Bad Debts - Save Money!

This is one of a series on how to handle items that affect the "basis" of tax.

I was doing a seminar a few months ago in and, near the end of the day, one of the participants said, “Jim, you just saved me $30,000.” He had just written off a $500,000 taxable sale as a bad debt. And he had just realized that he could reduce his taxable sales by that amount. Since the tax rate in his state is 6%...well, you do the math. I had been talking about bad debts and their effect on sales and use taxes.

If you sell something and charge tax, and the customer never pays you for the purchase, you’ll eventually write it off. Almost every state gives you the ability to recover the sales or use tax on that bad debt. They either allow it through a credit, refund or, most commonly, by simply deducting the bad debt from your taxable sales in the month you write it off. The method is usually clearly stated someplace in the instructions or law.

Because the people doing the sales and use tax return are usually NOT in the accounts receivable department, they probably don’t even think about bad debts, let alone their impact on the return. If you’re preparing the return, and you’re not adjusting for bad debts, then you’re throwing money away. If you’re not the one who prepares the return, then check out what YOUR company is doing. I won’t say you’ll save $30,000, but you’ll probably pay for your subscription to this blog.

Sales Tax Guy

Where are services taxable?

While you can usually tell what state gets to tax TPP by where the delivery occurred, the taxing of services isn't so easy.

1. Some states (and this is the default) simply tax the service if it is performed within the state.

2. Some states will tax based on where the customer receives the benefit of the services.

3. And some states will not tax if the result of the services (e.g. the item repaired) is shipped OUT of the state (related to number 2, but not precisely the same).

When these issues come up, you should assume option 1, by default, unless you can find something that says otherwise.

Sales Tax Guy

How to Read Legalese

If you're reading this, then you probably have to read legalese as part of your research into sales and use tax problems.

I don't disagree with the old joke that lawyers write legalese to keep themselves employed. But to be less cynical for just a second, there is a reason...precision. Well-crafted legal language should leave nothing vague, nothing gray. There will be no pronouns, since you can't be sure who "he" refers to.

So here are a few tips that I've picked up:

1. Be patient. This stuff isn't written for third-graders. It ain't like reading Harry Potter. You're going to have to face the fact that you may have to spend some time reading and analyzing. Take a deep breath.

2. Diagram the sentences. Remember 6th grade English class where you learned how to do this. And you whined about how you'd never have to be able to do this! While you don't have to actually diagram (although it might help), pay attention to the structure of the material. Note the conjunctions, the commas, the semi-colons, etc. Strict rules of grammar apply when you're talking about reading legalese.

3. I find that it helps to actually map out relationships and even give the parties names when I'm trying to unscramble legalese.

4. Bulletize the text if it presents you with several conditions.

Pardon me while I finish reading Harry Potter.

Sales Tax Guy

Should you tax your services?

Part of a series on essential actions you need to take

If you sell services, are they taxable? You might think they aren't, but are you sure?

I was doing a seminar in Pennsylvania a couple of months ago and participant asked me during one of the breaks, "Are headhunting fees taxable?"

I said, "Yes, as a matter of fact they are here."

"Dang!" This was not the actual word used, but I'm paraphrasing for our delicate readers.

She has been a recruiting firm in Pennsylvania for 10 years and had just gotten notified she was about to be audited, which was kinda why she was at the seminar. Since she had never filed any kind of sales tax return, thereby kicking in the statute of limitations, she might be looking at a 10 year liability on ALL of her sales for the last 10 years.

Bummer. You'd think this would have come up in one of the monthly meetings, but maybe she missed that one.

So don't assume what you do isn't taxable.

Now, here's the other problem. What about what you do in other states? Just about any service you can name is taxable someplace. Even if you provide professional services, it's taxable in a couple of states. Heck, in South Dakota, what I do is taxable!

If you actually perform the taxable service in a state, you need tax it.

What do you do?

At the very least, check the web page for the state you're working in, and see what they define as taxable services. If you want to look further, there are books on sales and use tax from RIA and the American Bar Association that I highly recommend.

I see businesses in almost every seminar that aren't taxing their services like they should. Solve the problem now by checking... in every state where you do work!

The Sales Tax Guy

Golden Rule: Nexus

Do you have nexus in a particular state? If you do, then you should be collecting sales or use tax on any taxable sales you're making in that state and filing a return. Even if you don't make taxable sales (e.g. everything is for resale) you probably still need to be registered and filing zero returns. And, of course, you should be getting those resale certificates that prove you're making non-taxable sales.

Here are three simple questions to ask:

1. Do you send people into the state (or already have people there) who are involved in the sales, marketing, delivery, installation, training, set up, or even the repair of your products and services? Are they there more than a couple of times per year? They don't have to be employees. They can be contractors or even manufacturer's reps. And they don't have to live in the state.

2. Do you have any facilities, offices, warehouses, or plants in the state? In other words, are you taking up space in the state. And you don't have to own the facilities. You can rent or even sublease the space.

3. Do you have a lot of tangible personal property in the state (e.g. inventory, property you lease to others, property used executing contracts, etc.)?

If you meet any one of these tests, then you should be worried about nexus in that state. That is the Golden Rule of Nexus.

What should you do?

1. Summarize all the states you're worried about and identify the amount and type of the sales and what conditions might give you nexus.
2. Review the state's nexus laws recognizing that they are subject to a lot of interpretation, court cases, constitutional restrictions, etc. Many nexus laws are completely invalid due to the Supreme Court decisions including Quill.
3. Still worried? Contact an sales and use tax expert who specializes in that state.
4. Don't ignore the problem. You have no statute of limitations protection in most states. Which means, if they catch you, they can go back billions of years.

I've written quite a few articles on nexus so please feel free to further explore this topic.

The Sales Tax Guy
(see disclaimer)

Felony Watch

More people gettin' thrown in jail (or at least getting in BIG trouble):

Contractors who didn't remit their collected sales tax to Washington state

Shenagins in Minnesota with a couple who had multiple businesses, allegedly filed false information and used fake numbers, didn't remit the taxes they collected, etc. All allegedly, of course.

This one made the news all over Ohio. A couple allegedly bought 62 vehicles from an Ohio dealer and told him they they would register them in Kentucky, therefore the dealer didn't charge Ohio tax. But the couple apparently never registered them in KY, but instead shipped them to Australia (these particular models aren't sold down under). Apparently someone at the dealer tipped off the state of Ohio that this was going on. Although you have to wonder...only after 62 cars???

And this article wouldn't be complete without at least one used car dealer who didn't remit the taxes...in this case, $734,000 in taxes.