I hate to make you cry...but....

I was doing a seminar in southern state a few years ago.  And there was a young woman in the class who had just been handed the sales tax responsibilities for her company.  She was in AP and, I'm guessing, just a few years out of school.

She was pretty sharp and stayed with me for the whole day.  But at the end, when I started talking about nexus, she looked a little green.  After the class, she came up to me.

Nice woman: "Uh, we sell fishing tackle* and we have only been filing in our state, no others."

Mean me: "Uh, huh - then what you sell is generally going to be taxable"

Nice woman: "Right.  It certainly is in our state.  Uh, we have independent sales reps that are all over the country.  Do we have nexus in all of those states? They're independent contractors if that helps."

Mean me: "Probably in most of them.  And the fact that they're independent contractors generally doesn't make any difference.  Depending on the state, one or two visits a year will be enough to do it.  In other states, they're a little more laid back.  How often to your people visit the states?"

Nice woman: "Oh, way more than a few times a year.  Every state has outdoor shows and fishing tournaments.  Our people are at all of them."

Mean me: "I hate to say it, but I think you've got nexus in pretty much every state that has a sales tax.  All of them."

Nice woman: "But we only sell off our website."

Mean me: "Doesn't make any difference. Sorry."

At this point in time, tears started flowing.  I've been doing these seminars for over a decade and I have never made someone cry.  I can only imagine how terrified she was.  She was going to have to tell her boss that they have to go from filing a return in just one state, to filing returns in 45 more.  Ugh.

I spent about 45 minutes with her after the class talking about her options, giving her names of consultants that could help, and generally how to go about dealing with this.  Essentially, I was patting her on the shoulder and saying "there there."  I truly ruined her day.  And I never heard from her again.

Don't let nexus ruin your day.  If you ship to multiple states, make sure of your nexus status NOW.  Because we don't want your staff crying.

There's no crying in Sales Tax.

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*Fishing tackle was not the product. I'm substituting here to protect they're identity. And I used fishing tackle because I have LOTS of fishing pictures.

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.

Great Article: Can Sales Taxes Bankrupt a Company?

These articles should scare the hell out of you.  It's a true sales tax horror story. The first is from Bellatoris Consulting, LLC who linked to the far nastier story from the Portland Business Journal that tells the tale of a mattress retailer in Portland, Oregon who got tangled up with nexus issues in Washington.  I've always figured that states preferred to avoid bankrupting businesses.  It's bad policy to put voters out of work.  But this is a business in Oregon.  So what the heck does Washington care?

Read the article and be scared.  Particularly if a significant amount of your business comes from the state just across the river.   Enjoy the article.  

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This link is part of a series called "Excellent articles that I wish I had written."  The short name is "Great Articles." 

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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Great Article: True, Scary, Funny Tax Stories*

from Avalara

I love horror stories.  And these are stories from the "other side" - where the auditors' souls reside.  Boo!

Happy Halloween

This link is part of a series called "Excellent articles that I wish I had written."  The short name is "Great Articles."  Enjoy.

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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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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

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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.

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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.

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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

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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.
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Illustrations and Parables: Don't overcharge the tax.

This article is based on a recent story about a retailer who kinda screwed things up. I’m not going to identify them, or give you a link to the original story because I’m going to severely mock them and I don’t need no trouble with no lawyers. Consider this fiction “inspired” by actual events.

1. The store has been overcharging their customers for nine months by 1 percentage point. The correct rate was 7% and the store was charging 8%. No mockery here…this stuff happens.

2. This is not just one store. There are several other stores in the chain. So I’d assume they have competent accounting folks. This, as it turns out, is a big assumption.

3. The extra money wasn’t paid to the state. The error was at the cash register, but they were remitting tax to the state at the correct rate. So they were holding on to all that overcharged tax. The owner wasn’t sure how much was over-collected, but estimated it was a couple of thousand dollars. Wasn’t sure? Does he have accountants, or monkeys with pencils?

4. A customer finally noticed the error (after nine months) and called the store. The assistant manager said there was no error, because the store was in a special taxing district; and that’s why the rate was a point higher than expected.

5. The customer then called the city and found out there was no special taxing district. In other words, the assistant manager was, er…wrong. What a surprise.

6. The customer then called the store again and was told, again, that the store had not made a mistake. Amazing how much trouble those assistant managers can get you in. They’re OK for checking restrooms and time cards, but you really should never let them near the phone. And if a customer calls about the same issue twice, maybe the problem should get escalated. I’ve never done much customer service training, but that seems like an obvious idea.

7. The customer called the local newspaper and they called the store. This time the assistant manager awoke from his stupor and got the owner involved. Within an hour, the owner called the paper, admitted they had made a mistake, had reprogrammed the cash registers, and was pretty embarrassed about it. He guessed that the mistake was when the last rate change had occurred (which makes sense). Amazing what a call to the local media will do.

8. The customer (and me for that matter) can’t understand why it took nine months for anyone to notice this. It seems like there was a general ledger account that had a whole lot of extra cash sitting in it. Heck, I wasn’t the world’s most detailed-oriented controller, but even I would notice that.

9. The owner said he’d issue refunds to anyone with receipts (who keeps those for very long?) or who is signed up for the store’s rewards program, which tracks purchases. But the rest of their customers…there shall be no refunds for them.

10. The owner then said he’d donate the remainder to charity. But the state said, “Not so fast, buckaroo.” The law (which is pretty typical in most states) says that, if too much tax is collected, it must be turned over to the state. The state did say that they’ll refund him the money after he refunds it to the customers; if he provides proper documentation. But the state gets the money first, and the excess stays with the state. Here’s a tip for the owner…before you start babbling to the media about a topic (sales tax) for which you obviously don’t have a clue, you might want to do some research. Or call those people with the letters after the end of their names.

OK, enough with the mockery. Here are three pieces of advice for those of you who collect sales and use tax from your customers. And these will be getting added to our best practices webinar as well.

1. Balance!
Every month, someone in accounting should be reconciling the amount of taxes you collect to the amount of taxes you pay. This should be one, relatively easy part of the normal sales tax return preparation. Unless you’re really sloppy, I can’t imagine that this would take more than a few minutes.

There, was that hard? But doing this will avoid these kinds of embarrassing and tough to solve mistakes that will really tick off your customers. And you’ll avoid the press calling your boss. We don’t want that.

2. Double check when the rates change!
Whenever there is a rate change, expect that this kind of thing will happen. So check your sales for the first few days or weeks to make sure that every system (or sales person’s price list, manual, etc.) has been updated with the correct rate change. If you overcollect the tax, refund it immediately. Usually if you do it within the same month, the state doesn’t care.

3. Escalate tax issues quickly
Don’t let non-financial personnel make decisions or talk to customers about sales and use tax. They really don’t know what they’re talking about. And you probably want to get a sales tax pro involved quickly.

Remember, this is not an uncommon occurrence. Don’t let it happen 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 (I’m thinking that’s the assistant manager) is hosted on Flickr. If you'd like to see more, click on the photo.

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Illustrations and Parables: Intercorporate Transactions

Businesses and organizations form corporations for a variety of reasons. The picture below shows a corporate shell around a variety of business activities.



There are excellent reasons for forming corporations:

1. There are obviously tax benefits.

2. Forming a corporation unifies and consolidates your business activities into one unit. That unit can then act as one, be sued, sue, purchase insurance as a unit, etc.

3. Corporations also limit the potential liability of the owners and facilitate easy changes in ownership (buying and selling stock,offering stock options, etc.).

When there is a transfer of tangible personal property (and certain taxable services) within that corporation (see picture below), there is no sales and use tax impact. Merely transferring such things within your company creates no taxable event. The might be some additional use tax owed if you move something from a low tax jurisdiction to a higher one, but that’s about it.



The problem occurs when you have subsidiary corporations within a larger corporation (see picture below). Those are all corporations that are owned, either partially or fully, by the parent. Now, when there is a transfer from one division to another, most states will consider that a sale. I repeat: a sale! That means that the transfer that you thought was just a journal entry on the books may become a taxable sale that you weren’t even aware of.



Companies form these subsidiary corporations for all of the same reasons that regular corporations are formed. And there’s one more reason – acquisitions.

Here’s the horror story:

Several years ago, a guy in, we’ll say, California invented a new machine. It was extremely expensive and it was new technology, so he was having trouble selling it. He finally got some venture capital together, and he started buying up small businesses all over the state and forcing the acquired companies to buy and use the machine. Since he wasn’t buying these businesses to be a tycoon, he left the previous owners in place as general managers, kept the local company names, and left the acquired corporations alone. All he was really trying to do was get his machine used.

He was successful. The machine worked wonderfully, did what it was supposed to do, and made the local businesses, as well as the corporate parent, a great pile of money. Yay!

The local divisions started moving the machines around. Sometimes a local office wouldn’t need one for six months, but the guy in the next county needed four of them for a year. So the machines got transferred from one division to another.

Then the revenuers came and all was lost:

1. When the inventor sold the machines to the local businesses, who, if you’ll remember, were separate corporations, he never charged sales tax. He, and his tax people, assumed that since they were all part of the larger parent corporation, sales tax wouldn’t be a problem.

2. When they transferred the machines from one subsidiary corporation to another, the state ruled that those transfers looked like sales. Which, obviously, nobody had thought of.

The assessment was for about $10,000,000.

I’ll just wait here for a second while you let that number sink in.



Yes, THAT bad.

When the company and their legal representation sat down with the state to talk, the state lawyers were confused. They didn’t know the lawyer across the table. Usually, at these conferences, it’s a sales tax lawyer and everyone pretty much knows everyone else. Who was this guy?

It turns out the owner had brought his bankruptcy attorney. They bluntly told the state that if they went through with the assessment, the company would have to go out of business. 

The variations that you'll see among the states, and that might help if you're in a similar situation include:

1.  Services between closely held companies may not be taxable in states where those services usually are taxable - leasing for example. In the above situation, if they had structured those transfers as leases, there may not have been any liability at all. And if the state didn't grant the leasing exemption, the tax liability would have at least been much less since it would only have been on the rental, not the cost of the machine every time it was moved.

2. States will frequently leave loopholes if the transaction between the two corporations doesn’t “look” like a traditional transaction – no exchange of consideration, the transaction recorded by a journal entry, etc. This probably would not have worked in this horror story since the owner had done nothing to integrate the accounting of the local corporations into the larger parent.  Remember, he left the locals alone.  All they had to do was buy and use his machines.


3. If the transaction meets the test of an occasional sale, the transaction may be exempt. That’s assuming you’re in a state where businesses actually can engage in occasional sales. In this situation, we're obviously not talking about occasional sales.

So the question is, are YOU making sales to your divisions? Are you transferring goods and taxable services from one unit of your corporate family to another part? If so, consider this as a warning…you better figure out what you’re doing. Look at your inter-company billing. Look at those transfer accounts. Talk to a good, local sales tax professional.

Some of the biggest assessments I've ever seen have been in this area. You've been warned.

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

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Illustrations and Parables: Bulk Sales

I was chatting with an old friend, and he was telling me a sales tax horror story that deserves repeating here. It involves bulk sales (ie. the sale of a business as a whole - lock, stock and barrel, as it were).

Don (not his real name) wanted to expand his computer business. He was based in Illinois, and heard about Arnie, who was in New York. Arnie said he wanted to retire and cash out. Don and Arnie both got their attorneys involved, and Don had his CPA thoroughly review Arnie's books. Don thought he had been very careful. And, because Don was buying the entire business including the inventory, fixtures, equipment, customer list and even keeping the employees on, it was a bulk sale. After the sale was closed, Arnie retired to his new boat in the south Pacific.

A short time after the sale, the New York Department of Taxation and Finance showed up to do a sales tax audit. And they assessed Don, the new owner, for $1,550,000 in sales taxes, almost all of which applied to sales that happened long before he had even heard of Arnie.

You see, Arnie had not been collecting tax on his sales of computer services. Hardware? Yeah, he was collecting on that. But not on the repair labor, which is taxable in New York. And Don, who was from Illinois where those services aren't taxable, didn't even think of this when he took over the business. He continued to make the same mistakes that Arnie had made.

Because Don had bought Arnie's business as a bulk sale, he bought everything from Arnie including any sales tax liability that Arnie had acquired. Don had to write a check to the state of New York that was more than half of the check that he had written to Arnie.

When you buy a business, and it looks like a bulk sale, the state will generally hold the new owner responsible for any sales and use tax debt from the previous owner. Even if the previous owner didn't know about it.

The way to avoid this problem varies from state to state. But it usually involves notifying the state revenuers that the business is about to be sold. The state then has a limited amount of time to either notify the parties that there is an outstanding liability, do an audit, or give the buyer a waiver. Remember, the process varies enormously, but that's the outline.

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How many ways did this get fouled up?

1. I don't know a lot about business sales, but there's usually not a complete cash out. The new owner holds some of the money back just for this kind of contingency. Don didn't do that.

2. Don and the attorneys and CPA's didn't know about the bulk sale rule. Now they do.

3. Don and the attorneys and CPA's didn't know that repair services are taxable in New York. Now they do.

4. And of course, Don didn't call his old friend Jim. But it never occurred to him because...

5. ...Don didn't know what he didn't know.

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The obvious question is did Don try to sue Arnie? Yep. But the former owner was in the south Pacific on a boat and not terribly accessible to the courts of New York.

So Don was, how to say this? Screwed. The business closed about six months later. With that gigantic audit assessment, Don didn't have enough cash flow to keep it going.

Truly a horror 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.

Other relevant key words: mergers and acquisitions

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Illustrations and Parables: The Steel Mill

I’ve told this story for years in my seminars, so if you’ve heard this one, I'm sorry. Just move along, nothing to see here.

A guy in the seminar was the controller for a steel mill – a BIG steel mill. They take raw iron ore and turn it into steel ingots. Since there’s not a big consumer demand for big chunks of steel, everything they sell is to other processors – for resale.

“We get resale certificates from all of our customers so we’re good there. Every month, we report something like $50,000,000 in sales on our return [it’s a BIG steel mill] and then, on the next line, $50,000,000 in exempt sales."

“We still send the state a fair amount of money every month, but it’s use tax on our purchases.”

One day, the sales tax auditor showed up. After an initial meeting where the controller and auditor seemed to hit it off, he showed the auditor to the usual conference room, gave him some starting audit fodder, and then left him to it.

After lunch, the auditor stopped by the controller’s office. “I think I gotcha,” were his opening words.

“What? You haven’t been here long enough to have ‘gotten us;’ you’ve only been at it for an hour or so.”

“Ah, but I had lunch in your cafeteria. Nice one and the food's good - cheap too.”

“Well, we’re out here in the sticks, so we’ve got to provide all those guys with some decent food. But what do you mean?”

The auditor inhaled, “They charged me $5.00 for the lunch. I also chatted with the manager there, and he said they’re all employees of the mill…you haven’t hired a management company to run the cafeteria.”

“Yeah…” the controller responded suspiciously.

“You are operating a restaurant. You’re making retail sales to your employees, albeit at a pretty reasonable amount. Now I just looked at your returns for the last few years, and you have NEVER reported a taxable sale. Not one dollar. Which makes sense given your business model. But you HAVE been making retail sales – out of that restaurant you’ve got downstairs. Where are you reporting those sales?”

"Uh..."

The final assessment was in the neighborhood of $200,000.

This amount wasn't catastrophic for a big company. But it certainly was embarrassing for that controller and not a particularly career-enhancing situation. You need to look at EVERY class of transaction and determine if it’s taxable or not taxable. This company didn’t even THINK of the cafeteria – they’re a steel mill! But over time, those $5.00 meals for three shifts add up.

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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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A Horrible Combination of Nexus and Unknown Taxable Sales!

The seller, in Indiana, sells complex machinery that often needs to be repaired and maintained.

Their customer in Wisconsin, calls with a problem - repair is needed.

Rather than maintain their own network of repair technicians, the seller contracts with local repair services to go and work on the equipment. So they call the Repair Service in Wisconsin who goes and repairs the machine in Wisconsin.

Repair Service has fixed the machine and sends the invoice shown below with sales tax on both the parts and labor to the seller in Indiana. Repair labor is taxable in Wisconsin.



Seller HQ will send this invoice to Customer Location. Note that they've added some margin and have NOT billed any sales tax.



To summarize:

1. Customer Location calls Seller HQ to get machine fixed.
2. Seller HQ calls Repair Service and assigns them the job.
3. Repair Service fixes the machine, making a taxable sale.
4. Repair Service bills Seller HQ charging sales tax.
5. Seller HQ bills Customer Location and does not charge sales tax.



I asked Seller HQ why they weren't charging Customer Location tax. She said that they didn't have nexus in Wisconsin and they had already paid tax to Repair Service.

"Ah, but you DO have nexus. Repair Service is acting for you and contracting for you to make repairs. Now if they were billing the customer directly, it might not be a problem. But they're billing you and then you're billing the customer. As far as the customer is concerned, Seller HQ is the seller of the repair service. It's a no-brainer. You have nexus in Wisconsin."

"Oh. But since Repair Service already charged me tax, I'm OK, right?"

"Nope. What you should have done is given them a resale certificate and then billed Customer Location the tax. You see, while Wisconsin got the sales tax revenue from Repair Service, they have not gotten the sales tax on the full sale to Customer Location, including your mark up."

"Are you sure?"

"Nope, I'm never sure. But there's another problem. When Customer Location gets audited by Wisconsin, the only invoice they're going to have is the one from you showing no tax was collected. Wisconsin will then make Customer Location pay the use tax, if they haven't already. Which means you've shafted your customer because you've already paid the tax.

"OK, so I'm supposed to give Repair Service a resale certificate and then bill Customer Location for the sales tax on my bill to them?"

"Yep. And that also means you're going to have to register as a seller in Wisconsin so that you have a resale certificate to give to Repair Service and so you can pay the taxes to Wisconsin."

"Uh, is this pretty much the way it works all over the country?"

"Yes. All of the 46 states that have a sales tax will want the tax, at least on the parts. And about half of them will also want the tax on the labor component too."

"Oh dear."

"Yeah.....?"

"We do this all over the US. That means we have to start doing this in 45 more states."

"Oops. You might want to call a sales tax consultant."

About once a week, when I do seminars, I come across a person who has nexus in every state. And they didn't know they were making taxable sales in any of those states.

The things to learn here:

1. If you sell all over the country, then you may have nexus all over the country if you have people representing you and acting for you. They don't have to be sales reps or employees. They could be independent contractors repairing your equipment for you. And if they're billing you and you're billing the customer, it's even worse.

2. You need to determine the taxability of what you sell in any state where you have nexus. If you have nexus in 20 states, you need to check 20 states. If you've got nexus all over the country, you should hire an assistant because your work load just increased.

3. It's usually helpful to look at the transaction from the customer's perspective. What is their AP department going to do with the invoice that they get from you? And what is the auditor going to do when they see the invoice? In this situation, Seller HQ would have immediately spotted the problem if they'd ask themselves those two questions.

---

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.
http://www.salestax-usetax.com/

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Illustrations and Parables: Garbage Cans

Sorry I haven't posted in a while. I was on the road last week and the week before was preparing for the road trip. And this week is, well, I'm just exhausted. But I wanted to let you know I was still alive.

Anyway, the road trip was productive, I picked up a couple of good stories for you.

One of the women in my class owned a garbage-hauling business. Now that's not a taxable service in this particular state, so don't get excited. But she did get audited, and was busted for not charging tax on the rental of her dumpsters. Apparently no one told her that rental of tangible personal property is taxable, which definitely includes those dumpsters.

By the way, the name on the dumpster pictured above was not the name of her company. It's just the only dumpster picture I had. And I always knew having a picture of a dumpster would eventually come in handy.

So the auditor assessed her $30,000 for the sales tax on the rent. Hers was a small company with only about 35 employees. So this was a pretty significant financial penalty

To add insult to injury, the auditor didn't mention to her that, since she was a lessor renting the dumpsters, she would be able to buy them tax free - for resale. Dang auditors.

What can we learn here?

1. She didn't check to see whether or not all of her sales were taxable. You need to carefully review all of your sources of cash, and see what the law says about them in the state where the service is performed, or the delivery occurs. Since the garbage hauling service wasn't taxable, she didn't even consider the fact that an ancillary service just might be taxable.

2. If you find out something is taxable, explore for other opportunities that the situation uncovers. Like being able to buy stuff for resale if you have to charge tax when you rent it to people.

---

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.
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: They get sneakier and sneakier

I picked up this story a couple of years ago. We'll use Virginia and Pennsylvania for the states, but those are not the real states involved.

The company in Virginia got audited by Pennsylvania for nexus. It turns out that they did have nexus, never realized it, and the auditor nailed them for a couple of hundred thousand dollars. The taxpayer understood they had really screwed up, so the audit wasn't as confrontational as it sounds like it ought to be.

During the audit, she asked the auditor, "How did you guys find us?"

The auditor was feeling expansive.

"You know how when you go into a diner, there's usually a box sitting on the cigarette machine or by the cash register with entry forms. You know, where you might win a fabulous, all-expenses paid trip to Disneyworld?"

"Yeah."

"Well, one of your employees filled out the entry card. The card asks questions like, address, employer, job title, etc. It also sneaks in a couple of other questions, like how often do you visit the state, and whether or not your visits are business related.

"Your employee gave your company name, said he was a sales rep, visited Pennsylvania 12 times a year, and the visits were business related. Your employee gave us everything we needed to determine that you guys have nexus in Pennsylvania."

"OK, I get that. But how did you auditors get that information?"

"Because we ran the contest."

---

OK, I left a few extra lines there to let you think about that for a moment.

The Commonwealth of Pennsylvania was smart enough, and sneaky enough, to front a couple of thousand dollars for a contest in order to collect information from anyone who spends time at a diner. Obviously most of the responses would be worthless, but they are going to find a few nuggets of gold.

What amazes me is that the politicians and bureaucrats would be smart enough, but also adventurous enough, to do this. This takes some real creativity to come up with something this sneaky. My hat's off to them.

By the way, please remember, this isn't Pennsylvania. That's just the state I've been using. It could be your state. And I'm not telling.

So you might want to tell anyone representing your company that, when they travel, not to enter those contests.

---

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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Illustrations and Parables: The Generator

I was doing a seminar in Mobile, Alabama when I picked this one up.

Background

Mobile, if you don't regularly watch the Weather Channel, probably gets more than their share of hurricanes. This particular company had a plant in the area. They were far enough back from the beach to not have a problem with water or storm surges, but they were still subject to wind damage. And the biggest problem was power outages that apparently could last for more than a week. So they bought a big, honkin' generator to provide backup power.

However, they didn't keep the generator at the plant. It was an outside generator and they didn't want to worry about wind damage. They stored it in Houston, Texas at the facility of the dealer who sold them the generator. You see, the hurricane that would tear up Mobile, is not going to be the hurricane that goes through Houston. This is the ultimate in "off site" backup.

The Plan

After the storm passes through, they'll call up the dealer and tell him to deliver the generator. That would probably take a day or so. In the meantime, they'll clean up the site and do any other preparatory work necessary.

The generator arrives, they set it up, and voilà, power! They can start making stuff, shipping to their customers, and providing employees with a much needed paycheck.

The Problem

The state of Texas audited the dealership and noticed the generator (probably more than one - storing these things is probably a nice little side business for them). After finding out who owned it, Texas went after the company in Alabama asserting that they had nexus in Texas. After all, they did have a pretty big and expensive piece of equipment sitting in Texas. Which means they have a physical presence in Texas. Right?

The company believed the auditor and paid their back taxes, penalties and interest and registered in Texas.

Duh?

I asked the guy who was telling me this story, "And you believed the auditor?"

"Well, yeah. He's the auditor, he knows what he's talking about."

"Do you have any other physical presence in the state? And I reeled off the various factors."

"No. Just the generator," he said, starting to feel nervous.

I said, "You really need to get yourself a lawyer who knows their way around Texas nexus issues. I can't believe that generator gives you nexus in Texas. It's just one piece of equipment that has nothing to do with exploiting the Texas marketplace. It's merely being stored in Texas because that's where the dealer happens to be. I'll bet a lawyer would be able to beat this easily"

"But the auditor said..." I think I ruined his day.

Folks, please remember that the auditor is likely to be telling you stuff she learned about in a meeting back at the office. She's not a lawyer, and she has not reviewed the court cases herself. She's just trying to pry some tax revenue out of you. Never take the auditor's word for it. Get yourself a lawyer or CPA who is an expert at sales and use taxes. They'll be expensive, but they'll know a whole lot more than that sales tax auditor. And they'll be on your side.

This company threw money away in the direction of Texas because they didn't understand the way nexus worked, and they believed the auditor. Don't do it!

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

See disclaimer and research the issues thoroughly before making decisions

Here's information on our upcoming seminars and webinars

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

Documentation when you ship out of state

Once upon a time, there was a jeweler who got audited. He was questioned on a whole bunch of sales that he hadn't charged sales tax on. The jeweler claimed that he shipped those items out of state. He pointed out, to the auditor, that the ship-to addresses were in different states, and that he had charged the customer for the shipping charges.

The auditor then asked the jeweler for actual proof that he had shipped the goods, as opposed to the more likely situation where the customer was in the store and arranged to have the items "shipped" with a minor freight charge.

The jeweler came up with the Fed Ex bills of lading.

The auditor then asked to see the actual invoices from Fed Ex, or the tracking reports.

The jeweler couldn't seem to find those records.

The jeweler had to go to bed without his supper.

Remember, the delivery point defines that state that gets to make the rules and gets the taxes. If the delivery is in the store at the counter, then obviously the state where the store is located gets the taxes.

A common scam is for dealers of expensive, but cheap-to-ship consumer goods to "ship" the goods and then just hand them to the customer in order to evade the sales tax. Sharp auditors simply ask for proof that the items actually were shipped. And Fed Ex bills of lading aren't enough. There's no signature, no stamp, no evidence at all on the typical form that the goods have even been touched by Fed Ex. The scam could simply involve preparing the Fed Ex bill of lading, and attaching it to the sales paperwork. And I wouldn't be surprised if that's pretty much what happened in this case. But as we've seen, that's not enough. You need proof.

Whenever you ship taxable goods out of state, the auditor will (hopefully) realize that they don't get to tax that shipment, assuming the seller shipped it out of state. You need to maintain adequate records to prove that:

• Invoices from the freight carrier
• Tracking logs
  
• Signed bills of lading
• Export paperwork

The standard Fed Ex form isn't enough.

A seminar participant once incredulously asked, "you mean I have to attach all that stuff to every invoice in my files?" My answer was that, no she didn't. But she should have an audit trail to be able to get to that paperwork, if the auditor needs to see it.

Remember, the auditor needs proof. Which isn't an unreasonable request considering the amount of potential taxes to be evaded using this scam.

Note, I'm aware of a further evasion that is almost foolproof. I'm not going to mention it here, because it is pretty sneaky and hard for the state to catch. Which is why I'll pass on mentioning it. But the truly nefarious among you have probably already figured it out.

This blog will be silent for the rest of the week. Have a good Thanksgiving.

Sales Tax Guy

See disclaimer and research the issues thoroughly before making decisions

Here's information on our upcoming seminars and webinars

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

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Illustrations and Parables: The Mystery of the Missing Texas Taxes

I was doing only my second seminar EVER on sales and use taxes. It was Manhattan and this woman comes up to me at the first break. I had talked about personal liability of officers in the previous section and she looked worried.

"Hi, I just started as the CFO for a company here in New York, and I found out that we've been selling a lot of stuff to a company in Texas for years, and charging them sales tax. But we haven't been filing Texas sales tax returns."

"Well, that's not the end of the world," I said. "Mistakes happen. I assume you have been remitting that money to the state of New York?" That's typically the way it works. Many people make the error of charging tax for deliveries in a remote state, but report those sales on their local return. Nobody's going to jail for that. Penalties and back taxes, yes. Striped pajamas? No.

"Well, actually, we haven't paid the taxes to anyone," she said. "That's how I found the problem. I was going through the general ledger and came across this account for Texas Sales Taxes Due."

"How much is in there?"

"One hundred and fifty-three thousand dollars."

My wife tells me I don't hide my emotions well. I must not have in this situation because she asked me, "Is this bad?"

"OK, let me make sure I understand this. Your employer has been shipping stuff to a company in Texas for a long time?"

"Yes, about eleven years."

"And they have been charging Texas taxes. And showing this on the invoices?

She nodded, "Yes, I looked at some of the recent invoices and they show 'sales tax' right on the invoice. It looks like the Texas rate too."

"Are they still doing this? Making sales to Texas, charging tax and letting it sit in that liability account?"

"Yes."

"Just out of curiosity, is this a small, entrepreneurial company where the owners have put pretty much everything into the business?"

"Yes."

"Hundred and fifty thousand?"

"Yep."

"And you haven't paid this money to Texas, or even New York, right?"

"Right." I really do remember this conversation like it was yesterday. It's firmly planted in my brain.

"OK. Final question. Are you really the CFO or is that just the title they gave you?" This happens, folks. They might have given her the CFO title, but not actually make her an officer of the company. I once was a "sort-of" CFO.

"Yes, in fact we just took care of the paperwork last week."

I took a deep breath. "Mary," her name was Mary, did I mention that? "You should probably leave the seminar now. You've learned enough for the day. I'd strongly recommend that you get this resolved, and you should talk to your own attorney. You're an officer of the company. Even though you weren't around when all of this happened, the longer you're on board, knowing what's still going on, the more likely you're going to be in deep trouble. You may wind up holding the bag."

The problems are:

1. The customer gets audited by Texas who discovers that they've paid all this tax to a company who wasn't registered in Texas. Texas makes the customer pay the money all over again, plus interest and taxes. The customer probably has a good case for fraud against Mary's company. They charged them tax and didn't remit it to any state. For eleven years!

2. Texas may decide to go after Mary's company, particularly if they had nexus in Texas. I didn't ask Mary about Nexus.

I've read more than a couple of stories where, in a start-up situation, the owners put their life-savings into the business, and then some. When the business fails, they've got nothing to make good on debts - like a sales tax liability in Texas.

But the CFO probably doesn't have any skin in the game. And Mary has some money. She's got a house, car, maybe a vacation home, and a 401k that carried over from another company. And she's an officer of the company. She really might be the only one left with any money when the dust settles after this company goes out of business. There have been cases...

As she left, I was really hoping she'd talk to a lawyer.

She emailed me a few days later.

Hi, Jim,

I quit the job. I went in to my boss' office the next day and said, "we really need to talk about this Texas tax liability." He said, "Mary, it would be a really good idea if you never brought this up again. Ever." I realized that I didn't want to work there anymore. I figured if he had a problem with just one thing like that, what else was lurking? And as the CFO, I didn't want to be associated with that kind of business.

Thanks, Mary

The moral of the story? There are two.

First of all, sales tax seminars can be more interesting than you'd think.

Secondly, if you're an officer of the company, you have some serious liability for your company's "mistakes," whether it's sales tax, payroll taxes or some other problem. Beware.

By the way, a couple of years later, I was chatting with an executive with the audit division at the Texas revenue department. I told him the story. After shaking his head, he asked hopefully, "You don't happen to know the name of either of those companies, do you?"

"Nope," I smiled. "My seminars are kind of like confession. What's said in the seminar, stays in the seminar."

And if you're wondering, the dialogue and facts are as true as I can remember. But the states, cities and Mary's name were all changed to protect the extremely guilty.


Sales Tax Guy

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Pet Store Shut Down (PAY YOUR TAXES!)

Part of a series on essential actions you need to take

This article would have just gone out on my new Twitter feed, but as I read this news article I got more and more ticked off and decided it required the full Sales Tax Guy treatment.

In case the article disappears, the essential facts are below.

There have been several stories recently about Rhode Island suddenly closing over 1000 businesses because they haven't paid their sales and use taxes.

That's the first thing to be ticked off about. Why do they pick the depths of the recession to close businesses and increase unemployment? Sounds like the RI revenuers need a reality check. Maybe some targeted state layoffs would do the trick.

But, it's not all entirely the state's fault either. As I read the article about this pet shop owner, I really can't feel sorry for him either. Now, I am assuming the article is correct which is a big assumption. So if I'm wrong here, I've seen other situations where the facts were pretty close to as described. So, at least we'll considered it a teaching opportunity.

1. Business hasn't been good for the pet shop for a while.
2. The owner quit remitting his sales taxes and started keeping the money to run his business, figuring he'd pay it back someday when business got better. The quote in the article is “I used that money to stay in business." [my emphasis]
3. He apparently hasn't been filing returns on schedule either.
4. He has had problems with the IRS too.
5. While not mentioned in the article, I'm betting he got more than a few letters from the state inquiring about when he was going to pay up.
5. He has virtually no assets.

And he wonders why the state won't give him a break and lenders won't give him money. Talk about a bad credit risk. The amazing thing is that he still has employees coming to work to take care of the critters. Hey, I'm in favor of taking care of the critters, but how is this guy paying his employees? Is he going to have to deal with unpaid wage claims at some point too?

While I'm a big appreciator of persistence, there is a signal that any business should heed when considering its viability. If the management can't (or won't) remit their sales taxes (which have been collected in trust for the state), and choose to use those funds to keep the business going, then it's probably time to rethink the business plan. This situation is not the beginning of the end. It's pretty much the last ledge before the business falls into the abyss.

And if I was working for a company where this was going on, I'd be asking for daily paychecks and hitting the bank on the way home to cash them.

Is it right to steal from the state, and defraud customers to keep the business going?

Stealing from the state? Yeah. The taxes weren't collected for the business's benefit. The seller, in most states, in merely the collector and is holding the taxes in trust. If the seller doesn't send the funds in, it's theft as far as I'm concerned.

Defrauding the customer? The customer didn't pay the business an extra few percentage points for the business's profit. They paid it under the assumption that the state would get that money. If the business isn't going to send the money in, then the business defrauded the customer.

The same thing applies to taxes you withhold from your employees' paychecks. If that money doesn't get deposited quickly... Well, let me just say this. I've heard that the IRS agents who audit companies for this particular problem - not making tax deposits - carry guns. Because people who violate this particular law, tend to find themselves wearing orange jumpsuits.

Bottom line folks. If you're small business, don't think that sales tax money sitting there waiting to be sent to the state is available for interest free loans you can take care of later. It isn't. And you won't. You'll probably wind up just like this poor pet store owner.

So if you've collected taxes, PAY THEM!

See, way more than what I could have squeezed into a Twitter post.

Sales Tax Guy

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Picture note: The cat is Pewee. She wants YOU to pay your taxes. More on Flickr here.

Illustrations and Parables: There are penalties for evading sales tax

I had a seminar participant relate this story to me recently, and I just have to pass it on. I’ve edited this a little, particularly the geography.

A lawyer walks into a furrier in Miami and purchases a $70,000 fur coat. He tells the clerk to ship it to Atlanta…it is, after all, a gift. The clerk doesn’t charge sales tax because the coat was shipped out of the state. And we all know that there’s no sales tax on an interstate sale, right?

The store gets audited by the Florida Department of Revenue. They assess the retailer roughly $6,000 sales tax on this sale, as well as many others.

You see, it really wasn’t non-taxable because it was shipped out of the state. The coat was in the store when the customer purchased it. Only AFTER the customer had control over the coat was it then shipped out of Florida. The customer could, after the sale was rung up, have changed his mind and taken the coat with him. Therefore, the store should have charged him sales tax. This is the logic. Enforcement is spotty on this. But a few states, like Florida, codify this in the statutes.

Of course, the store then billed the customer for the $6,000 in taxes they failed to charge him. They sent an invoice, with a very apologetic letter to his home.

The customer came home from work that night, and his wife asked him about the $70,000 fur coat that she never received. He’s now divorced.

So the penalties for evading sales tax can be more than just the taxes.