Whenever the conversation goes this way, I cringe

Frequently, someone will say to me, either in a seminar or in a comment or email “we’re a manufacturer so we’re exempt from sales and use taxes".

If I’m feeling frisky, I’ll usually interrupt them and say, "No you’re not."

They’ll be nonplussed and say, "Oh yes, we’re a manufacturer. We make doo dads."

"No, you’re not exempt because you’re a manufacturer. You’re exempt on some of your purchases because you use them in manufacturing. All of your purchases aren't exempt. And your sales aren’t exempt."

"Well, yeah, OK. If we buy a copier for the office, it's taxable. But everything in the plant is exempt. And we don't have to charge tax on what we sell."

"I'm guessing you're not charging tax on what you sell because you're selling it to others who are buying it for resale. It's got nothing to do with the fact that you're a manufacturer. Hopefully your'e getting resale certificates. And that bit about 'everything in the plant is exempt' is wrong."

Arrrrgggghhhhh! And then I cringe.

Not understanding these exemptions is a dangerous trap to fall into. Manufacturers, in many states, can buy materials and equipment tax free if the purchase will be directly used in the manufacturing process. The rules vary enormously by state, from California who gives virtually no exemptions, to Pennsylvania who is pretty generous. But there aren't any states that just say, "You're a manufacturer so you're exempt."

The only types of organizations that can even begin to make a claim that they're "exempt" are non-profits and government agencies. But even in those situations, the exemption is not total. There are usually restrictions on how they use their purchases and what they can sell tax free. And some states don't even have the exemptions.

Frankly, the only organization that can truly make the claim that they're exempt is the federal government.

So please remember that it's your specific types of sales, purchases, and use that are exempt. The rules are restrictive and they vary from state to state. So don't go around saying you're exempt. You're not.

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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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Is the Government Exempt from Sales Tax?

Short answer...no.

But, it depends on the state.

In most states, sales to federal, state and local governments are exempt from tax. But there are often restrictions, such as:

1. the purchase must be made directly by the agency, on the agency's PO, received by the agency and paid by the agency, or
2. the purchase must be used by the agency in a way that is within its normal scope of activity.

Variations on item 1 are pretty common; item 2 are less so.

But in some states, sales to state and local governments are taxable! And in one state, sales to the federal government are taxable.

Here are the states where sales to state and local governments are taxable

Arizona (In addition, sales to the federal government are also taxable at 50% of the basis)

Arkansas

California

Hawaii

Minnesota

North Carolina (the state is exempt, but local jurisdictions pay tax and get an annual refund)

South Carolina

Washington

Remember, there are variations. Every state listed will have some exceptions that allow certain agencies to buy tax-free. And many states that aren't on the list will impose sales tax on certain oddball state agencies. Plus, remember what I've always said about information presented as tables and lists.

The point here is to wake you up to the fact that sales to government agencies are not automatically exempt. Most vendors in most states don't realize this. If I'm in Texas, and I'm selling to someone at the capitol in Arkansas, it will be a shock to me when I find out I should have charged them Arkansas tax.

"Hey, they're the state! What are you talking about? That's silly."

I'm trying to avoid your saying that.

And if you live in one of the states I've listed above, and they're still having a budget crisis, you have to ask what they're doing with all that money?

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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/

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

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The Four Loopholes (Loophole Number 4)

There are four loopholes which created the need for use tax. Over a short period of time after inventing sales tax, the states started discovering that there were some situations where they weren't able to get the sales tax revenue they were expecting. We'll use this series of posts to discuss each one.

The state can't "reach" the seller - they have no jurisdiction over the seller

In other words, the state can't get the seller to collect the sales tax from the buyer, so they invented use tax to get it from the buyer instead.

The most common example of this is our good friend Amazon.com or, for that matter, any other mail order or online retailer.

If you're in most states, when you buy from Amazon.com, they don't have to charge you tax. The short answer is that they aren't in your state. There are no stores, warehouses, offices, facilities, delivery trucks, representatives, etc. In order for a state to impose their laws on a potential taxpayer, that taxpayer must have nexus in the state - a physical presence.

Amazon.com doesn't have a physical presence or nexus in most states. According to this page on Amazon.com's web site, they do have nexus in these states (WA, ND, KS, and KY) and charge tax. They also charge tax in NY, but that's a weird situation. Someday, I'll write an article about it, but don't hold your breath.

So Amazon.com doesn't have to obey most state laws and doesn't have to charge their buyers tax. So what is, say, Alabama supposed to do? They want that tax revenue. Mail order and online sales are a big part of the economy, and they can't simply write off that segment.

Alabama and all of the other states therefore close the loophole by imposing a use tax on the buyer. That use tax doesn't get paid very often, particularly by individuals. But for businesses, this is the primary objective of the audit that will hit you at some point. They will want to see if you've been paying your use taxes. Hopefully, regular readers of this blog are.

Another related way this loophole works are sales by the Federal government. States generally can't make the Feds collect sales tax on their sales. But many states will say that, if the buyer gets something from the Federal government, and it wasn't taxed, the buyer owes use tax. This is about the only other example of a situation where the state can't "reach" the seller.

The fourth loophole for why states have a use tax is to plug situations where they can't make the seller collect the tax.

Sales Tax Guy

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Picture note: I wanted to illustrated interstate sales and I don't have any pictures of semi-trucks. But this is one of my most popular train pictures. Enjoy it on Flickr here if you want to see it larger.

Selling to the Guv?

From a seminar last week:

A company sold a federal agency a LOT of equipment. The equipment was delivered directly to the federal agency although it was paid for by the subcontractor. The equipment dealer assumed that the sale was to the feds and therefore wasn't taxable. They were wrong.

Sales to our beloved federal government are dicey. In this situation, the title and possession passed directly to the federal government. A reasonable person would have thought the sale would be exempt from tax. However, many states say that what counts isn't who the product is delivered to, or even who takes title. In those states, the real test is who paid for the goods. If the check is printed by the US Treasury, then the feds bought it. If the check was printed by the contractor, then the contractor bought it.

The moral of the story is that if you sell to government agencies, you need to make sure of three things before you even bid.

1. Is the sale exempt in that state? There's at least one state where sales to the US government are taxable.

2. Does the state tax state and local government sales differently from federal sales?

3. How does the state handle the tax when a subcontractor is involved? It varies all the way from, if the contractor is acting as an official agent of the feds, to who takes title, to who pays the check.

In this particular real situation, the company was assessed over $100,000 in taxes that they should have charged the contractor. They were eventually able to recover it from the contractor, but it took time and a lot of effort.

Be careful and do it right.

Sales Tax Guy
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photo note: I had to come up with a representation for the federal government...I thought this would do nicely. You can see more of the picture here.