Sales and Use Tax for Sales and Marketing People

OK, for the record, I used to be in sales.  I've had several careers, and I spent 12 years in sales and sales management.  And I now own my own company, which counts as sales too.  So I know from where I speak.   I'm not just some guy from Accounting trying to make your life miserable.

Well, actually, I am trying to make your life miserable.  But that's a side benefit.  You see, I've never lost my accounting roots.

There are a few things that you folks need to know about sales tax.  First of all, it's a SALES tax.  Doesn't that sound like something you that you should be familiar with?

This project is going to take more than one article to cover, so I'm going to start with the most important points, and then add links to additional articles as they get written.  I'm sure your accounting people will forward you the link whenever an article pops up.  In the meantime, you can subscribe to this blog (see the box on the right at the top of the column) or you can follow me on Twitter.  I actually post other stuff besides sales tax on Twitter.  Like Dilbert.   

Here are the first two points, and they're closely related.

If you have offices, warehouses, property or even people in a state, then you may have to start collecting taxes on stuff you sell and ship there.  Even if your people don't live in that state, or maintain an office in that state, you may have "nexus" in that state.  You may be required to charge that state's tax on what you deliver there, and follow their rules on what's taxable and not taxable.

This may be disappointing for you because one of the major reasons you're making sales in that state is simply because you always thought you didn't have to charge tax.  Bummer.  Now you do.  You're going to have to start working harder.

Which brings up another problem.  What you think is taxable or exempt isn't the way it is there.  Every state taxes things differently.  For example, let's say you sell computer equipment and you're based in Chicago.  You send your sales people and installers up to Wisconsin on a frequent basis, but you don't maintain an office there.  That is, unless you consider the passenger seat of your sales rep's car to be her office.

You now have nexus in Wisconsin.  Which means that everything you deliver in Wisconsin needs to have Wisconsin tax imposed.

But wait, there's more (salespeople love that term, don't they?).

You know all that service and installation work you do in Wisconsin?  You should be charging Wisconsin tax on that too!  Wait a minute!  You're thinking that repair labor charges and installation charges aren't taxable.  They aren't.  In Illinois.  But you're in Wisconsin now, bub.  And they are taxable there.  See what I mean about it being different there? 

So to recap: you can make your company subject to the jurisdiction of another state by having facilities, people or property in the state.  In other words, a physical presence in that state.  When this happens, you have nexus in that state.  And then you have to collect that state's tax and follow their rules, which are probably completely different from the rules in your state.

Here's another example, then I'll send you on your way.

In most states, contractors pay sales tax on the building materials that go into the job.  This is the case in New Jersey.  But New Jersey has a "flow-through" exemption.  This means that if they're doing a project for a non-profit organization or a government agency, the construction contractor can get an exemption for the sales tax on the materials for that particular job. 

But Pennsylvania doesn't have a "flow-through" exemption.  And many contractors from New Jersey get jobs in Pennsylvania.  And they bid on the jobs assuming that there is a flow-through exemption.  They didn't know it's different there.  Then they start having materials delivered to the job site in Pennsylvania and discover that it's all taxable!  And they have now underbid the job.  I hear about this every time I do a seminar in New Jersey.  Contractors are getting burned on this all of the time.

Always remember, it's different there.

Ok, you can now go back to making sales.  But stay tuned.  There will be more articles written just for you (and anyone else who finds them useful)

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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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Things that will get you in the worst trouble

I've talked about many of these particular issues, over the years. So I thought I'd compile a master article so that you can, at a glance, see if you're doing anything really, really wrong.

First of all, I should define what I mean by "trouble."

1.  Big assessments and big fines

2.  Embarrassing assessments that, while not crippling the company, will nevertheless do bad things for your career

3. Large-scale overpayment of taxes. See item 2 regarding career impact.

So let's begin our hall-of-shame of sales tax mistakes.

1. Making sales that are taxable and you didn't know it. Do you perform taxable services? What about non line-of-business sales? Do you, for example, sell a lot of used equipment? Do you maintain a company cafeteria? You're probably selling more than just what's on the top line of your income statement. And don't even get me started about the other states you sell to. See below.

2. Related to 1 - making taxable sales in states where you have should have been collecting tax and didn’t realize it. In other words, you have nexus in a state but you don't know it. And you don't even know what are taxable sales in that state. It's a very common problem, and the states would really like to catch you.

3. In another instance of making sales you didn't know were taxable, beware of making intercorporate sales. Depending on your company, your business model, how you handle your paperwork, and the volume of the transfers, this may or may not be a problem. But you need to make sure. Of all of the assessments I've heard of, the biggest were in this category. And the only possible alternative for one taxpayer was bankruptcy.

4. Not collecting exemption certificates on your sales. This will mean more work for you when the audit hits, as well as embarrassment with the auditor, your management, and your customers. And you'll pay some taxes, interest and penalties.

5. If you buy a business, make sure you don't inherit the seller's sales tax liability. If you buy as a bulk sale,  you will, unless you do it right.

6. Not accruing taxes on your taxable purchases where no taxes were collected by the seller. AP generally knows this one, but may not have good systems in place to be sure of catching all of these invoices.

7. Overpaying taxes on invoices that you thought were taxable, but weren't. More tips are in our Best Practices file.

8. Who is the person in your organization who is most knowledgeable about sales and use taxes? It's usually the controller, but it's often the AP staff. But note how many of the above problems are related to the sales and marketing departments. And how many of your sales and marketing people have any knowledge or understanding of sales and use taxes? Right. That's what I thought. Here's one example of what they can learn.

9. Relying on bad resources for answers. Calling the state is a no-no. So is believing the auditor without getting something in writing. Here are good sources of information.

10. Finally, collecting sales tax, but failing it remit it to the appropriate state. Frankly, if you’re doing this, you shouldn't bother reading this blog anymore. What’s the point? Get measured for an orange jump suit instead.


Here's a link to some horror stories that will make excellent bedtime reading.

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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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Essentials Actions

Here are a few essential things that every organization and business must make sure they have under control.

Pay sales and use taxes that you collect from your customers. This is probably the worst offense possible, and can mean the loss of your business and possibly even orange jumpsuits. Don't screw this up.

Get exemption certificates from your customers and watch expiration dates.

Document things as if the audit will be two or three years from now. Because that is when the audit will happen. You're not going to remember what happened yesterday.

Be sure about your exposure to other states' taxes. Not just your own.

Make sure your services aren't taxable. In other states, too.

Make sure you get good advice from knowledgeable sources. Because you're probably not.

Pay your use taxes.

Don't overpay your taxes.

Check to make sure your business is taking advantage of every possible sales tax exemption.

Be nice to the auditor.

Watch your timings!

These were the things you really must do. And then there are a whole bunch of things you should be doing.



Sales Tax Guy

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A Guide to the "Sales Tax Guy"

Here is a guide or index to the various articles we've written on this blog:

First of all, there's Sales and Use Taxes in a Nutshell - a very basic article to give you a picture of the topic in 5 minutes or less.

Then there are the Golden Rules of Sales and Use Tax...what I consider to be the fundamental principles of the topic. Things you really ought to understand. The Golden Rules tend to be pretty consistent regardless of the state you're discussing. But the taxing policies vary enormously from state to state leading us to a motto: It's different there. It almost always will be.

We give you some ideas about policies and procedures and tips and techniques that you should at least consider implementing in your organization. In particular, these are things you really should do.

And we constantly hear about some sales you may not have realized were taxable. There are other tax traps. But we also try to find ways to reduce your taxes.

Auditors make your life miserable. Here is a guide to some of the odd audit interpretations and practices we've come across, along with how to deal with the audit itself.

Sometimes, we just gotta rant and rave about something. And there are some pretty silly laws that we've paid our politicians to write.

Sales and use tax information comes from a lot of different sources. We evaluate good ones and bad ones. And we give you information on finding good advice. It also behooves us to let you know that we offer seminars and webinars as well.

We occasionally do an Internet search to see who's going to jail because they didn't pay their sales and use taxes. That's always fun. And there are stories about people getting caught who didn't necessarily go to jail. They just paid a lot of penalties.

There's the occasional news item that catches our eye - and that we think should catch yours too.

And as we come across terminology that needs to be defined, we'll try to do so for you. We occasionally find a useful link as well.

Of course, there are frequently asked questions

And probably our biggest category of articles is on sales and use tax issues. Because this is, after all, a sales and use tax blog.


The Sales Tax Guy

Taxing Policies

This is another master article listing many of the taxing policies that vary from state to state. Over time, I’ll be developing articles going into the details in links. And when everything on this page has a link, I'll probably be finished, and I’ll publish a book. Then I'll be rich. ;-)

Absorption and separation
Admissions
Aircraft
Agriculture
Art (fine art, paintings, etc.)
Bad debts
Banks
Basis of tax
Boats and Watercraft
Broadcaster equipment
Bulk Sales
Cabinetry dealers
Carpet dealers
Casinos
Certificates
Charter fishing
Clothing
Commercial art
Commercial fishing
Common carriers
Computers
Construction contractors
Containers
Coupons
Data processing services
Digital media
Direct pay permits
Discounts (cash, term, or early payment)
Drop shipments
Drugs, medical supplies, and durable medical equipment
Employment agencies and staffing companies
Extractive industries like mining, oil, forestry
Enterprise zones
Environmental or green exemptions
Exemption certificates
Fabrication services
First Americans
Flags
Flooring
Food
Foreign Sales
Freight charges
Funeral directors
Gold, investment metals and numismatic items
Government agencies
Government contractors
Handling charges
Historic sites
Hospitals, nursing homes and inpatient healthcare facilities
Holidays (sales tax)
Information services
Installation charges
Intangibles
Intercompany transfers
Interstate commerce - property brought in
Interstate commerce - property brought in for temporary storage
Interstate commerce - property shipped out
Janitorial services
Landscaping
Laundry services
Local jurisdiction discretion, returns and enforcement
Lodging and meeting room rental
Lumping rules
Magazines
Manufacturers
Medical practitioners
Memberships
Motor vehicles
Movie production equipment
Newspapers
Nexus
Non-profit organizations
Nursery and horticultural
Occasional or casual sales
Personal services
Photography
Printing
Professional services
Publishing
Real property services
Rebates
Refrigeration equipment
Refunds and returns
Resale
Retailers
Rental of real property
Rental of tangible personal property
Repair of tangible personal property
Resale
Research and development
Responsibilities of the buyer
Responsibilities of the seller
Security services
Service and maintenance contracts
Situs or sourcing rules for local taxes
Software
Schools and education
Statutes of limitation
Telecommunications
Tile and flooring retailers
Tips and gratuities
Trade ins
Utilities
Vending machines
Vets
Withdrawal from stock (conversion to use)

There you have it. All the taxing policies consolidated into one place. Isn't it exciting?

Sales Tax Guy

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Sales and Use Taxes in a Nutshell

What every business owner, CEO, executive director, executive, requisitioner, purchasing agent, sales manager, and accounting person needs to know about sales and use taxes - in five minutes or less.

The problem for all of you is that you don’t know what you don’t know. My objective here is that you will at least know what you don’t know. Then you can ask more intelligent and pointed questions of the people you rely on for tax expertise.

So, here we go:

1. Those people you rely on for tax expertise probably don’t know much about sales and use taxes. They do know about income taxes, but they didn’t have to know anything about sales and use taxes to pass the bar or CPA exam. And a one hour break-out session at the annual CPA state convention really isn’t enough.

By the way, included in this list of people who aren’t necessarily experts are the sales tax auditors, and the people back at the department who answer the phone. Blame poor training and a desire to make the state’s payroll next week. These folks don’t memorize the law, and they’re much more likely to find situations where you owe taxes, rather than where the state owes you money. There won’t be any pats on the back if they return to the office having to give you a refund.

2. Forget everything you knew about income taxes. They just don’t count here. There are a couple of rules the states will sometimes use that come from the Internal Revenue Code, but that’s only so they don’t have to reinvent the wheel. For example, some states will classify non-profit organizations as exempt from sales tax if the organization meets the IRS rules (eg. 501c3 organizations). But most states use their own rules.

3. Sales and use taxes are not an option. If you make taxable sales, in most states you must charge your customers tax. And you must remit that money to the state. You can't "borrow" it. And buyers, if the vendor didn’t charge you taxes for some reason, then you must pay the use taxes in most states.

4. What's taxable. By default, the sales and use of tangible personal property are taxable. Most states will tax the sales and use of some services (see below) and some states will actually tax real property as well. Here's a checklist of the different taxing policies

5. The state you ship from is irrelevant. In the vast majority of transactions, the state whose rules and rates you have to follow, and taxes that apply, will be where the product is shipped to, where it is delivered, where it is first used.

6. And if you have any kind of physical presence in that state where the delivery occurs, you may have to register in that state, collect their taxes and file their returns. And you don’t get any brownie points for collecting the tax and remitting it to your state. The other state won’t give you credit for collecting and paying the wrong tax.

States can be pretty creative about what will give you that physical presence in their state (this is called nexus). For example, do you have a sales rep, consultant, trainer or some other person visit the state a couple of times a year? That may be enough. Note that they don’t have to live in that state. They just have to visit. Or do you have a piece of equipment sitting in a state? One BIG state says that’s enough to have nexus. Do you sublease hotel rooms and re-lease them to others? Then you may have facilities in the state…in other words, nexus.

7. There are 46 states, including the District of Columbia, that have a sales and use tax. And they all do things differently, sometimes dramatically differently. But they generally follow a similar structure, which I’ve taken to calling the golden rules of sales and use tax. And many of them do have similar taxing policies.

8. Services are often taxable. Probably the most commonly taxed are rental of tangible personal property, utilities, printing and fabrication, and repair labor. Remember, just because it’s not taxable where you are doesn’t mean anything. Remember, what counts is where it’s delivered. In the case of services, the delivery point can mean either where the service was performed, where the customer received the benefit of the service, or both. In other words, the destination state is what counts. And there are services that are only taxed in a few states, but they are taxed (eg. accounting and attorney fees, headhunting fees, insurance appraisal services, etc.)

9. States impose use tax on any use of tangible personal property in the state. This means that if you’ve bought property in one state, then move it to another state, you may owe use taxes in that new state. It gets even nastier if you have inter-corporate transactions. In those situations, you may be making brand new taxable sales if you “sell” equipment from one corporation to another corporation within the same company.

10. You should assume everything you sell, and everything you buy, is taxable until you can assure yourself that it’s not taxable. There are obviously going to be exemptions. But your thought process should be to assume it's taxable, then look for the loopholes. This is the approach the auditor will take, so you might as well get in that mindset. Here are some examples of sales where the seller got surprised by something that was taxable and they didn't realize it...until the audit.

11. Just because you make sales that aren’t part of your line of business doesn’t mean you aren’t making taxable sales. What about your cafeteria? Vending machines? Do you regularly sell surplus equipment? Do you make convenience sales to your customers? Do you sell logo merchandise to customers and employees? Do you have an annual clearance sale for employees?

12. You’re overpaying sales and use taxes. But the sales tax auditor will never point that out to you.

13. Just because you paid tax on something when you bought it doesn’t get you off the hook for charging tax when you sell it. If you’re making a retail sale, the fact that you mistakenly paid tax on it doesn’t mean anything. You should have bought it for resale.

14. When you get audited (notice I didn’t say “if”) you should be nice. Most auditors that I've talked to tell me that if you're professional in your treatment of them, they'll be professional in your treatment of you. And get professional guidance. The sales tax auditor may not know what he or she is doing, you don’t know what you don’t know, and your “normal” CPA or lawyer isn’t much better. This is not a good formula. Consider getting a sales and use tax professional involved early in the process.

15. By the way, get it in writing. Make the vendor who insists that your purchase is taxable show you where it says that. And make the auditor show you where the law says you owe a gazillion dollars. And be prepared to provide people with proof when you tell them something they didn’t know.

16. There are lots of exceptions. Remember, there are 46 different states doing it their own way. And within each state, there may be different taxing jurisdictions (eg. Colorado), and complicated laws written by politicians who are either corrupt or stupid.

Now what do you do? Get at least one person on your staff trained on sales and use taxes. Make them the designated expert. Before you assign Accounts Payable to this, note that this tax crosses ALL departments. The person you assign better be able to talk to sales, operations, etc. with some authority. I repeat: this is not just an AP issue. Bookmark this blog and read it regularly. Go to seminars. Invest in a library of reference materials. Sign up for webinars. Find a professional who knows something about this.

And I apologize to just about everyone in the world who've I've offended in this article.


Sales Tax Guy

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The Golden Rules of Sales and Use Taxes

These are fundamental principles that I've discovered in my years of training folks on this topic. These are things that the books and research materials assume you already know. Now you do. These golden rules are all listed in detail here.

Sales tax is a tax on the transaction

Taxable sales

Which state has jurisdiction over the sale

The ship-from state is irrelevant

Every state does it completely differently

There's an exception to everything

The buyer has the ultimate responsibility

Use tax is imposed even if you've already paid tax

The lumping rule

Be careful about your information sources

The invoice is your record

The rule of taxability

Nexus

The Basis of Tax

Use

The Four Exceptions

Sales tax and use tax are complementary

There is no sales tax on interstate transactions

The Basis of the Tax

The Seven Factors that determine the taxability of any sale

This is a "master article" that will serve to compile and organize the rest of the articles on this site. There are other master articles that I'll be developing. And they will all be updated regularly.

Sales Tax Guy

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