The Sales Tax Guy: August 2010

Monday, August 30, 2010

Sales and Use Tax on Utilities

We usually think of electricity, natural gas, steam, telephone, water and sewer as utilities. Steam? Yep. In some larger cities, there are many facilities that still operate off of steam provided by a central plant and distributed via underground pipes. You hear about one of the steam pipes exploding every once in a while, in New York for example. And I think there was a particularly nasty scene in a book and movie called The Bone Collector, but we won't go there.

Anyway, utilities are usually taxable either because the state has simply said that they're taxable, or the state has defined utilities as being tangible personal property. Notably, water and sewer are usually not taxable. But electricity and natural gas are pretty much universally taxable, though sometimes at a lower rate. And telephone service is usually taxable, but is also covered by a whole 'nuther batch of telecommunications tax laws.

There are two major exemptions related to electricity and natural gas:

1. Manufacturing - Many states that have decent manufacturing exemptions will include these in the category of exempt consumables, depending on the way the utilities are used.

2. Residential - Many states make utilities exempt when purchased for residential consumption. Sometimes, it's seasonal. The residential utilities exemption in Wisconsin, for example, only applies from November to April.

And both of the above exemptions also frequently apply to other "fuels" used in the same way, such as propane, fuel oil, etc.

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 more information

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Thursday, August 26, 2010

Sales and Use Tax Links

Orange Jumpsuit Time! Dozens of IL gas station owners accused of sales tax fraud WGN TV. Or maybe those owners will have to dress like the guy in the picture.

Memphis sales tax 13th highest, Tennessee No. 1 bizjournals.com
The Tax Foundation did a study. Tennessee has the highest sales tax burden too. Maybe it has something to do with that really high tax rate.

Bagels With a Slice of Tax nbcnewyork.com
The confusing food laws...turns out that bagel places really should be taxing the bagels when they slice them or if they're served for on-premises consumption. The rules for bakeries DO get a little confusing. And, of course, the customers are now complaining.

Tulsa Sues State Over Sales Tax Collections fox23.com
Apparently, the city thinks OK does a bad job at collecting sales tax and they want to do it themselves. They think they can do it better. Will we soon be adding OK to the list that includes AZ, CO, LA and AL?

South Carolina Spending Millions To Collect Unpaid Taxes blog.sabrix.com
Look out folks in SC. They spent money last year to hire auditors and it paid off. This year they're going to do it again.

Amazon.com & You: Internet Sales and the Long Arm of the Tax Man speedtax.com
Good recap of the current state of the Amazon laws, but also about how the states are getting super-aggressive in other ways to determine that your company has nexus in the state. It's worth reading if you do business in multiple states. Which is most of you.

Tuesday, August 24, 2010

Mistaken Manufacturer

I exchanged a couple of emails with a past participant yesterday. She'd been stung during a sales tax audit because one of her vendors hadn't charged her sales tax. So she wound up having to pay the use tax, plus interest and penalties. Standard stuff, of course.

What was interesting is that, after the audit, she called the vendor and asked why they didn't charge her tax. Their response was that they didn't have to, they were a manufacturer and therefore exempt.

What?

Now, to be fair, the product was odd enough that I can see there being some really arcane exemption lurking in the statutes. So I suggested she check on that. But it amazed me (I should learn to never be amazed) that a company would think that the manufacturing exemption would apply to what they sell.

Just to make sure, for some of you who may be reading this, when we're talking about the manufacturing exemption, it's for the purchases of the manufacturer who uses them in manufacturing. Every state has different rules of course, but that's the big concept. It doesn't grant an exemption to what the company sells! Sheesh.

Now, I'm sending a link to this article to (we'll call her "Jane") who gave me the idea for this article (thanks and a gold star to you!). But I'm going to have to chide her a little. I talk about the fact that, when an in-state vendor fails to charge you tax on something you think is taxable, you should call them and find out why. If she had made that phone call back when these purchases were made, she might not have convinced the vendor. But she would have known to accrue the tax, and thereby avoid the interest and penalties that she paid as a result of the audit.

And, as a consolation prize, I did tell her that the vendor was probably going to get audited. Let's face it. When an auditor comes across a few invoices from an in-state vendor where they didn't charge sales tax for any apparent reason, they're audit-bait.

Friday, August 20, 2010

Associations as a Research Resource

"...Give me your tired, your poor, your huddled masses yearning to breathe free..

An information source that I frequently suggest is your industry association. You're already paying dues to them. You should check to see if they can help you.

Most importantly, there may be an sales and use tax exemption for your industry that they lobbied for and won. States don't hand out exemptions because they're feeling generous. They pass the laws because enough suits took them out for lunch and jawboned them to death. And the people paying for the lunches and the jawboning are the various industry associations.

Want to know more about the manufacturing exemption? It's not a bad idea to contact your state's manufacturers' association. Want to know more about any exemptions for photographers? Well, maybe not.

Some associations are better at this than others. It's a function of the amount of dues that members pay, the existence of any dedicated full-time staff, and the leadership of the organization. And whether the industry is taxed or regulated enough to make it worthwhile to do some research or hire lobbyists.

I used to belong to an state association, and while, looking back on it, there were some sales tax issues that the industry faced, the organization was more about networking, having meetings and conferences, putting out a nifty newsletter, and producing publications on how to build business. Even if they did something about sales and use taxes, the members were so intent on growing their businesses (mostly entrepreneurs) that they would not have paid attention. There was at least one publication about income taxes, but there's always a publication about income taxes.

So don't have high expectations, but check with them anyway. See just what you get for all those dues you pay. Here are some ways they might be able to help:

1. They may have published a book or pamphlet about how sales and use taxes relate to your industry.
2. They may have an SUT attorney or CPA that they can refer who has a lot of experience in the industry.
3. They may have put together a link list on their web site to sales and use tax resources
4. They may even offer seminars on sales and use taxes with a focus on your industry. If they're not, they might be open to doing something like that. Ahem.
5. You might be able to network with other folks through meetings and online forums to discuss any sales tax questions.

There's another benefit. If you're in accounting (and most of you are), you probably haven't had much interaction with your association. Usually it's the operations. executives, and marketing people who go to the meetings, read the newsletters, etc. You'll receive new-found respect in your organization if you start asking about how the association can help. OK, I'm lying in that last sentence. No new-found respect for you....sorry. But you still might find it rewarding to see what your industry association has to offer.

Finally, chambers of commerce probably won't be much help. They're not industry specific, which is what you want. And most of them are more interested in networking and boosterism rather than something as crushingly boring as sales and use taxes. Although you never know. They just might be willing to sponsor a sales and use tax seminar for their membership. Again, ahem.

Wednesday, August 18, 2010

Sales and Use Tax Links

More on the "Amazon Tax" and having nexus just because a seller has affiliates in the state:
Tax Code Already Includes Click-Through Nexus, 14 States Say BNA
and commentary along with another post on action by the Multistate Tax Commission from State and Local Tax 360˚

Not getting enough tweets? These states are doing it. BNA

Texas sales tax holiday this weekend brenhambanner.com caller.com

Pa. hopes to shame taxpayers into paying up BusinessWeek yorkdispatch.com

Monday, August 16, 2010

Casinos

This article comes from a question that was asked a few weeks ago involving casinos. This happens to be one of the topics that I don't know much about because I never research it before doing a class. I never get any questions about casinos. There aren't that many states that even have casinos; and people that work for a casino never ask. Like utility companies, heavily regulated businesses like casinos already know how they're taxed.

As I was preparing this, I realized I needed to write another article first, on First Americans, since that's an important part of this topic. So the original question generated two articles and an excuse to take a picture (see above). Kudos to the person who asked!

So I did the research and figured it out. I searched my trusty RIA database for "casino" and found quite a few hits. Unfortunately for casino operators, not many of those hits are good things for their tax planning. In fact, most of the "hits" were rules to make sure that, when casinos give away complimentary rooms and gifts, the use tax is paid.

If you think about it, the reason states even allow legalized gambling is for the tax revenue. So why would they give any tax exemptions? There are even a couple of places where casinos in enterprise zones don't get the exemption that every other business gets. "Yeah, that manufactuer gets this exemption but you're a casino? I don't think so."

I did find two states (IN and MS) that have some exemptions for construction costs related to riverboat type casinos.

And then, of course, there are casinos on reservations. This is the biggest potential exemption for casinos. Since they're owned by First American tribal organizations, their purchases would apparently be exempt. But some states do work out arrangements for taxes anyway. And the casino sales? Since most of the customers are not First Americans, sales taxes are still imposed on the restaurant, gift shop, hotel and admission charges.

Gee, now that I've been talking about this, there are a couple of riverboats near my house. And I'm feeling lucky. See ya later.

Friday, August 13, 2010

Sales Tax Links

A Holiday from Fiscal Responsibility - The case against sales tax holidays - Reason.com
This is a great overview of sales tax holidays, why politicians love them, and why they're a waste of money. Not a long article, but full of great content.

An email from the vendor isn't enough!
This is why I constantly tell people that you need the details on the invoice. This article from Vertex explains why, at least in one case.

Independent Contractors Creating Nexus for Your Company?
A good quick article on situations where using an contractor in another state may give you nexus. State and Local Tax 360˚

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

See the disclaimer

Wednesday, August 11, 2010

First Americans

Sales and use taxes for Native Americans (the laws usually use the term "Indians" and I prefer "First Americans") are another of those highly variable taxing policies. This is also an issue that doesn't exist in all states. If the state has no tribal reservations, then there probably won't be any laws.

There are four overriding factors that lawmakers have to watch for in states with reservations: politics, the US Constitution, Federal treaties with the tribes, and tribal sovereignty.

The rules break down into a few different components, which I'll generalize here.

Sales to the tribal organization itself
These are generally exempt. Sometimes it's only if the delivery point is actually on the reservation; and other times the delivery point is irrelevant. For example, if a tribal organization calls up an electronics store and has them deliver a computer to the reservation, and the store bills the tribal organization directly, then that sale would be exempt pretty much everywhere.

But if someone went to Best Buy and picked it up, even though it was billed to the organization, then it would be taxable unless the state gave a more general exemption to the tribe.

Sales to individual First Americans
Generally, the exemptions are most common for transactions involving the tribal organization itself, not to individual members. Their purchases are taxable, particularly when they are off of the reservation. However, usually sales from a store on the reservation to a member of the tribe who will use it on the reservation are exempt.

Sales on reservations to people who are not First Americans
These are usually taxable. There have been some court cases involving cigarette sales, so this can get messy.

Some states make a deal with the tribes
Since the tribal organizations need a way of collecting taxes too, a few states will actually form agreements where sales and use taxes will get collected, even on the reservation, and they'll come up with some sort of revenue sharing formula.

Finally, in doing the research for this, I noticed that, as the rules get more complex, loopholes become a problem. There was a case where a tribe was determined to be, essentially, "selling" sales tax exemptions. Everybody lost when the court got hold of this one. If you think you've found a cool little loophole, talk to an an expert who can guide you. The state already knows about most of these; and just because you think you've discovered a neat trick doesn't mean it will work (it probably won't).

Monday, August 09, 2010

Drugs, Medical Supplies and Durable Medical Equipment

One of the most universal sales and use tax exemptions is for prescription drugs. Every state grants either a full exemption, or taxes these items at a reduced rate. From then on it gets complicated.

Factors that affect the prescription drugs exemption include:

-whether or not a prescription was actually written, or if it is just a drug that must be sold by prescription (think complimentary drugs given by doctors or samples to doctors from drug manufacturers)

-most states require the drug be for human use (as opposed to Fido).

Some states (not many) grant an exemption for pretty much all drugs and medications, whether prescribed or not. This would include aspirin, cold medications, etc. But the exemption may not extend to food supplements and vitamins.

Some states grant an exemption for medical supplies, like bandages. Sometimes these are only exempt when sold to medical practitioners, and other times the exemption is open to everyone. Most states grant exemptions for specific things like blood, and diabetes and colostomy materials.

And then there's durable medical equipment which includes everything from artificial limbs to wheel chairs. States get really specific on these particular items, but they frequently grant broad exemptions if the equipment is for home use and/or it's sold by prescription.

Remember, every state is different. But at least with this exemption, the details are comparatively easy to find. Since this is an exemption that affects voters, you'll often see easier-to-read publications on the state's web site that go into the details of the exemption, with lists and explanations. If that publication isn't available, there will probably be a particular regulation which should be comparatively easy to find. Or a bulletin for that matter.

See this article on why this exemption exists.

Thursday, August 05, 2010

Another Reason Not to Call the State

Our crack customer service team awaits your call

I've talked about why you want to avoid calling the state with any sales and use tax questions. I've now got another reason. I was talking with a woman in a seminar earlier this month and she told me this story that should make you even more suspicious.

She worked for a hospital and had called the state to find out about the taxability of a particular item. She started describing the situation which involved an item being shipped from Michigan to her state, and how she worked for a hospital, and how....

The state employee immediately told her it was not taxable and essentially hung up.

The woman came to the class convinced that anything shipped to her state from out of state wasn't taxable - because that was the question she had intended to ask. I spent some time deprogramming her with the message that it's the delivery state that counts, not the ship-from state. It doesn't matter that it was shipped from another state. In other words, the answer she got from the state representative was completely wrong. And for the wrong reason!

We talked more and I realized what happened. As she was explaining the situation to the person on the phone at the state, she mentioned hospital. Well, that gave the headphone wearer all the information she needed. It was a purchase by a hospital! Hospitals are exempt*. The answer is the purchase wasn't taxable. Yay!

If the state employee had listened longer and asked more, she would have found out that the hospital was buying this item for one of their for-profit subsidiaries which was taxable.

In most telephone-bank jobs, particularly the ones where they don't care about customer service, employees are evaluated on how quickly they can close a call and move on to the next one. They're not rewarded for patience or even giving the right answer. So this operator heard "hospital" and she had an answer. Done! Move on to the next call.

So when you're talking to the state on the phone, in addition to all of the other reasons why you shouldn't rely on their answer, you also have to make sure they don't prematurely give you the answer before they've even gotten all of the information.

Remember, if you have to contact the state, try to email them. At least you're not dealing with the state employee's needing to get you off the phone fast.

*Another problem is that not all hospitals are exempt. There are for-profit hospitals that would be just as taxable as anyone else. It's not super-relevant to the story, but I wanted to forestall someone pointing this out. ;-)

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 more information

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/

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

Monday, August 02, 2010

You need to look this stuff up folks!

I've got this disclaimer on the left side of the blog:

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. 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.

I had a comment on one of my posts recently from someone who was looking for information on a particular issue. He didn't specify the state, and I read the question as being somewhat general in nature. He was miffed by my non-specific response. He apparently wanted a definitive answer. I pointed out that, if he had read my blog, he'd know that I don't specialize in definitive answers.

My job is to help you understand the way the law works. Your job is to find the answer, hopefully with a push in the right direction from me. In other words, and using a very old and tired metaphor, my job is not to feed you, my job is to teach you how to fish.

For folks who have taken one of my seminars (online or in-person), or for whom I'm doing coaching, I will do some research. If these folks have a detailed question about how to handle a situation in a particular state, I ask them to see if they can find the answer on their own. If they can't, I will look it up in the sales tax database that I use and send them the article that discusses the question. They can then make a decision based on the same data that I would see.

And here's where you should do your research.

Finally, please understand that there are, with the exception of the state web site, no free answers

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 more information

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/

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

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.