Friday, February 27, 2009

Buy a new car on Obama! (sort of)

Here's an article from the Washington Post that popped up on an income tax credit for sales taxes on new cars that's part of the stimulus package. Go out and buy a car!

Here's another article from, one from KFVS12 and one from the Middletown Journal. If you'd like to look for more, here's the Google search.

While I try to restrict this blog to discussions about state sales and use taxes, everyone once in a while ya gotta broaden your horizons. Particularly if it's timely.

While we're on the topic of news articles, here's a hilarious one about a guy who was trying to pay $1.50 in taxes that the store didn't charge. Beware of your government, Floridians!

Sales Tax Guy
Buy a CAR, dang it!

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picture note: Yes, that's me with my baby. She's getting a little old, but is still is sufficient for the use she gets.

Wednesday, February 25, 2009

"So, what's this use tax?"

I get this question all of the time and I just realized I've never written about it directly.

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 didn't have to (that's another long story involving nexus). Therefore, you as the buyer must pay use tax.

The states really don't expect individuals to pay the tax, although they give you the opportunity and they're kinda ticked off about it. 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.

But businesses, who will get audited eventually, need to worry about this. They will eventually get caught. See this golden rule.

Sales Tax Guy
See disclamer

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Monday, February 23, 2009

Accounting Tests for Nexus

One of the things with nexus issues is that the people who are likely to create the most problems for your organization in this area will be the sales and marketing folks. And they NEVER have a clue. I know they don't come to my seminars, and I'm sure they're not doing any outside reading. So it kinda falls to the accounting folks to keep an eye on this.

Since nexus is created by having a physical presence in remote state, then accounting should look for clues:

1. Paying bills to contractors for installation of your product in other states. That's the kind of thing that gives you nexus.
2. If you own, lease or contract your own delivery trucks, look at where they go. Delivery in your trucks usually gives you nexus.
3. Look at any bills for warehousing charges in other states. That indicates you have inventory being stored in a remote state.
4. In the same vein, look for any space rental charges in remote states.
5. If you have goods drop-shipped from a shipper in another state, that may give you nexus there.
6. Are you writing commission checks to independent sales reps or marketing firms based in remote states?
7. And, of course, if you're reimbursing people for their expenses incurred in other states, you've probably got a nexus problem there.

Enjoy making sales and marketing miserable.

Sales Tax Guy
See disclaimer.


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*picture note: Does this remind you of your sales staff?
This is Dirk of "The Swordsmen"
Bristol Renaissance Fair, Kenosha Wisconsin August 2008

Wednesday, February 18, 2009

Repair Labor and Maintenance Contracts

Here's the deal on maintenance contracts and repair labor.

Many states impose sales and use taxes on the labor to repair tangible personal property. In other words, if you get your rocket engine (see picture) repaired, you're gonna pay tax on the parts AND the labor. No surprise there, unless you're in a state that doesn't do this. In which case, you're probably shocked beyond all belief. Sorry. Hope you didn't spit anything on your laptop.

Anyway, the next question is whether or not maintenance contracts get taxed. Usually, maintenance and extended service contracts are taxable in states where the repair labor is taxable. And not taxable in states where repair labor isn't taxable.

However, if the contract includes a regular supply of materials - such as toner and paper in a copier contract, that will usually make the contract taxable. Even in states that don't tax repair labor. These types of contracts essentially become a pre-purchase of TPP and become taxable.

Finally, some states differentiate between a maintenance contract sold by the company who's going to be doing the service vs. a third party who will simply contract out the work when necessary. In the latter case, those are often considered insurance policies as opposed to maintenance contracts and not taxed.

Sales Tax Guy
See disclaimer

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Here's more information on the picture, if you're interested.

Monday, February 16, 2009

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

Thursday, February 12, 2009

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.

Tuesday, February 10, 2009

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

Saturday, February 07, 2009

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


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.

The Sales Tax Guy

See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.

Here's information on our upcoming seminars and webinars.

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

Friday, February 06, 2009

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.