Wednesday, April 07, 2010
A Horrible Combination of Nexus and Unknown Taxable Sales!
The seller, in Indiana, sells complex machinery that often needs to be repaired and maintained.
Their customer in Wisconsin, calls with a problem - repair is needed.
Rather than maintain their own network of repair technicians, the seller contracts with local repair services to go and work on the equipment. So they call the Repair Service in Wisconsin who goes and repairs the machine in Wisconsin.
Repair Service has fixed the machine and sends the invoice shown below with sales tax on both the parts and labor to the seller in Indiana. Repair labor is taxable in Wisconsin.
Seller HQ will send this invoice to Customer Location. Note that they've added some margin and have NOT billed any sales tax.
1. Customer Location calls Seller HQ to get machine fixed.
2. Seller HQ calls Repair Service and assigns them the job.
3. Repair Service fixes the machine, making a taxable sale.
4. Repair Service bills Seller HQ charging sales tax.
5. Seller HQ bills Customer Location and does not charge sales tax.
I asked Seller HQ why they weren't charging Customer Location tax. She said that they didn't have nexus in Wisconsin and they had already paid tax to Repair Service.
"Ah, but you DO have nexus. Repair Service is acting for you and contracting for you to make repairs. Now if they were billing the customer directly, it might not be a problem. But they're billing you and then you're billing the customer. As far as the customer is concerned, Seller HQ is the seller of the repair service. It's a no-brainer. You have nexus in Wisconsin."
"Oh. But since Repair Service already charged me tax, I'm OK, right?"
"Nope. What you should have done is given them a resale certificate and then billed Customer Location the tax. You see, while Wisconsin got the sales tax revenue from Repair Service, they have not gotten the sales tax on the full sale to Customer Location, including your mark up."
"Are you sure?"
"Nope, I'm never sure. But there's another problem. When Customer Location gets audited by Wisconsin, the only invoice they're going to have is the one from you showing no tax was collected. Wisconsin will then make Customer Location pay the use tax, if they haven't already. Which means you've shafted your customer because you've already paid the tax.
"OK, so I'm supposed to give Repair Service a resale certificate and then bill Customer Location for the sales tax on my bill to them?"
"Yep. And that also means you're going to have to register as a seller in Wisconsin so that you have a resale certificate to give to Repair Service and so you can pay the taxes to Wisconsin."
"Uh, is this pretty much the way it works all over the country?"
"Yes. All of the 46 states that have a sales tax will want the tax, at least on the parts. And about half of them will also want the tax on the labor component too."
"We do this all over the US. That means we have to start doing this in 45 more states."
"Oops. You might want to call a sales tax consultant."
About once a week, when I do seminars, I come across a person who has nexus in every state. And they didn't know they were making taxable sales in any of those states.
The things to learn here:
1. If you sell all over the country, then you may have nexus all over the country if you have people representing you and acting for you. They don't have to be sales reps or employees. They could be independent contractors repairing your equipment for you. And if they're billing you and you're billing the customer, it's even worse.
2. You need to determine the taxability of what you sell in any state where you have nexus. If you have nexus in 20 states, you need to check 20 states. If you've got nexus all over the country, you should hire an assistant because your work load just increased.
3. It's usually helpful to look at the transaction from the customer's perspective. What is their AP department going to do with the invoice that they get from you? And what is the auditor going to do when they see the invoice? In this situation, Seller HQ would have immediately spotted the problem if they'd ask themselves those two questions.
The Sales Tax Guy
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