Wednesday, October 29, 2008

Golden Rule: The Lumping Rule

Generally speaking, when you lump (or bundle) a taxable charge together with a charge for something that's not taxable, you will make the entire transaction taxable.

For example:

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

Golden Rule: Be Careful About Your Information Sources

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