Monday, April 11, 2011
Parables and Illustrations: Do you sell equipment?
If you sell old equipment, you may be making taxable sales. Have you taken a look at this problem?
One particular construction company that I'm familiar with (heavy/highway) is constantly buying new equipment. Constantly. The owner really likes new equipment (he must have been a big fan of Tonka toys as a child).
In the old days, as he bought new equipment, the owner would need to sell the odd piece of used equipment. This happened a couple of times a year and the transactions were concluded over a beer at the local tavern. These were "occasional sales" and wouldn't be taxable.
But, as the years went by, and the company grew, they found themselves getting rid of more and more used equipment. They added "selling equipment" to the job description of one of the purchasing guys and started paying him a commission. They parked the equipment in front of the building, put a sign up, and installed lights so that the equipment could be seen at night. The deals were now closed at the office, not over a beer. The company had become a used equipment dealer. But they did not realize that. Until the audit.
The state came in and noticed the amount of cash being thrown off by the equipment sales. They also noticed the lights, signs, etc. The auditor said, "you know, you should be charging tax on all of those sales." The company talked to a lawyer, who referred them to a sales and use tax lawyer, who told them they were screwed. The assessment was over $300,000 with the interest and penalties. The lawyer helped get that reduced, but it still hurt.
Another situation was similar, but not as painful.
A hospital found themselves selling lots of used medical equipment. They could afford to be spendthrift because of the patient mix in their service area (lots of private insurance). They sold the used equipment to other, poorer hospitals, clinics, and physicians offices.
Yes, the hospital was a non-profit organization. But sales by non-profits are usually taxable, other than fund-raising events. So this hospital should have been charging tax.
"But wait! Weren't they selling the equipment to other exempt hospitals? So the sales would still be exempt, right?"
Yep. But remember that not all hospitals are government or non-profit operations. There are for-profit hospitals too. And they sold equipment to physicians and clinics who are generally taxable.
Luckily, unlike the construction company, this organization realized what they were doing and began collecting taxes before they got caught.
Not such a horror story, but illustrative anyway.
There are three major points to be made here:
1. You may be selling so much equipment that you become an equipment dealer. If you're doing more than selling the odd item over a beer, you should take a hard look at the situation.
2. Your core business may not be your only source of taxable sales. Other sales may be taxable without you realizing it. Until the audit.
2. Your company changes. If you make a judgment about the taxability of something today, will the same set of circumstances and laws exist in five or ten years? You need to frequently re-analyze what you are doing. Don't just rely on the decision that was made in the good old days.
The Sales Tax Guy
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