Your taxes at work or why you shouldn't assume the auditor knows what they're talking about.

I was doing a seminar in the Capital of East Dakota a few years ago.

When I walked into the meeting room a couple of hours before the event, I was surprised by the number of participants that were on the roster. Usually, in a city the size of Snagglepuss (the capital of East Dakota, as if you didn't know), I would have expected about 20 to 30 people. But the list showed almost 80 folks. This was pretty close to a record for me. I've only seen crowds of that size in Manhattan. And this wasn't Manhattan. Not even close.

I took a look at the roster again to see if I could find any reason for the big numbers and immediately spotted the cause. Almost 50 people were from one organization...the East Dakota Department of Revenue.

I groaned. It's never a good thing when someone from the tax department is at one of my seminars. It's not that they interfere. In fact, they are usually complimentary about the program. What drives me nuts is that everyone else in the seminar shuts up. There's virtually no interactivity, no questions, no comments...nothing! After all, who is going to ask a question about their sales tax issues when there's an auditor sitting in the front row? And the auditor isn't going to ask any questions - they don't want to look like they don't know about sales tax. So it turns into a really boring seminar for the audience.

In this case, I had not just one auditor, which is bad enough. I had 50 of them, far outnumbering the civilians in the room. It did not promise to be a good day.

And it didn't inspire confidence in the East Dakota Department of Revenue either. As a seminar presenter, you can tell if your audience is getting the material you're presenting. You see smiles of comprehension, knowing nods, and people ask questions to clarify points as opposed to "Can you explain use tax again?" In this class, I was looking out on close to 50 people who were clearly lost. There were a lot of dull stares coming from the auditor part of audience. Their lack of understanding was confirmed by the questions they were asking at the breaks. I felt like saying, "Wait a minute, you guys are sales tax auditors?"

You may be wondering how the civilian part of the audience was doing. I saw nothing but pure terror on their faces. And they kept making sidelong glances at the auditors that were sitting among them.  Also interesting was how many of them had taken off their name badges.

During one of the breaks, I was chatting with one of the few auditors who I could see was getting the material and asking smart questions. I asked him, "Why are you guys here?"

He said, "Oh, this is our in-service training for the year."

I said, incredulously, "For the year???"

"Yep.  There's not a big training budget"

"Who's minding the store?"

He said that this was only about one third of the audit staff.

Now think about this...

The price of this class was $200 per person. Even if they got a deal from the seminar company I was working for, they probably still paid $7000 or $8000 for those 50 people.  And they were only a third of the staff.

For that same price, they could have had someone do a custom seminar for their entire audit staff, not just one third of them. Instead they got a seminar not designed for them, but for businesses and taxpayers.  And this one day general seminar was their only training for the entire year!!!

So there are two take-aways from this:

1. The auditors in your state may not be getting the training they need, so you should not assume they're always right.

2. The training department for your department of revenue may not be spending your money wisely.

Please keep in mind there are are lots of good, knowledgeable, and competent sales tax auditors out there. I have met quite a few. If you get one of these folks, your audit will be professionally conducted by a sharp representative of the state.

But there are a lot of dolts out there too. Particularly in East Dakota.  I mean, they named their capital Snagglepuss!

By the way, other than the made up geographical names (which I'm having fun with), this is an absolutely true story.

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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

Don't forget 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. 

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Illustrations and Parables: Intercompany Transactions

Bill* invented a machine to curry wockies.* His problem was that while he knew the machine would be a real boon to the wocky service industry, it was really, really expensive. He had a lot of trouble convincing the industry to use his machine because of the ridiculously high initial cost. Finally, one of his investors suggested a tactic that has been long used by inventors with money. He bought his customers and made them use the Frazier Wocky Currier*.

In the Great State of East Dakota*, which is in the heart of the wocky region of the country, he bought ten small little wocky service companies, spread throughout the state. Since he didn’t really want to get into the wocky service business, the typical deal was, “Here’s a pile of money for your company. You keep running it the way you like. You can even keep the same name on the sign. I don’t care. But, whenever a situation comes up where you need to curry wockies, you have to use my machine.”

From a financial perspective, he simply bought all of the shares in the corporations of these little service companies and let them stand as separate, but commonly owned, subsidiaries of his own company, The Frazier Currier Company*.

His corporate empire looked something like this*



The machine was a success. It was incredibly effective and the customers were thrilled. In fact, the local companies actively looked for opportunities to curry wockies, so they could use the machines even more. Everyone made money.

The Frazier Currier Company manufactured the machines and then shipped them to the service companies.



Business got so good that sometimes they couldn’t get enough machines. So they would move machines from one service company to another to meet local demand.



Then the State of East Dakota audited them.

And the auditor noticed that they were selling these very expensive machines from the parent to the subsidiaries and no sales tax was being charged. And that the subsidiaries were selling the machines to each other, and no sales tax was charged.

Frazier Currier Company argued that these were just movements of machines between branch locations, that they weren’t sales.

But the auditor pointed out that every branch, as well as the parent, was a separate corporation. And in East Dakota (and in most states), corporations are legal persons. Transfers of tangible personal property and taxable services between persons, are sales. Period. The assessment was over $10,000,000.

The only way the Frazier Currier Company was able to negotiate the assessment down, was by bringing East Dakota’s leading bankruptcy attorney to the negotiations.

So what’s the moral of the story here?

First of all, bring a bankruptcy attorney to the negotiations.

Seriously, you need to make sure, when you are transferring taxable goods and services among subsidiaries and parents, that you are properly taxing the transactions. In most states, they look at the form and nature of the transaction. Is there formal paperwork? That makes it look more like a sale. Is there just a note to the bookkeeper so he knows where the machine is? Maybe it’s not a big deal. Is it an occasional sale? That might get you off the hook. But you need to know.

And here’s the kicker. This is not well documented in most state’s statutes and regulations. This is one of those areas where you need a local consultant who knows the customs and audit practices of East Dakota or whatever state you're in.

The irony is that, of all of the accountants and lawyers that Bill used when he set up the business, he didn’t have a sales tax expert. That august personage could have told Bill to set up leasing arrangements so that every machine is owned by The Frazier Currying Company and is LEASED to the subsidiaries. Because, in East Dakota, there’s an exemption to the rule for intercorporate transactions if they're leases.

*I’m using fake names to either protect the innocent, the guilty or to just be funny.

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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

Don't forget 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. 

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Printing and Publications

I had a rant all set about the "Amazon tax", but I decided you needed some actual content, as opposed to me editorializing, so here you go.  I might do it in a day or so, after the steam stops coming out of my ears.

There are several issues to consider when it comes to printing and publications.

First of all, printed products are usually taxable.  They're tangible personal property and therefore, by default, taxable.  But there are plenty of exemptions, which we'll talk about.

Take newspapers for instance.  You know, those things that get ink all over your hands.  We used to read them when we were riding in the stagecoach.  Now we have iPads.

Anyway, in some states, there's a sales tax on newspapers. Consumers usually don't see this because the tax is absorbed into the price when sold from a machine or street vendors. In other states, there is simply no tax on newspapers. And I'll bet that, in those states, there are editors who are complaining about all of the big corporate exemptions.  But are they complaining about the exemption they get for newspapers? Didn't think so.

Dang. And I wasn't going to editorialize.

Magazines are different. They are often taxable when sold over the counter, but there are some states where they are exempt. And if they are taxable when sold over the counter, they're usually not taxable when sold by subscription.  The subscription one is tricky.  There are states that DO tax subscriptions.  And they have a field day with doctors' offices. 

Newsletters and other periodicals, when sold by non-profits, are often not taxable, with some restrictions.

Then, there is the definition of what precisely IS a newspaper, magazine or newsletter. For example, newspapers often specifically have to be printed on newsprint and come out at least weekly. And magazines often must be published at least quarterly, have advertising, and soft covers.  And then there's the question of taxability if the publication is delivered digitally. 

Finally, there's the printing of advertising, catalogs, brochures, and similar custom printed documents.

There are a couple of states that make this easy.  In those states, custom printing is considered a service and is not taxable.  Done!

However, most states will say that custom printing is taxable.

One general exception for custom printing is product that is shipped out of the state.   While there are usually specific laws that state this, it's rooted in this golden rule.

There are a couple of states that say that custom printing, if shipped via common carrier (like the Postal Service) to the individual customers and prospects, even within the state, is not taxable. This presents a bookkeeping challenge. If you have 100,000 brochures printed, how many will be mailed to your customers, and how many will be kept for handing out at tradeshows, etc?  And the method of delivery is important.  In one state, the law requires that the delivery must be by US Mail.  Not Fed Ex.  The US Mail.  Gotta be careful to read the entire rule.

To summarize the big points:

Stock printing: generally taxable
Newspapers: often taxable
Magazines: usually taxable
Publications by non-profits: often not taxable
Subscriptions: often not taxable
Custom printing: usually taxable
Printing shipped out of state: generally not taxable
Custom printing shipped within state to individual customers: sometimes not taxable

Remember, every state will be completely different.

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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

Don't forget 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. 

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