Wednesday, November 25, 2009

Documentation when you ship out of state

Once upon a time, there was a jeweler who got audited. He was questioned on a whole bunch of sales that he hadn't charged sales tax on. The jeweler claimed that he shipped those items out of state. He pointed out, to the auditor, that the ship-to addresses were in different states, and that he had charged the customer for the shipping charges.

The auditor then asked the jeweler for actual proof that he had shipped the goods, as opposed to the more likely situation where the customer was in the store and arranged to have the items "shipped" with a minor freight charge.

The jeweler came up with the Fed Ex bills of lading.

The auditor then asked to see the actual invoices from Fed Ex, or the tracking reports.

The jeweler couldn't seem to find those records.

The jeweler had to go to bed without his supper.

Remember, the delivery point defines that state that gets to make the rules and gets the taxes. If the delivery is in the store at the counter, then obviously the state where the store is located gets the taxes.

A common scam is for dealers of expensive, but cheap-to-ship consumer goods to "ship" the goods and then just hand them to the customer in order to evade the sales tax. Sharp auditors simply ask for proof that the items actually were shipped. And Fed Ex bills of lading aren't enough. There's no signature, no stamp, no evidence at all on the typical form that the goods have even been touched by Fed Ex. The scam could simply involve preparing the Fed Ex bill of lading, and attaching it to the sales paperwork. And I wouldn't be surprised if that's pretty much what happened in this case. But as we've seen, that's not enough. You need proof.

Whenever you ship taxable goods out of state, the auditor will (hopefully) realize that they don't get to tax that shipment, assuming the seller shipped it out of state. You need to maintain adequate records to prove that:
  • Invoices from the freight carrier
  • Tracking logs
  • Signed bills of lading
  • Export paperwork
The standard Fed Ex form isn't enough.

A seminar participant once incredulously asked, "you mean I have to attach all that stuff to every invoice in my files?" My answer was that, no she didn't. But she should have an audit trail to be able to get to that paperwork, if the auditor needs to see it.

Remember, the auditor needs proof. Which isn't an unreasonable request considering the amount of potential taxes to be evaded using this scam.

Note, I'm aware of a further evasion that is almost foolproof. I'm not going to mention it here, because it is pretty sneaky and hard for the state to catch. Which is why I'll pass on mentioning it. But the truly nefarious among you have probably already figured it out.

This blog will be silent for the rest of the week. Have a good Thanksgiving.

Sales Tax Guy

See disclaimer and research the issues thoroughly before making decisions

Here's information on our upcoming seminars and webinars

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


No comments: