More examples of taxable stuff you didn't know about

One of the things you need to be aware of is that some of the services and things you sell are taxable and you didn't even know it. Here are a few from some recent assessments.

A trucking company got nicked for the sales tax they should have charged the contractor drivers that they sold the trucks to. The transaction was complicated, but they WERE selling the trucks and it didn't qualify as an occasional sale because they sold a LOT of trucks.

A time-share company that sold furnished apartments should have been charging taxes on the sale of the furniture. And the fact that they had already paid tax didn't count because they "used" them by having them in the units to show before the units were sold (they were "on display).

A boat club found out that its membership fees were taxable because they really were rental fees. And the rental of boats was taxable.

An interesting link from California

This article, well written by Annette Nellen in the "The California Progress Report", covers much of the ground regarding use tax, the problems in collecting it, and some ideas about better enforcement. I like the one about vetting potential public employees and other folks about whether they have paid their use taxes.

Sales Tax Guy

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Doing business in another state?

Part of a series on essential actions you need to take

Most businesses have out-of-state business. If the extent of your sales is that you ship products, then your primary concern will be whether you have nexus in the remote state and should be charging that state's tax.

But the other problem, that can be even trickier, is when you perform services in that other state. Many states tax a wide variety of services including professional services, recruiting fees, insurance adjustment services, information services, contractors, and my favorite, the labor associated with the repair of tangible personal property. And the list goes on. And nexus isn't the issue if you're performing taxable services in a state. You must be charging sales tax on your sale of taxable services.

You must do this:

Whenever you perform services in another state, check to see if what you're doing is taxable in that state.

This infomation is not that hard to find. Most states will show, in the publications section of their web sites, what are considered taxable services. And the sales tax books that I recommend both cover the issue.

If what you do isn't specifically listed, don't assume you're safe yet. Look a little deeper at the interpretations of the taxability of the service. Check as many resources as you can before deciding. And, if necessary, punt.

For example, whenever I do a seminar in a new state, I always double check to see if speaking fees are taxable (they are in a couple of states). But the law rarely specifically mentions "professional speakers," so I look under training, consulting services, business advisory services, etc. And if there's a hint of a whiff of the potential for taxability, I'll keep looking until I'm sure.

It wouldn't do for a guy who trains on sales and use taxes to get busted by a state for not charging sales and use tax.

Sales Tax Guy
See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Don't sign that return!

I'm on a mission. The problem is that most companies don't take sales and use tax seriously. As mentioned elsewhere, your executives don't know what they don't know. Since the big dogs don't take the tax seriously, if they give it any thought at all, the odds of them signing the SUT return are pretty low. Which only reinforces the "not taking it seriously" part.

So, here's an idea. Make the big dogs in your organization sign the return. If they start signing it, maybe they'll ask questions. Maybe they'll start taking the tax seriously. Maybe they'll read this blog. Maybe, just maybe, they'll go to a seminar or take in a webinar! (OK, there's a self-serving aspect to this editorial too)

And if they wonder why they need to sign this silly sales tax return, offer the observation that they probably sign the company's 1120 Federal Income Tax return? Frankly, if you get audited, the bigger assessment, and certainly the bigger surprise, will probably come from the sales tax audit. So they should be scared of sales and use tax. And therefore, take it seriously. So encourage your execs to take the responsibility they already have and sign the return.

Wait a minute! Did he say "they already have?"

Yeah, I did. Even if a lowly staff accountant signs the return, the real responsibility will come to rest on the officers of the company anyway. Just another example of what they didn't know.

By the way, I know that some of you don't have this opportunity. You're working at a branch location of a larger company that files consolidated income tax returns out of your home office. But that's usually not an option for sales tax. So you're off the hook. But for the rest of you, I'm wagging my finger at you.

Sales Tax Guy
See disclaimer

Here's information on our upcoming seminars and webinars And please don't forget to visit our advertisers!

Update

I've updated this post about litmus tests for choosing a professional. I added item number 5 after responding to a question.

http://salestaxguy.blogspot.com/search?q=litmus+test

Sales Tax Guy

The Golden Rules of Sales and Use Taxes

These are fundamental principles that I've discovered in my years of training folks on this topic. These are things that the books and research materials assume you already know. Now you do. These golden rules are all listed in detail here.

Sales tax is a tax on the transaction

Taxable sales

Which state has jurisdiction over the sale

The ship-from state is irrelevant

Every state does it completely differently

There's an exception to everything

The buyer has the ultimate responsibility

Use tax is imposed even if you've already paid tax

The lumping rule

Be careful about your information sources

The invoice is your record

The rule of taxability

Nexus

The Basis of Tax

Use

The Four Exceptions

Sales tax and use tax are complementary

There is no sales tax on interstate transactions

The Basis of the Tax

The Seven Factors that determine the taxability of any sale

This is a "master article" that will serve to compile and organize the rest of the articles on this site. There are other master articles that I'll be developing. And they will all be updated regularly.

Sales Tax Guy

See disclaimer

Here's information on our upcoming events

A sales tax holiday for Illinois?

New guv (you heard about our old guv, right?) wants to raise taxes, but offers a weak sales tax holiday as a little sweetener. The retailers don't like it. Chicago Tribune

Here's information on our upcoming seminars and webinars

Sales Tax Guy

Golden Rule: Sales Tax is a Tax on the Transaction

This is a very important thing to remember as you begin to understand the theory of sales and use taxes, particularly with regard to interstate commerce. Sales tax is a tax on the sale itself. Hence its name. It is a tax on the transaction.

There will be situations where the sale can't be taxed for one or more reasons. Because of this problem, the states had to invent another tax. Yes, you've got it. Use tax. Use tax is the plug when a loophole in the sales tax law allows a transaction to go untaxed.

We'll discuss the loopholes in the future.

Sales Tax Guy

Here's information on our upcoming seminars and webinars

Selling to the Guv?

From a seminar last week:

A company sold a federal agency a LOT of equipment. The equipment was delivered directly to the federal agency although it was paid for by the subcontractor. The equipment dealer assumed that the sale was to the feds and therefore wasn't taxable. They were wrong.

Sales to our beloved federal government are dicey. In this situation, the title and possession passed directly to the federal government. A reasonable person would have thought the sale would be exempt from tax. However, many states say that what counts isn't who the product is delivered to, or even who takes title. In those states, the real test is who paid for the goods. If the check is printed by the US Treasury, then the feds bought it. If the check was printed by the contractor, then the contractor bought it.

The moral of the story is that if you sell to government agencies, you need to make sure of three things before you even bid.

1. Is the sale exempt in that state? There's at least one state where sales to the US government are taxable.

2. Does the state tax state and local government sales differently from federal sales?

3. How does the state handle the tax when a subcontractor is involved? It varies all the way from, if the contractor is acting as an official agent of the feds, to who takes title, to who pays the check.

In this particular real situation, the company was assessed over $100,000 in taxes that they should have charged the contractor. They were eventually able to recover it from the contractor, but it took time and a lot of effort.

Be careful and do it right.

Sales Tax Guy
See Disclaimer

See our coming events

photo note: I had to come up with a representation for the federal government...I thought this would do nicely. You can see more of the picture here.

Evil Revenuers

This comment came up the last time I was in a state on the east coast with remarkably complicated and badly documented rules for contractors*. In some cases, contractors buy for resale, in other cases they pay tax on their product but charge tax on their services; and in other cases they can sell their services for resale, but only if they get a certificate that the state doesn't seem to want to tell them the number of.

Every time I do seminars in this state I cringe, because the contractors in the room, who would like to do the right thing, can't seem to figure anything out. And neither can I.

One participant speculated that the state deliberately kept things confusing so that they were assured, whenever they audited contractors, that they'd find plenty of money to assess.

I'd hate to believe that were true.

Sales Tax Guy

* I don't need trouble with these people, so I won't mention the state. But trust me, if you're a contractor and you're in this state, you know who I'm talking about.

Two Recent Nexus Decisions

In one case, a multi-level marketing company was determined not to have nexus because they sold only through dealers who took title to the goods and were solely responsible for their further delivery to the customer. The company did have a physical presence, limited to a couple of visits by executives in a year and eight one day training seminars. The court ruled that was not enough physical presence.

On the other hand, a web seller of hotel rooms wound up having nexus in another state because they were considered to be the "furnisher" of the rooms (not the hotels themselves) and therefore were doing business in the state. The legalities get a little convoluted, so to simplify, I'd say the web company was essentially leasing the rooms from the hotels, then subleasing the rooms to the guests. In other words, the company was leasing property located in the state. And doing it a lot.

Watch yourself when it comes to nexus!

Sales Tax Guy
See disclaimer

Illinois Senate Decides - Pluto is a Planet

This is in the category of stupid politician tricks.

Why in a sales tax blog?. Because I beat up politicians in my seminars about why sales tax laws are often complicated...they write stupid laws. Here's proof.

http://www.sciam.com/blog/60-second-science/post.cfm?id=pluto-fans-illinois-stands-with-you-2009-03-06

Thanks, Chuck for the suggestion.

Sales Tax Guy

Temporary Storage

I've told this story for years. It's time I share it with you here.

A guy called me from Maine. He had bought a piece of equipment for his Delaware facility and had it shipped there. But because of several factors, he had the equipment picked up and stored at a facility in Philadelphia for a couple of months.

His question was, "Do I owe Pennsylvania use tax?" The answer is yes. He used the equipment in Pennsylvania, therefore he owes Pennsylvania the tax on his use of the equipment.

He argued that he hadn't used it in Pennsylvania. My response was that he used it by having control over it in Pennsylvania. He didn't have to be there. He just had to have control over it. He could have picked up the phone, told the guy in Pennsylvania to move the machine back to Delaware right away, and the machine would have been move. Control.

Now keep in mind that most states will, to some extent, give credit for SUT already paid on property brought into the state. And Pennsylvania would too. But since the machine went to Delaware, where there is NO sales and use tax, there was nothing to give credit for. So he owed the full Pennsylvania use tax. Some states have exemptions for this sort of thing. Pennsylvania doesn't.

And to add insult to injury, since he stored it in Philadelphia, he would owe the higher tax. Pennsylvania's tax is 6%. It's 7% in Pittsburgh and Philadelphia.

Isn't this stuff fun?

Sales Tax Guy

See Disclaimer
Don't forget to check out our coming events!

Picture note: Philadelphia City Hall

You don't know what you don't know

Part of a series on essential actions you need to take

One of the biggest tax assessments your company will experience probably won't be from the IRS. It'll be sales and use tax. Here are some reasons:

1. Your professionals (your CPA and lawyer) know about income taxes. And they are constantly giving you, or at least anxious to give you, advice about your income tax strategy, planning, avoidance, etc. They learned about income taxes in school. And they've probably got letters after their names certifying that they're experts at income taxes.

2. Those same professionals, in all probability, learned absolutely nothing about sales and use taxes in school. It's not their fault. Very view schools even offer courses in sales and use taxes.

3. Those same professionals, when they go to continuing education conferences, rarely go to the break-out sessions on sales and use taxes. Again, it's not their fault. The conference probably didn't offer any sessions on sales and use taxes. And those professionals do need to know about income taxes.

4. Therefore, based on items 1-3, your professionals probably know nothing about sales and use taxes, other than what everyone else knows. They may be able to prepare a sales and use tax return, but that really doesn't mean they know the kinds of things that I talk about on this blog. They don't know what they don't know. Because they never got any training. It ain't their fault!

5. Therefore, you're not getting good advice, if you're even getting advice.

6. So when the auditing gods decide who will get assessed, the IRS god will not be able to surprise you. You've been getting advice. You may get nailed for some taxes, but it's likely to be something that you were kind of expecting. Your professional said, "Mary, this is kinda edgy, but I'd suggest treating the transaction this way. If the IRS catches it, and they argue that it's taxable, we can decide at that point whether to fight it or not." In other words, no surprise.

7. But when the sales tax god decides to send her minions in to make your life miserable, you won't have had that conversation with your professionals. In fact, their response will probably be something like, "Gosh, that's taxable? Huh. Learn something new every day." And privately, they're thanking the professional liability god that you never asked them any questions, and/or they didn't put any answers to you in writing.

8. The moral of the story? Your professionals don't know. And if you're hoping they're going to be providing you guidance for sales and use taxes like they've done for income taxes, you're in for a rude awakening. They don't know what they don't know because they never learned about it.

And neither do you.

I've probably managed to offend every tax lawyer and CPA in the country with this one. Please keep in mind that there ARE some professionals out there who DO go to the break-out sessions, who DO subscribe to the newsletters, tax databases, buy the books, etc. In fact there are some that actually have a practice of sales and use taxes.

Here's another fact to keep in mind. I was glancing through a paper copy of a sales and use tax newsletter about a year ago. One of the major ones. Know how many subscribers they had? 800. For the entire country! 800! That means less than 20 per state. And probably half of those newsletters went to large companies who learned that they didn't know what they didn't know.

It doesn't bode well. Ask your professional which sales tax publications and newsletters they use.

Here's another one. Know what type of company often gets hit with use tax assessments? Law firms and CPA firms. Most businesses kind of figure this one out because there's a line on the sales tax return about paying use taxes on out-of-state purchases. But since professionals don't fill out a sales tax return for their own business (they don't provide taxable services in most states) they don't 't know they have to pay that use tax.

They didn't know what they didn't know.

Your job?

Read this blog. Review my articles on tax traps. Join our events. Read some books. Go to seminars. Find a professional who knows about this stuff and get some good advice. Here's where you can find more information.

Find out what you don't know. Then you can ask some questions.

Sales Tax Guy

Golden Rule: The Ship-From State is Irrelevant

As a corollary to the delivery point golden rule, the state that TPP is shipped from has no standing. They are irrelevant.

Because:

1. They can't impose sales tax on an interstate transaction because of the Commerce Clause.
2. The only tax that will be imposed will be a tax on the buyer's use of the TPP. And that use will only occur where the buyer actually uses it, in other words: controls it. And that will not be happening if the seller actually ships it to the buyer.
3. Just about every state has a law that essentially says that there is no tax imposed if the property is shipped out of the state pursuant to the terms of the agreement. Which kind of states 1 and 2 sideways.

In a nutshell, the ship-from state is irrelevant. The delivery state gets to make the rules and impose the use tax.

But the ship-from state is going to want proof you DID ship it out of state; as opposed to the buyer coming into the state and picking the product up at your dock. So you'll need shipping documents and bills of lading that show you did, in fact, ship the goods.

Sales Tax Guy

Don't forget our coming events!