.

The easiest one, if not necessarily the most desirable, is if the state actually has officially said something on this. So the first places to check would be the state statutes, regs or policy statements. You may not like the answer.

There are four other suggested options that I've heard of:

1. As long as you are enjoying business from the nexus that you had, then you still have nexus. In the above scenario, as long as you are still getting business from that sales rep and the relationships he developed, you still have nexus.

2. You have nexus for the statute of limitations of the state. So if the statute of limitations in the state is 3 years, then your nexus goes away 3 years after the rep is fired.

3. One year or so.

4. The most aggressive attitude I've heard of is one full reporting period. So if you file monthly, and the rep is fired in May, then you would cease filing in July. Good luck with this one! Although, it would probably be the course I'd follow, assuming there was no other law on the books in that state.

Oh, one more thing. You may have nexus for multiple reasons. So just because one source goes away doesn't mean you don't have nexus anymore. Be very careful.

Sales Tax Guy

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Here's information on our upcoming seminars and webinars

Picture note: the picture above (he's waving - get it?) is hosted on Flickr. If you'd like to see a larger version, click on the picture, then click on the "all sizes" button above the picture.

Predatory Auditors - a "Harvest" Audit

This sort of thing doesn't happen all the time, and may never happen at all in your state. But this particular practice is worth noting to give you some ideas about avoiding similar trouble.

One seminar participant reported that an auditor had stayed for over 2 years (and was still there when she was at the seminar).  In that time, he had managed to get engaged to one of the AP specialists. The state wouldn't close the audit but stayed on site, not so much to find more dirt on the taxpayer under audit, but to continue to go through their files looking for other companies to audit. It was, in their words, a "harvest" audit.

Frankly, it sounded like the revenuers back at the state office building didn't want this guy to come back and were happy to have parked him someplace else.  And he was happy to stay, for the obvious reasons. 

How do you avoid this?  Don't let auditors get too comfortable. Be professional and put them in a hospitable location. But restrict access to just key audit contacts. Physically isolate them as far from others in the office as possible (particularly AP), and establish some time limits.

Here's one situation where it's OK to let the auditors be comfortable.

And for God's sake, keep them away from your AP staff!  That is, unless you feel like buying a shower present, then a wedding gift and, probably at some point in time, a baby shower gift.  Ugh.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details that haven't been discussed, and every state is different.  Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: any images above are hosted on Flickr. If you'd like to see more, click on the photo.

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obg