Nutty Rules - Flour in Candy

In many states grocery store type food is not taxable. But also, in many states, candy is taxable. But how to define candy? While this seems silly, it's not really that strange when you think about it. The Streamlined Sales Tax Project definition (which several states use) for candy essentially says that if there's flour in the item, it's not candy, it's food. Which means a Kit Kat bar is food, not candy.

Why? Think about the poor clerk at the store. He or she needs an easy way to tell a taxable item from a non-taxable item. Looking at the ingredient list to see if flour is an ingredient is pretty easy.

Personally, I'm pretty excited about Kit Kat bars being "food." I can't wait to tell my nutritionist.

Sales Tax Guy

Summer Intern Project

Here's a fun thing to have your intern do. Or you can do it as well. It's a little tedious, but will pay off with fewer problems during an audit. And, depending on where you are, might even save you some money.

Based on this golden rule, the state that gets to tax a sale is generally the state where the delivery occurs. But here's the catch. When an out of state vendor ships you product, and they charge you tax, which tax are they charging you? If they're doing what many of them do and charging you their state's tax, that isn't correct. If you're having product shipped from Maine to your office in Florida, then the Maine tax isn't right. The only state that gets to tax will be Florida.

So you've paid the wrong tax. And when you get audited, Florida probably will not give you credit for having paid a Maine tax on a shipment to Florida. So you may wind up having to pay the tax a second time.

Here's how to avoid the problem:

1. Review your invoices for shipments from out of state. If the vendor charges tax, ask which state they are charging. If they tell you the ship-from state, then refuse to pay the tax. You'll have an argument, but just about every state has laws on the books that specify that shipments out of state are not taxable in that state. You'll have to do some research, but you can win the argument.

Note though that I said "just about." There are a couple of states where the issues are a little blurry. Watch out for HI, NM, and TN and one or two others in weird circumstances. But by setting up terms as FOB destination and having the vendor arrange the shipment, even those states will give up jurisdiction.

2. This is the intern part. Review past invoices that are shipments from out of state. Ask the vendor the same question. Repeat item one.

3. The vendor may say, or indicate on the invoice, that they're actually charging you the correct tax. If so, then demand proof that they're registered in your state. Ideally, have them fax the registration document from your state. If they don't have that handy, then get their registration number and confirm it with the state. You can usually do this by looking it up on your state's web site, or emailing the state.

4. Obviously, make sure that you report and pay your state's use tax on all of these invoices.

There is a particular type of vendor to pay particular attention to. Whenever I've heard of a company systematically screwing this up, it was a small to medium sized business that was primarily local but occasionally did business out of state. They're so used to filing just their own state's return that they don't even think of other states' taxes. They've never been to a seminar, never researched anything, their CPA and lawyer are clueless. They just cruise along filing their tax return every month, doing it the way they've always done it.

On the other hand, companies whose market is national or international will usually do this correctly since, over time, they've gotten busted.

Remember, the purpose here is to pay the right taxes and gain credibility with the auditor by showing that you've got this issue covered. There is a money savings benefit as well. If the tax rate in your state is 6% and the rate in your vendor's state is 7.75%, then you're looking at recovering 1.75%. In other words, if your state's rate is lower than where it was shipped from, you only owe the lower state's tax. And if you're in Alaska, Oregon, Montana, New Hampshire or Delaware, the savings can be huge.

Sales Tax Guy
See disclaimer

Golden Rule of Taxability

In general, all sales of tangible personal property are taxable.
In general, all sales of services are NOT taxable.

However, there are lots of exceptions. States provide a multitude of exemptions for sales of everything from food sold by a grocery store to non-profit organization purchases. And every state taxes some specific services, like rental of equipment or repairs to tangible personal property (TPP).

So, unless the law says otherwise, sales of TPP are assumed to be taxable. But sales of services are presumed to be exempt unless there is a law saying that a particular service IS taxable.

Caution though. Don't just casually peruse the law. If you find nothing in a few minutes of research, don't assume that state doesn't tax your service. Review several sources including basis information before coming to your conclusion. A lot of stuff hides in the basis rules.

There's also a corollary to this rule: All states do it completely differently. What is taxable and what is non-taxable varies 180 degrees from one state to another. Some states give an enormous amount of exemptions. Some states tax virtually all services. Do your research.

A good assumption to make is that everything is taxable unless you make sure it isn't taxable.

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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 we haven't discussed, and every state is different.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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A Certificate Isn't Enough!

Here's a question I recently got (I've edited it a little):

"I am selling someone a machine, and they have provided me with their tax id number. Is this enough? What else do I need and how do I report it on my return?"

Every state is different so make sure you check the local statutes and regulations. But here are the general rules:

1. You'll need a certificate from the buyer, usually signed, describing the situation, and showing their registration number with the state. Each state has their own set of forms and requirements. Check the forms section of the state Web site. Just the number itself usually will not do it. And make sure the number is the state's assigned number, not the federal employer ID number.

2. The transaction must truly be exempt from tax. If you know it's taxable, even if they give you the proper paperwork, you usually must still charge tax. For example, if your friend is a funeral director, and he's buying a cash register, it's probably not for resale. Even with a resale certificate, you'll probably need to charge tax. Again, state rules vary - I'm giving you the most conservative perspective.

3. As far as reporting it on the return, read the instructions. Most states require you to report your gross sales and deduct your exempt sales.

Sales Tax Guy

A Sneaky Nexus Problem

I stole this from a sales and use tax speaker by the name of John Morrow, so all credit to him for illuminating this for me.

Let's say your company, years ago, made one sale in Wisconsin. After a few more sales, someone asks the question, "Shouldn't we be charging tax?" You do your research, realize you do have nexus and should charge tax. But you defer action because the amount of sales really aren't big enough to make it worthwhile.

Then, as the years progress, business increases steadily in Wisconsin. Now, ten years later, Wisconsin is a BIG state for you. If someone again asks the question, "Shouldn't we be charging tax?", the answer might be, "well, we looked at that years ago and decided we didn't have a problem."

A year later Wisconsin audits you and nails you for eleven years of taxes. Not only did you have nexus, but because you never filed a return, there is no statute of limitations protection for you.

There are three morals of this story:

1. Beware of your previous decisions. Conditions may have changed or the original decision may have been extremely wrong.

2. If you decide you don't have enough business in a state to worry about nexus, at least keep track of your sales in that state and regularly and frequently review the situation. Otherwise, eleven years go by and you get a big surprise.

3. In most states, you have not statute of limitations protection if you've never filed a return.

Sales Tax Guy

Don't Trust Tables

I've mentioned this before but it bares repeating since the question just came up today.

Don't trust information presented in tabular form or in lists. I was chatting with a woman today, and she was clutching an old publication her company used to answer sales and use tax questions. She really relied on this publication but she recognized that it was a little out of date. She was looking for something to replace it. There were a couple of pages of text and then tables showing the various exemptions... maybe five pages for each state. As I glanced through it, I could spot quite a few situations where the one word answer was just not enough.

The problem is that we like tables because they're simpler. Answers are distilled down to a nice, neat matrix and we get some very short answers that fill in the little boxes. Unfortunately, most of the answers are NOT short and NOT simple. So when we rely on lists and tables, we're NOT getting the whole answer. In sales and use taxes, we simply need longer answers. We need paragraphs!

Tables may be OK for simple issues like rates, but beware of tables and lists for more complicated topics. Always assume it's more complicated.

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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.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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What states DON'T have a sales tax

There are five states that have no state-wide sales and use tax:

Alaska
Oregon
Montana
New Hampshire
Delaware

This is not terribly useful information unless you're in those states (and therefore already know that there's no tax). But the rest of you shouldn't get excited. Go to those states and buy something tax free, and you'll still owe the use tax when you return to your state.

But this is a great trivia question at parties! Beware though. I've tried it, and it seems like everyone leaves pretty soon afterwards.

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

See the disclaimer on the right.


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

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Illustrations and Parables: You can run, but you can't hide

I tripped across this situation when I did this seminar in Washington state. But it's a fairly common practice elsewhere. But I just happen to have a nice picture from that part of the world.

Washington has a pretty high tax rate. Oregon, it's neighbor to the south, across the Columbia River (see picture), has no tax at all. So, if you're thinking about buying, say a big screen TV, and you live in the southern part of Washington, you might just think of going to Oregon to buy that appliance.

A woman in my class did precisely that. Apparently, there are LOTS of appliance stores along the border in Oregon who cater to their friends from Washington. She bought the TV in Oregon and paid no sales tax. Then she brought the appliance home in her car. A few weeks later, she got a letter from Washington advising her that she owed use tax on her purchase.

"How did they find us?" was the question she asked.

I said, "I'll bet you paid for that television by opening up an account at the store. You didn't write a check, use a credit card or pay in cash. Right?"

"How did you know?"

"The store filed a lien on the the TV which is a public filing. These things are now computerized in many states. All the state has to do is search the filings looking for a seller in Oregon with a buyer in Washington. Bingo!"

"Oh."

One more way that you can get caught is when you declare big purchases that you bring back into the US. US Customs shares that information with states.

So as we saw with the Florida story, states may find those big purchases that you thought were tax free. Don't be surprised if one day, you get a letter too.

By the way, searching those public filings would also possibly turn up retailers who may have nexus in the state. So if you are afraid of that particular exposure in states where you do business, you may want to avoid filing a lien.

Sales Tax Guy

More on Certificates

Here are some tips on getting exemption certificates:

1. Follow the rules for the state where the delivery occurred, not where you're shipping from or where you're billing.

2. Try to get the actual certificate published by that state. While many states accept the multi jurisdictional form, they prefer their own. It's always a good idea to provide the auditor with the paperwork they're expecting. It also helps you make sure you're getting all the information they really want.

3. Make sure everything is filled out and signed.

4. Watch the numbers used. The federal employer identification number is NOT the number in the vast majority of the states. But it is the most commonly (and mistakenly) provided number.

5. Watch expiration dates. It seems like more and more states expire their certificates after a certain number of years. One way of addressing this is by refreshing one third of your collection per year.

6. Accept the certificates in good faith. This means there's nothing obvious, or something you should have known, that would tell you the sale really is taxable.

7. Even if you don't have nexus in the state you're shipping to, it's not a bad idea to still get certificates. Maybe you do have nexus and you didn't realize it. But mostly, it makes it easier from a policy perspective to collect certificates. Your staff just gets the certificate, regardless of the state.

Sales Tax Guy

See disclaimer

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Get Exemption Certificates! Always!

Part of a series on essential actions you need to take

This should be the standard policy in your company:

We will always charge tax unless we have the resale or other exemption certificate, or other necessary paperwork IN HAND prior to shipment.

The benefits of doing this are:

1. You assure that the sale really is exempt from tax. You're not making any assumptions (and we all know what happens when you assume, don't we?).

2. You won't have to deal with trying to collect the money later when you get audited and find out that the sale was taxable.

3. You don't have to rely on the customer to send you one when you get audited. And depending on the state, you may have a limited amount of time to get those certificates.

4. You avoid problems with customers that vanish (go out of business), and therefore won't be able to send you a certificate two or three years later when you get audited.

If you stick to this policy, you'll have to do more "credit memos", but people who do this tell me it works well and they are happy with the results. You owe it to yourself to give this a shot.

The Sales Tax Guy

Golden Rule - The Buyer has the ultimate responsbility

Part of a series on essential actions you need to take

When I first began to develop the Golden Rules of Sales and Use Tax, this was the first rule.

If the seller doesn't charge tax, the buyer must pay use tax.

There are some important elements to this rule:

1. The seller, in most states, MUST charge tax, assuming the sale is taxable and they have nexus in the state. There are a couple of states where the buyer doesn't have to pay the use tax if the seller fails to charge tax. But the buyer usually still owes the money to the seller if the seller discovers the mistake; it must be an intrastate sale; and the seller must be registered with the state to collect tax. This is not a very common variation.

2. Sales and use taxes are complementary taxes. The means that, generally, the rates and rules are the same because use tax is essentially only supposed to kick in when the buyer hasn't paid the tax to the seller.

What this means is that, just because the seller hasn't charged the buyer tax, it doesn't mean the buyer is off the hook. The states have set it up so that the ultimate responsibility for the tax falls to the buyer.

Here's a little example of this.

The Sales Tax Guy

Florida Will Find You

Let’s say Danny wants to buy a big screen television for $2,000. He goes out to jimbosfabuloustvs.com (I certainly hope nobody has that URL) based in Kentucky and places his order.

Now an appliance this big isn’t going to be sent UPS. There is an entire industry of shipping companies out there who do, what is called, “home delivery.” This involves not only shipping and delivering the item, but also setting up and installing. They typically deal with items like appliances and furniture…the kind of thing you really don’t want to find leaning up against your door when you get home from work.

Now Danny thinks he’s saved himself $140 in Florida sales tax by buying out of state. But what the poor guy doesn’t know is that when that “home delivery” truck enters Florida, it’s stopped at one of Florida’s fine agricultural inspection stations. They then scan the bill of lading and send it to Tallahassee. A letter is then prepared and sent to Danny which reads something like this:

Dear Danny

You recently received a television from Jimbo’s Fabulous TV’s. Our records do not show this vendor as registered to collect sales and use taxes in Florida. Enclosed is a brochure describing all citizens’ Florida use tax responsibilities. We estimate the value of your purchase to be approximately $2,000. Therefore, we will be expecting a check from you for 7% of that amount within 30 days. If the amount of your purchase was different than our estimate, please take 7% of the correct amount and send us a copy of the invoice. If taxes WERE collected by the vendor, please send a copy of the invoice with no remittance.

Thank you, and welcome to Florida.

Florida is the only state that I know of that does this. I believe they are unique for a couple of reasons:

1. They don’t have an income tax. And states that don’t have an income tax get a little nutty about their sales tax.
2. They already have the infrastructure in place. I was talking with someone from the state of Florida about this and he told me that they had very little cost to get this program going. They only had to buy scanners for the stations and hire some people in Tallahassee.
3. If you’re heading into Florida on Interstates 10, 75 or 95…where else are you going? Florida is the only state where, if you enter it, you are likely destined for the state. No other state could do this because so much of the traffic is just crossing the state. It would be impractical to scan all of the bills of lading at the entry point.

I did have one seminar participant who said, “Well, the truck could be heading for Cuba.” I sent him to the Remedial Geography class across the hall and we moved on.

Finally, I was reminded to tell this story because I just finished up a seminar series in Florida. Almost every day, someone in the class told me a story like this one.

The morals

First, if you’re shopping for a big appliance or furniture in Florida, you’re gonna pay the tax. One way, or the other.

Secondly, if you're from another state, they DO have ways of finding you. Florida's method is unique, but the states have other ways.

The Sale Tax Guy

Hey Florida Folks!!!

Fear not! Nothing came up later in the week that needs correction here. Thanks for stopping by. Feel free to visit anytime.

Beware of Bad Advice

A seminar participant in Alabama (I’m lying – it wasn’t Alabama) called the Department of Revenue. She was told, “Your Alabama resale certificate will work in all the states.”

Well, sometimes it does and sometimes it doesn’t. For example, if you’re in Alabama, and go and pick up goods at your vendor’s dock in some other state, they’ll probably accept your Alabama resale certificate. But they will probably also require you to fill out a form making clear that you are buying the goods for resale, and you are taking them out of state without use, AND that you won’t be selling it right back into the state where you’re picking it up.

And, of course, an Alabama certificate will work when the shipment is sent to Alabama.

But it won’t work in states that have, what I call, the Nutty Drop Ship Law.

There are two morals to the story

1. Getting phone advice from the state is always risky;
2. Be VERY careful about accepting the advice of a state when it comes to the rules in other states. Frankly, many of them barely know their OWN state laws and have no business telling you what the rules are in other states.

Sales Tax Guy