An Interesting Issue with Rental of Tangible Personal Property

I came across an interesting item when I was browsing New Jersey's sales and use tax rules today. It's regarding the leasing and rental of tangible personal property.

First of all, to recap the general rule in most states: the rental of tangible personal property is a taxable sale. The lessor must charge sales tax on the rental charge of the TPP. But this also allows the lessor to buy the equipment "for resale" so he doesn't have to pay sales tax on his purchase. All he has to do is provide a resale certificate to his vendor. Done.

Now this particular glitch is one I noticed because it was clearly spelled out for New Jersey. But it probably applies in the other states as well.

The lessor buys equipment to rent. He pays no sales tax. He charges his customer tax. But what happens when there's an operator involved?

Now we have to figure out if the real transaction is the hiring of the operator, with the equipment becoming incidental to the real purchase of the operator's services.  Or are we still renting a machine and the operator is just there because we don't know what levers to pull? 

There are a couple of different ways that the states handle this:

1.  If the operator has control over how the machine is used, it's no longer a taxable rental (with some variations on what is meant by control).
2.  If the cost of the operator is more than the cost of the rental, it's no longer a taxable rental.
3.  If there's an operator, it's no longer a taxable rental.  Period. 

Here's the glitch:  Let's say you routinely provide your equipment with an operator.  And based on the way the state's law works, the rental becomes non-taxable.  Then you really can't be purchasing the equipment with a resale certificate anymore, because you're really not buying for resale.  You're not charging sales tax anymore because you're not making taxable sales.  You're really using your equipment, or rather, your operator is.

So, if you're the lessor, you should have had your vendors charge you tax (or you should have paid use tax) when you bought the equipment you rent with an operator. Which means, if this is new to you, you owe the state a bucketload of money. 

Interesting huh?  I wonder how many leasing companies do this;  Or have gotten busted on this.  And I wonder how many auditors even check for this.  

This illustrates a larger issue.  Many sales tax exemptions are based on how you will use the purchase (or not use it, in the case of the resale exemption).  But if you change your mind later, you lose that exemption.  How many of you are paying attention to this?  Here's another example where sellers get burned all of the time.

Hope I didn't ruin any weekends.

Well, OK, yeah, I kinda do.  (grin)

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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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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.

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

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.
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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Making sales you didn't know were taxable

Part of a continuing series

I had a guy in my seminar in state "A". He was an equipment rental company. He had stores in both state A and also the next-door state "B".

The tax rate in state A is about 9%. The tax rate in state B is about 6%. If you're renting a very expensive piece of equipment, you just might be thinking you'll rent it in state B, bring it back to state A and save yourself 3% sales tax on the rental.

Unfortunately, for the guy in my class, he didn't realize that the vast majority of the states require that you charge the sales tax on rental of tangible personal property (TPP) based on where it's used, not simply the location it is rented from.

So, this guy got audited by state A. And they nailed him. If I remember, the assessment was in the neighborhood of $500,000. That's half a million dollars, folks. For a really bad mistake.

Frankly, I'm surprised that someone in that business hadn't known about this rule. Could it possibly be because his CPA and lawyer didn't know what they didn't know and gave him bad advice? Or no advice at all? Nah.

So if you're in the rental business folks, watch where your equipment is being used.

By the way, you're probably asking how the rental company could have known where the equipment was being used. How could they have known to charge the tax for state A as opposed to the rate in state B where the store is? Because most of the time, the rental company delivered the equipment to the job site. Ahem.

Sales Tax Guy

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The Resale Exemption

This is really almost not an exemption. That's because purchasing for resale is fundamental to the concept of sales and use taxes (SUT). SUT is usually a tax on the final consumer (or at least the transaction involving the final consumer). Since someone buying product to resell isn't, by definition, the final consumer, there shouldn't be any sales or use tax. Henceforth, the resale exemption.

If you buy something that you're going to sell to someone else, you shouldn't pay sales or use tax on it. You should provide your vendor with a resale certificate (that's what it's typically called). This gives your vendor reliable assurance that you're not to be taxed and why.

Then, when you sell your product, you must charge your customers tax and remit it to the appropriate state. Unless, of course, your customer is also buying for resale, in which case he/she needs to provide you with a resale certificate.

This is called the resale exemption. This is not absolutely universal, but it's pretty dang close. And it's really not an exemption like food, non-profit organizations, etc. It's fundamental to the entire concept of sales and use taxes.

There are variations on this rule. For example, in most states, real property construction contractors who buy building materials for their projects are considered the end users and are not buying for resale. Lessors, in most states, buy their property for resale because they will be charging the lessee tax on the rental or lease charges. And there are a few states where people, who provide taxable services, can buy some of their materials tax free using this exemption. Finally, the ingredients exemption for manufacturers, as well as the container exemption, are natural extensions of this exemption.

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More examples of taxable stuff you didn't know about

One of the things you need to be aware of is that some of the services and things you sell are taxable and you didn't even know it. Here are a few from some recent assessments.

A trucking company got nicked for the sales tax they should have charged the contractor drivers that they sold the trucks to. The transaction was complicated, but they WERE selling the trucks and it didn't qualify as an occasional sale because they sold a LOT of trucks.

A time-share company that sold furnished apartments should have been charging taxes on the sale of the furniture. And the fact that they had already paid tax didn't count because they "used" them by having them in the units to show before the units were sold (they were "on display).

A boat club found out that its membership fees were taxable because they really were rental fees. And the rental of boats was taxable.

Are you making taxable sales without knowing it?

Many businesses make sales that are taxable, and they don't realize it. I herewith start a new series (actually it's a continuation of a couple of other posts, but now I'm making it official) of situations where an organization should have been taxing their sales and didn't. I'll list a few examples here, along with some categories, but there will be many more in the future.

Sale of services in your state that are taxable, and you didn't even realize it. For example, this story about a recruiting firm in Pennsylvania who didn't realize that their services were taxable. Another one, which I was reminded of in a seminar the other day, was a bank that had acquired a convention facility and didn't realize that meeting room rental was taxable in their state.

Exempt organizations who think they're off the hook on the sales tax on their sales. A city in Texas who put a parking garage and didn't charge tax on their parking fees got stung on this one. They thought that, because they were the city, they didn't have to worry about that stuff.

Services vendors who don't realize that their services performed in another state, are taxable. Typically repair companies, contractors and professionals will get stung by this one. They don't even think about taxing services that are non-taxable in their home state. It never even enters their minds.

Non-core sales. Many companies are making sales that are taxable, but because the sales are a small part of their total operations, they don't think about the sales tax. I had a guy in the seminar who worked for a manufacturing operation that ran a cafeteria for their employees. Their sales of food were taxable sales, but the company didn't even think about those sales and got stung for over $100,000 in taxes. Other types of sales in this category include the company store and vending machine sales.

Occasional sales that aren't occasional sales Depending on the state, if you make enough sales of a particular type of product, you're no longer making occasional sales. You've become a retailer. For example, a business that has monthly surplus sales of office equipment and computers to their employees has probably become a retailer and should be charging sales tax. Another example would be intercompany sales between subsidiary corporations. If done often enough, they may become taxable sales, depending on the states rules regarding occasional sales.

And, of course, the big one, nexus. Beware of making sales to a state where you have the hint of a breath of the possibility of a potential physical presence. You may need to be collecting that state's tax.

Stay tuned for more stories.

Sales Tax Guy