Wednesday, August 27, 2008

News Link: Billions in sales tax not collected

Here's what happens when the news media gets involved with these issues. They have no clue. If you look at the detailed list, many of these are standard exemptions that exist in most states. No explanations. Just the sexy items. Sigh.

Monday, August 25, 2008

Digital Converter Boxes*

We here at SalesTaxGuy are always looking out for you folks. We just wanted you to know that. So when these stories started popping up, we knew you’d be concerned.
Y’know all of those announcements on TV about the upcoming shift to digital, and how you can get a coupon for the converter box? And you’ve all been worrying about the sales tax impact of that coupon, haven’t you? Yep, I knew it. So, here’s the information you’ve been desperately seeking.
So far, of the states that have made an announcement about this, they seem to be roughly split in half.
The good guys are considering the coupon to be a reduction in the basis of the tax calculation. Therefore, if you paid $50 for a box, and the coupon reduces the price to $10, the sales tax will be calculated on the $10 - NOT the $50. In some cases, the state law already supports this method, in other cases they consider the coupon to be a sale to the US government. Either way, these states are the good guys, as of this writing: WI, PA, FL, CT, KY, CA, IL, TX
Then there are the states wearing the black hats (the bad guys)…you’ll have to pay sales tax on the full amount of the sale with no deduction for the coupon in: NY, TN, UT, OH, NE, SC, NM
If you’re saying, “Huh?” then you probably don’t know about this little coupon situation:
When it comes to coupons, most of the states say that a coupon, issued by someone other than the retailer, will NOT reduce the basis of the tax calculation. If you buy some soap and use the dollar off coupon on the $3 bottle, then the tax is still calculated based on $3. The assumption is that the selling price hasn’t really changed. It was just paid for with $2 of your money and $1 of the manufacturer’s money.
But in the case of the converter box coupon, the theory, in some states, is that, since the US government is providing the coupon, $40 of the sale is actually to the US government and that sale can’t be taxed. And some of the states rightly think that making people pay the sales tax on that full $50 is not the politically wise thing to do.
So, I hope that’s a load off all of your minds.
By the way, in my research, I came across the link to get the aforementioned coupon…
Happy viewing.
Sales Tax Guy
*The picture is not mine. Thanks to DixiePistols. Here is a link to the picture

Saturday, August 23, 2008

Link: Ohio's Definition of Taxable Food
A short article on how one state handles this issue

Monday, August 18, 2008

Link: Sales tax idea intriguing; needs study

This article shows some of the differences between property taxes and sales taxes and the reasons why sales taxes are popular.

Saturday, August 16, 2008

Don’t Trust Auditors

First of all, in the event that there are any auditors reading this, there are good people doing this job, including you. I’ve met a few. In fact, when I actually was an accountant, I’ve been lucky enough to have mostly good auditors. There was that time when one of them had to keep leaving early to testify before a grand jury. But that’s another story.

Most of what I talk about here are stories and examples that I’ve heard from people in my seminars, or from actual conversations with auditors. I think that most of you who are reading this, who are auditors, would agree with me. You shouldn’t be the only source of information for your victims. That’s the point of this article. Taxpayers shouldn’t trust auditors for these reasons:

1. Auditors are not necessarily well-educated accountants.

They may not even have a degree in accounting! I had one guy in my class who described an audit where he had to spend an entire afternoon with an auditor explaining depreciation to him. Now I learned about depreciation in freshman year in college. I’ll admit I had some problems with sum-of-years-digits, but I got straight-line pretty fast. If you have to teach an auditor about depreciation, do you really want to rely on him for tax information?

The state revenue department doesn’t get the top graduates either. They go on to jobs with large companies, CPA firms, graduate school, etc. The rest of the business world and the IRS gets most of the rest of the good folks. Let’s put it a different way…I know of no one who got a degree in accounting, with high honors, who skipped the recruiting fair and went directly to work for the state revenue department.

Keep in mind, for the most part, a front-line auditor’s job consists of looking at invoices all day, working in miserable spaces, surrounded by people who hate you. Not a great way to attract the best talent.

2. They usually receive bad training.

A couple of years ago, I had a group of auditors in my seminar. When I asked them at the break why they were in the meeting, they said that it was their in-service training for the entire year! One 6 hour seminar, that is at a general, introductory/intermediate level, was their training for the entire year? And this was not a small, backwater place either. But frankly, from the looks on their faces, and the questions they were asking, an introductory seminar probably was the right place for them to be.

A former auditor was in my class recently who described her new-hire training as an auditor. On the first day, after she had taken care of the paperwork, etc., her boss handed her the state audit manual and said, “Read this. You’re going out on your first auditor tomorrow. Solo.” So, after half a day of reading a manual, this recent accounting graduate was out there auditing companies, putting them threw hell, giving them bad information, etc. And all because the state only did training for new recruits every quarter.

There are some states that take auditor training seriously. I get the sense that most don’t.

So don’t assume your auditor even knows the law. At best, if they paid attention in class, they know what the trainer wants them to know. And trust me, they don’t memorize the statues and regulations.

3. They’re job is to get money.

Given that you’re dealing with auditors who are not necessarily well educated, and haven’t been well trained, the capper is that they’re told to go out and get money. So they will do what they can. Which means they will interpret the law badly, possibly not even follow the law, or maybe even intentionally bluff you. And I’ve heard lots of stories about all of these situations.

What can you do?

Don’t trust them! Make them show you where the law says you have to do it this way. If it’s the law, it’s written down. If they say, “well, that’s how we do things,” then you’ve got some room to maneuver. I call that an undocumented enforcement policy. It isn’t the law. Although a badly trained auditor may think it’s the law.

To me, the best way of keeping an auditor in line is to have a sales and use tax expert (not a generic lawyer or accountant) in on the meetings. This way they know that you’ve got someone in your corner who knows more than they do. They’ll be more careful, and they will be less inclined to bluff. And if you can’t afford your own expert, then make sure the auditor knows that you’re not going to be a pushover. Research these issues as they come up using whatever resources your boss will spring for. But make sure the auditor knows you intend to be smarter than them.

Sales Tax Guy

And again, apologies to all those good auditors out there.

Thursday, August 14, 2008

Golden Rule: Taxable Sales

A taxable sale, one that triggers either sales tax or use tax, occurs when all of the following events happen:

1. There is a sale
A transaction has occurred where one party bought something in exchange for something else (usually money, but not necessarily - a swap would also be a sale). A gift is not a transaction. So, with the typical exception of registerable items, like automobiles, there is usually no use tax imposed on someone who received something as a gift.

2. Of tangible personal property (TPP) or taxable services
TPP is tangible, which means it's perceptible to the human senses. And it's personal property. In most states, personal property is defined by what it's not. If it isn't real property, then it's personal property. And real property is generally defined as land and anything that is permanently affixed to land (or other real property) and integrated into the use or value of that real property.

So it's TPP if it is not permanently affixed and integrated into real property. The ship above is TPP. It's really, really big, but it's not permanently affixed to land. And because I took a picture of it*, then it was obviously tangible.

Finally, every state does tax some services. Some states tax many services, other states tax very few.

3. By a retailer
Generally, the sale must be made by someone who is in the business of selling the product or service. If they're not in the business, then they're making an occasional sale. That ship, if sold by a shipping company, who is in the business of using ships - not selling them, wouldn't be taxable because it was sold in an occasional sale. Except that it may be registerable. If so, then like automobiles, the buyer will owe use tax. The state will get those big purchases whenever they can.

4. To the final consumer.
If the sale was to a dealer or wholesaler, then it was for resale. It wasn't sold to the final consumer. The final consumer is generally going to be the person who bought for some other reason to resell, or they are simply the final buyer. Either way, identifying the final consumer usually isn't that hard.

So, to recap, anytime there is a sale of TPP (or taxable services) by a retailer to the final consumer, then you have a taxable sale and either sales taxes or use taxes are due.

Ta da!

Sales Tax Guy

* I took this picture from the center of the Golden Gate Bridge in San Francisco in 2004. I highly recommend that walk. It's beautiful and exhilarating.

Tuesday, August 12, 2008

Golden Rule - The Invoice is Your Record

Most states require that the user pays use tax. But, the user is off the hook if they can show they've already paid tax to the vendor. And how do they show this? The invoice. In other words, if the seller has put tax on the invoice, then that document is not only the receipt for the payment, but is also the buyer's receipt for having paid the tax.

And if you've gone through an audit, you'll know that sitting in a room, paging through invoices looking to see if taxes were charged, is a significant part of the auditor's routine.

Note, however, that the tax must be billed by the vendor. A scribbled comment on the invoice that you've paid the tax separately probably isn't going to work.

Another thing to keep in mind...and this is more record-keeping. When you do need to make notes for the file that will help during an audit, try to make the notes on the invoice itself. If you make it easy for the auditor to see the explanation, you'll have less questions from that auditor, and will probably keep issues from getting out of hand. And you'll build credibility by having good records.

If you simply staple the paperwork to the rest of the material that's already attached to the invoice, it may get lost. I've worked at some companies where the AP specialists would need to order special, heavy-duty staplers just to keep all of the paperwork in place. And we've all seen those odd pieces of paper sitting in files and wondered, "I wonder what paperwork this goes with?"

If you are going to attach it, attach it well. AND, attach it close to the invoice as opposed to in back, so it will be less likely to detach itself and get lost. AND make a note on the invoice indicating that the paperwork is there.

Sales Tax Guy

Link: Hawaii's General Excise Tax Regressive Like Mainland Sales Tax

Not just for Hawaii, this article describes how sales taxes are regressive taxes. Plus, it gives me a chance to give you a Hawaii picture (grin)

Link: State, Nassau to share records to find sales-tax cheats

Seems like something they should have already been doing.,0,4506749.story

Link: States may tax iTunes, other digital downloads

Look out! If they're not doing it in your state, they will...eventually, maybe.

Link: Economy threatens sales-tax holidays

A good article discussing the tax planning issues involving sales tax holidays, and lists the states that have them. I've seen this article in several papers.

Friday, August 08, 2008

Thursday, August 07, 2008

Link: The State of Your Retirement Can Be Taxing
Scroll down to the section on sales taxes. Written for potential retirees, it's a very nice summary of the way sales tax works, at least in terms of rates and basic exemptions.

Link: Sales tax holiday victim of economy
Here's an example of why you can't count on even "permanent" sales tax holidays.

Link: Tax Accountant - Sales & Use Eddie Bauer Bellevue

So, if I ever get tired of doing this...

Just to show you there are places in this world for sales and use tax geeks.

Wednesday, August 06, 2008

Link: Gov. Proposes Hiking Sales Tax

California is thinking about it.

Tuesday, August 05, 2008

Do Trade Shows Give You Nexus?

As usual, it depends on the state. Some states are strict, some states are more laid back. The best I can do is give you the factors that states may consider to determine if you have nexus.

In no particular order, here are the factors any of which could give you a problem:

1. How many person-days per year are you doing trade shows in the state? The fewer person-days (this used to be called man-days, but I'm being politically correct, if obtuse) a year you spend in the state obviously will reduce your chances of having nexus.

2. Do you take orders AT the show? Or do you merely demo the product and hand out literature. If you take orders, that is gonna be a problem in many states. On the other hand, you may try to be tricky and pretty much close the sale but tell your customers that you'll take care of the paperwork after the show. Keep in mind that the states aren't stupid. They've found most of the loopholes.

3. What's the target market for the show? If you're doing an international show in Chicago at McCormick Place for a few days a year, and you don't take orders at the show, you're probably not going to have a problem. But if you do a home improvement show at a local expo center, that's targeted for the local market, you may have a problem regardless of the number of days you do the show or whether you take orders.

4. Do you actually deliver the product at the show? If so, you should be charging sales tax. Nexus isn't even an issue anymore. It's an INTRAstate sale. Unless the state allows you a temporary permit to collect taxes just at the show, you'll have to register, which really complicates things.

Here's the overall gist. Generally, the physical presence that will give you nexus in a state will have something to do with helping you exploit that state's marketplace. If you're doing a show in a state, and you're trying to sell to that particular state, and you do it more than a few days a year, you'll probably have nexus.

And don't forget that you may owe use tax, in that state, on the property, samples and equipment you bring to the show. Thought you were off the hook, eh?

The Sales Tax Guy

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.

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