News Links for the Last Week

These are the news links I've posted on Twitter for the last week:

Great editorial on the tax loophole fairy. http://bit.ly/bPJjcq

Look out NY, more auditors getting hired in Albany! http://bit.ly/ds86UL And a "yeah, sure" quote at end.

Interesting how Toyota's problems can cause a serious problem for sales tax in some cities http://bit.ly/acG2zW

Good article on how sales tax exemptions affect real jobs, not just "fat cats." http://bit.ly/cdzORD

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The Sales Tax Guy
http://salestaxguy.blogspot.com

Here's information on our upcoming seminars and webinars. Don't forget, we just announced our February to April schedule!
http://www.salestax-usetax.com/

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Illustrations and Parables: They get sneakier and sneakier

I picked up this story a couple of years ago. We'll use Virginia and Pennsylvania for the states, but those are not the real states involved.

The company in Virginia got audited by Pennsylvania for nexus. It turns out that they did have nexus, never realized it, and the auditor nailed them for a couple of hundred thousand dollars. The taxpayer understood they had really screwed up, so the audit wasn't as confrontational as it sounds like it ought to be.

During the audit, she asked the auditor, "How did you guys find us?"

The auditor was feeling expansive.

"You know how when you go into a diner, there's usually a box sitting on the cigarette machine or by the cash register with entry forms. You know, where you might win a fabulous, all-expenses paid trip to Disneyworld?"

"Yeah."

"Well, one of your employees filled out the entry card. The card asks questions like, address, employer, job title, etc. It also sneaks in a couple of other questions, like how often do you visit the state, and whether or not your visits are business related.

"Your employee gave your company name, said he was a sales rep, visited Pennsylvania 12 times a year, and the visits were business related. Your employee gave us everything we needed to determine that you guys have nexus in Pennsylvania."

"OK, I get that. But how did you auditors get that information?"

"Because we ran the contest."

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OK, I left a few extra lines there to let you think about that for a moment.

The Commonwealth of Pennsylvania was smart enough, and sneaky enough, to front a couple of thousand dollars for a contest in order to collect information from anyone who spends time at a diner. Obviously most of the responses would be worthless, but they are going to find a few nuggets of gold.

What amazes me is that the politicians and bureaucrats would be smart enough, but also adventurous enough, to do this. This takes some real creativity to come up with something this sneaky. My hat's off to them.

By the way, please remember, this isn't Pennsylvania. That's just the state I've been using. It could be your state. And I'm not telling.

So you might want to tell anyone representing your company that, when they travel, not to enter those contests.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars. Don't forget, we just announced our February to April schedule!
http://www.salestax-usetax.com/

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

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News Links for the Last Week

These are the news links I've posted on Twitter for the last week:

New Mexico considering "Amazon" law regarding sales tax and nexus in the state - http://bit.ly/8KJhek from Sabrix

Felony watch: Albany bar owner indicted - allegedly didn't pay 191K in sales taxes and other stuff too. http://bit.ly/8KH8aL

Another suggestion for a "temporary sales tax" in Maine. Read the comments. http://bit.ly/7ZYzHV

Measure 67 in Oregon - kind of like a sales tax, only worse! What are they smoking? Oh yeah, it's Oregon. http://bit.ly/7ZaQXO

When is the last time you heard of a tax going away? This guy from KMBC in KC is purty smart. http://bit.ly/4P2LHp

California thinking about manufacturing exemption for green companies http://bit.ly/7J0UyU They don't have a mfg exemption, coming back?

Florida considers resurrecting their sales tax holiday http://bit.ly/6nKada

The problem with local SUT rate differences - people can just drive across the count line - http://bit.ly/51uX0D

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Quick Tip: Pay Your Taxes!

Pay your taxes! The quickest way to get your business shut down by the state is to collect taxes from your customers and then not pay it to the state. The reason this is on my mind is that I indirectly found out that the reason a business in my little corner of the world shut down, is because they collected taxes, but didn't bother to remit them.

PAY THEM!

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Where did the sale occur? (Part 3)

This is part of a mini-course on the two major types of sales (intrastate and interstate) and their impact on sales tax and use tax.

This is part 3. Here is part 2. Please start this series with part 1.

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When last we left our hero, the great state of Texas, they were just trying to get their money from somebody. As we saw in part 2, there was a good chance that Brad wouldn't pay the use tax on the motor he bought from Jennifer because he was, well, stupid. We'll give him the benefit of the doubt. He just didn't know.

But maybe Texas can get Jennifer to collect it from Brad. Maybe.

To refresh your memory, here's the transaction:



The problem for Texas, as things stand, is that they can't make Jennifer collect tax from Brad. They can't make Jennifer collect sales tax because of that darned Constitution that we mentioned in part 1. And they can't make Jennifer collect Brad's use tax because Jennifer is in Tennessee! She isn't in Texas. They have no jurisdiction over her.

Now there are a lot of situations where a state can reach across a border and grab someone by the collar. But this isn't one of them. Jennifer is in Tennessee. Based on what you know so far, Texas can't touch her.

So they're still out the taxes.

But wait!

Jennifer has a sales rep - John.



John visits Texas five or six times a year. He flies into Dallas, drives around for a few days and flies out of Houston. Now Jennifer is in trouble. John's physical presence in Texas gives Jennifer nexus in Texas. Texas can now make Jennifer collect the use tax from Brad and remit the money to Texas. Yay!

So to summarize:


1. Angelina charged Brad sales tax because it was an intrastate sale in Texas.



2. Jennifer didn't have to charge Brad sales tax because it was an interstate sale and the Constitution restricts the ability of states to tax interstate commerce.

3. Brad owes tax on his use of the motor once he receives it in Texas

4. Brad probably isn't going to pay that use tax.

5. Texas would really like to get Jennifer to collect that use tax.



6. Which they can now do because Jennifer has a physical presence in Texas - nexus.

When the sale is intrastate, the tax that usually applies is sales tax
When the sale is interstate, the only tax that can apply is use tax.

And to answer the question that has lead all three of these articles, it's Texas. It was Texas when it was an intrastate sale. And it was Texas when it was an interstate sale because the only applicable tax in that situation is use tax. Which obviously can only be imposed in the state where Brad receives the goods. So the golden rule is that the state where the buyer receives the goods will be the state that imposes the tax.

Thank you for your patience. No more mini-courses for a while. Although, I like the maps. So you'll see those again. Real soon.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Where did the sale occur? (Part 2)

This is part of a mini-course on the two major types of sales (intrastate and interstate) and their impact on sales tax and use tax.

This is part 2. Here is part 1. Please start this series there.

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Remember, from part 1, that Jennifer doesn't have to charge sales tax, for any state, on her interstate sale to Brad. The Constitution says so. The states can't tax interstate sales.



In this situation, the responsibility therefore falls to Brad to pay use tax to Texas. Texas is the state where Brad took control of the motor for the first time - where he used the motor for the first time. Therefore, Texas gets to impose use tax on his use of the motor.

But Texas also knows that Brad is unlikely to pay this use tax. If Brad is an individual, it'll never happen. But in this situation, Brad is a business.

The problem is that if Brad is a small entrepreneurial operation, he doesn't even know he's supposed to pay something called use tax. His accountant (if he has one) probably doesn't know. If Brad hired a bookkeeper or AP specialist to help him, they would probably know about the need to accrue use tax because they did it at their previous job. But Brad hasn't gotten to the point of hiring any experienced office staff yet, other than his sister-in-law. He's in start-up mode, and he's just trying to survive.

Many small businesses are just not going to pay their use tax.

Texas knows this. And they also know they can't make Jennifer collect sales tax from Brad, because of that durned Constitution (see above).

But maybe they can get Jennifer to collect the use tax from Brad. Use tax is not a sales tax. It's not a tax on the transaction, so the Constitution doesn't get in the way. And it is the tax that Brad owes, since there was no sales tax imposed. So why not make Jennifer collect use tax from Brad instead of the sales tax?

You would be right! They can make Jennifer collect the use tax from Brad.

Or can they?

See part 3

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Where did the sale occur? (Part 1)

This is part of a mini-course on the two major types of sales (intrastate and interstate) and their impact on sales tax and use tax.

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The sale occurs when two events have happened. It begins when the seller ships the goods. It ends the buyer receives the goods.



In this example, Angelina ships a motor to Brad. The sale begins when Angelina (the seller) does her job - when she ships it.

The sale ends when Brad (the buyer) takes control of the motor - when he receives it at his receiving dock.

Angelina ships it from Amarillo, Texas.

Brad receives it in Houston, Texas

The sale began in Texas. And it ended in Texas.

This is what is called an intrastate sale. It's a sale that happens within the state.

Intrastate sales are easy. You just charge sales tax (if you’re the seller). And if you’re the buyer, and the seller doesn’t charge you tax, ASK!

But let’s say that, instead of buying from Angelina, Brad decides to buy the motor from his old friend, Jennifer. She’s in Nashville. So Jennifer ships the motor to Brad in Houston.



As you can see, the sale started in Nashville, Tennessee.

The sale still ended at Brad’s receiving dock in Houston, Texas.

This is called an interstate sale. The sale begins in one state and ends in another state.

Interstate sales are a problem. Because of this darned document.



Article I, Section 8 of the Constitution for the United States of America says that

“The Congress shall have power …

…To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;”

According to the courts, this essentially means that, with a couple of exceptions, only Congress can tax interstate commerce. The states can't tax interstate commerce.

Therefore, because of the Constitution, Jennifer doesn’t have to charge sales tax for either Tennessee or Texas.

Bummer.

The problem for Texas is to figure out a way to get their money when Brad buys from Jennifer. Hey, it's a sales tax cliffhanger!

Here's part 2

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Where do sales tax and use tax laws come from?

So, where do all of these sales and use tax laws come from?

1. The US Constitution

Our founding fathers did a good job. But the Constitution does present some limitations on what the states can do. The document restricts the states' ability to tax interstate commerce, First Americans, the US government and it also imposes rules regarding due process and equal protection.

The problem is that, because it is so general, the meaning of the Constitution is really found in the court cases (see item 7).

2. US Statutes

These are laws passed by Congress. There aren't many related to sales and use tax and the ones that exist are related to specific issues, such as credit unions and telecommunications. But the biggest federal law is the one that hasn't been passed. Congress could allow states to tax interstate commerce. But they have not. If they did, then Amazon. com would have to charge you tax on your book purchases, saving you the trouble of voluntarily reporting that tax to the state. You are reporting the tax, right?

3. State Constitutions

I normally don't see many references to this one in my SUT research. But these laws provide the foundations and parameters for the rest of the state rules.

4. State Statutes

This is the true basis for most of our sales and use tax laws. The state legislature passes these laws and the guv signs them. Unfortunately, politicians write these laws.

5. State Regulations

When the politicians pass the laws, there are always holes that need to be filled in. The legislature usually leaves the nuts and bolts to the state tax department who take care of the details. The regulations (the name varies from state to state) are where the rubber truly does meet the road. When I do my research, the first source that I look at is usually the regulations.

6. Bulletins

The laws and regulations don't cover everything. Sometimes a situation comes up that needs to be addressed. And regulations take too long to change. So the state will issue a bulletin (this name varies from state to state).

The problem is that these are often hard to find. Most states seem to either omit them from their web site, or list them by number with no explanations. It makes it hard to browse looking for something that will help you. And, well, have you tried the search box on the state web site? I thought so.

7. Courts

The judges look at vague or conflicting constitutions, statutes, regulations and bulletins and decide how they apply or if they apply.

However, court cases are often not easily available. There are a LOT of them, they're hard to read, and only the most important are freely available on the web. Lawyers get paid a lot of money for searching court cases.

Items 1 through 5 are usually pretty easy to find on the web. Numbers 6 and 7 are harder. If the law is in the auditor's favor, they'll the relevant bulletin or court case. But if they don't like the court case, or the bulletin gives you a break, you won't hear about them.

So you need help, because the bulletins and court cases have really important information. And they're the toughest to find. Your best resources are going to be either a good sales and use tax professional, or a subscription to an online database. Both are expensive. But both can get you to information that you might not be able to otherwise find.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.

http://www.salestax-usetax.com/

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

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News Links for the last week

These are the news links I've posted on Twitter for the last week:

The Online Hotel Room Tax Battle Rages In Florida and Kentucky from SalesTax Buzz http://bit.ly/7651gG

Free-market group: Colorado should rely more on http://bit.ly/6vjhEZ

Nebraska is told they don't need to make any stinkin' sales tax changes http://bit.ly/8LXv2a

Interesting historical info on Mississippi sales tax (and routine current angst, too.) http://bit.ly/6To5o0

Denver Pot Dispensaries: 390; Colo. Starbucks: 208 http://bit.ly/6txVlr / Hilarious!

An above average look at the Amazon.com problem for sales tax. Thanks for the heads up @Sabrix_SalesTax http://bit.ly/5BMF7f

Good review of sales tax systems software http://bit.ly/9DAdt

Indiana puts tax dodgers online http://bit.ly/7fpppw

Colorado to tax medical marijuana? http://news.google.com/news/more?pz=1&cf=all&cf=all&ncl=dgcKynRCC4SnCdMpiPBqhv_OMNENM

Here's a great comment on the OK 2nd amendment thing http://www.fieldandstream.com/blogs/rifles/2009/12/chad-love-pandering-gun-owners

Now Oklahoma is talking about a 2nd Amendment sales tax holiday http://bit.ly/6AbYgX joining LA and SC.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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Gimme all your gold!

There are a variety of ways that gold and numismatic (coin collecting) items are taxed.

A common method of taxing gold and coins, held for investment purposes, is to not tax them. In many states, this type of tangible personal property is exempt. Since these items are held as investments, and other types of investments aren't taxed (eg. stocks and bonds), this makes sense.

It gets more complicated with collector-type coins, including those mint and proof sets sold by banks. In some states, these items ARE taxed. Since the items are purchased as a hobby, and possibly only partially for investment, the states tax them.

Here's some of the criteria used by the states to figure this all out:

If the value is based on nothing more than the actual metal content, it might not be taxable (investment).

If it is legal tender, it's usually not taxable, unless it's being sold for more than face value (which means it might be a numismatic item).

If the value of the item is over a certain amount, it may not be taxable (often because it's starting to look like an investment).

If it's jewelry, it's going to be taxable (obviously just expensive TPP).

If it's a precious metals futures contract, it usually isn't taxable (clearly an investment).

If you're a philatelist (stamp collector), I rarely see any exceptions for you. Sorry.

This is a highly variable issue. So be prepared to do some research here. Every state is going to do it differently.

More on intangibles and investments here.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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

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The Usual Angst

I used that term in a Twitter post yesterday. It reflected the common theme of most sales tax news articles that I see these days. I shall summarize, so you can see how truly universal the problems are.

1. Everybody is targeting Amazon. com for some of their states' budget woes. Out-of-state sales is an issue, but it isn't just Amazon.com. There are a LOT of internet retailers who don't charge tax. But Amazon is big and "corporate" so they are the easy scapegoat. Some are even demanding that the greedy corporations voluntarily collect and remit taxes to the local states.

2. Sales tax revenues keep falling. Business is slow. There are limited options to closing the gap.

3. Journalists and politicians keep talking about closing the "loopholes," particularly "corporate" loopholes. Yet, amazingly, others want more exemptions. Hmmm. Discussed for the past two days.

4. Do we raise rates? Some want to do this. But others want to cut costs and services, or do something else to close budget gaps - like raising income or property taxes.

There you have it. 90% of the sales tax news fits into those categories. Depressing, isn't it?

Tomorrow I'll actually talk about tax policies. Yep, got the article written and everything!

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See disclaimer and research the issues thoroughly before making decisions

Here's information on our upcoming seminars and webinars

Picture note: "angst" - get it? the picture above is hosted on Flickr. If you'd like to see more, click on the picture.

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What are there so many exceptions? (more)

Part 2 (see part 1)

3. And then, there's, well, politics. Politicians have to worry about making voters (or contributors) angry. How else to explain why farmers can buy much of their equipment and consumables tax free? It's not like the industries mentioned in part 1, where you need to attract them or they'll go to another state. What's the farmer going to do? Take his land and leave? But almost every state has vast exemptions for agriculture.

Exceptions usually start when the tax is imposed. Then people complain about it, they organize, and then the lawmakers pass an exemption (because they really hate it when you organize). And then other people organize. It's not just farmers. Other politically motivated exemptions, that come to mind, include: non-profit organizations, energy savings and alternative energy equipment, admissions to cultural events, marshmallows, etc. If a politician can keep a voter or contributor happy, then it's fair game for an exemption.

Of course, there are a few loopholes that are driven purely by backscratching, graft, corruption, etc. In every state I look at, there are laws that are clearly written to help out one particular company, or a friend of a friend. Clearly politicians do not always get special rules passed purely for the benefit of the state's citizens. Although they'll claim they did. And if honest politicians and newspaper editors want to clear away some of those, the way is open.

And then there are flags.

4. There are exemptions that are simply forced on the state by the Constitution. The Constitution restricts states in taxing the federal government, interstate commerce, and First Americans. There is not much the states can do about it. It's the Constitution. Tough to change.

But not being able to tax Amazon.com seems to be one of the biggest whines I read about. I just read a few more yesterday (I won't bother you with links - there are far too many and they all say the same thing: "Amazon is a big corporation and therefore bad and they must be taxed." The reason Amazon, and many other small, unincorporated, out-of-state sellers, don't charge tax is because of the Constitution and the commerce clause. But try explaining that to a editorial writers or politicians.

5. Finally, it's just complicated. There are lots of rules and exceptions because business is complicated. Because sales and use taxes are essentially based on transactions, adjustments have to be made for new and creative ways that companies find to do business.

I know people would like it to be simple, but it's not. Which is also good for little old me.

Oh, and two things that I'm sure all of those editorial writers won't complain about when they bring up loopholes: there's usually no sales tax on newspapers or newspaper advertising.
Sounds like a pretty significant loophole to me.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

See disclaimer and research the issues thoroughly before making decisions

Here's information on our upcoming seminars and webinars

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Why are there so many exceptions???

Part 1

Every once in a while, I see an article in a local newspaper complaining about all of these "loopholes" that exist in the sales tax laws. Often it's a newspaper editorial, sometimes it's a politician. In both cases, the writers are, to put it gently, ill-informed.

Here's the thing. If sales taxes and use taxes didn't have the loopholes, I wouldn't have a job. And that's kind of important. But other than paying my mortgage, loopholes are necessary, regardless of what some misguided journalist or politician says.

1. SUT is a regressive tax. That means that the tax that the richer folks pay is a smaller percentage of their income than what the poorer folks have to deal with. In other words, the tax hurts the poor more than it hurts the wealthy. That's why income taxes are progressive. The income tax rate increases as one's income goes up. It's an attempt to "equalize the pain" by making the rich pay a bigger percentage of their income in taxes. Such income taxes are progressive taxes. The reverse, sales taxes, are regressive taxes.

In order to make the sales and use tax less regressive, lawmakers put those darned "loopholes" into the laws to eliminate the tax on the kinds of things that everyone buys and that make up a larger percentage of what poorer folks spend their money on. That's why there are exemptions for prescription drugs, food, residential utilities, newspapers and, in some states, clothing. There's even one state that exempts the repair of motor vehicles, because everyone has to get their car fixed, particularly if they're poor and driving an old beater. [OK, it took me a while, but I finally tied the picture at the top into the post.]

2. Another reason for the "loopholes" is competition. A good example of this is the manufacturing exemption. In many states, equipment used directly in production is exempt from tax. This is not simply a giveaway to the "moneyed interests" in the state. It's done because if the exemption wasn't there, the manufacturers wouldn't be either. If, say for example, Illinois eliminated the manufacturing exemption, businesses would leave in droves for states like Indiana, Michigan, Missouri and Wisconsin, where there are very nice manufacturing exemptions.

And most manufacturers won't even open up plants in states unless there is an exemption available to them. Why would they if they can get a better deal in Wisconsin? So states must give those exemptions in order to get high-paying, skilled manufacturing jobs in the state. Every state, at least when it comes to sales and use taxes, is in competition with other states.

There are other "competitive" exemptions. They include movie production, research and development, and high-tech industries. Not every state has them, but the reason they do is to suck businesses into their states.

These exemptions are critical to states for attracting and keeping jobs. They're also the most commonly whined about by the editors and politicians.

Part 2 tomorrow.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

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.

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