The Sales Tax Guy: June 2010

Friday, June 25, 2010

A Sneaky Sales and Marketing Trick

If your company typically makes taxable sales, then you probably have Angelina's problem.

Angelina has been losing sales for a while to Jennifer. She and Jennifer sell the same thing, at a similar price. But Jennifer isn't charging Brad sales or use tax on her sales to him, or anyone else in Texas. Why? Because Jennifer doesn't know that she's supposed to charge Texas tax on those sales.

Now I'm giving Jennifer the benefit of the doubt. She may actually know that she is supposed to charge Brad tax. She may choose to ignore the fact because, if she did comply with Texas law, she'd lose lots of sales (and probably have to fire John). But I'm pretty sure that Jennifer is a good guy, so let's just say that she is one of the thousands of small to medium size businesses who don't understand these rules.

If you're a new reader, and one of the aforementioned thousands, the reason Jennifer has to charge Brad tax is because she has nexus in Texas. John is her sales rep and John's physical presence in the state brings her under Texas' jurisdiction. And they require that she charge her customer "use" tax on the Brad's use of the equipment that she sent to him in Texas.

But Angelina is smart. She just took one of our seminars. So now she knows that Jennifer is supposed to be charging tax, which would eliminate Jennifer's competitive advantage. Brad would no longer have a reason to buy from Jennifer, and would buy from Angelina. If both Jennifer and Angelina charged Texas tax, then they would be on equal footing and the competition would be fairer.

So Angelina picks up the phone, writes a letter, or sends an email along the lines of:

Dear Texas Comptroller of Public Accounts:

Jennifer is based in Nashville, Tennessee. She ships to many Texas customers, and is not charging them the Texas use tax. I happen to know that she has nexus in Texas, because I've run into John, her sales rep, on several occasions. I frequently see him in client offices and at trade shows. I've even had lunch with him where I found out that, while not assigned full-time to Texas, he spends at least six weeks a year here, and he's done it for over ten years.

I'm loosing a great many sales to Jennifer who's only competitive advantage is that she's not charging the use tax that she should be imposing.

Please take action to "educate" her about her responsibilities to the great state of Texas.

Assuming Texas is doing their job, and there are no guarantees, they will contact Jennifer and probably audit her, assessing massive back-taxes, interest and penalties.

And Brad will come back to Angelina, who will be snickering to herself when Brad's not looking.

Here's the important part. If your company has a problem similar to Angelina's, where you have out of state competitors who aren't charging tax in your state, but you know they have nexus, then rat 'em out! Hey, this is war!

The only thing that prevents companies from doing this is that they don't know they can. Sales and marketing people know virtually nothing about sales and use taxes, which is actually kind of ironic. And because of this ignorance, they don't know that there actually is a way of dealing with those out of state vendors who are stealing the business.

If you're like most people who read this blog, you're in accounting or purchasing. This just might give you something you can bring up at the next interdepartmental meeting to help solve a problem. You're usually making trouble for sales. Now you can help them.

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

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

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

Friday, June 18, 2010

Golden Rule: The Resale Exemption

You can have anything you want, as long as you want cheap, plastic crap.

This one is so obvious, it's taken me until now to make it a golden rule.

The idea of sales tax is that it's a tax on consumption. In other words, it's a tax on the transaction that involves the final consumer (end user). Most transaction oriented taxes are set up that way.

It's a different story when you start talking about who the tax is imposed on. Some states have a "gross receipts" tax, for example. The tax is legally imposed on the seller, but they are generally allowed to pass it along to the end user. But that "gross receipts" tax is still only imposed on the gross receipts of sales to the end user.

Who is the end user?

It's really hard to positively define them. So we use a negative definition - who isn't the end user? As discussed in the golden rule of taxable sales, "the final consumer is generally going to be the person who bought for any other reason than to resell..."

If you bought something to consume, you're the end user.
If you bought it to save or collect, you're the end user.
If you bought something to give to someone else, you're still the end user.

But if you bought it to resell to someone else, then you're not the end user. You're buying it for resale. The sale to you is exempt in virtually all states. Now before you start telling the good people at Wal-Mart that you're buying for "resale," a word of caution. You still have to go through all the state's registration paperwork, provide the seller with a resale certificate, and you'll have to file sales tax returns. Other than that, simple.

Why do consumption taxes only involve consumer transactions?

Because if the tax was imposed every time there was a sale, then the taxes would pyramid. For example:

The iron mine charges sales tax to the steel mill
The steel mill charges sales tax to the fabricator
The fabricator charges sales tax to parts wholesaler
The parts wholesaler charges sales tax to the component manufacturer
The component manufacturer charges sales tax to the car manufacturer
The car manufacturer charges sales tax to the car dealer
The car dealer charges you sales tax

You wind up paying a whole lot more for that car because everybody added that 8% sales tax into their costs and prices. That's pyramiding. So consumption taxes are only imposed on that last transaction.

The resale exemption justifies other exemptions, to some extent:

Containers
Agriculture
Manufacturing
Direct supplies used by taxable service providers (in some states)

What about use tax?

Remember, that use tax is essentially a loophole plugger and wasn't meant to be a stand alone tax. Even though it technically isn't a tax on the transaction, it still is considered a consumption tax. It is, after all, a tax on use.

Monday, June 14, 2010

Sales and Use Tax Links

Some great articles on salestaxbuzz.org.
He even mentions Snooki. Can't beat that.

Massachusetts sales tax holiday hinges on federal stimulus funding for state Medicaid program
So now, Congress is essentially funding a sales tax holiday. Interesting. And worthy of note for people in states that don't have a sales tax holiday.
Masslive.com

Some labor is subject to sales tax in Texas
Someone thought labor wasn't taxable in TX and wrote to this columnist. Texas taxes a LOT of services and labor, but it's interesting that the average voter doesn't know this. That's because Texas has arranged things so that most of the taxes are imposed on services performed for businesses, but not for individuals. So Texas citizens don't realize that they are paying a lot of sales taxes on services, just indirectly. Those darned politicians are so sneaky!
Statesman.com

Medical Device Companies: Is Your Device Exempt from Sales Tax?
Interesting information on medical exemptions, particular for durable medical equipment.
Accounting Web

Baldacci: Tax Reform Still Needed, Despite Voters' Rejection - Maine
Another state gets shot down trying to tax more stuff (broadening the tax base), but covering it up by handing out a tax rate cut.
mpbn.net also bangordailynews.com

Area man arrested on sales tax charges - Utah
This guy reported that he charged his customers tax on his return, but refused to pay them to the state. Huh? Oh, and he didn't pay some withholding taxes either.
thespectrum.com

Bag Taxes Are Bad Tax Policy, Fall Short of Claimed Environmental Benefits
Is it worth it to have a "fee" on disposable bags?
Tax Foundation

Pennsylvania amnesty ends June 18th.
Better get some hustle on!
accountingweb.com

Friday, June 11, 2010

Common Carriers

Common carriers are regulated companies that haul people and/or goods for money. They offer their services to the public and will theoretically haul for anyone. Hence the name, "common carrier." On the other hand, a "contract carrier" offers their services to a small group of clients and can refuse customers.

Here's a good discussion on Wikipedia.

So who are common carriers?

Air carriers
Note we're talking about American Airlines and Fed Ex, not the local charter service.

Trucking companies
There are some contract carriers in this category, particularly delivery services.

Railroads

Ships and ferries
NOT charter fishing boats. This category would included ships destined for foreign ports and, in some states, barges.

And depending on situation, taxis and car services, telecommunications and pipeline companies have been referred to as common carriers.

The Neutral Zone

The "neutral zone" comes into play when an interstate delivery occurs. In an interstate sale, if a common carrier picks up goods in Florida and delivers them to Nebraska, the delivery point is considered Nebraska, even though they left the seller's control in Florida. This is the case in most states, even if the buyer hired the common carrier.

And it makes sense. If the essence of "use" for use tax purposes is "control," then the buyer has no control until the truck pulls up to their dock. The control of the goods passes from the seller to the common carrier at the seller's dock. The goods remain in the control of the common carrier until they arrive at the buyer's dock. At that point, the buyer takes control of the goods.

At no point, even if the buyer hired the common carrier, can the buyer stop the train carrying his shipment and tell the conductor, "My shipment is on your train. I want it now please." In other words, the buyer has no control, therefore did not use the goods.

So, the common carrier is a neutral zone where, even though the seller has shipped the goods, the buyer still hasn't taken control of the goods. No use tax is imposed on the buyer while the common carrier has delivered the goods.

Having said that, there are a couple of states that pretty much say that if the common carrier was hired by the buyer, then the common carrier is acting as the buyer's agent and the buyer does take delivery at the shipper's dock. But that is unusual.

Common carriers have exemptions

The second thing to remember about common carriers (particularly railroads, ships and air carriers) is that they have exemptions available to them based on how they will use the purchase - if they're going to use it directly in interstate commerce. For example, air carriers can generally buy their planes and parts tax free. Ditto for railroad rolling stock and large ships. The exemption is less common for trucking companies. Some states don't grant any exemption for "over the road" trucks and parts delivered in the state. Or the exemption may be based on mileage outside of the state versus inside the state.

It's also worth noting that some states, like Idaho, don't have an exemption for large ships. I haven't figured out why. But if someone knows. please contact me. ;-)

Tuesday, June 08, 2010

Non-Profits Aren't Always Exempt

Most people assume that if an organization is a non-profit, then they’re exempt from sales and use taxes. Not true. I actually did a survey the other day to validate what I thought were the trends. It’s nice to know I was right.

Of the 46 states that have a sales and use tax, only 31 have, what I would call, broad non-profit exemptions. Their laws simply say that organizations such as charitable, educational, religious, research and other not-for-profit organizations are exempt from sales and use taxes.

Frequently, these states use the IRS 501 (c) criteria. Often they use other rules that are more restrictive that the IRS’s requirements. But the end result is that most such organizations will be tax-exempt.

And there are a couple of states where, while the laws aren’t sweeping in their coverage, the individual exceptions are so numerous that the effect is to make most non-profits exempt from tax.

However, there are 15 states that do not have broad exemptions. This means that non-profit organizations are generally taxable in one third of the taxing states! These states all have specific exemptions, usually for schools and youth organizations (like the Boy Scouts and Girl Scouts). And the laws frequently let hospitals, the Red Cross and Habitat for Humanity off the hook. But your average humane society is probably going to be taxable.

Also, keep in mind that, in most cases, even if there is an exemption for an organization, that organization has to go through some paperwork, register and get a number from the state before they actually can buy tax-free.

So don’t assume that a non-profit doesn’t have to pay sales and use taxes. The exemption that you think exists is not there in quite a few states. And even if there is an exemption, make sure it applies and that you have the appropriate paperwork.

Monday, June 07, 2010

Recent Sales and Use Tax News

State rate changes in:
Kansas

Local rate changes and additions in:
Iowa
Vermont

Upcoming sales tax holidays
Florida 8/13 to 8/15
Illinois 8/6 to 8/15
Mississippi 7/30 to 7/31
Tennessee 8/6 to 8/8

Other news

In Florida they’re continuing exemptions for the space and entertainment industries. There are also exemptions for the fractional aircraft business. And aircraft purchased in another state are also exempt from use tax if kept in Florida for a limited amount of time per year. And admissions to things like the Pro Bowl, and NBA All-Star games are exempt.

Florida also announced a tax amnesty running from 7/1/10 to 9/30/10.

And finally, in Florida (which taxes non-commercial real estate rental), it was ruled that only 1.12% of the rent for a assisted living facility was taxable since that is the only taxable portion. Florida Technical Assistance Advisement 10A-020, 04/19/2010

In Hawaii, charter fishing boat businesses ARE taxable. In The Matter of the Tax Appeal of Reel Hooker Sportfishing, Inc., Exact Game Fishing, Inc., and Finest Kind, Inc. v. Department of Taxation, Haw. Intermediate Ct. App., Dkt. No. 29598, 05/28/2010

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

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

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

My source for the above items is RIA's weekly newsletter, "State and Local Taxes Weekly." I strongly recommend subscribing to this or some other sales and use tax newsletter.

Friday, June 04, 2010

News Links

Illinois offers a sales tax holiday on clothes, shoes and most school supplies on 8/6 to 8/15. Blocking it out on MY calendar!

Rendell abandons Pa. state sales-tax overhaul
Lots of news about this over the months that I've ignored because I knew it wouldn't happen.

Philadelphia Inquirer complains about the discount provided to sellers on the return. Claims unnecessary. But then, newspapers aren't taxable so they don't get that discount. Boo hoo.

Maine referendum on broadening the tax base to include most, but not all, services. The objective is partly to tax tourists more and give a break to the locals. Annoying, but actually one of the primary justifications for consumption taxes.

Wagoner County (Oklahoma) commissioners vote to rescind sales tax proposal
Gee, maybe a sales tax increase to fund an amusement park isn't a great idea.

Dozens could be using loophole to avoid sales tax on boats
Register with the county as a boat dealer, buy your boat tax free. Interesting rule in Nebraska.

Authorities: Now's the time to prepare for storm
Louisiana hurricane sales tax holiday this weekend

Marine industry giddy over new sales tax break
In order to be competitive with other states and to help their local industry, Florida grants a tax break to yacht owners. Of course, if there was ever a tax break given to "fat cats," this would be it. But it helps create jobs and will probable increase sales tax revenue on other stuff, which is the important thing.

FELONY WATCH

Newport News restaurant owner charged with embezzlement

City files sales tax charges against former business owner

Watsonville couple are among state's largest sales tax delinquents
They've already been to jail, but still haven't paid back the taxes, fines, etc.

CONTINUING TRENDS
(In other words, old news)

Some local jurisdictions report that their sales and use tax revenue is increasing after a long decline

Most states and local jurisdictions are still struggling with raising taxes, cutting spending, etc.

Have a good weekend, everyone. And if you're in Louisiana, buy stuff!

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

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

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

Thursday, June 03, 2010

Golden Rule: There is no sales tax on interstate transactions

Yeah, I said it. And I'll say it again. There is no sales tax on interstate transactions.

Note that I said interstate transactions, where the item is shipped from one state to another state.

Sales tax does apply to intrastate transactions, where the item is simply shipped from one point in the state to another point in the same state.

Since sales tax doesn't apply to interstate transactions, what tax does apply? You got it...use tax. Since use tax is a tax on the use of an item, as opposed to the transaction (like sales tax), use tax can plug the loophole where the sales tax couldn't be collected, namely interstate transactions. Heck, that's what it was invented to do!

So, when it's an interstate transaction, there's no sales tax. But there is use tax. The buyer has the responsibility of paying the use tax to the state. However, if the seller has nexus in the state, the the seller has to collect the use tax from the buyer. It'll look a lot like sales tax since the rules and rates are generally the same.

To see an illustration of why this is the case, please see this three part series. It's got pictures, maps and everything!

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

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

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.

Wednesday, June 02, 2010

Be Careful with your Assumptions

I was talking with a friend the other day. As I like to do, I figured out a way to introduce sales tax into the conversation. I knew that his customers were usually wholesalers and dealers. Here's the way the conversation went:

Me: So, Bob, do you guys charge sales tax?

Bob: Nah. Everyone who buys our stuff is buying for resale. We never sell to the end user.

Me: Not even off your website?

Bob: Nope. The quantities are just too small. We're set up to ship skid-loads of material. We just refer consumers to a list of dealers on the website

Me: What about contractors. You do sell directly to big contractors, don't you?

Bob: Yeah. But they're buying for resale too.

Me: Bob, I'll bet you didn't know this, but contractors are, in most states including the one we're in, considered the end users of the building materials they buy. Therefore you should be charging them tax. As far as the law is concerned, they are NOT wholesalers or retailers. They're the consumers.

Bob: [long pause]

Me: And I bet you're not getting resale certificates from your wholesale customers either. When you get audited, you'll need those certificates, even if it's your business model to only sell wholesale.

Bob: Can I use your phone. I left mine in the car.

Folks, you must be careful with your assumptions. Make absolutely sure of the taxability of every sale you make. The safest way is to assume everything is taxable until you can confirm that it isn't.

Here is the golden rule of taxability, which states the defaults for sales of services and sales of TPP. And here are the exceptions. And here are the situations where you'll need certificates.

Note that, if Bob had asked his contractors for resale certificates like he did for the rest of his customers (ahem), he would have discovered his mistake. Most contractors would be nervous about providing a resale certificate. Bob would then have presumably realized he should be charging them tax.

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

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

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

Tuesday, June 01, 2010

Recent Sales and Use Tax News

Missouri changes lots of local rates as of 7/1/10

Other local rate changes and additions in:

Alabama
Arizona
Colorado
Utah

Minnesota accelerated sales and use tax payments for vendors with liability over $120,000 per year. Effective 9/1/10
Minnesota Session Laws 2010, 1st Special Session CHAPTER 1--H.F.No. 1

Florida sales tax holiday 8/13 to 8/15
Books, clothing, shoes, bags, etc. priced at $50 or less are exempt. Also school supplies at $10 or less.
CHAPTER 2010-93 Council Substitute for House Bill No. 483 & House Bill No. 469

In Hawaii, licensed mixed-martial arts promoters see rate changes
THE SENATE S.B. NO. 2399 TWENTY-FIFTH S.D. 1 LEGISLATURE, 2010 STATE OF HAWAII H.D. 1 C.D. 1

Also in Hawaii, return due date changes on hotels and rentals.
Hawaii Dept. of Taxation Announcements 2010-02, 05/13/2010

Maryland has exempted sales to vet organizations if they qualify under 501(c)(4).

After-prom admissions to sightseeing boats in New York weren't taxable admissions. Phew!
In the Matter of the Petition of Promoceans, Ltd., NYS Tax Appeals Tribunal, Dkt. Nos. 822102; 822103, 05/13/2010

MRI equipment taxable in Pennsylvania. The equipment used to be considered additions to real property. But since most are leased and relatively easy to move and replace, the state now considers it the sale (or rental) of TPP.
Pennsylvania Sales and Use Tax Ruling SUT-05-008, 05/20/2010

In Virginia, an advertiser having printed material shipped to prospects within the state from outside the state as not subject to use tax on the material since they never "used" it.
Virginia Public Document Ruling 10-72, 05/18/2010

Wisconsin says that p-card users are going to be audited in the same manner as anyone else. Therefore, make sure you have the records to demonstrate you've paid the tax.
Wisconsin News for Tax Practitioners 05/25/2010, 05/25/2010

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

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different.

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

My source for the above items is RIA's weekly newsletter, "State and Local Taxes Weekly." I strongly recommend subscribing to this or some other sales and use tax newsletter.

Articles You Need to Read!

Welcome to the Sales Tax Guy, a production of salestax-usetax.com.

If you're new here, you may wish to start your exploration with our article on Sales Tax in a Nutshell and our subject index.

We've also written master articles on sales and use taxes:

a Guide to The Sales Tax Guy

the various Taxing Policies,

Things that will get you in the worst trouble,

the Golden Rules of Sales and Use Taxes, and

the Essential Actions you need to take.

And here are the best resources for finding answers to your questions as well as our seminars!

Disclaimer

Please keep in mind that our purpose is to provide general information to familiarize you with certain issues. The information we provide may not apply to your particular situation or to the applicable state, may oversimplify an issue, or may omit a point that is relevant to you. In addition, exceptions, unwritten rules, and different interpretations abound. And every state (and sometimes local jurisdictions) will do it differently. Therefore you should not rely on the information provided for your specific needs.

After reading any of our material or participating in training or coaching, you should always consult with an attorney, CPA or tax adviser who is a local expert in sales and use taxes for the applicable state, and/or do your own research in authoritative publications before applying the principles or suggestions mentioned.

See our suggestions about the best resources for finding information.