Why do I have to pay sales tax on the car I bought from a guy on Craigslist?

In my surfing adventures looking for material for my other blog, I often come across questions that people have asked on various online fora*.  And sometimes they're grist for my blogging responsibilities.

The question is at the top of this article. Here's my poor attempt at an answer:

When you buy a car from a dealer, they are going to charge you sales tax on the sale of the car. I think we all kind of understand that. Easy. Unpleasant, and maybe a surprise, but nevertheless - we get it.

When you buy a used car from a dealer, they are still going to charge you sales tax on the sale of the car. "Whoa," you say, "what are you talking about? It's used! Sales tax already has been paid on that car."

It doesn't make any difference. You see, a common misconception is that sales tax is on the item being sold. It's actually on the sale itself. That's why it's called a sales tax. That car might keep getting traded in, and every time a dealer sells it, it's subject to sales tax.

However, there is another way you can buy a used car - from Jim on Craigslist. That's how I sold my 1997 Pontiac Grand Prix**

I put an ad on Craigslist and someone called within a couple of hours and handed me cash later that day. And I, as the seller, didn't have to charge Joe sales tax. And before you ask "why?" I'll tell you. Because I was making an occasional sale (often called a casual sale). These are sales by sellers who are not in the business of selling the item being sold. Since I wasn't in the car sales business, I didn't have to charge tax on the sale of Eleanor (yeah, I called her Eleanor).

That's also why you don't have to charge tax when you have a garage sale - you're making an occasional sale.

But here's the thing. Cars are probably the most expensive thing that most of us will ever buy that's not real property (like a house). The state doesn't want to give up the sales tax just because Joe didn't buy the car from a dealer. But they also have trouble imposing the responsibility of charging the sales tax on me because I'm probably going to screw it up. Since I don't sell cars very often (like once every 20 years), I'm unlikely to know about a rule that says I have to collect the sales tax. So most states have an alternate plan. They collect the tax when Joe registers the vehicle and gets his new plates.  Joe, of course, is surprised and complains about it on an internet forum. ***

So I, the seller, am off the hook. But Joe is in for a surprise when he goes to the DMV.

Finally, it's a technical matter, but the type of tax changes when you pay the state when you register the car. Sales tax is a tax on the sale of the car. But when the state can't impose tax on the sale, they have this other tax that plugs that loophole. It's called "use tax." This is a tax on Joe's use of the car. Some states will properly call it use tax. But others will call it a sales tax just so that Joe doesn't freak out thinking that the state is just making up taxes now.

* Yeah, I know the more usual word is "forums," but I just like the way "online fora" sounds. Trust me, I'm not trying to be a word snob. I'm not an elitist - I'm right down there with the rest of you people.

** I loved that car. It's the only car I've ever had where girls actually thought it was cool. Not me of course, but the car. Loved that car.

*** See, I can use regular people words too!

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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/

FAQ - Keeping the Lights On in the Manufacturing Plant

This issue comes up a lot in seminars...

Usually, environmental equipment (keeping the lights on, maintaining a comfortable temperature in the plant, etc.) is taxable, even in states that grant exemptions for manufacturing equipment and materials. The problem is that, while necessary, the lights and temperature in the plant don't have a direct impact on the product being processed. If you want to make the argument that you need the lights on to operate the equipment, I'd agree with you. But you also need the sales and marketing department to keep the plant operating. That doesn't make them exempt. The rules are generally that the item must be directly used in the manufacturing process.

What does directly mean?  This is not the rule in the majority of states, but it's my rule of thumb.

In order for an item to be exempt under manufacturing rules, the item must touch the product.

I admit that's strict and most states aren't quite that nuts. But if you're going to argue for an item to be exempt before the Sales Tax Guy Tribunal, you'll need to rationalize from that statement. Good luck.

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

See the disclaimer on the right.

Don't forget our upcoming seminars and webinars. http://www.salestax-usetax.com and there's more sales tax news and links here http://salestaxnews.blogspot.com

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

Do I have to get exemption certificates in states where I don't have nexus?

I get this question every once in a while - so hey, it's a blog entry!

The situation is that you're selling something taxable to a customer in state A.  You're in state H.  Do you have to get an exemption certificate from them when you don't have nexus? 

It depends.

1.  How sure are you that you don't have nexus?  Nexus situations can change.  You may have decided in 2010 that you don't have nexus in state A, but in the meantime, those jerks in sales have made a couple of big sales there, sent in a crew of installers, made arrangements with a repair firm to provide service, and the VP of sales has been visiting every couple of months.

If you haven't figured it out, you now have nexus in state A.  But if you're basing your assumption on the decision you made in 2010, you're gonna be in trouble.

It would sure be nice to have that exemption certificate.

2.  How much of a hassle is it to get the certificates?  If your customer in state A is practically begging you to take his certificate, then, oh, what the hell, take it.

On the other hand, if your customer is one of those pain-in-the-butt mega-retailers who refuse to cough up the resale certificate, then, maybe you want to take the chance.

So the two factors to consider are your confidence level in whether or not you have nexus balanced against the hassles of getting certificates. 

Another thing to consider is that Congress may eventually pass something that looks like the Marketplace Fairness Act.  That means that if you're a larger company*, you'll eventually be required to collect taxes in all states, regardless of whether or not you have nexus.  So you'll need to be getting certificates from all the states anyway.  But this is probably a couple of years off (I hope).

Frankly, putting on my strict, no-risk controller's hat, I'd establish a policy that we get exemption certificates from everyone.  That way if that dang sales guy goes behind my back to state M, I'm covered. 

*part of the argument is what "large" means

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

See the disclaimer on the right.

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com
and there's more sales tax news and links here http://salestaxnews.blogspot.com

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What do you mean, I can't stiff the state on sales tax by buying from Amazon.com???

One of the political columnists* I follow has recently tweeted about how he loves to buy from Amazon.com because he loves (paraphrasing) sticking it to the state for sales tax. While Amazon.com hasn't started charging tax in his current state, who knows?  This particular state has tried, just like California, Colorado and a few other states.

Legally you can't evade the sales tax by buying from Amazon.com or another out of state seller who doesn't charge sales tax.  Legally, you owe use tax instead.  See this golden rule.

Use tax was invented to plug loopholes in the law where sales tax didn't get collected. Essentially, the law works this way: if you have purchased something that should have been taxed, and it wasn't, then you owe use tax.

The best example is a book from Amazon. com. In most states, they won't charge you tax. But you're not off the hook. It should have been taxed, but Amazon.com didn't have to (that's another long story involving nexus). Therefore, you as the buyer must pay use tax  Unfortunately, the state doesn't have a good way to collect it.  They rely on the buyer to know the law and be willing to comply with the law.  And they're kinda ticked off about it.

They do give you the opportunity. In many states, there's a line on your state income tax return, usually near the bottom of the second page, where you're expected to put something in there. Most people don't. And states generally have a form for you to fill out to report your use taxes. This is probably one of the least downloaded forms the states have. If you feel a pang of guilt, and want to start filling it out, it often has a name like "consumer's use tax return." Look on the state's web page under forms.

Individuals simply don't get busted on this (very often).  Sometimes, states do have ways to find this information and it usually surprises the hell out of the buyer.  But most of the time, the state just throws up their hands and tries to figure out ways to require Amazon.com et al to collect that tax.  So far, disappointment has reigned.

But if you go around tweeting about the fact that you like to burn the state on their sales tax, eventually someone at the state revenue department may decide that a letter, if not an audit is in order. 

Businesses, who will get audited eventually, really need to worry about this. Because they will get audited and get caught.  Individuals?  Well, my job is to point the law out to you, and make you feel a little guilty.  Beyond that, you're on your own.

*I enjoy this guy, so I won't tell his name, or the state. Although I think the state knows by now.

[This is an update of an article I wrote in 2009.  I've spruced it up a little, but it was hard to improve on perfection.]

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The Sales Tax Guy http://salestaxguy.blogspot.com
See the disclaimer on the right.
Don't forget our upcoming seminars and webinars. http://www.salestax-usetax.com and there's more sales tax news and links here http://salestaxnews.blogspot.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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FAQ: "Do you have any articles that deal with the taxability of ____ for all states?"

This inquiry was received today.  It's a pretty frequently asked question so I thought I'd take a stab at it again.

"Do you have any articles that deal with the taxability of janitorial services for all states?"

Actually, I do have pretty detailed notes (my cheat sheet) on this for every state, but I wouldn't publish it.  I don't typically write articles with that level of state-specific detail.  But the databases have that info.  I use RIA as my research tool (although CCH has the information as well) and I can research and update my notes on janitorial services for any state in a matter of moments.  Frankly, if you need that kind of information for all the states on a frequent basis, you should subscribe to one of the databases. 

Even if you were to find such an article, you can't count on it unless, frankly, you're paying for it.  Let's say you find a web site where you can get the information for free - someone put together a table of janitorial services taxation for every state.  My questions would be: how is it updated, are there citations to specific statutes and regulations, and is the information in the table detailed enough to cover the possible exceptions and gotchas?  You're probably going to have to pay for that kind of reliability.

When I do a state-specific seminar, I re-research the state every time.  I don't just rely on my cheat sheet from the last time.  I review it for what is taxable or not, change things where necessary,  and review any updates to the sales and use tax laws since the last time I did a seminar for that state.  So when I do the seminar, I can feel comfortable that I'm using the latest info.  That's one of the reasons why I don't provide recordings of these seminars.  I don't want people relying on information that can so easily go out of date.  And a table or article from a free web site is likely to be not very detailed and easily out of date.

Which is why I don't typically provide that level of detail unless I've got specific warnings that the information is illustrative and is probably out of date.

So don't rely on tables or cheap information.  Use good research tools. 

Sorry, I must be off today.  No jokes.  Dang.

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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 that haven't been 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: any images above are hosted on Flickr. If you'd like to see more, click on the photo. 

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FAQ: What are the Different Types of Exemption Certificates?

An exemption certificate is presented to the seller by the buyer.  Properly completed, it relieves the seller of the responsibility of collecting sales and use tax from the buyer.

Generally, certificates are needed for exemptions based on buyer's organization, or how the buyer will use the purchase. The forms required vary by state.  Sometimes there is one form that works for all exemptions, and sometimes there are specific certificates for certain sets of exemptions.

There are several types of exemption certificates:

Resale
The buyer is intending to resell the purchase or use it as an ingredient in something he will manufacture.


Agriculture
The buyer will be using the purchases for farming, cattle, or nursery-type activities.  This category also sometimes include forestry and aqua-culture.

Direct Payment 
The buyer has made a deal with the state to allow them to pay their use taxes directly.  Therefore, they do not have to pay sales and use taxes to the seller.

Most states have the above exemptions.  The following are exemptions that are used in most states, but are nowhere near universal.

Non-profit organizations
Charitable organizations usually have to be registered with the state and provide a certificate to the seller if the purchase will be tax free.

Government agencies
Often these exemptions are documented by other paperwork, such as contracts or purchase orders.  However some states do use certificates for this exemption. 

Manufacturers
If they're going to use equipment and supplies in manufacturing, many states give an exemption which the buyer must document with a certificate.

You'll also see exemption certificates used for other exemptions including mining, commercial fishing, out of state custom printing, enterprise zones, research and development, etc.

Note, despite the disclaimers plastered all over, some people still bust my chops about a particular rule not being the case in their state.  Remember, the rules are different where you are!  Sheesh.

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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 that haven't been 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/

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Who CARES if they have nexus?!?

I've heard these two questions so many times, including today, that I feel the need to put them to rest.  So if I've suggested you read this article in response to an email, then ya best read it now.

Question 1: My vendor has nexus in our state.  Shouldn't THEY be charging tax?  

In a perfect world, yes, they should be charging you tax.  But, you may have noticed that we're not in a perfect world.  Your vendor may not realize they have  nexus, or they do realize it but choose to ignore it.  If you call them and insist they collect, you run the risk of:

a.  Ticking off your vendor
b.  Having to educate them about nexus, which is above your paygrade
c.  Having them say, "OK, we'll start charging tax," just to make you shut up.  This will come back to haunt you. 

You could rat them out to your state's department of revenue, but that just seems...tacky.

But who cares?  Just accrue and pay the use taxes the vendor should have charged you, and move on.  There's no economic cost to do this, and if you have a decent system in place, not really any more work.

There is a risk however, of the vendor getting caught in a couple of years. They may come back to you for the tax that they didn't collect when they should have.  Protect yourself from this hassle by having a clear audit trail on the invoice showing that you HAVE self-assessed use tax.


Question 2:  My customer is based in Canada.  I'm in Nebraska.  He has nexus in Nebraska.  I know this because I'm delivering the shipment to his warehouse here in Omaha.  He says I shouldn't charge tax because he's in Canada.  What should I do?

Charge Nebraska sales tax.  Their nexus isn't the issue when it's something YOU sell.  Nexus is only relevant to determine if a seller has to charge tax in states the seller ships into.  If you're a customer of this company, see question 1.  You shouldn't care about the buyer's nexus in your state.  What you need to care about is properly taxing your sale.

And generally, that means to base your decisions on where the delivery occurs.  Since that happened in Nebraska, you collect Nebraska tax.  If they claim the purchase is exempt because they're in Canada, ask them for proof.  Point out that if you go to Canada and buy something in a store there, you are not exempt from Canadian tax. 

There might be other exemptions (eg. manufacturing, resale, etc.).  But I know of no exemption in Nebraska for material delivered in Nebraska just because the customer is Canadian.  Again, ask them for evidence that they are exempt.  They should be able to provide you with a Nebraska or US law.

As a point of comparison, if you shipped the goods directly TO Canada, then they would be right.  The delivery point is Canada and Nebraska sales tax would no longer apply.  But that's not what's happening.

See why that delivery point rule is so handy?

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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 that haven't been 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.  By the way, I have no clue why I used it.  It just seemed seasonal..

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Dealing with the Home Office

A recent webinar participant had a couple of complicated questions, so we made a phone-date to chat when I knew I would be spending an hour or so in a Chicago rush hour.  So, while I was in the warm embrace of traffic, we talked sales tax. 

Warning, the language gets a tiny bit crude a little later.  Just letting you know in case you have delicate sensibilities.

A problem she was having that ran through all of her questions was the problem of dealing with her corporate office.  She was kind of the chief-cook-and-bottle-washer in the office at a branch location of a much larger (though not gigantic) company.  She had grown so frustrated at the inconsistent guidance she was getting that she decided to sign up for all four of our webinars.  Yay for her!

The conversation eventually evolved to talking about what she could do to solve the problem with corporate.  Before I tell you the answer I gave her, let me put a different disclaimer than usual here: there's a reason I finally decided to start my own company.

I have spent years in the corporate world and years presenting seminars on regulatory issues (like sales and use taxes).  I have heard this complaint more than a few times. I gave her this precious bit of wisdom:

"These problems are above your paygrade."

Folks, I want you all to learn about sales and use taxes.  I want you to care about sales and use taxes.  I want you to care about your company.  And your company should want these things too.  But if, once you've learned, they refuse to listen to you, then relax.  This problem has now sailed WAY above your paygrade (but you can still be smug knowing you're better informed about sales and use taxes than they are).

See, if you're at the right paygrade, then when you complain, people will listen to you.  And they may change things.  They may do it grudgingly, but they'll at least pay attention and give you explanations.  But if they won't do that; if they pretty much ignore your concerns, or respond in a blow-you-off kind of way, than the issue is above your paygrade.  Simple.  They've just told you in their own special way.

But that doesn't make you feel that much better, does it?  Because when it all blows up, you're still gonna get in trouble, right?

Email is a wonderful thing because it solves a problem that I had back in the day.  Back then, pre-email, we had to write "cover your ass" memos whenever we felt that an issue we had raised had been ignored.  So we wrote something like, "in regards to the meeting we had today on the Johnson Project, I just want to confirm that you said that I should just forget about it."  And our bosses would immediately spot that as a CYA memo.  This was not a career enhancing move, but was usually the only thing we could do that would get us off the hook when the proverbial poop hit the fan. 

Today, you kids have email.  So you probably haven't even HAD a meeting.  You've been exchanging emails with your boss that document the entire Johnson Project conversation.  So when someone starts chucking poop, you've got cover.

So make sure you raise the issues via email, then go home at 5 and watch The Simpsons.  Relax.  Then go back to work in the morning, ready to face the bright new day, with a song in your heart, and ready to deal with some fascinating new sales tax issue. 

And if you're corporate, listen!  Those people may actually know more about it than YOU do.  And if they won't listen to YOU, then it's obviously above your paygrade too.

You see, what it comes down to is that if they don't listen to you and respect your opinion, then you obviously don't need to worry about it anymore.

Now I know that some of you more responsible readers are going to still take ownership of the problem and want to solve it for the good of the company.  And that's admirable and I don't want to discourage this.  So please learn and try to solve the problems.  But I don't want you to get ulcers and migraines from the frustration of dealing with people that don't care as much as you do.  I have the ulcers to prove it. 

At some point in time, go home and watch the Simpsons.  

As I said, there's a reason I am out of that world. 

And just to show you how hip I am, feel free to watch Family Guy too.

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The Sales Tax Guy
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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Sales and Use Tax Books You Should Own - Redux

This article first appeared back in 2007 and I thought it should see the light of day again. 

These are sales and use tax books that I strongly recommend as reference tools. If you have to worry about a few states, you really should own them. If you are in only one state, they may be overkill, but are still worthwhile.  Both books cover all of the states.

Guide to Sales and Use Taxes (from Research Institute of America)
This book has an enormous amount of information for each state, with the material broken up into 15 subchapters within each state chapter. It also has an opening chapter which is basically "sales tax 101." If the book is weak, it is in two areas: there aren't any citations, and it sometimes provides too much data with too little interpretation. These deficiencies are made up for in the next book.

Sales and Use Tax Deskbook (from the American Bar Association)
Each state's treatment is written by an attorney who specializes in that state's sales and use taxes. While I've only met a couple of them, I heard of many more. So far, they have all been heavy SUT litigators and highly "plugged in."

The book actually provides less detail than the Guide (above), but does provide more interpretation of the laws, as well as citations. So you can read the basic information, then drill down to the statute, regulation, bulletin, court case, opinion letter, etc.

Here are two particularly useful items provided by the book:

1.  It gives you the rules for taxation of exports out of the state. Now you'll have ammunition for your discussions with vendors who are charging you their state's tax as opposed to the correct one (yours).

2.  For most states, the book shows the "drop ship" rules, which will, again, help with vendors who really don't understand this particular topic.

I actually recommend both books if you have the budget.

First of all, owning both books gives you the ability of second sourcing or even third sourcing your research. It's always helpful, on confusing issues, to see if the books agree.

The other reason is updates. By owning both books, you can flip-flop your purchases. One year get an updated version of the inexpensive book, next year get the expensive one, and so on.

Finally, you'll notice I'm not offering to sell you these books. That's because I want you to trust that I'm not biased here. I'm not recommending them to make money. Contact the publishers and they'll be happy to sell them to you.

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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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FAQ: What if I underpay my taxes?

This question came in over the weekend and I just answered it. I've sanitized it, because it's worth mentioning to those of you who are relatively uninformed about this:

Found your Sales Tax Guy blog while doing some research. I'm hoping you can answer a question for me.

I own a small retail store in New Jersey. I recently discovered that my now former accountant was underpaying the amount of sales tax I owe. We collect the correct amount (8.75%) but it looks like we have been sending about 7.75% to the state every month for the last three years!

Should I just forget about the past shortages (we're paying the correct amount now) and hope that the state doesn't discover the error? How could the state discover the error anyway unless I brought it to their attention?

Doreen, of all of the possible mistakes that you can make, this is dang near the top of the "really bad" list. Have a look these articles.

You need to get professional help from someone who knows their way around sales and use tax. It'll be expensive but not as expensive as the price you'll pay if you ignore this. And New Jersey is broke, so they're even more aggressive about finding unpaid taxes.

They'll find you. It's called a "sales tax audit." And this particularly problem is one they'll probably find in the first hour or so of the audit. Snap.

Find some help.

Jim

This also brings up an issue I've talked about before. While your accountant may be highly knowledgeable at income taxes, there's a good chance that he or she knows virtually nothing about sales and use taxes. But the eventual responsibility will rest with you. So make sure that whoever you take advice from on this topic actually knows something about it. And make sure they're doing it right.

Jim

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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/

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FOB

When I started writing this, I thought I'd give you a link that would explain what FOB meant.  I was surprised that there are several different meanings for FOB, other than the one I was going for.  This Wikipedia article should be sufficient to help you understand this term as I plan to use it.

To oversimplify, FOB means where the legal title to the shipment transfers to the buyer.  If the terms are FOB Origin (or shipping point), then the legal ownership of the goods transfers when the seller ships them.  If the terms are FOB Destination, then the seller hasn't transferred the ownership to the buyer until they arrive at her receiving dock.

Legal ownership determines who is responsible for the freight, and who suffers the economic loss when the shipment is lost in transit.  If you're the seller, you want to transfer ownership immediately, which means you're going to want the terms to be FOB Origin.  If the item is lost, it's the buyer's problem.

On the other hand, if you're the buyer, you would prefer to have the terms be FOB Destination, which means that the seller still is responsible for the shipment, until it arrives at your dock.  Purchasing agents usually negotiate terms as FOB destination just for that reason, particularly on more expensive items.

The question of the effect of FOB comes up frequently in sales and use tax conversations because people think that the FOB point determines the state that has jurisdiction over the transaction.  It doesn't.

The state that has jurisdiction is, very simply, almost always the state where the physical delivery occurs, or where the buyer takes control over the goods - which is pretty much the same thing.  This is because the tax that is imposed, when we're talking about an interstate sale, is use tax.  And use tax is generally imposed when the buyer uses (or controls) the goods.  No matter what the terms are, the buyer doesn't control the goods until they arrive at her dock (if shipped by common carrier).

Conversely, if the buyer (or her agent) picks up the goods herself (not using a common carrier), then the physical delivery occurs at the shipper's dock.  This is so, even if the original terms of the sale were FOB Destination and the buyer changed her mind at the last minute.  What counts is where the physical transfer of control took place, not where the contract terms state the ownership transfer occurs.

Think about it.  If it was that easy to manipulate the state that had jurisdiction, then all Amazon.com would have to do is put their warehouse in Oregon (no sales tax in Oregon), and then ship everything FOB Origin.  Then there would simply be no tax at all.  But that's NOT how it works.  What determines the state with jurisdiction is where the physical, real transfer of possession or control takes place.  That's an event that can't be manipulated by contract language.   And so that's the event that really counts.

When FOB does matter

Having said all of that, there are two states that specifically say that the FOB point determines which state has jurisdiction - Tennessee and New Mexico.

Tennessee* isn't really a problem because they have a big loophole.  As long as the seller arranges for the shipment of the goods, and the buyer doesn't pick them up, or arrange for the pickup, Tennessee doesn't claim jurisdiction.  But if the buyer picks up the phone and calls the common carrier and arranges for them to pick up the goods at the dock in Tennessee, then Tennessee does claim that they have jurisdiction.  The easiest way to solve this problem, other than letting the vendor arrange shipment, is to make sure the terms are FOB Destination.  Then the loophole is moot.

New Mexico is different.  They have no loophole.  If you order something FOB Origin from Albuquerque, New Mexico says that the tax belongs to them.  Period.  This goes in the face of all of the things we talk about regarding interstate commerce.   But the reason NM can get away with it is because they don't really have a sales tax.  They have a gross receipts tax that is solely imposed on the seller.  Since the transaction itself isn't being taxed, New Mexico can simply say that they get all of the taxes on anything that is sold in New Mexico, even if it's shipped out of the state.  However, they are fair.  If the terms are FOB Destination, they don't claim jurisdiction.  So, as with Tennessee, the best solution when you're buying from NM is to make sure the terms are FOB Destination.

Please remember that there are some complications if you decide to make all of your purchases FOB Destination.

1.  The vendor may not be interested in doing this.  This is often an easy negotiating point, but sometimes the vendor stands firm. And you have to bring it up if you want the change.  All sales contracts, if they're written by the seller, will state the terms as FOB Origin.  That makes sense, since those terms are best for the vendor.

2.  You may wind up paying the freight if the terms are FOB Origin.  That could be a significant amount of money - even more than the sales tax.  So watch this one.

3.  In some states, the freight may be taxable if the sale is FOB Origin.

Summary

FOB points don't count in determining the state that has jurisdiction.  What matters is where the goods are physically delivered.  Well, that's except for two states: Tennessee and New Mexico.  In those two states, the FOB point should be Destination to make sure the tax is for the delivery state.  And since purchasing usually works to set this up anyway, it may not be a big problem.

*Tennessee Important Notice No. 10/01/2001, 10/01/2001

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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

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FAQ: Why do I have to pay sales tax when I buy a used car?

This question came up on Twitter a couple of days ago.  It's a frequent query, so I thought I'd respond to it here: 

I'm not a "taxes are evil" guy. That said, charging sales tax on a used car seems weird. Hasn't it been sold already?"

The thing to remember is that sales tax is not a one-off tax.  Most people think it is, but it's really not.  Think about the name of the tax.  It's called a "sales" tax.  That means that every time it's sold, sales tax applies.  So when the car is sold new, there's sales tax.  When the dealer sells it used a few years later, there's sales tax.  And when it's sold a few years after that, there's sales tax. 

Obviously, the amount of the tax will go down every time the car is sold, but it's still subject to sales tax every time it's sold.  

It's the same way with other stuff.  Say you buy a painting at a art dealer.  She'll charge you sales tax.  A few years later, you discover it's incredibly valuable and you have an auction house sell it for a million dollars.  They'll have to charge sales tax to whoever buys it.  Even though you already paid sales tax on it.

Because every time there's a sale, there's sales tax.

There's one exception, and that's occasional sales.  But let's keep it simple for now.

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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

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FAQ: The out of state vendor hasn’t charged me sales and use tax, but they should have. How do I make them?

This is a simple question, but it’s surprising how often I get asked.

There are two likely reasons for the out of state vendor not charging you use tax:

1. They don’t know anything about what’s taxable in your state. All they know is that, if that if they’ve shipped it out of their state, they don’t have to worry about it.

2. They don’t collect taxes in your state because they’re not registered. You may think they should be, since you constantly see their sales rep in your office, but you’re not going to win that argument (unless you’re Walmart). And frankly, it’s not really a problem. You just accrue the use taxes and have a nice day. You’re always going to have to accrue some use taxes, so just systematize the process and you’ll be fine.

By the way, if you have “demanded” that the vendor start charging tax, how do you know they’re charging the correct state tax? They may be charging the tax for their state (which is generally wrong). Or they might “say” they’re charging your state’s tax, just to keep you happy. They might just be pocketing the extra billings.

Hey, it happens. If you’re going to demand that the vendor charge tax, and they do, make them give a copy of their permit for your state to make sure they really are doing it right.

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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

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FAQ: Nexus and Independent Contractors

I was asked this question yesterday, and I realized that it was one of them there frequently asked questions.

"In one example [in a webinars] you discussed how having an employee (even transient) within a state could cause nexus. Does the same apply to independent contractors? We have some sales representatives that are not employees, but who do call on and sell to our customers. Does this vary state to state?"

Yes, the same rule applies to contractors (non-employees). I've not seen any rulings that differentiated between employees and contractors. The real question is what the person is doing for you. If they are representing you and helping you get or close business in the state, that's enough. And no, it does not seem to vary from state to state. As I said, every state seems to treat contractors the same as employees.

One of the reasons for this, I think, is that many employers probably misclassify their contractors anyway. I used to teach a course on this and the rules are a lot stricter than you think. Most of the people that you consider contractors would probably be reclassified as employees if the right people audited you. Thankfully, the sales tax auditor doesn't care about this one. They treat contractors and employees the same when it comes to nexus.

By the way, the contractor doesn't even have to be an individual. If you've got manufacturers rep firms representing you, that can create the same problem.

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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

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Freight Charges

This article was originally written in August of 2007. I recently reviewed it and it still is correct!!! But I thought I'd add a few additional items.The taxability of freight or delivery charges is one of the most frequently asked questions. And the rules vary all over the place. In more than half the states, freight charges are taxable. This means that you would add the charges to the merchandise total in determining the basis for the tax calculation.

This means that, if the sale is taxable, then the freight will be taxable in those states. But if the sale is not taxable (eg. manufacturing equipment or resale), freight isn't taxable.

Here are some additional points. Remember though, that whether or not freight is taxable is only a question if the sale is taxable.

1. If the seller is actually separately showing his inbound freight (the freight the vendor pays to acquire the property), then that charge is usually included in the basis - it's taxable. For freight charges to be non-taxable, they can only be for shipments from the seller to the buyer.

2. In states where shipping charges are NOT included in the basis, there are usually restrictions. Here's a laundry list of the possible requirements. Note that these are highly variable:

• Is the freight charge separately stated? This is universal. For shipping charges to be non-taxable, they must be separately stated on the invoice.
• If the sale terms are FOB origin, then the freight isn't taxable. Does the ownership transfer at the shipping point?
• The seller can't make a profit on the delivery charge: the charge better be pretty close to what the carrier actually charged the vendor. If the seller's freight charge is more than the freight he paid, the freight charge is taxable.
• Did the seller ship via common carrier or in his own vehicle?
• Does the buyer have the option of arranging their own shipment or going and picking up the goods at the seller location?
• Was the freight charge separately agreed upon? In some states, having it be on a separate line on an order form is enough. In other states, it must be a separate physical contract. In other states, it depends on the precise wording of the agreement. If there's any restriction that is a highly gray area, this is the one.

4. Shipping charges billed directly to the buyer by a common carrier are generally not taxable (these are "collect" charges). The buyer owes no use tax on those charges.

Please remember that this is a taxing policy that is highly variable from state to state. You need to research this carefully.

Then there are those "easy" states who just say "Is the sale taxable? Then the freight is taxable." I love those states.

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The Sales Tax Guy http://salestaxguy.blogspot.com
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It's spring - when thoughts turn to garage sales (and sales tax)

Do I have to worry about charging sales tax on my garage sale?

If you live in most states, and you only have one sale a year, no.

The reason is that you're making an occasional sale (aka a casual sale). These types of sales are not taxable for the simple reason that they're not taxable retail sales. You're not a retailer. As long as you're not a retailer in the eyes of the state where you're conducting the sale, then you don't have to worry about charging (and remitting) sales tax.

Why aren't you a retailer?

1. You're only doing this once a year. More than that and some states start paying attention.

2. Your signage consists of a crummy piece of poster board that your kid made and hung with duct tape on the stop sign at the corner. And you've got a couple of balloons in the yard. The balloons don't even have helium - cheapskate. No self-respecting retailer would do that.

3. Your competitors don't know about you, other than that jerk down the street who also decided to have HIS garage sale this weekend. Do the real "antique" dealers in the area care about you? No, of course not.

4. There's no real business associated with this event. You're doing it in your front yard. And we're not talking about your son's lawn mowing business.

4. You didn't buy all that junk to resell. You bought it to use. I'm not talking about whether or not you did use the stuff. You intended to use it.

So you're off the hook. In most states, you don't have to charge sales tax.

What about anything you buy at a garage sale? Do you owe use tax?

Again, generally no. There is no taxable retail sale because there is no retailer. If there is no taxable retail sale, then there's no event to charge sales tax on, and there's no event that use tax covers either. So no use tax is owed by the buyer.

Note, if you're in Colorado, forget about everything I just said. In fact, just ignore this whole article. Sorry.

And if someone is selling a car, truck, boat or snowmobile at their garage sale, the rules are different.

For the rest of you, yay! Have fun. And call me if you see anything that looks like it'll do well on Antiques Roadshow and is waaayyyy under-priced.

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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. The rules do vary from state to state.

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

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So, what state do I worry about?

A variation on this question came up in a telephone conversation yesterday. And it comes up so often, that I apologize to all of you for not addressing it sooner.

Here's the scenario:

Your company is headquartered in Austin, Texas.

The customer is headquartered in Albany, New York.

The contractor, who has been hired by the customer, orders the goods from you while sitting in their field office in Jacksonville, Florida.

You ship the goods from your manufacturing plant in St. Paul, Minnesota to the job site in Folkston, Georgia.

The contractor is headquartered in Redding, California.

The contractor's AP department is in Helena, Montana.

Which state gets the sales tax or use tax?

Here's a hint.

It isn't New York, Texas or California. The location of the corporate headquarters is so irrelevant, it isn't funny.

It's not where it was ordered from. Again, not relevant.

A very common misconception is that the billing address is somehow important. It isn't. AP folks often screw this up and base their assumptions on the taxing rules in their state. And since Montana has no sales tax, that must mean that everything the contractor buys is not taxable. Right? Wrong.

Another common mistake is to tax the transaction based on where it was shipped from. Wrong. The ship from state is irrelevant.

By process of elimination, we've narrowed it down to one state - Georgia. And that is the state that has jurisdiction. Because they are the state where the goods were received and taken control of by the buyer. And since it was an interstate sale, there can't be any sales tax. So use tax is owed to Georgia by the buyer.


Unless...

...you have nexus in Georgia. Maybe, for example, you have an engineer who regularly visits job sites in Georgia to help spec out projects and assist with installations. Then you'll have to bill the Georgia use tax on the invoice and remit the money to Georgia. Even though you're in Texas.

But no matter who has to pay the tax, the only state that gets the tax is Georgia. Because Georgia is where the delivery occurred.

So the next time you're dealing with a transaction involving multiple states, it's really pretty easy to figure out the state you have to be concerned about. Just ask yourself, where was the delivery point?

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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.

Here's information on our upcoming seminars and webinars. Don't forget, we just announced our February to April schedule!
http://www.salestax-usetax.com/

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Watch Out, Construction Contractors!

There was a case recently in Minnesota. You can read the opinion here, if you dare. Section I is what I'm going to talk about.

Remember the typical way that contractors are handled in most states: they pay sales or use tax on their building materials but do not charge their customers tax. What they sell (construction contracts) isn't taxable.

The intention of the law is that the contractor, when preparing his bid, factors in his material costs, which include the sales tax. So the contractor really looses no money. The tax gets passed on to the customer, buried in the material costs.

But in the above situation, the contractor got busted. He didn't bury the tax in the material cost. Instead, he showed it separately on his billings and apparently in a pretty obvious way. It was so obvious, (and I'm reading between the lines a little) that his customers (and the auditor) could easily assume that he was billing for the sales tax.

Minnesota law states that, if you bill someone for sales tax, you owe that money to the state, even if the billing was incorrect or illegal. Similar laws exist in many of the states.

This guy had billed his customers sales tax by showing it on the invoice. Minnesota held out their hand and said, "pay up." He argued that he had already paid the tax to his building materials vendors. They said, "Don't care. You collected sales tax. Pay it to us." He lost.

I'm often asked about this by contractors. "My customer wants to see my costs broken out separately on the invoice. Can I show the sales tax I paid?"

The answer is be very, very careful. You don't want it to look, in any way, like you're charging them sales tax. Frankly, the best way is just to show the material cost, with the tax as part of the number. Heck it's calculated for you - it's at the bottom of your materials invoices. But if you show the tax on the invoice, even if you're careful to say that it's merely one of all the costs you've paid for the materials, you might get an over-zealous auditor. Like me.

Check the law in your state to see how much flexibility you have. And write your contracts so that you don't have to break out the sales tax on the your invoices.

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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.

Here's information on our upcoming seminars and webinars. Don't forget, we just announced our February to April schedule!
http://www.salestax-usetax.com/

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Direct Pay Permits

This is a compilation and enhancement of several previous articles on direct pay permits.

First of all, what is a "Direct Pay Certificate?"

It's an exemption certificate that the buyer hands to the seller. It relieves the seller of the responsibility of collecting the sales and use tax from that particular customer. This is because the buyer has made a deal to pay the use tax directly to the state. They have gotten a direct pay permit from the state.

Why would these certificates exist? Larger organizations (eg. manufacturers, contractors and utilities) find them helpful because they buy lots of different things, some exempt and some taxable. They have very complex operations, and it may be impractical to have the seller collect the tax. In some cases, the buyer may not even know if a purchase is taxable at the time of the billing. So this makes it easier for both parties.

The customer buys pretty much everything without the vendors having to charge sales tax. The direct pay permit holder then self-assesses the use tax. And the vendors have one less customer to worry about.

Sometimes the purchasing and operational issues are so difficult that the user may even come up with a calculation. A manufacturer might say, "We bought $400,000 worth of shop supplies last month. Our studies indicate that 40% of those supplies become ingredients in the product and the rest are used in our operations. So 60% of the $400,000 is taxable, and that's what we accrue and pay use taxes on."

It's not easy to arrange that kind of allocation if the tax is being collected by the seller. How are they only going to bill for 60% of the tax? On the other hand, all the buyer has to do is make a journal entry, and the problem is solved.

What's in it for the state? First of all, not all states grant direct pay permits, so don't assume you can just apply for one. But the benefit for the state is that the audits are less detailed. Since the user comes up with calculations and ratios as described above, the auditor theoretically has to grind through fewer transactions. And I think another reason is that the state may actually get overpaid! See the discussion below.

Now you may think this is a pretty good idea. But there are catches:

1. States don't like to hand direct pay permits out like Skittles. They often have volume requirements and expect to see adequate accounting systems in place. If you don't have professional accounting management, and you use QuickBooks, you're not going to be able to get a permit.

2. Don't think of this as a way of avoiding/evading tax or getting to hold onto the tax money a little longer. You're going to probably have to pay your use taxes monthly, and you can pretty much count on getting audited every few years. Because the state is now relying solely on your company to self-assess (and we know how reliable most of us are at that), the state is going to be much more likely to audit you. Regularly. Frequently. Set up an office just for the auditors, if you know what I mean.

3. Tied in with number 2, you're likely to get audited before they even give you the permit, just to see if you have those systems in place to self-assess properly. And they're going to want to look at those studies you're using for your calculations to make sure you're doing it right.

4. Beware of mixing up which vendors you pay sales tax and which ones you don't (by giving them the direct pay certificate). I've talked with taxpayers who were not consistent in using their certificate. This resulted in paying sales tax on purchases and then turning around and self-assessing tax on the same purchase. Keep very close track of who you give a direct pay certificate to and who you don't.

5. One of the things I've talked about is that you should be careful about overpaying your taxes because you mistakenly believe something is taxable. A clue to this is when you think something is taxable, and the vendor hasn't charged you tax. A phone call is in order. But if you have a direct pay permit, your vendors aren't going to tax you at all. You'll now be relying solely on your own understanding of the tax laws, and you won't be getting the reality check from your vendors. You may not realize it, but there is some education that is happening because of the give and take with your vendors. Get a direct pay permit and you're on your own.

Whether or not you get a direct pay permit is simply a question of how much easier it would be to self-assess versus the risks of overpayment and audits. I'd strongly recommend you sit down with a local expert to see what they're recommendations are based on your specific situation. And if that alternative seems too costly, then you probably shouldn't get a direct pay permit.

Sales Tax Guy

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Do I have to pay use taxes on my inventory?

Whenever I start talking about use taxes, the question almost always comes up about whether someone needs to pay use taxes on their inventory.

We need to make sure we know what inventory means. Here are some questions:

1. Did you buy it with the intention of reselling it?
2. Have you changed your mind about that?
3. Are you using it as a demo unit?
4. Have you given it to someone to use but you're still holding it on the books as inventory?
5. If you're using it as a display item, do you intend to sell it for pretty close to the original price?
   

If you answered "yes" to the first question and no to the rest, then no matter how long you hold the inventory, you shouldn't owe use tax on it. You bought it for resale and that's one of the most fundamental exemptions for sales and use taxes. Even if you move it from state to state, you still owe no use tax.

Unfortunately, there are other taxes which may apply - such as personal property taxes (in some states).

But with regard to sales and use taxes, you should be off the hook. Just watch your answers to those five questions. Because if you answer wrong, then you've used the inventory and you will owe use tax.

More about withdrawals from inventory here.

Sales Tax Guy

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