Wednesday, November 21, 2007

Where do we put the auditor

Don't put them next to AP. One participant in a seminar several years ago said that the auditor had been there for over a year and was now engaged to one of her AP specialists. This is not a good thing.

Find someplace for them far away from other human beings. Make them comfortable and be professional, but isolate them. The objectives are that they don't get too comfortable, and that they don't have the opportunity to overhear conversations.

Don't let them near the lunchroom or the copier room. Provide them with coffee, pop and offer to get snacks for them. If they need copies made, do that for them. Anytime they venture beyond their assigned office, they should be escorted by the audit contact who is yelling, "Auditor's coming! Shut up!"

Sunday, November 18, 2007

Golden Rule: Every state does it completely differently!

Another way of saying this:

It's different there! I don't care where "there" is, it's different!

Aside from some Constitutional restrictions including due process and the commerce clause, states pretty much are free to tax what they want and exempt what they want. And they do. Some states grant most of the typical exemptions (like non-profits, manufacturing, prescription drugs) and other states tax all that stuff.

And some states scrupulously do not tax services, whereas some states tax virtually all services.

Surprisingly then, probably because lawmakers aren't that creative, there is some consistency, generally in the form of the Golden Rules and other consistent practices, like the handing of contractors, leases, taxing only TPP, etc. But there are exceptions to even these general rules.

The message is simply this. Do not assume that any state where you're performing services, shipping to or receiving from has the same laws as the next state over. Everything is up for grabs.

A "motto" that has developed out of my seminars is, "It's different there."

Sales Tax Guy

Thursday, November 15, 2007

Links: Wikipedia on Sales and Use Tax

Here are more links on

Wikipedia includes several articles on sales and use taxes including a general article on sales taxwhich is not specific to the US. Then, there's an article on sales taxes in the United States which is includes a capsule summary of each state. Don't expect much from the summaries. Some states have lots of detail, and some states have a sentence or two. There's also an article on use tax.

Sales Tax Guy

Wednesday, November 14, 2007

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

Sunday, November 11, 2007

Getting the State's Official Exemption Certificate

Always attempt to get the official certificate for the state where the delivery is occurring. By getting the certificate that the auditor is used to seeing, you'll avoid questions. In addition, the auditor won't need to talk to his/her boss to determine if what you've presented will be sufficient.

The less thinking the auditor has to do, and the less questions they have to ask, the better.

Sales Tax Guy

Friday, November 09, 2007

Be nice to your auditor

As Patrick Swayze says in the movie Road House, "be nice."

Do not tell your staff, "You know that room in basement, behind the furnace, where we used to keep the asbestos? Put the auditor there. And whatever you do, don't let him have any Krispy Kremes"

Be nice.

I'll talk about the geographic placement of the auditor in another article, so let's talk about some other things to do.

1. If you get notification of what the auditor is going to be looking at, familiarize yourself with that law, and any forms and publications before the audit happens. This will help when dealing with questions and issues. See below.

2. Have an audit contact. This person will be involved in every meeting and will review all paperwork going to the auditor. This way, you have one person who knows everything that is being communicated to the auditor. This person will hopefully be able to build a relationship with the auditor, and see issues coming before they get out of hand. And it's not bad to have a witness to every conversation with the auditor.

Beware, however, of making the audit contact a tool of obstructionism. You want the auditor to do their job and get out of your hair. I don't recommend obfuscating and playing games resulting in they're feeling the need to stay for years.

3. Answer their questions, but don't volunteer more than is necessary.

4. When questions or issues come up, try to research them and resolve them as quickly as possible. It helps if you've done your research early (see above). You want to avoid problems being formally noted in the auditor's work papers. When that happens, it becomes harder to brush them aside. Managers get involved, formalities kick in, etc.

5. Most auditors are not experts in sales and use tax law. They know how to audit and they can follow their audit manual, but that may be the level of their sophistication. I had a guy in my seminar once whose auditor claimed to have a college degree. Even so, he had to spend half a day with the "graduate" explaining depreciation to him. So, if an auditor says something, don't assume they are correct. Ask them, in a non-confrontational way, for citations and research it yourself. "You know, it's not that I don't believe you. But could you show me where it says that because my boss is going to want to see something on this."

6. Consider wasting their time. If the auditor is only assigned for two weeks, consider making them less efficient than they would otherwise be. Take 'em out for long alcohol-related lunches. Engage in long bull sessions.

The controller for a video game company told me how they would put auditors in the show room. Employees would constantly whisper to him,"Hey, the auditors are in the showroom playing video games!" The controller would respond, "That's just what we want them to do!"

7. Be nice. I've had more than one auditor tell me that if they are treated professionally, they will be professional as well.

Here are some other articles about what to do during an audit.

Sales Tax Guy