What's taxable when it comes to photography?

There was an link on Sales Tax News and Links today that brought up this topic.  I actually wrote about this originally on July 16, 2009.  Amazingly, the article needed little updating.  But I have changed a few things and applied a little wordsmithing.  So for you professional or semi-professional photographers out there, enjoy.

Photography services

Most states don't broadly tax services - but some do. And photography is also considered the delivery of product (the prints), and that product is usually taxable as the sale of tangible personal property. However, these rules vary enormously from state to state.  So you need to research what YOUR state does.

For example, I'm in Illinois, and photography services aren't taxable. Even the delivery of the prints, if they're part of the photographer's service, like doing a wedding or a portrait session, are still not taxable.

However, in Wisconsin (a popular vacation destination for people from Illinois in case you've never seen Stripes), most photographic services, including shooting those portraits and weddings, are taxable. I bet that just bummed out a bunch of photographers I know in Wisconsin.

Film or print processing

Getting prints from the drug store is taxable in most states. It's the delivery of tangible personal property. And if you order prints online and they're delivered to you, you'll owe use tax if they don't charge tax.

Sale of prints

Just like the sale of any other tangible personal property, sales of photographic prints (eg. at an art show) are taxable.

Delivery of images online

In a few states, the delivery of pictures electronically is taxable. But while many states tax downloaded video, music and books, most states just haven't gotten around to photographs yet.  But that will change over time. And the auditor might try to bluff you, just for grins.

And if you deliver the photographs on a flash drive or a DVD, then you've transferred tangible personal property, and the sale is no longer simply a transfer over the internet but a true sale of TPP.

Special tax breaks

There are a few states that have special exemptions for the sale of art - and this usually includes fine art photography.  Don't get excited though.  Only a few states do this.

Here's the cool part

If you're selling your taxable prints, then the paper and ink that you purchase is usually exempt as purchases for resale (or ingredients if you're thinking manufacturing).  Heck, the inkjet printer might even be exempt as manufacturing equipment.

Please remember that, as you saw with Illinois and Wisconsin, the rules vary widely from state to state.  You gotta look it up for your state.  Because it's going to be different there.

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

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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

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Sneaky Taxes

Just because there's no sales tax on a particular item or service, doesn't mean that there might not be another tax lurking around the corner.

States seem to come up with them to trip you up.  Here are three situations that should worry you:

1.  In Illinois, some home rule jurisdictions are trying to tax self-storage.  Generally, there's no state tax on services, or even rentals, in Illinois, so this would be the kind of thing you wouldn't expect.  Sneaky.

2.  In Indiana, there's a very obscure rule on rental of space for massages, dancing etc.  I'd be willing to bet the rule was created as a way to shut down massage parlors.  They probably don't know about it, so the state can get them the way they got Al Capone - taxes!  It's probably easier to do this than to use undercover cops.

3.  But the top of the sneaky pile comes from Rosemont, Illinois (Illinois again...hmmm).  Here's a city that refused to tell a tax professional what the laws were in their fair city.  Think about that for a second.  A city passes a law, and then refuses to tell people about it.  How do you comply with that?  I should also say that Rosemont has a certain "reputation" in the Chicago area.

So, be on the lookout for taxes that might be lurking, ready to trip you up.  Do as much research as you can, but always be prepared to find something else.  I'd also suggest staying in touch with others in your industry and local jurisdiction to get a little advanced warning.

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The Sales Tax Guy
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See the disclaimer on the right.

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Sales Tax Tip - Freight Charges in Illinois

While this is specific to Illinois, it will help the rest of you understand how damn tricky these laws can be.  And don't take my word for the following - read the articles mentioned, and do your own research.

By default, freight charges on taxable purchases are taxable in Illinois.  However, they are not taxable if:

the charges are separately agreed to and

the charges are reasonable.  This means that the billing for the freight charge can't exceed the amount that was actually charged to the vendor.  In other words, the vendor can't make money on the "freight charge."

What the hell do we mean by "agreed to?" Based on this court case (beware - it's a PDF file), an indicator of "agreed to" is that the charges not just be separately stated, but that the customer has the ability to pick up the goods on that purchase.  Internet purchases generally don't give you that option, so freight is taxable on most internet purchases.

 Remember, don't take my word for it - there are more details.  Read the court case, read this article, and take a look at this one which is even more complete.

Still murky, right?  But if it makes you feel better, the option to pick up the goods is part of the rules in a few other states too.

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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

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Surveys? Freaking Surveys??? (warning - snark attack)

I just saw a  survey sent to state revenue officials regarding sales tax nexus. I've also seen one that involves enforcement of drop-ship rules.  There are others around. 

I'm not going to discuss the survey results - I'll leave that to the publishers.  The point is that, when it comes to some topics, we have to figure out how the state is going to enforce the law based on surveys!  Really?

My admittedly naive philosophy is that the laws should be written in some official place.  They should be in statutes, regulations, bulletins and court cases.  These are things that someone can look up.  They shouldn't have to be compiled by a publisher doing a survey.

I'm not blaming the publishers.  I'm blaming the states for coming up with nutty positions about gray areas based on stupid and complex laws that they created.  The publishers are just trying to provide us with some useful information.  I get that. However, I can see some problems.

Let's say that you take a position, based on the latest survey done by Joe's Sales Tax Consultants and Tattoo Parlor.  The survey measured the amount of time you must have a service person in a state before you have nexus.  It mentions Frank Derp as the source of the information for that state, and says that you would need a repairer in the state 10 days in order to have nexus.  Therefore you've carefully managed your visits to the state so that you're only there 9 days.

When you get audited, the auditor says you have nexus.  "But wait!" you splutter, "we kept it to 9 days and this survey (which you triumphantly slam on the desk) says it's 10 days."

There are at least three unpleasant ways this can go for you: 

1.  The auditor says, "I don't care what some survey says.  I talked with my boss and he said you've got nexus.  So that's it."

2.  The auditor says, "Oh yeah, that answer was given by Frank Derp.  I heard about that.  When the survey came in, they brought it up at the staff meeting.  Nobody wanted to fill it out, so Frank got stuck with it because he was sick that day.  We all laughed when we saw the answers he gave.  He was high on Dayquil."

3.  The auditor says, "Oh yeah, that answer was given by Frank Derp. He was an idiot.  He got fired a month after that survey came out."

This is the problem with surveys.  They're not official.  I agree they're necessary to be able to get some feel for the squishy enforcement positions of the state.  But if it's a gray area that requires a survey because the official laws aren't specific enough, proceed carefully.  Because the only laws that really count are the official ones.  And if it's gray enough to have to do a survey, how can you be sure the auditor will stick to the survey and not use his own, or his supervisor's judgement?

Your option, if the auditor sticks to his guns, is to fight it...which is going to cost you money.  And do you really think, if you wind up fighting this all the way to court, that the judge is going to pay much attention to what Frank Derp said?

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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

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Can I just pass on the tax?

A reader today posed this scenario. 

Mark is the manufacturer and sells to the retailer

Rhonda is the retailer who sells to the customer

Calvin is the customer

Apparently, Mark is charging Rhonda sales tax. 

Rhonda therefore incurs the cost of the sales tax.

Rhonda would like to pass on this cost to her customer, Calvin.

Can she?

There is an obvious question here

Why can't Rhonda buy from Mark for resale? This would seem to be the obvious and legal solution.  Particularly since Rhonda is required to charge Calvin tax if the sale is taxable and she has nexus in the state.

Two exceptions spring to mind

It's possible that this is a drop shipment and Mark has to charge Rhonda tax but Rhonda doesn't have a way to charge Calvin tax since she has no nexus in the delivery state. 

It's also possible that Rhonda is a contractor.  In most states, she pays tax to her vendors for her building materials but doesn't charge tax when she bills Calvin for the job.

These are the obvious and common exceptions - there are more.

Other than the above exceptions, Rhonda should be buying for resale and charging tax, if the sale is taxable.

However, if she is incurring sales tax for some reason (like the two listed above) and she can't pass it on, or is not allowed to pass it on, then it's a cost of doing business, and she has the ability to fold the tax into the price of her goods.  The only obvious restrictions I can see are:

Rhonda doesn't price herself out of the market and

the customer agrees to the price

Note that these are not sales tax law restrictions...this is just business.  Rhonda can set her price at any point she wishes, as long as the customer agrees.

However...

Rhonda generally can't charge Calvin something called "tax" in a state where she isn't registered.  Rhonda might think this is a way to recover the money from the customer without having to negotiate a new price.  Unfortunately the law generally requires that you must be registered in a state before you charge that state's taxes.  In addition, if she were to be audited, the state would ask her why she has not remitted that "tax" money to the state.  If Rhonda needs to show a charge on the invoice, call it a "we're going to hold you upside down and shake money out of your pockets" surcharge.  But don't put the word "tax" on Rhonda's invoice to Calvin.

And if Rhonda is making a taxable sale to Calvin, then she is required to charge Calvin tax, if she has nexus in the state.  And she should obviously be buying for resale.

Bottom line

If Rhonda is making a sale to Calvin that is taxable and she has nexus in the state, she should be charging Calvin tax.

If the vendor is charging her tax, she should figure out why she can't buy it for resale.

If it's some other situation where she's incurring tax as a cost, she can't pass it on as "tax."  But she can fold that cost, like any other cost, into her price. 

Geez, this stuff is complicated!  If you're reading this and desperately waving your hand because Jim missed something, I know.  But the more holes I fill in, the less understandable this is.  Suffice to say, it's messy.

And don't even get me started on absorption

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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

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What do you mean, I can't stiff the state on sales tax by buying from Amazon.com???

One of the political columnists* I follow has recently tweeted about how he loves to buy from Amazon.com because he loves (paraphrasing) sticking it to the state for sales tax. While Amazon.com hasn't started charging tax in his current state, who knows?  This particular state has tried, just like California, Colorado and a few other states.

Legally you can't evade the sales tax by buying from Amazon.com or another out of state seller who doesn't charge sales tax.  Legally, you owe use tax instead.  See this golden rule.

Use tax was invented to plug loopholes in the law where sales tax didn't get collected. Essentially, the law works this way: if you have purchased something that should have been taxed, and it wasn't, then you owe use tax.

The best example is a book from Amazon. com. In most states, they won't charge you tax. But you're not off the hook. It should have been taxed, but Amazon.com didn't have to (that's another long story involving nexus). Therefore, you as the buyer must pay use tax  Unfortunately, the state doesn't have a good way to collect it.  They rely on the buyer to know the law and be willing to comply with the law.  And they're kinda ticked off about it.

They do give you the opportunity. In many states, there's a line on your state income tax return, usually near the bottom of the second page, where you're expected to put something in there. Most people don't. And states generally have a form for you to fill out to report your use taxes. This is probably one of the least downloaded forms the states have. If you feel a pang of guilt, and want to start filling it out, it often has a name like "consumer's use tax return." Look on the state's web page under forms.

Individuals simply don't get busted on this (very often).  Sometimes, states do have ways to find this information and it usually surprises the hell out of the buyer.  But most of the time, the state just throws up their hands and tries to figure out ways to require Amazon.com et al to collect that tax.  So far, disappointment has reigned.

But if you go around tweeting about the fact that you like to burn the state on their sales tax, eventually someone at the state revenue department may decide that a letter, if not an audit is in order. 

Businesses, who will get audited eventually, really need to worry about this. Because they will get audited and get caught.  Individuals?  Well, my job is to point the law out to you, and make you feel a little guilty.  Beyond that, you're on your own.

*I enjoy this guy, so I won't tell his name, or the state. Although I think the state knows by now.

[This is an update of an article I wrote in 2009.  I've spruced it up a little, but it was hard to improve on perfection.]

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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

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Adventures in Sales Tax: Spas

If you follow my Twitter feed, you may have noticed that I have a weird interest in tweeting about sales tax violations that result in felony charges.  The vision of someone doing the "perp walk" because of sales tax is a strangely intriguing one to me.  These situations usually occur because a small business has collected sales tax and failed to remit it to the state.  The business has charged the customer tax, but not remitted it.  That's defrauding the customer.  That's a pretty clear and "perp-walkable" crime to me.  And they failed to pay the money to the state, which really ticks off the revenuers.

Today I came across this article about a couple of massage parlors getting busted in Columbus, Indiana.  There were the obvious charges that you would associated with such a business.  But there were over $350,000 in sales tax assessments!

I tweeted the article, but then thought about it.  Some states impose a tax on massage services.  Not many, but some do.  I knew that Indiana didn't impose such a tax (they don't generally tax services).  What could the assessment be for?  Yeah, they might sell a bottle of oil once in a while, but not enough to get to that kind of liability.  And if these places really are being used for what the criminal complaint describes, who buys oil?

So I opened up my trusty sales tax database.  I confirmed that there was no tax on massage services.  Then I searched Indiana for "spa."  Nothing.  Then I searched for "massage."  Bingo! 

Under Ind. Code § 6-2.5-4-4 (which is the section of lodging, accommodations and hotel rooms):

(a) A person is a retail merchant making a retail transaction when the person rents or furnishes rooms, lodgings, or other accommodations, such as booths, display spaces, banquet facilities, and cubicles or spaces used for adult relaxation, massage, modeling, dancing, or other entertainment to another person: (1) if those rooms, lodgings, or accommodations are rented or furnished for periods of less than thirty (30) days; and (2) if the rooms, lodgings, and accommodations are located in a hotel, motel, inn, tourist camp, tourist cabin, gymnasium, hall, coliseum, or other place, where rooms, lodgings, or accommodations are regularly furnished for consideration.

Those sneaky sons of guns in Indianapolis.  They nailed 'em on a section of the tax law I didn't expect...hotel rooms.  Now, nobody would ever think the business of a massage parlor is renting cubicles - it's incidental to the "service" being performed.  But if you're looking for a way to tax this kind of activity, and your state doesn't tax services, this will do quite nicely.  Everyone taxes hotels, just slide this extra "booth" clause in there.

What a great way to nail the bad guy.  Create a tax he would never have thought of and nail him with it just as the SWAT team bursts in!  (OK, I'm making that up).

So I learned something new today about Indiana.  And I'm going to be looking at those lodging statutes a little more carefully in the future.  And if you operate a massage parlor, you probably should as well.  Before those guys with the bullet-proof vests knock on your door.

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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 that haven't been discussed, and every state is different.  Here's more information

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Great Article: Beware of Posting Sales Tax Questions on Social Media Sites

from www.salestaxsupport.com

My heart always sinks when I do a public sales tax seminar and see a sales tax auditor shows up.  I know that the rest of the class will go completely quiet and not ask questions.  They're terrified that the auditor will notice.  And with all this social media flopping around, you just never know when those auditors are lurking, waiting to pounce.  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.
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Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.  And yes, I once did a seminar in a room with a mirror ball.  Actually, now that I think of it, a couple of times.  Sigh.

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Great Article: Open Your Mail

from Kelly Phillips Erb, at http://www.forbes.com

I've written about this myself, but it's a really evergreen topic. While the author discusses the need for you to read and respond to notices from the IRS, you get 'em from the state too.  Read the dang notices.  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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Great Article: Three Deal Breakers for Acquisitions

From the good folks at http://salestaxinsight.com

About a year ago, I wrote a true horror story about this problem.  This article summarizes the problem much more succinctly than I was able to do. 

This link is a new series we're offering called "Excellent articles that I wish I had written."  The short name is "Great Articles."  Enjoy and learn.

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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

Don't forget our upcoming seminars and webinars.
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Things Change

I was doing an on-site seminar earlier this week, and one of the things that came up, that I thought would be worth mentioning here, is that things change.  The problem is that we make decisions about sales and use taxes (along with everything else) and then move on.  A few years pass and things have changed.  But those decisions are still in place.  And if someone asks about it, you say, "Oh, we decided about that years ago."

Have you reevaluated the situation to see if the sales tax situation has changed?

Here are just a few things that immediately spring to mind where you might make a decision, and see the situation change, resulting in a serious error down the road.

Nexus
A couple of years ago, you decided the the presence you had in a state did not mean you had nexus.  You were even right!  But then, over the years, you have more sales people visit the state, you start renting equipment in the state, do some seminars, send your own trucks into the state, or some court cases are decided which result in you now having nexus.

And then, there are the new states you're in that you haven't even considered.  

Taxable services
You've determined that the services you offer aren't taxable in the states where you sell.  But are you subscribing to a tax newsletter to make sure that the state doesn't make those services taxable?  States are constantly looking for ways to expand their tax base and adding taxable services is one of the ways.  If you're not staying up to date, you're in for a surprise.

Occasional sales of equipment
In the past, you've occasionally sold the odd piece of equipment.  Those were occasional sales in most states.  But your business has grown and now you're an equipment dealer.  I just wrote an article about this last week. 

The moral?  Periodically you should take a big picture look at your past sales tax decisions and see if anything needs updating. Don't assume that the decision you made a couple of years ago is still good.

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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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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

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

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Gotta watch those widget sales

I had a question from a class participant a few days ago, and it was such a good question, I thought I'd use it here.  But I promised her I'd sanitize the heck out of it.  So think of this as a question "inspired" by the real question.

"My company is an HVAC contractor [in most states, contractor sales aren't taxable - they pay tax on the building materials they use].  We prepare widgets in our shop that will be attached to the HVAC equipment.  Since it's part of the construction job, we just cost the materials used for the widgets to the job and pay sales tax on the few hunks of steel that we use.  

However, we have a lot of customers who buy the widgets without our doing any actual HVAC work (our widgets are very popular and user installable).   When this happens, we just send the widget to the customer, and bill them.  We don't charge sales tax. Should we?"

You should be charging tax on the widgets that you sell at retail to your customers. If the widgets become part of the building where you're doing the HVAC work, then you would pay tax on the widget components when purchased. 

But when you sell the widgets outside of a construction contract, you are making retail sales of tangible personal property, and those are taxable sales.  You should be charging tax.

The problem is that, if you've already paid tax on the components of the widget when you bought them, and then you collect tax on your retail sales of them, then the state is getting too much money. In most states, there are two solutions (and you need to check your state rules to make sure of your options):

Purchases resold - Many states make provision for purchases you make that were taxed, and are subsequently sold at retail where tax is collected.  The states usually let you deduct your "purchases resold" from your use tax liability.

Buy for resale - If your retail sales of widgets are substantial, consider giving your vendor a resale certificate for all of the widget components and pay no tax on any of those purchases.  Then collect tax on your retail sales and accrue use tax on the materials that become part of your construction contracts.

Either way, there is extra bookkeeping involved.  But if the retail sales of the widgets are substantial, you should come up with a solution before the next auditor finds it.

This is another example of a situation where a business was making taxable retail sales without even realizing it.  Does anyone else have this problem?   You betcha!

And finally, if you are actually manufacturing the widget, you should look into whether or not there are any manufacturing exemptions available 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

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Manufacturing Exemption: The "Use It Here" Rule

Here’s a sneaky situation involving the manufacturing exemption.

There are quite a few states who require that, in order for the exemption to work, the use of the exempt items must be within the state. This makes logical sense, given the purpose for the exemption. But there are a couple of situations (that I can think of) where a problem would occur:

Situation 1

The reason I even thought about this rule was because of a guy in the class who ran a truck routinely from his plant in state B to pick up manufacturing equipment at a dealer in state A. He had asked an unrelated question, and I started thinking about it and realized that there was a problem.

Let’s say you’re the seller in state A. Your customer, from state B, comes in and picks up manufacturing equipment. You try to charge him state A’s sales tax, but he waves around his exemption certificate from state B, maintaining that he’s going to be using this equipment in manufacturing. But in YOUR state, the manufacturing exemption only applies to manufacturing equipment that will be used in state A. The "use-it-here" rule.  Since the purchase will not be used in state A, the customer’s state B manufacturing exemption is worthless.

Even if the buyer fills out state A's manufacturing exemption form instead, it won't be valid because he's not "using it here."  And you will owe state A the sales tax you should have charged your customer.

The solution is easy - simply ship the equipment to the customer in state B. Then, since it’s a shipment out of the state, state A has no jurisdiction, and the delivery is in state B. Everybody happy.

A similar problem exists if state A didn’t have any manufacturing exemption at all. In that case as well, the buyer’s state B certificate is irrelevant. Same solution.

Situation 2 

You purchase equipment and have it shipped to your location in state B. There’s a manufacturing exemption in state B, so no sales or use tax. But you then reship the machine to state C. Since you never used, or intended to use, the purchase in your plant in state B, and state B has a “use it here” restriction, you will owe use tax on that machine to state B.

Note that state C has a manufacturing exemption, but state B doesn’t care. And since you stored (used) the equipment in state B, they get to nick you for the use tax.

Remember, not every state has this "use it here" rule, so check it out first.

And if you can think of any more situations where this "use it here" rule would be a problem, please let me know.

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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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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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Whenever the conversation goes this way, I cringe

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

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

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

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

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

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

Arrrrgggghhhhh! And then I cringe.

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

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

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

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

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

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

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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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.
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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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