Sales and Use Tax News Links

There are plenty of articles in the news these days about how state and local sales tax revenues are plummeting. And there are a couple of editorials about sales tax policies that reflect a lack of understanding by the editors at the Philadelphia Inquirer and the PressofAtlanticCity.com

Energy related SUT holiday in Georgia at AJC.com and also at GPB

Sales Tax Guy

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Withdrawal from Stock

This is a continuation of the topic started in this article and a variation on this article.

Let's say that Jim, at Jim's Bait Shop, buys his stock from Bill's Wholesale Bait. Jim, as we saw in the previous articles, wouldn't have to pay tax because he's buying it for resale. The most fundamental sales and use tax exemption is for resale. So Jim's got nothing to worry about. Obviously, he will charge his customers tax on the bait and other tackle that he sells.

Scenario 1

Jim got up this morning and decided to take the day off and enjoy his favorite hobby, you guessed it, fishing. So he stops in at the store, takes a tub of his Special Blend out of the cooler, leaves a note for Burt, his bookkeeper, and heads off in the boat.

Now the state wants some money. When Jim bought that bait, he said he was buying it for resale. Which was true at the time. But then Jim changed his mind and took some of the inventory and "converted it to use." In other words, he didn't resell that particular tub of bait. He used it.

Hopefully, Burt has been to a seminar or two and knows about this problem. If he does it right, he'll be making a journal entry to reduce the inventory for that tub of bait, and he'll also be accruing the 8% use tax as well. Since Jim didn't pay sales tax when he bought it, he now owes use tax when he uses it instead of selling it.

Scenario 2

Jim does a chamber of commerce show and gives away small tubs of Special Blend at his booth. He used them as advertising premiums, therefore he owes use tax. Remember, he didn't pay tax when he bought the bait. But now he's used it. He's converted his inventory to use.

Scenario 3

Then there's Mary Kay. Mary Kay is a champion in bass fishing tournaments. She likes Jim's Special Blend and proposes a sponsorship deal. She'll use his bait (and wear the appropriate patches, etc) if he gives her 100 tubs of bait a year. He hasn't sold her 100 tubs of Special Blend, he's given it to her. Since he didn't sell it, he owes use tax on his cost of that bait. He used that inventory by giving it away.

Scenario 4

This applies to inventory that he gives to charity as well. Let's say the local Girl Scout troop wants to host a fishing derby (the stories just get weirder and weirder, folks) and they ask Jim for a donation of bait. Jim is happy to oblige and donates 50 tubs of Special Blend - essentially the same deal as with Mary Kay. You might think, "The Girl Scouts are tax exempt!" Yes, but not necessarily as far as Jim's donation. About half the states will say that Jim doesn't have to pay use tax on donated inventory. The other half will make him pay. You need to check the law in the relevant state.

Scenario 5

Finally, an old customer, Tony storms into Jim's establishment and demands a refund. The "Special Blend" didn't work! Jim apologizes and says that he had trouble a couple of days ago too. He offers Tony three tubs of the latest batch. Tony leaves happy. Jim leaves another note for Burt. Burt will have to make another journal entry reducing inventory and accruing the use tax on those three tubs because Jim used them by giving them away.

The term I used earlier, and that I've used for a long time is "conversion to use." Jim converted his inventory, which wasn't taxable, to use in all five examples above. Which means Jim owes use tax.

So the take-away here is that, if you sell stuff, you need to account for any situations where your stuff is taken out of inventory and wasn't sold. If you use it on your own, give it to a customer for goodwill or as a prototype, use it as a advertising premium or in trade, or give it away, you owe use tax. You used it.

About the only situation where your inventory can "go away" without you owing use tax is if you throw it away. And I've seen at least one state where manufacturers would have to consider scrap materials thrown away as used.

By the way, it's easy for a sharp auditor (big assumption) to catch this one. Remember poor old Burt. He's been making journal entries to reduce the inventory each time Jim gives away some inventory. All the auditor has to do is go through the inventory general ledger account and look for any entries reducing inventory for purposes other than sales and she's got you.

The solution is actually pretty simple. Whenever you make a journal entry to reduce your inventory, make sure you check to see if you owe use tax. And accrue it if you do.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Picture note: the pictures above is hosted on Flickr. If you'd like to see more, click on the picture.

QuickTip: Sources of Sales and Use Tax Information

Here is my list, in descending order of cost and value, of the most useful sources of information on the topic of sales and use taxes.

Sales Tax Guy

Here's information on our upcoming seminars and webinars And we do coaching!

Picture note: the picture above is hosted on Flickr (and the caption on Flickr is pretty funny). If you'd like to see it, click on the picture.

Refresh Your Exemption Certificates

I'm assuming you have all the necessary exemption certificates from your customers. That's a big assumption, of course. Most of you don't. But if you do, then the next problem is making sure that the certificates you have are still valid.

Depending on the state, certificates may expire. So you need to make sure you refresh them. There are four options:

1. Carefully pay attention to the expiration rules for each state where you need certificates and then do the necessary requests, and follow-ups to keep your files up-to-date. This is lots of work and requires regular research.

2. Refresh one third of all your certificates every year. That way, you get a completely new set of certificates every three years which meets the requirements of just about all of the states.

3. Refresh all of your certificates every year. This is overkill, but it certainly is safe and will meet the requirements of every state. In both items 2 and 3, we're basically talking about sending out a form letter to your customers. It means a couple of spreadsheets, some mail-merges, a little annoyance for your vendors, and the time of a summer intern. We're not talking about a major investment.

4. Invest in some software. There is software out there that will manage your certificate process for you. The software will determine what forms you need, store the imaged documents, and tell you when you need to refresh. It's item 1, but automated. I've met folks from these companies and they even appear as advertising on this blog - in fact I saw one this morning when I posted this. So they're out there. In fact, I just did a quick Google search for you. You may want to check them out. This method is expensive, but safe.

Regardless of the method you use, get your exemptions certificates and keep them up to date.

Aside from being safe, if you've got this under control, the auditor will be impressed. So you've got that going for you. Which is nice.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Picture note: Yes, it's the Frazier family milk jug. Had to. Sorry. ;-)

Sales and Use Tax News Links

In the category of not-so-smart politicians, Arizona is the state you want to live in if you want to buy a used car. From AZCentral.com, in just about every other state, if a car is bought in an "occasional sale" situation (like buying a car from someone in their driveway), there's no sales tax because the state can't make someone, who's doesn't do it as a business, collect sales tax (it's an occasional sale). But states CAN impose a "use tax" on the car when the buyer goes to get the car registered. Just about every other state does this at the counter at the motor vehicle office. But Arizona evidently doesn't.
They are giving away tax revenue that the other states manage to capture. And dealers obviously have a bone to pick because they're geting shafted by having to charge tax whereas an individual seller doesn't.

And the politicians don't want to make the seller collect the tax. Right, it's an undue burden. But why not do what every other state does, and collect when the registration occurs? Oh, yeah. It's an undue burden on the people behind the counter at the state office. Sorry, I forgot.

Duh.

-----

There is a lot more news about the Pennsylvania proposed tax on arts admissions.

-----

Ohio proposal for a sales tax holiday in August and December!

-----

California announces that certain business buyers will have to register for use taxes, even if they don't have to register for sales tax. From Acccounting Web.

-----

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Rebates

This is one of a series on how to handle items that affect the "basis" of tax.

Let's say you're interested in a computer - the Univac Model 4206. If you buy it from Gene's Finer Computing Machines, he will charge you his "friend" price of $100,000 (it's a nice computer).

In today's mail, you got a letter from Univac offering you a rebate of $5,000 if you buy your 4206 before the end of the month. That works for you so you get yourself over to Gene and buy that computer. You mention that the rebate brought you in, and Gene kindly offers to handle the rebate for you if you'll sign it over to him.

Gene sells you the computer and the invoice shows:



The basis for the tax calculation is $100,000, not 95,000. The reason is that, while it looks like you're getting a discount which ought to reduce the tax base, you're really paying $100,000. $95,000 is coming out of your pocket and $5,000 is being paid by Xerox. As far as Gene is concerned, he's still sold that copier for $100,000 and that is what he'll report as his gross sales.

Think about it this way. Maybe Gene wasn't able to cash in the rebate for you. In that case, you'd file for that rebate later. Then Gene is obviously going to have to charge you sales tax on the full $100,000.

So rebates generally do NOT reduce the tax basis because the original sale amount is still being paid. There are a few states that do reduce the tax base by rebates but you could count them on the fingers of one hand. And there are some states that handle rebates for vehicles differently. Check the local laws.

Here is a later article on a related topic - coupons.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Miscellany

First of all, if any of you noticed the Twitter feed that was in the left column, I apologize. I noticed some very bad words on there. The gadget I used somehow tapped into someone else's account. Mine is pretty harmless.

Secondly, someone asked a question recently that made me think that I should probably discuss just precisely what a webinar is. Since we're, kind of like, doing them. About 50% of this was taken from a good article on Wikipedia. Our web page will be updated later today.

Our webinars are live training sessions presented via the internet with a small downloaded application on each person’s computer. Attendees access the meeting by clicking on a link distributed by us after registration. The webinars are one-way from the presenter with chat capability so that audience can ask questions and provide feedback. Participants view the PowerPoint presentation on their computers, and listen as well. There is also an option to dial in using a standard phone line for the audio.

After registration, within 7 to 14 days of the event, we’ll send the login instructions with a link and session ID. Participants should plan to join the meeting 5 to 10 minutes prior to the official start.

A few days before the seminar we’ll also provide a current version of the handouts for the webinar to make it easier to take notes and follow along.

Finally, here's a couple of links.

Arts_community_shocked_by_new_tax_burden
What I find interesting about this situation is that they didn't hit movies and sports admissions. If one wanted to be paranoiac, it could look to one that they went after the kinds of admissions where the richer and more cultured folks would likely go. But for the rest of us and our pleasures, they left sports and movies alone.

Canada's GST
Here's a pretty good article describing Canada's sales tax system.

Sales Tax Guy

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Two situations where you'll need an exemption certificate - and why!

Exceptions from the default sales tax rules can usually be broken down into four broad categories:

1 Services that are taxed

Exemptions from the tax based on:
2 Organization of the buyer
3 Expected use by the buyer
4 What is being sold

Generally, if something is exempt, because of what it is (item 4) - like food or drugs, then no certificate is necessary. But if it's exempt because of who the buyer is (item 2), or what the buyer's intended use is (item 3), then you'll probably need a certificate from the customer.

In both of these cases (2 and 3), the reason for the exemption is buyer-centric. The buyer is a particular type of organization (eg. government or non-profit). Or the buyer is going to use the purchase in a certain way. Therefore, you will need something from the buyer giving you assurance of their type of organization or their planned use. Because they know, and you don't. But with exemptions that are based on what is being sold (item 4), the exemption is self-evident and usually has nothing to do with the buyer.

The buyer knows who they are and they know what they're going to use the purchase for. So they need to inform you in a way that puts them on "the hook" and gets you "off the hook." That is the purpose of an exemption certificate.

By the way, a short plug: the Four Exceptions are essentially the basis for our Taxing Policies by State webinar. Please join us for states you're interested in.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Quick Tip: When buying sales tax software...

The best single piece of advice I can give you is to ask for and visit references. This is the most important thing you can do to stay out of trouble. And you'll drive the sales reps crazy. Read more.

Sales Tax Guy

Here's information on our upcoming seminars and webinars And we do coaching!

Direct Pay Permits

This is a compilation and enhancement of several previous articles on direct pay permits.

First of all, what is a "Direct Pay Certificate?"

It's an exemption certificate that the buyer hands to the seller. It relieves the seller of the responsibility of collecting the sales and use tax from that particular customer. This is because the buyer has made a deal to pay the use tax directly to the state. They have gotten a direct pay permit from the state.

Why would these certificates exist? Larger organizations (eg. manufacturers, contractors and utilities) find them helpful because they buy lots of different things, some exempt and some taxable. They have very complex operations, and it may be impractical to have the seller collect the tax. In some cases, the buyer may not even know if a purchase is taxable at the time of the billing. So this makes it easier for both parties.

The customer buys pretty much everything without the vendors having to charge sales tax. The direct pay permit holder then self-assesses the use tax. And the vendors have one less customer to worry about.

Sometimes the purchasing and operational issues are so difficult that the user may even come up with a calculation. A manufacturer might say, "We bought $400,000 worth of shop supplies last month. Our studies indicate that 40% of those supplies become ingredients in the product and the rest are used in our operations. So 60% of the $400,000 is taxable, and that's what we accrue and pay use taxes on."

It's not easy to arrange that kind of allocation if the tax is being collected by the seller. How are they only going to bill for 60% of the tax? On the other hand, all the buyer has to do is make a journal entry, and the problem is solved.

What's in it for the state? First of all, not all states grant direct pay permits, so don't assume you can just apply for one. But the benefit for the state is that the audits are less detailed. Since the user comes up with calculations and ratios as described above, the auditor theoretically has to grind through fewer transactions. And I think another reason is that the state may actually get overpaid! See the discussion below.

Now you may think this is a pretty good idea. But there are catches:

1. States don't like to hand direct pay permits out like Skittles. They often have volume requirements and expect to see adequate accounting systems in place. If you don't have professional accounting management, and you use QuickBooks, you're not going to be able to get a permit.

2. Don't think of this as a way of avoiding/evading tax or getting to hold onto the tax money a little longer. You're going to probably have to pay your use taxes monthly, and you can pretty much count on getting audited every few years. Because the state is now relying solely on your company to self-assess (and we know how reliable most of us are at that), the state is going to be much more likely to audit you. Regularly. Frequently. Set up an office just for the auditors, if you know what I mean.

3. Tied in with number 2, you're likely to get audited before they even give you the permit, just to see if you have those systems in place to self-assess properly. And they're going to want to look at those studies you're using for your calculations to make sure you're doing it right.

4. Beware of mixing up which vendors you pay sales tax and which ones you don't (by giving them the direct pay certificate). I've talked with taxpayers who were not consistent in using their certificate. This resulted in paying sales tax on purchases and then turning around and self-assessing tax on the same purchase. Keep very close track of who you give a direct pay certificate to and who you don't.

5. One of the things I've talked about is that you should be careful about overpaying your taxes because you mistakenly believe something is taxable. A clue to this is when you think something is taxable, and the vendor hasn't charged you tax. A phone call is in order. But if you have a direct pay permit, your vendors aren't going to tax you at all. You'll now be relying solely on your own understanding of the tax laws, and you won't be getting the reality check from your vendors. You may not realize it, but there is some education that is happening because of the give and take with your vendors. Get a direct pay permit and you're on your own.

Whether or not you get a direct pay permit is simply a question of how much easier it would be to self-assess versus the risks of overpayment and audits. I'd strongly recommend you sit down with a local expert to see what they're recommendations are based on your specific situation. And if that alternative seems too costly, then you probably shouldn't get a direct pay permit.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars And we do coaching!

And please don't forget to visit our advertisers!

Coaching

It's been a busy week here at Sales Tax Guy Central. First we schedule webinars. Then we do our first one. And now we are offering coaching on sales and use taxes. Think of it as one-on-one training. We don't provide sales and use tax advice on specific tax issues - that's the job of local sales and use tax experts. But often it's helpful to have a better understanding of the problem itself so that you know how to ask better questions, or where to find the best (and cheapest) answer.

Think of this as sitting around the table in a coffee shop talking about your plans and getting ideas.

If you're interested, please visit the Coaching page for more information.

I hope to actually talk to you soon!

Sales Tax Guy

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Picture note: I wanted a picture of me with a whistle looking like everybody's favorite coach. But, for some reason, no whistle in the house. Plus my beard is as long as it's ever been, which means I don't look like anyone's favorite coach. But this guy looks intense, which works for me. If you'd like to see the picture on Flickr, click here.

If you insist on contacting the state...

...do it by email. As mentioned previously, don't call. But you can at least get a slightly more reliable response from them if you ask them via email. Then the response will be an email. Which means you at least have something to show the auditor that corroborates your position.

There are a couple of issues.

1. It still may be the wrong answer. And to cover themselves, it's a good bet that there will be a disclaimer at the bottom of the email saying, essentially, "We might be wrong. Don't take our word for it."

To deal with that, when you ask your question, ask for a link to where you can read more about it. Don't take the answer you are given without some support.

2. If you email them a question, they now know who you are. I mean, you gave them your email, didn't you? Set up a Yahoo or Google mail account, or use your personal email account. Use some email address that won't enable the state to track you back to your company.

"Ha," you're saying, "the state would never do that." Yes they would. I've had several people over the years who got audited suspiciously soon after they had asked a question. And the audit centered on the exact area the question was about. And I had one auditor in the class (I hate it when they show up, but they always provide interesting information) who did, in fact, cop to the fact that they audited people based on questions they asked.

3. You may be dealing with a state who has not, as of yet, heard of email. You'll be forced to use the phone. Or find some better way of getting your answers.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Picture note: the picture above is hosted on Flickr. If you'd like to see a larger version, click on the picture, then click on the "all sizes" button above the picture.

Quick Tip: Don't CALL the State!!!

I get this a lot as the reason why people are doing it a certain way. Please stop it! See this article. And this one. And this one too. And this entire topic.

Please don't CALL the state to get information you're going to actually use.

Sales Tax Guy

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Do I have to pay use taxes on my inventory?

Whenever I start talking about use taxes, the question almost always comes up about whether someone needs to pay use taxes on their inventory.

We need to make sure we know what inventory means. Here are some questions:

1. Did you buy it with the intention of reselling it?
2. Have you changed your mind about that?
3. Are you using it as a demo unit?
4. Have you given it to someone to use but you're still holding it on the books as inventory?
5. If you're using it as a display item, do you intend to sell it for pretty close to the original price?
   

If you answered "yes" to the first question and no to the rest, then no matter how long you hold the inventory, you shouldn't owe use tax on it. You bought it for resale and that's one of the most fundamental exemptions for sales and use taxes. Even if you move it from state to state, you still owe no use tax.

Unfortunately, there are other taxes which may apply - such as personal property taxes (in some states).

But with regard to sales and use taxes, you should be off the hook. Just watch your answers to those five questions. Because if you answer wrong, then you've used the inventory and you will owe use tax.

More about withdrawals from inventory here.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Picture note: the picture above is hosted on Flickr. If you'd like to see a larger version, click on the picture, then click on the "all sizes" button above the picture.

Quick Tip: Where to find a sales and use tax professional

The best place to start is with your CPA. And if they're not comfortable with anything beyond filling out the return, then a big CPA firm. Here's one article on this and a whole lot more.

Sales Tax Guy

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Sales and Use Tax News Links

Already registered in NY. Guess what? You have to register again. And it'll cost you $50! and here

Ohio Grocers argue commercial activities tax is basically a sales tax and here

More problems between MA and NH, particularly with the MA tax increases

Amazon.com invites affiliates back in HI

Interesting problem between IA and NE when a reciprocal agreement fell through.

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Picture note: I'm trying to give you folks different pictures of "links." If anyone has any other suggestions, please let me know.

Quick Tip: Get your people trained!

Yeah, I know this is what I do, but you really should get Sales, AP, Purchasing, Order Entry and just about everyone to be a little smarter about sales and use taxes. Read more.

Sales and Use Tax News Links

Lawmaker taken to tax for buy at N.H. store
Not my pun - the newspaper's - although it's pretty good. MA passes SUT increase and a liquor tax increase. Legislator who voted for both is caught buying liquor in no-tax NH. Tsk Tsk.

Tax-Friendly Places to Retire
An interesting discussion of the interaction of sales taxes, property taxes and income taxes. And the sales tax info is pretty accurate - which impresses me. Check out the interactive table too.

Sales Tax Guy

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Golden Rule: The Four Exceptions

There are four major exceptions to the Golden Rule of Taxability which basically says that all sales and use of TPP are taxable and all sales of services are not taxable.

1. Just about every state will tax some mix of services, with rental of TPP, utilities, lodging, and food service being the most common.
2. The purchases of several types of organizations, including government agencies and non-profit organizations are usually exempt. Sales by these organizations are often exempt to some extent, often if it's related to fund-raising activities.
3. Purchases may be exempt based on how the purchase will be used. Typical exemptions are purchases by farmers for agricultural use, and by manufacturers for use in the manufacturing process.
   
4. Then there are exemptions based simply on what the item is, such as grocery store type food and prescription drugs.

A good starting point for your research into all of these exceptions is our taxing policies article. Remember though, it is work in process. Another article that may help your understanding is about decision factors.

By the way, a short plug: these four exceptions are essentially the basis for our Taxing Policies by State webinar. Please join us for states you're interested in.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

And please don't forget to visit our advertisers!

Quick Tip: Review paperwork going to auditor

Make sure you look at all the paperwork and information going to the auditor to avoid surprises and to make sure you're really answering their questions.

Sales Tax Guy

See disclaimer

Sales and Use Tax News Links

California considers "affiliate program" nexus changes
This is an ongoing attempt by the states to get more companies to have nexus in their states. I guess I'm going to have to write an article about this one!

Oregon should market and capitalize on its lack of a sales tax
Of course, that would be encouraging residents of those other states to violate their states' use tax laws, but that's just quibbling. ;-)

Bellwood, East Dundee sales-tax rates top Chicago's 10.25%
I'm always looking for record-breaker sales tax rates. Yay, Illinois!

Quick Tip: When does nexus go away?

Here are some answers to the age old question of "when does my nexus go away?" My favorite is one full reporting period after whatever physical presence you had disappears. But there are more conservative options.

Sales Tax Guy

See disclaimer

Here's information on our upcoming seminars and webinars

Picture note: the picture above is hosted on Flickr. If you'd like to see a larger version, click on the picture, then click on the "all sizes" button above the picture.