Thursday, June 07, 2007

Check transaction taxability

The major risk that companies have is not paying use tax on their untaxed purchases. And we discuss this problem in the seminars. BUT, it's also important to NOT pay taxes when you don't have to. For example, I had a participant from Illinois recently tell me this story.

They bought services from a company that was also in Illinois. Because the vendor didn't charge sales tax, the AP department self-assessed use tax. Apparently, nobody asked whether or not this service was taxable (in many states it is). But in Illinois this service isn't taxable. If the AP department had simply asked the vendor why they weren't charging tax, they might have avoided paying taxes they didn't need to pay.

But nobody asked. And they self assessed use tax on these purchases for years.

Finally, someone asked a question about the invoice and a purchasing agent, who had been in my seminar, happened to notice that they were self-assessing use tax. She emailed me asking whether or not I thought this invoice was taxable. I replied that I couldn't imagine how it could be. She researched it further and discovered that they had OVERPAID the state of Illinois by almost $19,000!

The morals of the story:
1. Check the taxability of every transaction, particularly large or continuing ones;
2. When you have an in-state vendor who isn't charging tax, they might know why. Before you go self-assessing, ask them.
3. One of the reasons this mistake may have been made is because the person deciding on taxability may have been most familiar with another state and just assumed Illinois would be the same. Make sure your staff knows that the state rules vary from state to state. Assume nothing is the same.

The Sales Tax Guy

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