Sunday, December 28, 2008
Obviously, the whole point of use tax is that you owe it if the vendor didn't charge it (in most states). But, don't automatically do it in one situation: if the vendor and the buyer are in the same state - an intrastate sale.*
In that situation, it's worth a phone call to the vendor asking why they didn't charge tax. If the purchase came from out of state, then the likely reason for the failure to charge tax would be that the vendor hasn't got nexus, or doesn't realize they have nexus, or has chosen not to register in the state. Just go ahead and pay the use tax. But if the vendor is in the same state as the buyer, then they are obviously supposed to charge tax. So why didn't they charge you tax?
Purchase Not Taxable
It could be that they screwed up, and you do in fact owe tax. But you may not owe tax if the purchase really wasn't taxable. It's reasonable to expect that the vendor of something is more likely to know how to tax what he sells than the buyer. It's definitely not guaranteed, but they should know more. So ask them.
There was a woman in Johnson City, Tennessee who was accruing taxes on repair labor when the vendor failed to charge tax, which was frequently. I asked her what state this was for, since Johnson City is really close to Virginia. She said it was for her Virginia plant. I pointed out to her that repair labor isn't taxable in Virginia. She was dumbfounded. "You're kidding, right?" She had been accruing taxes for years on something that wasn't taxable. While repair labor is taxable in Tennessee, it was being performed and delivered in Virginia where it wasn't taxable. If she had simply made a phone call to the vendor and asked why they had not charged tax, she would have found out...years ago; and tens of thousands of dollars ago.
The other possibility, that will save you money, is that the vendor is absorbing the tax. In other words, they're burying the tax in the "price" of the goods. This is often done because the vendor finds it easier to do this than to try to explain to the customer why they have to charge tax.
I had a guy in Texas who charged his customers tax on repair labor, which is the correct thing to do in Texas. But because the invoices were paid out of the home office in Illinois (where labor is not taxable) the AP department kept short-paying the invoices for the tax on the labor. They were mistakenly thinking in terms of Illinois rules. Obviously they had not been to my seminar.
Phone calls didn't work. So the vendor simply started sending invoices with the repair labor priced a little higher to included the sales tax, which was no longer shown on the invoice. He absorbed the tax. Texas got their sales tax revenue. The AP department paid the bills. The vendor was happy.
The problem with absorption is that, in most states, it is illegal. The reason, aside from some high-fallutin' legal theories about where the burden of tax is imposed, is simply to let the customer, and the auditor, know that taxes have been paid. The invoice is a receipt for the taxes. So if the vendor absorbs the tax, the buyer doesn't know if the taxes were paid and, if the buyer doesn't call the vendor and ask, will pay the taxes a second time. Which the state is kind of counting on.
Of course, the state has no problem with getting their money twice. ;-)
So, for two reasons, you should call your in-state vendors if you feel you need to accrue the tax: 1. To make sure your purchase really is taxable.
2. To make sure they haven't absorbed the tax and already paid it to the state.
Of course, you may find out the vendor screwed up and didn't charge you tax. Try to get them to re-bill you properly. This will protect against complications down the road when they get audited.
*You should also follow this procedure for out of state vendors who you KNOW have nexus in your state, and are BIG. There's no reason that they shouldn't be charging you tax either. The question comes up once in a while about GIGANTIC vendors and why they aren't charging you tax. If they're that GIGANTIC, they should know the rules, and they are almost certain to have nexus.
I've written up an Illustration and Parable about this.
Sales Tax Guy
Monday, December 15, 2008
This is the start of a new series of posts about audit interpretations. In particular, I'm going to try to include situations that don't appear in the law (or require a clarification the taxpayer won't like). I'll also try to report on flat out abuses where the taxpayer, if they had challenged the auditor, would probably not have been robbed.
The first item comes from Michigan this week.
Two people on two different days, when we talked about safety equipment, told me this one. They said they had been assessed on the safety equipment worn by the office personnel when they went back into the manufacturing area. The goggles, etc. worn by the plant workers weren't a problem.
It looks like the auditor was right. Michigan law says that stuff that is used for administrative uses isn't exempt. Obviously the AP specialist isn't going in back to work a lathe, they're getting paperwork taken care of. In other words, administrative use.
Sales Tax Guy
Tuesday, December 02, 2008
In most (but definitely not all) states, if you’re a manufacturer, you can invest in machinery, get it repaired, and buy consumables tax free, or at a lower rate. And even in states that aren’t very generous to manufacturers, there still may be some exemptions available.
And it’s not just manufacturers. Here are some other industries where I’ve seen exemptions that other folks at the chamber of commerce mixer don’t get:
Radio and TV stations
So check your state’s laws to see if there might not be some exemptions for your business.
Sales Tax Guy
Friday, November 14, 2008
Generally, use tax is imposed on the storage, use or consumption of tangible personal property (TPP) in ANY state where it is used.
In other words, if you purchase an item in Pennsylvania for $100,000 where the tax rate is 6% and then bring it to, say, Tennessee, where the rate is, say, 9%, then you will owe Tennessee additional use tax because you're using the TPP in Tennessee. Even though you've already paid Pennsylvania!!!
But, don't panic. There are lots of exceptions (and gotchas):
1. You'll get credit for the taxes you've already paid to Pennsylvania. So, you'd only owe Tennessee 3% (the difference between 9% and 6%) or, using the above example, $3000. So it's not double taxation (which I know you were thinking); it's just catching up to the use tax rate in the state where you're using the TPP.
The gotcha is that some states may restrict the credit they give in these ways:
- They will only give you credit if the original state gives a similar credit (which just about all of them do).
- They may only give you credit for state taxes you've paid, not local taxes. Or they may require that you offset state taxes against state taxes and local taxes against local taxes. But other states will allow you to pool the taxes.
3. Most states do not apply the rule against property that has been sent into their state to be repaired, fabricated or otherwise worked on by a local vendor, and then sent back out of the state.
4. While the default basis for the tax calculation would be the original invoice price of the item, many states will base the additional use tax on some adjusted value, usually fair market value when the property enters the state. For example, if you brought that $100,000 machine to Tennessee, they would base the additional 3% on the original invoice cost of $100,000, even if you've been using it for 5 years. But if you had brought it to Louisiana, the basis would be whatever the fair market value of the machine was when you brought it into the state. So, if the machine was only worth $20,000, then you would owe Louisiana (assuming their rate was also 9%) 3% of $20,000 which would be $600. Much better than $3,000.
Every state does this differently, and sometimes it's hard to find that basis. The default is the item's original invoice price...you have to look for the exception. Disclaimer: I didn't find an exception in Tennessee. If you know of one, please let me know (with a citation). I did find the exception in Louisiana.
5. Some states are very nice and simply say that, if you've used the TPP for more than, say, six months outside of the state, then they don't impose an additional use tax. Or they'll use the fair market value as opposed to the original purchase price. Either way, much better.
6. Some states have exemptions for commercial use in the state for certain types of activities, like sports such as horse and car racing.
7. Here's a gotcha. That TPP that you bought and used in Pennsylvania may not have had any tax imposed on it at all because it was exempt in Pennsylvania. But that same item is fully taxable in Tennessee. So you will wind up paying the full 9% ($9,000) use tax! Watch out for exemptions that exist in the origin state that don't exist in the destination state.
7. Some states have exemptions for property that comes into the state for the sole purpose of being stored, with no intervening use, and then shipped out of the state. So if you've brought TPP into Louisiana, for example, that was simply stored to be shipped out of state, and so labeled (that is the specific requirement in Louisiana), then they would not impose use tax.
8. Finally, TPP that is simply in-transit through a state can't be taxed - the Constitution's commerce clause.
Sales Tax Guy
(please read the disclaimer)
Wednesday, October 29, 2008
If I get my car fixed in North Carolina (and about half of the states), there's no tax on the labor, just the parts. But that's as long as the mechanic shows the parts and labor charges as separate items on the invoice. If he bills me $800 for the labor and $200 for the parts, then he would only charge me tax on the $200 of parts.
But if he just billed me $1000 for "parts and labor" with no breakdown, then I would have to pay tax on the entire amount.
There are variations on this rule, particularly for situations where the parts are insignificant in relation to the total invoice. And you'll see rules that set the amount of the taxes at 50% in some bundled situations. And here's another example of a combination of a sale of non-taxable services and taxable TPP.
But beware that this is a fundamental part of the way sales and use taxes work.
Sales Tax Guy
Thursday, October 02, 2008
Alternatively, Get It In Writing!
1. Auditors aren't going to be helpful. They're job is to reach into your wallet and extract money. Therefore, don't count on them to do the right thing by you. Sometimes, if you're lucky, the auditor will point out where you have overpaid taxes. Sometimes. See my articles on audits for more information.
2. Your accountant and lawyer probably have virtually no knowledge about sales and use tax. The vast majority didn't learn anything in college about it. And the subject isn't on the bar or CPA exams. So, unless they have developed a specific expertise, they generally don't know much about it. So if they tell you, "don't worry about," ask them for something in writing. Then they'll worry about it.
Oh, they know about income taxes. And because of that, they'll think they know about all taxes. But not this one. In fact, it's been my experience, that a professional who specializes in income taxes won't be an expert in sales and use taxes. And an expert in sales and use taxes won't be much help when it comes to income taxes.
3. You learned it wrong from whoever trained you. Either they didn't know, they've been doing it wrong, or something got lost during the training. Or you heard it wrong. Oral communications is the worst form of information transfer. This is why you should have a good sales tax manual.
4. The law is complicated. There are lots of places where it comes from. There are lots of interpretations, lots of ways to get it wrong. And there are lots of exceptions.
In other words, get it in writing, from an authoritative source that'll impress the auditor.
Sales Tax Guy
Friday, September 05, 2008
More than 8,000 businesses in seven different zip codes throughout the state are being notified this week of impending visits from Board of Equalization (BOE) specialists who will be canvassing the areas to ensure the businesses are properly registered and paying taxes.
Simpler sales tax sought
Short article about the streamlined sales tax project.
Thursday, September 04, 2008
Discussing the impact of Maryland's proximity to Delaware and lost sales / use tax revenue. I've never really thought of it as smuggling, but that's pretty much what it is.
Retailers could get county tax
It's the old story. Politicians pass higher county sales tax. Business crashes because customers go across the line to another county to buy stuff at a lower rate. Businesses start moving across the line to catch up with their customers. Politicians panic because businesses are leaving (along with the tax revenue). Politicians offer to "rebate" some taxes. Politicians. Ya gotta love 'em.
Wednesday, September 03, 2008
Wednesday, August 27, 2008
Monday, August 25, 2008
We here at SalesTaxGuy are always looking out for you folks. We just wanted you to know that. So when these stories started popping up, we knew you’d be concerned.
Y’know all of those announcements on TV about the upcoming shift to digital, and how you can get a coupon for the converter box? And you’ve all been worrying about the sales tax impact of that coupon, haven’t you? Yep, I knew it. So, here’s the information you’ve been desperately seeking.
Saturday, August 23, 2008
Monday, August 18, 2008
Saturday, August 16, 2008
First of all, in the event that there are any auditors reading this, there are good people doing this job, including you. I’ve met a few. In fact, when I actually was an accountant, I’ve been lucky enough to have mostly good auditors. There was that time when one of them had to keep leaving early to testify before a grand jury. But that’s another story.
Most of what I talk about here are stories and examples that I’ve heard from people in my seminars, or from actual conversations with auditors. I think that most of you who are reading this, who are auditors, would agree with me. You shouldn’t be the only source of information for your victims. That’s the point of this article. Taxpayers shouldn’t trust auditors for these reasons:
1. Auditors are not necessarily well-educated accountants.
They may not even have a degree in accounting! I had one guy in my class who described an audit where he had to spend an entire afternoon with an auditor explaining depreciation to him. Now I learned about depreciation in freshman year in college. I’ll admit I had some problems with sum-of-years-digits, but I got straight-line pretty fast. If you have to teach an auditor about depreciation, do you really want to rely on him for tax information?
Keep in mind, for the most part, a front-line auditor’s job consists of looking at invoices all day, working in miserable spaces, surrounded by people who hate you. Not a great way to attract the best talent.
2. They usually receive bad training.
A couple of years ago, I had a group of auditors in my seminar. When I asked them at the break why they were in the meeting, they said that it was their in-service training for the entire year! One 6 hour seminar, that is at a general, introductory/intermediate level, was their training for the entire year? And this was not a small, backwater place either. But frankly, from the looks on their faces, and the questions they were asking, an introductory seminar probably was the right place for them to be.
A former auditor was in my class recently who described her new-hire training as an auditor. On the first day, after she had taken care of the paperwork, etc., her boss handed her the state audit manual and said, “Read this. You’re going out on your first auditor tomorrow. Solo.” So, after half a day of reading a manual, this recent accounting graduate was out there auditing companies, putting them threw hell, giving them bad information, etc. And all because the state only did training for new recruits every quarter.
There are some states that take auditor training seriously. I get the sense that most don’t.
So don’t assume your auditor even knows the law. At best, if they paid attention in class, they know what the trainer wants them to know. And trust me, they don’t memorize the statues and regulations.
3. They’re job is to get money.
Given that you’re dealing with auditors who are not necessarily well educated, and haven’t been well trained, the capper is that they’re told to go out and get money. So they will do what they can. Which means they will interpret the law badly, possibly not even follow the law, or maybe even intentionally bluff you. And I’ve heard lots of stories about all of these situations.
What can you do?
Don’t trust them! Make them show you where the law says you have to do it this way. If it’s the law, it’s written down. If they say, “well, that’s how we do things,” then you’ve got some room to maneuver. I call that an undocumented enforcement policy. It isn’t the law. Although a badly trained auditor may think it’s the law.
To me, the best way of keeping an auditor in line is to have a sales and use tax expert (not a generic lawyer or accountant) in on the meetings. This way they know that you’ve got someone in your corner who knows more than they do. They’ll be more careful, and they will be less inclined to bluff. And if you can’t afford your own expert, then make sure the auditor knows that you’re not going to be a pushover. Research these issues as they come up using whatever resources your boss will spring for. But make sure the auditor knows you intend to be smarter than them.
Sales Tax Guy
And again, apologies to all those good auditors out there.
Thursday, August 14, 2008
A taxable sale, one that triggers either sales tax or use tax, occurs when all of the following events happen:
1. There is a sale
A transaction has occurred where one party bought something in exchange for something else (usually money, but not necessarily - a swap would also be a sale). A gift is not a transaction. So, with the typical exception of registerable items, like automobiles, there is usually no use tax imposed on someone who received something as a gift.
2. Of tangible personal property (TPP) or taxable services
TPP is tangible, which means it's perceptible to the human senses. And it's personal property. In most states, personal property is defined by what it's not. If it isn't real property, then it's personal property. And real property is generally defined as land and anything that is permanently affixed to land (or other real property) and integrated into the use or value of that real property.
So it's TPP if it is not permanently affixed and integrated into real property. The ship above is TPP. It's really, really big, but it's not permanently affixed to land. And because I took a picture of it*, then it was obviously tangible.
Finally, every state does tax some services. Some states tax many services, other states tax very few.
3. By a retailer
Generally, the sale must be made by someone who is in the business of selling the product or service. If they're not in the business, then they're making an occasional sale. That ship, if sold by a shipping company, who is in the business of using ships - not selling them, wouldn't be taxable because it was sold in an occasional sale. Except that it may be registerable. If so, then like automobiles, the buyer will owe use tax. The state will get those big purchases whenever they can.
4. To the final consumer.
If the sale was to a dealer or wholesaler, then it was for resale. It wasn't sold to the final consumer. The final consumer is generally going to be the person who bought for some other reason to resell, or they are simply the final buyer. Either way, identifying the final consumer usually isn't that hard.
So, to recap, anytime there is a sale of TPP (or taxable services) by a retailer to the final consumer, then you have a taxable sale and either sales taxes or use taxes are due.
Sales Tax Guy
* I took this picture from the center of the Golden Gate Bridge in San Francisco in 2004. I highly recommend that walk. It's beautiful and exhilarating.
Tuesday, August 12, 2008
And if you've gone through an audit, you'll know that sitting in a room, paging through invoices looking to see if taxes were charged, is a significant part of the auditor's routine.
Note, however, that the tax must be billed by the vendor. A scribbled comment on the invoice that you've paid the tax separately probably isn't going to work.
Another thing to keep in mind...and this is more record-keeping. When you do need to make notes for the file that will help during an audit, try to make the notes on the invoice itself. If you make it easy for the auditor to see the explanation, you'll have less questions from that auditor, and will probably keep issues from getting out of hand. And you'll build credibility by having good records.
If you simply staple the paperwork to the rest of the material that's already attached to the invoice, it may get lost. I've worked at some companies where the AP specialists would need to order special, heavy-duty staplers just to keep all of the paperwork in place. And we've all seen those odd pieces of paper sitting in files and wondered, "I wonder what paperwork this goes with?"
If you are going to attach it, attach it well. AND, attach it close to the invoice as opposed to in back, so it will be less likely to detach itself and get lost. AND make a note on the invoice indicating that the paperwork is there.
Sales Tax Guy
Not just for Hawaii, this article describes how sales taxes are regressive taxes. Plus, it gives me a chance to give you a Hawaii picture (grin)
Friday, August 08, 2008
Frankly, this was kind of hilarious. If you get it, you're evidently just as twisted as I am.
Thursday, August 07, 2008
Here's an example of why you can't count on even "permanent" sales tax holidays.
Just to show you there are places in this world for sales and use tax geeks.
Wednesday, August 06, 2008
Tuesday, August 05, 2008
In no particular order, here are the factors any of which could give you a problem:
1. How many person-days per year are you doing trade shows in the state? The fewer person-days (this used to be called man-days, but I'm being politically correct, if obtuse) a year you spend in the state obviously will reduce your chances of having nexus.
2. Do you take orders AT the show? Or do you merely demo the product and hand out literature. If you take orders, that is gonna be a problem in many states. On the other hand, you may try to be tricky and pretty much close the sale but tell your customers that you'll take care of the paperwork after the show. Keep in mind that the states aren't stupid. They've found most of the loopholes.
3. What's the target market for the show? If you're doing an international show in Chicago at McCormick Place for a few days a year, and you don't take orders at the show, you're probably not going to have a problem. But if you do a home improvement show at a local expo center, that's targeted for the local market, you may have a problem regardless of the number of days you do the show or whether you take orders.
4. Do you actually deliver the product at the show? If so, you should be charging sales tax. Nexus isn't even an issue anymore. It's an INTRAstate sale. Unless the state allows you a temporary permit to collect taxes just at the show, you'll have to register, which really complicates things.
Here's the overall gist. Generally, the physical presence that will give you nexus in a state will have something to do with helping you exploit that state's marketplace. If you're doing a show in a state, and you're trying to sell to that particular state, and you do it more than a few days a year, you'll probably have nexus.
And don't forget that you may owe use tax, in that state, on the property, samples and equipment you bring to the show. Thought you were off the hook, eh?
The Sales Tax Guy
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.
Thursday, May 15, 2008
The gist is that affiliates an online vendor has in a state (people who they pay a commission to for referring business to the vendor's web site - Amazon.com has thousands all over the country) count as a physical presence in the state. Overstock.com actually suspended their referral program in New York because of this.
Here's a later story http://www.news.com/8301-10784_3-9944934-7.html?part=rss&subj=news&tag=2547-1_3-0-5
All credit to NY for coming up with an interesting approach. This should be interesting.
Saturday, May 10, 2008
Based on a quick survey, it looks like the current list is Virginia, Louisiana and Florida.
Sales Tax Guy
Thursday, May 08, 2008
The short answer is no. But that wouldn't be very interesting.
First of all, I've not researched this in every state, but generally, if you don't have nexus for sales and use tax in a state, you don't have any responsibilities to that state for SUT. Having said that, most sales agreements have, as boilerplate, language that says that the buyer is responsible for all taxes. I don't think it's required, it just crosses some t's and dots some i's.
By the way, people tend to think this boilerplate gets the responsibility off of the seller's back to collect the tax. It doesn't. It merely serves as notification to the buyer that they have to pay the seller the sales or use tax and/or they have to pay use tax. It doesn't mean, "We won't be collecting tax, even though the law says we must. It's your problem." A seller can't avoid the law by writing something into a contract. If they could, just think of the possibilities! "But officer, I have a contract with my customer that says I have to get the stuff to him by 4pm. It's 3:45 and he's 20 miles away. So that allows me to exceed the speed limit, right?"
Keep in mind a couple of other issues:
1. You may have nexus, the buyer knows it, and they are bugging you to charge tax to make it easier for them. You don't think you have nexus. But are you sure? Have you reviewed the law in that state to see if you have nexus. If you think you must have a permanent presence, you're wrong. Other factors, like sales reps visiting more than a few times a year, will probably do it. And since your customer is seeing those reps, they have a legitimate question.
2. Even though you really don't have nexus, if your customer is big enough to push you around, they may force you to register in the state to collect tax from them.
3. Drop ships. Say you're the middleman, having someone drop ship products to your customers for you. Your shippers may want to collect the tax from you, even though you're buying "for resale." That's because of what I like to call the "nutty drop ship law." Depending on the laws in the destination state, they have be required to do so, even though you have no nexus in the state.
Bottom line: I don't believe you have to notify a customer that they're responsible for taxes if you don't collect them. But it seems like a good idea. And just because you think you don't have nexus doesn't mean you don't have anything to worry about.
Sales Tax Guy
See the disclaimer
Thursday, May 01, 2008
- If it's below ground, it's an improvement to real property...if it's above ground, it's not.
- The tax applies based on where the property "lands" - where it will eventually be used.
- If it's used in the plant, it's exempt.
These aren't terribly accurate. But people swear by them.
Rules of thumb or shortcuts may or may not be useful. But the thing to remember is that they are, at best, approximations of a difficult and complex issue. If you use them, recognize them for what they are: shortcuts. It's best to look at what the law actually says. That means bulletins, statutes, regulations, etc. Not shortcuts.
And remember, shortcuts can be muddy and slippery.
How's that for a cool metaphor?
Sales Tax Guy
Thursday, March 27, 2008
A lawyer walks into a furrier in Miami and purchases a $70,000 fur coat. He tells the clerk to ship it to Atlanta…it is, after all, a gift. The clerk doesn’t charge sales tax because the coat was shipped out of the state. And we all know that there’s no sales tax on an interstate sale, right?
The store gets audited by the Florida Department of Revenue. They assess the retailer roughly $6,000 sales tax on this sale, as well as many others.
You see, it really wasn’t non-taxable because it was shipped out of the state. The coat was in the store when the customer purchased it. Only AFTER the customer had control over the coat was it then shipped out of Florida. The customer could, after the sale was rung up, have changed his mind and taken the coat with him. Therefore, the store should have charged him sales tax. This is the logic. Enforcement is spotty on this. But a few states, like Florida, codify this in the statutes.
Of course, the store then billed the customer for the $6,000 in taxes they failed to charge him. They sent an invoice, with a very apologetic letter to his home.
The customer came home from work that night, and his wife asked him about the $70,000 fur coat that she never received. He’s now divorced.
So the penalties for evading sales tax can be more than just the taxes.
Wednesday, January 09, 2008
Michigan just repealed their new, broad tax on services.
The Sales Tax Guy