Friday, March 04, 2011
Illustrations and Parables: A weird invoice where they paid extra California taxes for a shipment of non-taxable items to Idaho
I received a call from one of my previous class participants on Wednesday. Doris had emailed me a question the day before, but it was so long and involved that I wanted to talk about it on the phone. I had a long drive in Chicago morning traffic, so she called me back at the perfect time.
Doris had sold some boxes to Sam in Idaho. The boxes were containers for Sam's product so they were bought for resale and Doris had Sam's resale certificate. Doris had billed Sam, with no sales tax on the invoice, since it wasn't taxable.
But then Doris got a call from the Sam's distributor in California. For some reason, they were going to pay the bill. Here's the conversation:
Distributor: I have your invoice here for the boxes you sold to Sam. Why didn't you charge sales tax?
Doris: It's not taxable. They're boxes for his products so they qualify as exempt.
Distributor: No they're taxable. You need to rebill us with California sales tax.
Doris: You're wrong. They're not taxable. It's called the "container exemption." I'd be happy to send you more information.
Distributor: I need to have California tax on this invoice.
Doris: But I can't bill you California tax anyway. We aren't registered in California, don't do business in California and don't have nexus there. I can't collect taxes for a state I'm not registered in. Besides, the delivery occurred in Idaho, therefore it would be Idaho tax anyway. But it's not taxable!
Distributor: If you don't charge me California tax, we'll just add the tax to the payment.
Doris: If you do that, I'll just have to send you a refund check. We can't accept that money.
Distributor: We won't cash it.
At this point, Doris, realizing she was talking to a tree stump, gave up and sent me the email.
After we went through the whole thing, Doris asked, "I'm right, aren't I?" I said, "Absolutely! The best chance you have is that the person who handles the refund check won't have heard from this idiot. They'll deposit it and that'll be it. Out of curiosity, what part of accounting was the person from?"
Doris replied, "She was the sales rep."
"Ah. Now it makes sense."
If there's anyone who'll stick to their guns, on a topic they know nothing about, in the face of someone who clearly knows what they're talking about, it's a sales rep. (I kid, I kid. I spent years in sales)
I explained to Doris that she needed to keep very detailed notes on this situation because of two potential scenarios:
1. The California distributor gets audited by the state of California who discovers that taxes were paid to Doris. The auditor will ask Doris what she did with the money, since she's not registered in California. Doris will need to be able to document that she did refund the money.
2. The California distributor hires a reverse sales tax auditor who comes across this weird invoice where they paid extra California taxes for a shipment of non-taxable items to Idaho. [Boy, as soon as I wrote that, I knew I had the title of this article.]
The auditor will immediately call Doris and demand a refund for the overpayment. Again, Doris will need to be able to document the refund.
Now the other thing that the sales rep didn't know about (and many of you probably don't know either) is that refusing to cash the check doesn't really solve the problem. After about a year or so, depending on the state, it will become an unclaimed property issue. Doris will have to send a letter to the company telling them they have an uncashed check. If they still refuse to cash it, Doris will then turned the money over to the abandoned property department of the state. Her job will then be finished. The money has been paid, in this case, to the state.
Now, when that reverse sales tax auditor calls about the overpayment, Doris can just say, "Yeah, that company you're working for refused the payment. We had to turn it over to the state treasurer. Call them. Not my problem anymore."
But, as I said, Doris needs to document the heck out of this. Because she'll be lucky if this doesn't pop up again in the next three or four years.
And here's a message for sales people, or any non-accounting folks out there. If the accounting people seem to know what they're talking about, there's a chance they do. I'm just sayin'.
The Sales Tax Guy
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