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

Watch those numbers

Beware of the numbers you receive from your customers on those exemption certificates. The most common mistake they make is to put their Federal Employer Identification Number (FEIN) on the forms. That is usually NOT the number. But it's the number they give because most accounting folks know their FEIN by heart. It's the first thing that comes to mind when anyone seems to need a longish ID number.

Most states assign their own numbering sequence and don't use the FEIN (which is assigned by the IRS*). The number on the resale certificate provided by your customer should usually be the number they received from the state when they registered as a retailer/dealer/reseller. And, except for a couple of states (MI and NY for example), it ISN'T the FEIN.

And if the state assigns other numbers, such as for non-profit organizations, again they are rarely use the FEIN.

If you're not familiar with the numbers used by the state you're getting the certificate for, then ask your customer to give you the number off of their license or permit, off of the sales tax return, or off the document they received from the state.

Picture note - I found a random number generator on Google and pasted it into an old picture I had. Cool, huh?

Sales Tax Guy

*I like to think of the FEIN as a company's "social security number". It's used in the same way for tax filing purposes and to identify the company, and has the same number of digits. And just like the SS number, it's become a more universal ID number for other purposes besides those of the IRS.

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

The Standard Contractor's Rule

First of all, a definition: in this discussion, "contractor" means a construction contractor - someone taking tangible personal property and turning it into real property.

In most states the standard way these situations are taxed is that the contractor pays tax on his building materials - the stuff that goes into the building. He does not charge his customer tax. The logic is that the contractor is actually using those materials to perform the non-taxable service of building real property.

The other view is that the contractor is the last person to buy the building materials as taxable tangible personal property. Therefore, he pays the tax. Either way, states have gravitated towards the treatment of the contractor's purchases as being taxable.

Of course, the cost isn't eaten by the contractor. She will pass it on to her customer as part of her materials cost. But the sale to the customer is not a taxable sale and therefore there should be no tax on it, as such.

This same treatment is usually used for contractors that repair or improve real property as well.

Maybe half of the states have an exemption that allows the contractor to purchase their building materials tax free if the project is for an exempt organization, like a church or a school. But it is not universal.

Finally, there are states that do not do it this way. They either consider the entire sale from the contractor to the buyer to be taxable, the services to be taxable, or some combination thereof.

And then there are a couple of states that have a contractor's occupation tax. Sigh.

Sales Tax Guy
See disclaimer and make sure you check the rules in YOUR STATE.

Two Different Types of Property

[THIS ARTICLE HAS BEEN UPDATED, OVERHAULED AND REPLACED!]

Seems like we should have these cleared up for future purposes
While there are variations, these are pretty good definitions in most states.

RP - Real property

Real property is generally property that has been:

1. permanently
2. affixed
3. to other real property (like land and buildings) and
4. integrated into the value or use of that real property.

Factors that that are considered for item 4 include whether the additional property extends the life, or increases the value of the existing real property. One test that I've seen used, which is pretty good, is: if the building was purchased, would the new owner probably retain the addition, or would they probably tear it out?

TPP - Tangible personal property

Tangible personal property is property that is perceptible to the human senses (tangible), and is not real property. See above.

Note that, in general with lots of exceptions and variations, sales of real property are not taxable, but that sales of tangible personal property are, by default, taxable.

And then there's a third type of property: intangible personal property.

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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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Commercial Refrigeration Equipment

I saw this article recently involving a ruling from Pennsylvania. It caught my eye because, well it's my job. But also because this very question has come up more than once in the last year or so. And it sticks in my mind that it came up in Pennsylvania. So, you PA folks out there, pay attention.

For some of you, this might be interesting as a guide to how YOUR state might treat this equipment. And for the rest of you, who are wondering why you should care about commercial refrigeration (haven't typed this word yet without misspelling it) equipment, the theory itself is interesting.

The problem involves installing those big units in grocery stores. Do they become real property or not? In other words, is the sale of the equipment treated as a sale of installed TPP and therefore taxable. Or is the resulting installation considered RP (real property)? In which case, the contractor rules kick in (contractor pays tax on building materials, does not charge customer tax).

PA came up with, what I think, is a pretty good test. If the refrigeration unit (there, I spelled it right) is self contained with the compressor being inside the unit, then it's considered the sale of TPP and the seller would charge the grocery store sales tax. However, if the compressor is located outside of the unit, probably someplace else in the store, then it's considered RP. In that case, the contractor pays tax when he buys the unit and he doesn't charge tax to the grocery store - the standard contractor treatment.

The theory, for the rest of you, is that when you are installing big equipment, one test for whether or not it's a real property contract and therefore taxable to the contractor but not to the buyer, is whether or not the equipment is self contained and can function on it's own. If so, it's a sale of TPP and therefore taxable to the buyer.

But if it still needs other equipment in the building to be able to function, then it might be considered a real property contract and treated under the normal contractor rules.

Like I said, interesting. No, fascinating!

Sales Tax Guy
See disclaimer.