Great Article: Solving the Pains of Sales Tax Returns

from Avalara

A pretty good overview of why you may wish to get rid of doing sales tax returns.  This whitepaper covers the challenges of doing them yourselves, and the benefits of outsourcing.  Yes, there's a page on Avalara, but the rest of the piece is "sales-free."  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/
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Dealing with the Home Office

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

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

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

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

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

"These problems are above your paygrade."

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

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

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

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

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

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

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

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

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

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

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

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

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

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
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Illustrations and Parables: A weird invoice where they paid extra California taxes for a shipment of non-taxable items to Idaho

The following is a true story.  I've randomly changed the names, states and products so that nobody, least of all me, will get in trouble.  But it had to be told.

I received a call from one of my previous class participants on Wednesday.  Doris had emailed me a question the day before, but it was so long and involved that I wanted to talk about it on the phone.  I had a long drive in Chicago morning traffic, so she called me back at the perfect time. 

Doris had sold some boxes to Sam in Idaho.  The boxes were containers for Sam's product so they were bought for resale and Doris had Sam's resale certificate.  Doris had billed Sam, with no sales tax on the invoice, since it wasn't taxable. 

But then Doris got a call from the Sam's distributor in California.  For some reason, they were going to pay the bill.  Here's the conversation:

Distributor: I have your invoice here for the boxes you sold to Sam.  Why didn't you charge sales tax?
 
Doris: It's not taxable.  They're boxes for his products so they qualify as exempt.

Distributor: No they're taxable.  You need to rebill us with California sales tax.

Doris:  You're wrong.  They're not taxable.  It's called the "container exemption."  I'd be happy to send you more information.

Distributor:  I need to have California tax on this invoice.

Doris:  But I can't bill you California tax anyway.  We aren't registered in California, don't do business in California and don't have nexus there.  I can't collect taxes for a state I'm not registered in.  Besides, the delivery occurred in Idaho, therefore it would be Idaho tax anyway.  But it's not taxable!

Distributor:  If you don't charge me California tax, we'll just add the tax to the payment.

Doris: If you do that, I'll just have to send you a refund check.  We can't accept that money.

Distributor:  We won't cash it.

At this point, Doris, realizing she was talking to a tree stump, gave up and sent me the email. 

After we went through the whole thing, Doris asked, "I'm right, aren't I?"  I said, "Absolutely!  The best chance you have is that the person who handles the refund check won't have heard from this idiot.  They'll deposit it and that'll be it.  Out of curiosity, what part of accounting was the person from?"

Doris replied, "She was the sales rep."

"Ah.  Now it makes sense."

If there's anyone who'll stick to their guns, on a topic they know nothing about, in the face of someone who clearly knows what they're talking about, it's a sales rep.  (I kid, I kid.  I spent years in sales)

I explained to Doris that she needed to keep very detailed notes on this situation because of two potential scenarios:  

1.  The California distributor gets audited by the state of California who discovers that taxes were paid to Doris.  The auditor will ask Doris what she did with the money, since she's not registered in California.  Doris will need to be able to document that she did refund the money.

or

2.  The California distributor hires a reverse sales tax auditor who comes across this weird invoice where they paid extra California taxes for a shipment of non-taxable items to Idaho. [Boy, as soon as I wrote that, I knew I had the title of this article.]

The auditor will immediately call Doris and demand a refund for the overpayment.  Again, Doris will need to be able to document the refund.

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Now the other thing that the sales rep didn't know about (and many of you probably don't know either) is that refusing to cash the check doesn't really solve the problem.  After about a year or so, depending on the state, it will become an unclaimed property issue.  Doris will have to send a letter to the company telling them they have an uncashed check.  If they still refuse to cash it, Doris will then turned the money over to the abandoned property department of the state.  Her job will then be finished.  The money has been paid, in this case, to the state.

Now, when that reverse sales tax auditor calls about the overpayment, Doris can just say, "Yeah, that company you're working for refused the payment.  We had to turn it over to the state treasurer.  Call them.  Not my problem anymore."

But, as I said, Doris needs to document the heck out of this.  Because she'll be lucky if this doesn't pop up again in the next three or four years.

And here's a message for sales people, or any non-accounting folks out there.  If the accounting people seem to know what they're talking about, there's a chance they do.  I'm just sayin'.

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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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http://www.salestax-usetax.com/
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A Sneaky Sales and Marketing Trick - Revisited

Listen up sales and marketing people.  Since I'm currently working on educating you, here's an important tip that I wrote back in June 2010.

If the following conditions are happening to you, you really, really need to read that article.

1.  Do you have an out of state competitor who regularly steals business from you because they don't have to charge tax, but you do?

2.  Do you know, or at least suspect, that they have nexus in your state? 

3.  Are you sneaky and nasty?  Actually, that's kind of a silly question if you're in sales.  I kid.

Then take the steps mentioned in this article.  You probably didn't know you could do these things (neither do most accounting types, so don't blame them), but depending on your state's laws, you can at least make some trouble for that competitor.

Enjoy. 

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

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details we haven't discussed, and every state is different.  Here's more information

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
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Is it that time already?

Part of a series on essential actions you need to take

As I go through the newsletters, there is one thing I repeatedly see that makes me shake my head. People lose appeals, refunds, and are assessed penalties constantly, And there is one thing that happens way too often. It may not be the only problem, but it is certainly one way to lose money. They were late!

The company either filed their sales tax returns late (sometimes years late, but that's not what I'm talking about here). Or they didn't file for the refund* until after the deadline. Or that appeal notice got sent in a few days late.

And nothing probably brings more joy to the revenuers back at the office than to get a refund request, look at the date, and realize they can easily throw it in the "tough luck" pile. They don't have to think, they don't have to fight it. The taxpayer simply screwed themselves out of the opportunity.

Now, I don't expect you to memorize the due dates for all of the things you have responsibility for. But we're accountants! Well, most of us, anyway. This should be relatively easy for left-brained people like us to organize. If we were all sales and marketing folks, I could see the problem. But we're accounting types. This should be easy! Create tickler files. Set up a due date calendar. There's this thing called Excel that may work too!

If you're filing a return, when is the due date? Will the postmark date be sufficient? Not always, by the way.

If you have to file advanced deposits, when are they due?

If you need to file for a refund, when does it have to be submitted? How many years do you have? If you're going to do self-audits, figure out how frequently to do them to meet the refund deadlines.

If you've been audited and you're going to file an appeal, when does the state need to have it in their paws?

Now, you all know I hate to offend CPAs and attorneys, so I'll try to be gentle here. The thing is, in many of the cases where the taxpayer lost money or the opportunity for a refund or an appeal, the filing was the responsibility of, ahem, those outside professionals. Now, it's not necessarily because their bad people. It's just that, well, have you seen their offices? It amazes me, whenever I visit my CPA to give him our income tax** paperwork, that he's able to find anything. I have to be careful where I step! One twist of an ankle, and Mr. Johnson's medical deductions become a scuff mark.

So you need to take the responsibility. This is the easiest thing to screw up, and the easiest to solve. Make sure your professional files on time. Heck, call them and ask! Remind them! And if you really want to be a snot, demand proof that they did, in fact, mail the paperwork on the correct date.

This is possibly overkill, but I'm beginning to see the benefit of sending key returns and paperwork via certified mail. That way you have proof you mailed it. I wouldn't bother with the "return receipt" though. I just want to have proof it was mailed. It costs a little extra but it gives you proof in the unlikely event that the state busts you. But the real benefit is that it makes everyone a little more careful when they know they can't get away with, "well, I'm pretty sure I dropped it in the mailbox on August 31."

Bottom line? This problem is too easy to avoid. Watch your deadlines and make sure the paperwork gets filed on time. Geez.

Sales Tax Guy

See disclaimer and research the issues thoroughly before making decisions

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*Don't assume that a state's statute of limitations is the same as the time for you to file an appeal. The statute of limitations may be three years in your state, but the time to file for a refund may only be one year. So check it out!

**Yes, I have a CPA do my income taxes. I really hate income taxes. All those dang forms to fill out.....


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Refresh Your Exemption Certificates

I'm assuming you have all the necessary exemption certificates from your customers. That's a big assumption, of course. Most of you don't. But if you do, then the next problem is making sure that the certificates you have are still valid.

Depending on the state, certificates may expire. So you need to make sure you refresh them. There are four options:

1. Carefully pay attention to the expiration rules for each state where you need certificates and then do the necessary requests, and follow-ups to keep your files up-to-date. This is lots of work and requires regular research.

2. Refresh one third of all your certificates every year. That way, you get a completely new set of certificates every three years which meets the requirements of just about all of the states.

3. Refresh all of your certificates every year. This is overkill, but it certainly is safe and will meet the requirements of every state. In both items 2 and 3, we're basically talking about sending out a form letter to your customers. It means a couple of spreadsheets, some mail-merges, a little annoyance for your vendors, and the time of a summer intern. We're not talking about a major investment.

4. Invest in some software. There is software out there that will manage your certificate process for you. The software will determine what forms you need, store the imaged documents, and tell you when you need to refresh. It's item 1, but automated. I've met folks from these companies and they even appear as advertising on this blog - in fact I saw one this morning when I posted this. So they're out there. In fact, I just did a quick Google search for you. You may want to check them out. This method is expensive, but safe.

Regardless of the method you use, get your exemptions certificates and keep them up to date.

Aside from being safe, if you've got this under control, the auditor will be impressed. So you've got that going for you. Which is nice.

Sales Tax Guy

See disclaimer

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Picture note: Yes, it's the Frazier family milk jug. Had to. Sorry. ;-)

The Process

Here is the entire process (at a very high level) for making sure you accrue for sales and use taxes.

- The user sends in requisition to purchasing.

- Purchasing orders and decides at that time on the taxability of the purchase (yes, purchasing makes the decision -- I hear wailing and gnashing of teeth).

- The vendor ships or performs service and bills you.

- AP reviews the invoice and the PO and determines if taxes were charged and if they needed to be charged.

- If taxes weren't charged, and item really is taxable (contact your vendor to make sure you don't over-accrue), then AP codes and enters the invoice with a debit to tax expense and a credit to use tax liability.

- The tax return is prepared by accounting and the use taxes on purchases come from the accrual by AP. You may want to have a system where AP forwards copies of accrued invoices to validate the accrual, but that's up to you.

Done. How hard was that? What could be simpler?

Oh, yeah. Purchasing is the one who gets to make that decision about taxability (there's the wailing and gnashing of teeth again).

Why? Because purchasing already knows what was purchased and how it is being used. These are two things that AP doesn't necessarily know, and it probably isn't obvious from the paperwork or accounting codes. So they have to contact Purchasing. Which annoys everybody. If purchasing knew what the rules were, problem solved. "But wait!" you say, "Purchasing doesn't know the rules." That's where a taxability matrix comes in handy (don't worry, future article).

Hmm, I wonder how many of you AP folk are emailing this article to your purchasing pals right now. Go ahead, you know you want to.

Sales Tax Guy

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Picture note: the picture above is hosted on Flickr. If you'd like to see a larger version, click here, then click on the "all sizes" button above the picture.

Private Letter Rulings

If you are stumped and there isn't a rule, bulletin, regulation, law, court case, or interpretation that addresses your particular question, you've looked in all the places we've talked about here, and you can't get anyone to give you an authoritative answer, there may be help.

Most states will give you a private letter ruling, opinion letter, or something similarly named. The idea is that you formally ask the revenue department about your situation and they give you a formal, take-it-to-the-bank answer. It's not a guess, it is, for you, the answer. And they have to honor it when you get audited, assuming you didn't fib when you gave them the information, and things haven't changed.

Sometimes these letters are published so that others can find some guidance if they're in similar situations to yours.

Yay! Why didn't we do this before???

Because, to do it right, it is expensive. You want to do this anonymously so that the state doesn't know who you are, and send auditors out in the night to ambush you. You want to go through an attorney or CPA. They'll ask the question, keeping your name out of the discussion. In addition, if the professional specializes in sales and use taxes, they might even be able to answer the question without having to get an opinion letter.

This ain't gonna cost you a couple of hundred bucks. This will probably cost a couple of thousand. But if you're looking at a big issue, involving lots of money and risk, this is a very good way of getting a good, reliable answer.

Sales Tax Guy

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Get those certificates

I had a woman in my class once who told me about her experiences in getting resale certificates. She didn't bother.

She worked for a toy manufacturer. And she worked for the distribution division. She sold only to resellers and distributors. There was a sister company who did sell to the end user through their web page and catalogs. But it was a separate company, separate corporation, separate facility, separate everything except products sold and the parent company.

Her company got audited by, we'll say*, Illinois. During the audit, the auditor asked about resale certificates for all of her sales into Illinois. She said, "We don't get them. Our business model is only to sell to retail stores and distributors. None of our customers buy for end use. Talk to our sister company about that. We don't need resale certificates." The auditor said that she did and pointed out the law. But he was nice enough to give her 60 days to get them (not all states are required to provide this grace period).

So she began to work on getting those certificates. And 60 days later, she still owed Illinois $50,000 for the sellers' use taxes she had failed to charge her Illinois customers. Not because her customers refused to provide the certificates. Her company was big enough to demand and get those certificates. She owed money because some of those customers had evaporated. You see, the retail toy business is pretty volatile. Retailers come and go. She owed taxes on the ones that had "gone." If they're gone, she's not going to be able to get a resale certificate.

But if she had simply done what she was supposed to do, she would have owed nothing.

The moral of the story is very simple: get the resale certificate. Get it before you even ship the goods, because that is when you've got leverage over the customer. Don't wait until later or assume the sales rep will get it. You get it now. Here's a procedure you may want to use.

Then you won't have to argue with your customers or run the risk of them going out of business on you.

PS...before you go all notes on some of your customers, you should read these articles about drop ships. And here is much more information on all forms of exemption certificates.

Sales Tax Guy

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*When I use "we'll say", that means I making it up.

Picture note: The toys shown don't represent the company I'm talking about. It's just a picture of toys. You can see it bigger here.

Accounting Tests for Nexus

One of the things with nexus issues is that the people who are likely to create the most problems for your organization in this area will be the sales and marketing folks. And they NEVER have a clue. I know they don't come to my seminars, and I'm sure they're not doing any outside reading. So it kinda falls to the accounting folks to keep an eye on this.

Since nexus is created by having a physical presence in remote state, then accounting should look for clues:

1. Paying bills to contractors for installation of your product in other states. That's the kind of thing that gives you nexus.
2. If you own, lease or contract your own delivery trucks, look at where they go. Delivery in your trucks usually gives you nexus.
3. Look at any bills for warehousing charges in other states. That indicates you have inventory being stored in a remote state.
4. In the same vein, look for any space rental charges in remote states.
5. If you have goods drop-shipped from a shipper in another state, that may give you nexus there.
6. Are you writing commission checks to independent sales reps or marketing firms based in remote states?
7. And, of course, if you're reimbursing people for their expenses incurred in other states, you've probably got a nexus problem there.

Enjoy making sales and marketing miserable.

Sales Tax Guy
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obg

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*picture note: Does this remind you of your sales staff?
This is Dirk of "The Swordsmen"
Bristol Renaissance Fair, Kenosha Wisconsin August 2008
www.theswordsmen.com/index.shtml

How AP can figure out where the company has nexus

In many organizations, Accounts Payable gets stuck with all of the sales and use tax responsibilities. The problem is that many companies have nexus problems, which usually doesn't have much to do with AP. The sales and marketing people won't think of this in a million years. So, it falls to Payables to raise some red flags.

Here's a fun procedure for Accounts Payable which will ruin the days of all those sales and marketing folks.

One way organizations typically acquires nexus is by having people visit a state frequently enough that they can be determined to have a "physical presence" in that state. And AP knows about this! How, you might ask? Because they process the expense reports!

So, as you're paying invoices for contractors installing your product, sales reps making calls on customers, and management speaking at industry events, etc. , note the states that they're spending time in. Keep a list of the states and, when a state starts getting visits more than a couple of times a year, make noise about how your company might have nexus in those states.

Oh, this is going to be so much fun!

More on this in a few days.
The Sales Tax Guy

See disclaimer and research the issues thoroughly before making decisions

Here's information on our upcoming seminars and webinars

Some times it pays to overpay

I spoke with a contractor in my seminar last week who described a different situation. Because they're very small with limited ability to do the necessary bookkeeping, they have essentially been double paying their sales and use taxes. They knew they were, but the cost to hire someone to do it right would be more than what they're overpaying. The silver lining is that, when they were recently audited, they pointed this out. The auditor gave up really fast when she realized that anything she came up with would be offset by the overpayment.

I'm not recommending intentionally overpaying your taxes to run off an auditor, but if you do know that you're overpaying, keep this in the back of your mind when you're sitting down with the auditor.

Sales Tax Guy

The Decision Tree

This blog post has been replaced

Sometimes, you just gotta punt

Sometimes you just have to punt. To me, this means that, after exhausting all of your resources to find the answer, you may just have to make an educated guess. The law doesn't always provide the answer. It's badly written, the regulations may be vague, or the issue may simply not have been addressed yet in official publications.

So what are you gonna do?

Here's my advice. But please keep in mind that your success will rest on things like the mind of the auditor, your treatment of the auditor, how much money is involved, the level of your documentation, etc.

If you have done your research, and you've looked in the books, on the Web, talked with your lawyer and CPA, even emailed the state, and you're still not comfortable with the information that you've been given, then punt. Do it the way you think you ought, informed by the research you've done. I'm guessing your decision will involve paying less tax. But, keep a record of your research. Print out pages off the web. Photocopy text out of the books. Get letters or emails from your professionals. And keep it all in a punt file.

In two or three years (remember, the audit won't be tomorrow), you'll need to explain the reasoning behind your decision to your friend from the department of revenue. If you've got it all together in your punt file, then it will be something that you can easily, quickly and credibly show to the auditor.

Even if you got it wrong, the auditor may respect your effort to do the right thing and give you a break on interest and penalties...maybe even the entire liability itself. But that will only happen if you've got a good explanation. Which your punt file will give you.

Sales Tax Guy
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My Customer Won't Pay the Tax

I've had this question come up a couple of times in the last few days so I thought I'd discuss it here. The problem is customers who, after having been billed sales or use tax, refuse to pay the tax.

Generally, states require the vendor to remit the tax to the state. Whether the customer pays the tax to the vendor isn't important to the state. So, if the customer refuses to pay the tax, the vendor winds up holding the bag.

So what are your options?

1. Ask the customer for documentary evidence for why they don't owe the tax, like a certificate or a citation to a statute or regulation. Remember, you've got to be convinced, otherwise you're not accepting the certificate in good faith. And the customer may not even make the effort to provide you with documentation.

2. Is the sale taxable? Double check your facts, talk to your adviser to make certain of your position that the sale is taxable. I know it's hard to believe, but maybe, just maybe, the customer is right on this one. Don't take any draconian action until you know for sure.

3. Consider firing the customer. If they won't obey the law and they're costing you money, then don't sell to them anymore. Of course, your sales department won't appreciate this.

4. Eat it. If you've got enough margin, and the customer is worth it, just cover the tax with your margin. Perhaps, slowly raise the price you're charging your customer to cover your additional cost. Of course, the sales department should take the hit for this additional cost, since they're the ones insisting that you keep selling to this customer.

5. Document that you've billed the customer and they've refused to pay. Always bill the tax to the customer and let them refuse to pay. This way, when you get audited, you can build auditor credibility by demonstrating that you're doing the right thing in this situation. Plus, there's the revenge angle. The auditor would love to know about this customer. Remember, if they're refusing to pay you the legal tax, they're not paying tax elsewhere. They'll get a visit from the auditor and they'll pay...lots...eventually.

6. Rat 'em out. I don't recommend it but in the interests of full disclosure, I should mention this. I've tripped across a couple of states with laws where, if you report the customer to the state, they'll waive your liability for the taxes. Talk about revenge....

Sales Tax Guy

How to Read Legalese

If you're reading this, then you probably have to read legalese as part of your research into sales and use tax problems.

I don't disagree with the old joke that lawyers write legalese to keep themselves employed. But to be less cynical for just a second, there is a reason...precision. Well-crafted legal language should leave nothing vague, nothing gray. There will be no pronouns, since you can't be sure who "he" refers to.

So here are a few tips that I've picked up:

1. Be patient. This stuff isn't written for third-graders. It ain't like reading Harry Potter. You're going to have to face the fact that you may have to spend some time reading and analyzing. Take a deep breath.

2. Diagram the sentences. Remember 6th grade English class where you learned how to do this. And you whined about how you'd never have to be able to do this! While you don't have to actually diagram (although it might help), pay attention to the structure of the material. Note the conjunctions, the commas, the semi-colons, etc. Strict rules of grammar apply when you're talking about reading legalese.

3. I find that it helps to actually map out relationships and even give the parties names when I'm trying to unscramble legalese.

4. Bulletize the text if it presents you with several conditions.

Pardon me while I finish reading Harry Potter.

Sales Tax Guy

Getting Refund of Taxes from the Vendor

Tying in with the item from a couple of days ago, what do you do if the vendor has incorrectly charged you tax, and you discover it after you've paid. You want your money back, I presume.

The best way to avoid this problem is to have good AP procedures in place to avoid improper payment of taxes. But let's assume that you don't.

One easy way to get your money back is to simply take it as a deduction or debit memo on your next payment to the vendor. This works if you still owe them money. But then you're going to have problems with the vendor who now wants HIS money back. Depending on how interested you are in keeping this vendor happy, will affect whether or not this is an operative technique.

OR you can ask for your money back (a refund). This will require you to demonstrate to the vendor how they incorrectly collected taxes from you. This conversation will have to go higher than whomever you normally talk to in the billing or receivables department. Unless it's really a mechnical problem, this issue is way beyond them. You're going to have to talk, probably, to the vendor's controller, CFO, possibly even their lawyer.

There are two problems with getting the vendor to cough up the money.

Firstly, they don't believe you. All they know about sales and use tax is what they've been told. So you're gonna have to 'splain it to them. See above.

Secondly, they don't want to give you the money back because then they have to get the money back from the state. That presents a cash flow problem for them because they usually can't get a refund from the state UNLESS they have ALREADY refunded it to the customer. And then the state is likely to audit them. Most states see a substantial request for credit or refund as an invitation to an audit. And since nobody likes being audited, the vendor has got even more reason to be reluctant to refund the money to you.

So what do you do?

Most states take the position, either officially or informally, that the only person they'll refund overpaid taxes to is the person that wrote them the check in the first place, which means the vendor. So you're stuck. You need to get the vendor to cooperate. But what if, as mentioned above, the vendor resists?

If the vendor won't cooperate, then advise the vendor that you will go directly to the state for the refund. I'd suggest you state this formally, in writing, possibly on your lawyer's letterhead. Some states WILL refund your money if the vendor won't cooperate, goes out of business, is bankrupt, etc. But it's tough. And even if the state won't refund the money to you, the threat of going to the state (and thereby opening up the vendor to the aforementioned audit) may break up the logjam.

This, by the way, is a pretty relationship-destroying approach. And may even subject YOU to an audit. I'd suggest talking to everyone concerned before using this strategy.

(Sigh) Sounds like a pretty rotten situation. Yep, it is. The best way to solve this problem is, as mentioned at the top of this article, to develop procedures to that catch overpayments before they go out the door. We've talked about some of these already on this blog, and we'll talk about more in the future. Stay tuned.

Sales Tax Guy

And, of course, note the disclaimer

Vendor didn't charge tax - What do we do?

"A vendor didn't charge us the correct tax. He billed us 6%, the correct tax should have been 6.5% We advised him of this, then paid the uncharged tax as use tax on our return. A month later, he bills us for the difference. Do we owe him since we paid the tax on our own?"

Theoretically, you don't owe the sales tax since you've paid the use tax. But you messed things up by not giving the vendor a chance to do it correctly. You should have given the vendor a chance to bill you properly before you self-assessed. In the future, wait a month or two to see what the vendor does. At this point, my recommendation would be to make an worksheet adjustment to your use tax liability on your next return to get the money back from the state, and pay the vendor. That way his records are correct, and you'll avoid a long drawn out discussion with the vendor.

This may not be technically legal, but leave a good audit trail. If the auditor can understand what you've done, you should be OK. The state got their money...that's the important thing.

Sales Tax Guy
See the disclaimer

Why is my vendor charging me tax on drop shipments?

Here’s the problem.

- Moe (in California) orders goods from Curly, the retailer.
- Curly (in Wyoming) orders goods from Larry, the manufacturer or distributor.
- Larry (in Georgia, but with nexus in California) ships the goods to Moe.
- Larry bills Curly.
- Curly marks it up and bills Moe.
- Curly is registered ONLY in Wyoming, has a WY resale certificate and does NOT have nexus in California. Which means he doesn’t charge Moe any tax.

In, what I like to call, the “nutty” drop ship states (California is one of them), they require that Larry must charge CA tax to Curly, even though Curly is buying for resale. They will let Larry off the hook for the tax if Curly provides Larry with a California resale certificate (and CA registration number, of course). Curly doesn’t have this because he doesn’t have nexus in CA. And he doesn’t want to register in CA and therefore collect tax because he’ll loose any competitive advantage he has in CA, aside from the other problems with letting CA know he’s out there.

So Larry must collect the tax from Curly and Curly obviously has his margins squeezed. And he can’t pass on the tax to Moe because he’s not registered to collect tax in CA.

Moe also loses here because, since he has an invoice from Curly with no tax shown, the auditor will assess him for use tax on the purchase that Larry has already paid the tax on!

Many vendors (Larry) have been caught on this issue by NDSS (nutty drop ship states), so many of them just automatically follow these rules, regardless of whether they’re shipping to a NDSS or not. This causes problems for the Curlys of the world because they’re being forced to pay tax that isn’t truly due.

If you find yourself in this situation, I recommend that you research the NDSS situation in the ship-to state, and then challenge the vendor. Make them show you where they’re required to charge tax and show them what you’ve come up with. And of course, depending on the relationship you have with the vendor, don’t pay the tax.

There's more on this here

Sales Tax Guy
Of course, the usual disclaimers

Picture note: the illustration above is hosted on Flickr. If you'd like to see a larger version, click here

.tdropships

Contractors charging tax?

In most states, contractors pay tax on their purchases and don't charge their contracting customers tax. The problem arises for contractors that have a retail side of their business too.

If most of what they buy is for resale, but they do some contracting too, then they'll generally buy for resale and self-assess use tax on whatever they consume for the contracting business.

But if they buy mostly for the the contracting business (their use), but sell some as well, then they should probably pay tax on all of their purchases. But they've already paid tax! Therein lies the problem. What I'll recommend is specifically sanctioned by some states, and makes logical sense everywhere else. When you sell something (and charge tax) on something you have already paid tax on, then simply adjust your use tax basis on your return for the amount that you sold. That should square everything up.

Is is legal? As I said, in many states yes. In other states, they're usually silent on the issue. It certainly is a defenseable (and logical approach to take). Just don't tell em I said so. ;-)

Sales Tax Guy

See disclaimer