Monday, January 12, 2009

Charging Taxes Instead of Raising Prices

Here's a new scam that, frankly, makes sense - if you're a felon.

There was a case recently where a seller charged tax on a non-taxable service. He didn't call it "sales tax" - he just called it "tax." But he put it on the invoice where you'd typically see sales tax. And his employees used a sales tax rate card in the presence of the customer to calculate the "tax." He knew the service wasn't taxable, he was just trying to make more money. He wanted to raise his price but he couldn't because he had competition. So he decided to just start charging "tax."

The problem is that the state asked him where the money was. If you're going to charge your customers tax, even if incorrectly, then you're expected to pay the money to the state. Which, of course, kind of defeats the purpose.

The article I read did not indicate the penalties assessed by the state. I hope they were high. I wonder though, if the state took any action to get the customers, who had been illegally charged tax, their money back.

Probably not.

The moral of the story is that you need to be aware of the taxability of what you're buying. And if the seller is charging tax on something you don't think is taxable, then yell. And threaten to call the revenuers.

Tuesday, January 06, 2009

Tanning Salons

I recently heard of an interesting audit practice.

One of the things that sales tax auditors want to do is make sure that a business is not making unrecorded sales on which they should have paid sales taxes. In the particular state where I heard this, tanning services are taxable. But to make sure the salon was actually reporting all of their sales, the state reviewed their electric bills for the last few years. Why?

The answer? Since the major use of power in a tanning parlor is the tanning bed, then you can see a pretty close relationship between the use of the bed and the electricity cost for the business. Once you know the ratio (which the state has probably already calculated), then a simple comparison of the power use of the store versus the reported sales of tanning services will give the state a good (but not bulletproof) idea of whether or not all of the sales have been reported.

Occasionally, they have a flash of brilliance. What are ya gonna do?

Sales Tax Guy