Golden Rule: There's an exception to everything

No matter what the rule is, there's a darned good chance that there's an exception to it someplace. Congress, at the Federal level, writes poor laws. What makes you think state legislatures would write sales and use tax laws that are any better? In fact, they're probably worse at writing this stuff.

So the laws are vague, incomplete, difficult to comprehend, and contradictory right from the start.

Add a quart of court decisions, both Federal and state, that render many of the laws either unconstitutional or modified in some meaningful way.

Add disorganized official bulletins and opinion letters that are hard to research.

Mix in auditors and support folks who don't have business training or even accounting degrees, and are out there giving "official" advice to taxpayers when they should probably be locked in a room someplace.

Stir in the fact that the business landscape keeps changing with new technologies and new business models and techniques. Many states still haven't figured out how to tax downloaded software!

Add a dollop of the lack of training, beyond the mechanics of filling out forms, offered by the states. Not that I'm really complaining. Their failure on this one keeps me working.

Add another dollop of the lack of education that lawyers and accountants receive on this topic, thereby creating an entire industry of income tax professionals who don't know what they don't know about sales and use tax, but still give advice. Again, not really complaining.

Sprinkle on the spice that every state does it completely differently; that what's taxable and what's not taxable varies almost completely whenever you cross a state line.

And, to complete the baking metaphor, mix it all together and you've got a messy, gooey cake. But it's tasty for sales and use tax professionals, and me, because we make money off the confusion. Hooray!

Sales Tax Guy

Sometimes, you just gotta punt

Sometimes you just have to punt. To me, this means that, after exhausting all of your resources to find the answer, you may just have to make an educated guess. The law doesn't always provide the answer. It's badly written, the regulations may be vague, or the issue may simply not have been addressed yet in official publications.

So what are you gonna do?

Here's my advice. But please keep in mind that your success will rest on things like the mind of the auditor, your treatment of the auditor, how much money is involved, the level of your documentation, etc.

If you have done your research, and you've looked in the books, on the Web, talked with your lawyer and CPA, even emailed the state, and you're still not comfortable with the information that you've been given, then punt. Do it the way you think you ought, informed by the research you've done. I'm guessing your decision will involve paying less tax. But, keep a record of your research. Print out pages off the web. Photocopy text out of the books. Get letters or emails from your professionals. And keep it all in a punt file.

In two or three years (remember, the audit won't be tomorrow), you'll need to explain the reasoning behind your decision to your friend from the department of revenue. If you've got it all together in your punt file, then it will be something that you can easily, quickly and credibly show to the auditor.

Even if you got it wrong, the auditor may respect your effort to do the right thing and give you a break on interest and penalties...maybe even the entire liability itself. But that will only happen if you've got a good explanation. Which your punt file will give you.

Sales Tax Guy
See disclaimer

Definitions

When you are doing your research, beware of the meanings of words. I had an interesting conversation this week with a seminar participant who was having a tough time finding information on the taxability of software subscriptions. Initially, I was having a tough time understanding what he was driving at. Then I realized he was talking about software maintenance contracts.

I gathered this was what his company called the product, and he assumed that everyone called it that.

So if you're having a tough time finding the answers, keep in mind that the thing you're looking for may have a different name. And if you're talking about technical jargon, the legal terminology may not have caught up. For example, you'll often see the term electronically transmitted software, when what everyone means is downloaded software.

Take a deep breath, keep an open mind, and experiment.

Sales Tax Guy

My Customer Won't Pay the Tax

I've had this question come up a couple of times in the last few days so I thought I'd discuss it here. The problem is customers who, after having been billed sales or use tax, refuse to pay the tax.

Generally, states require the vendor to remit the tax to the state. Whether the customer pays the tax to the vendor isn't important to the state. So, if the customer refuses to pay the tax, the vendor winds up holding the bag.

So what are your options?

1. Ask the customer for documentary evidence for why they don't owe the tax, like a certificate or a citation to a statute or regulation. Remember, you've got to be convinced, otherwise you're not accepting the certificate in good faith. And the customer may not even make the effort to provide you with documentation.

2. Is the sale taxable? Double check your facts, talk to your adviser to make certain of your position that the sale is taxable. I know it's hard to believe, but maybe, just maybe, the customer is right on this one. Don't take any draconian action until you know for sure.

3. Consider firing the customer. If they won't obey the law and they're costing you money, then don't sell to them anymore. Of course, your sales department won't appreciate this.

4. Eat it. If you've got enough margin, and the customer is worth it, just cover the tax with your margin. Perhaps, slowly raise the price you're charging your customer to cover your additional cost. Of course, the sales department should take the hit for this additional cost, since they're the ones insisting that you keep selling to this customer.

5. Document that you've billed the customer and they've refused to pay. Always bill the tax to the customer and let them refuse to pay. This way, when you get audited, you can build auditor credibility by demonstrating that you're doing the right thing in this situation. Plus, there's the revenge angle. The auditor would love to know about this customer. Remember, if they're refusing to pay you the legal tax, they're not paying tax elsewhere. They'll get a visit from the auditor and they'll pay...lots...eventually.

6. Rat 'em out. I don't recommend it but in the interests of full disclosure, I should mention this. I've tripped across a couple of states with laws where, if you report the customer to the state, they'll waive your liability for the taxes. Talk about revenge....

Sales Tax Guy

Is your company like this?

I had a woman in my class the other day who had a real challenge moving ahead. Her company sells in about all of the states, and has a really mixed bag of taxable and non-taxable sales and customers. She actually had to take a day of vacation and come to the seminar on her own, paying for the fee out of her own pocket! She even purchased the books that I recommended, again, on her own. I truly admire her for her commitment, but shame on the company for ignoring a potential problem, and making this person pay for education necessary to do her job.

We didn't get into what her plans were, but I hope they involved one of these courses of action that I recommend to you if you work in this type of organization:

1. Get educated about this topic and become an expert. And keep bringing up SUT issues in meetings and email. Then, when the apocalypse (major audit assessment) happens, you can sit back and say, "I told you so." Enjoy.

2. Quit. Why is a smart person like you working for these chuckleheads?

3. Get smart about SUT and then quit. There are companies out there that value this expertise and will be very interested in you. Just type in "sales tax" at Monster.com and you'll find them.

Rant setting off.

Sales Tax Guy

Where can I Find Sales Tax Seminars

I get this question all of the time.

Of course, there's your good friends here at the Sales Tax Guy

and, to be fair, here are some firms that come up when you do an Internet search:

http://www.takechargeseminars.com/(legal and tax specific) This would be us.
http://www.nationalseminarstraining.com/ (general public seminar company) This includes National Seminars Group and Padgett-Thompson
http://www.pryor.com (general public seminar company)
http://www.lorman.com/ (legal and tax specific)
http://www.peisnerjohnson.com (legal and tax specific)
http://www.salestaxinstitute.com/ (legal and tax specific)
http://www.seminarinformation.com/ (legal and tax specific)

You should also check with organizations like the state chamber of commerce or your industry association. Sometimes, these organizations will offer seminars.

Most state tax departments will do seminars as well. Unfortunately, they're usually more oriented towards mechanical issues like filling out forms, getting more taxes from you, and they're not put on by professional trainers. But they may be useful.

Sales Tax Guy

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Use A Local Consultant

I constantly tell people to use a sales and use tax expert. I mention it in the disclaimer as well as in my seminars and in these various articles.

You need an adviser familiar with local issues. You need someone who knows your state's laws really well, through a regular practice. You need someone who knows the people at high levels of the tax department; someone who goes to the annual barbecue that the state's chief counsel throws. You need someone who knows what the auditor thinks, and the unwritten customs and written procedures she follows. You need someone who knows the sales and use tax ropes.

Frankly, you need someone who knows where the bodies are buried.

And it isn't your typical attorney or CPA.

And where do you find this sales tax god?

Sales Tax Guy

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Avoiding tax on your RV

"I have heard that you can buy an RV in a non sales tax state and if you live on the road (no state residency) - you don't have to pay taxes for it! Any truth?"

Good question. Here's the logic (I'm not saying it's the law, just the logic):

Generally taxes apply first where the property is delivered. So let's say that George buys an RV in the no-sales-tax state of Nomadia (I'm making that up - there's no state called Nomadia). As far as the dealer is concerned, there's no sale tax and George skates. But there have to be plates on the RV, so George gives his sister's address in Nomadia, where he gets his mail, including the bill for the insurance on the RV, as well as his forms from the IRS, etc.

Then George drives his RV around with no permanent residence.

But early next year, when George comes through town to pick up his tax forms, he'll also find a form for his state income tax for Nomadia. See, as far as the state is concerned, since he has registered the RV in Nomadia, that must mean he's a resident of Nomadia. Which means he now owes Nomadia income tax. And the reason they don't have a sales and use tax is that they have a really obnoxious income tax. Uh oh.

Now, while George can buy an RV in a no-tax state, George has to give an address somewhere. And that state will start thinking you're a resident of that state. And if that state has no sales and use tax, they'll probably have other taxes that may be even worse, long term. If not income tax, think property taxes.

But, let's say George actually gets his mail at his brother's house in Jimigan (another fictitious state). George better not EVER visit his brother, even for Christmas. If George attracts the attention of the local constabulary, they will wonder why the registration on the RV doesn't match George's driver's license which says he lives in Jimigan. They will probably make George plate the vehicle in Jimigan, and then, of course, pay the use tax. And possibly a penalty, with interest.

BUT WAIT, THERE MORE! Nomadia still things George lives there because that's where he registered the vehicle. So, George may wind up paying Nomadia taxes, Jimigan taxes AND the Jimigan use tax on the RV. George is going to wind up paying more to get a CPA to sort this out then the taxes he saved on the RV.

Dodge one loophole and there's often a noose waiting for you on the other side.

What actual states do is worthy of some professional research. But what I've given you is a logical discussion of what I see are the problems.

I tell my seminar participants this all the time: most states have found most of the loopholes since the first sales tax law was passed in 1930. For something like an RV, I'm guessing they will have figured this one out.

Sales Tax Guy
See disclaimer

Don't Trust Your Software

I hate to say this, because it may tick off some software vendors that might be inclined to buy advertising on this site (hint hint hint), but it's important that the buyers of software understand something important.

I had an email recently from a seminar participant who asked whether or not her company, who had to register in Louisiana, also had to register in the different Louisiana parishes as well. The answer I gave her was that yes, if you have nexus in Louisiana, then any shipments you make to any of the local jurisdictions are taxable as well. She said that their software vendor had not brought this up, so they hadn't done anything about it. She was new, so she was asking questions, poor soul.

I have this problem in the payroll and wage-hour seminars that I teach (occasionally) as well the sales tax courses. Please don't expect your software vendors to keep you compliant with the law. Their job is to provide you with software that will do what you want it to do. If you don't want to file taxes in local jurisdictions in Louisiana, they're OK with that, and will provide you with that option. The software support people you deal with probably don't understand what nexus is, let alone what the local jurisdictions expect.

And if you buy payroll software and don't mention that you need it to do the regular rate of pay calculation, they're not going to bring it up (and probably won't know about it even if you ask). This is entirely off the subject of SUT, but it illustrates the point.

I had lunch with a software company a while back and we got on the topic of Louisiana. The owner of the firm, who we'll call "Mike", knew the Louisiana law very well. Mike said that he had more than a few customers who chose not to collect the local taxes and file the local returns. The attitude was, "let them come and get me." And Mike was not going to argue with paying customers.

I don't encourage any of you to do what Mike's customers are doing. While some of the local tax collectors aren't highly sophisticated, the larger parishes ARE pretty smart, and they also hire independent auditors to do out-of-state audits. And those auditors are paid on commission. This is not a good thing.

So don't count on your software vendor to do any more for you than provide quality software to do the job that you say you need done. It's up to you to figure out what you need done.

Finally, if your computer room looks like the one above, I see a big upgrade in your future.

Sales Tax Guy

My customer says they'll pay the tax on their own

Just because the customer assures the seller that they'll pay the tax doesn't relieve the seller of any burden to collect the tax. But, if the buyer provides the vendor with a direct pay certificate, that'll work.

In most states, there is a recognition that some buyers have such complex purchasing situations that it would be easier to simply let them self-assess the use taxes. However, most states are also strict about who they hand direct pay permits to. Here are the usual criteria:

1. Have good policies and procedures in place to make sure the taxes are properly self-assessed
2. Meet certain volume requirements
3. Go through an initial, detailed audit
4. Go through future audits almost every year.

Once the customer is authorized, they send their vendors direct pay certificates which the seller can then treat just like a resale or other exemption certificate (there are some restrictions). But without that specific piece of paper, do not accept the customers assurances that they'll pay their own taxes, even if it comes in a letter, contract, sales agreement, or PO.

In order to be relieved of your responsibility for collecting the tax, you need a direct pay certificate.

If someone said they're buying for retail, you wouldn't take their word for it. You'd want the resale certificate. Right? Right?

Sigh.

Sales Tax Guy

Shipping from outside of the US

We're shipping from Canada. Do we have to worry about sales and use tax?

Sure you do. If the shipment is being delivered in a US state, you'll have to worry about use tax if you have nexus in that state. Similarly, a US company will have to worry about Canadian and provincial taxes when it does business in Canada. The only issue is whether or not you have nexus in the US state you're shipping to.

If you don't have nexus, you have nothing to worry about. The buyer will have to self-assess their use tax. But if you do have nexus in the state, you'll have to register and collect taxes.

Sales Tax Guy

See disclaimer