Monday, December 28, 2009

Illustrations and Parables: The Generator

I was doing a seminar in Mobile, Alabama when I picked this one up.


Mobile, if you don't regularly watch the Weather Channel, probably gets more than their share of hurricanes. This particular company had a plant in the area. They were far enough back from the beach to not have a problem with water or storm surges, but they were still subject to wind damage. And the biggest problem was power outages that apparently could last for more than a week. So they bought a big, honkin' generator to provide backup power.

However, they didn't keep the generator at the plant. It was an outside generator and they didn't want to worry about wind damage. They stored it in Houston, Texas at the facility of the dealer who sold them the generator. You see, the hurricane that would tear up Mobile, is not going to be the hurricane that goes through Houston. This is the ultimate in "off site" backup.

The Plan

After the storm passes through, they'll call up the dealer and tell him to deliver the generator. That would probably take a day or so. In the meantime, they'll clean up the site and do any other preparatory work necessary.

The generator arrives, they set it up, and voilĂ , power! They can start making stuff, shipping to their customers, and providing employees with a much needed paycheck.

The Problem

The state of Texas audited the dealership and noticed the generator (probably more than one - storing these things is probably a nice little side business for them). After finding out who owned it, Texas went after the company in Alabama asserting that they had nexus in Texas. After all, they did have a pretty big and expensive piece of equipment sitting in Texas. Which means they have a physical presence in Texas. Right?

The company believed the auditor and paid their back taxes, penalties and interest and registered in Texas.


I asked the guy who was telling me this story, "And you believed the auditor?"

"Well, yeah. He's the auditor, he knows what he's talking about."

"Do you have any other physical presence in the state? And I reeled off the various factors."

"No. Just the generator," he said, starting to feel nervous.

I said, "You really need to get yourself a lawyer who knows their way around Texas nexus issues. I can't believe that generator gives you nexus in Texas. It's just one piece of equipment that has nothing to do with exploiting the Texas marketplace. It's merely being stored in Texas because that's where the dealer happens to be. I'll bet a lawyer would be able to beat this easily"

"But the auditor said..." I think I ruined his day.

Folks, please remember that the auditor is likely to be telling you stuff she learned about in a meeting back at the office. She's not a lawyer, and she has not reviewed the court cases herself. She's just trying to pry some tax revenue out of you. Never take the auditor's word for it. Get yourself a lawyer or CPA who is an expert at sales and use taxes. They'll be expensive, but they'll know a whole lot more than that sales tax auditor. And they'll be on your side.

This company threw money away in the direction of Texas because they didn't understand the way nexus worked, and they believed the auditor. Don't do it!

The Sales Tax Guy

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