Monday, April 27, 2009

Question about Certificates

I just got this one emailed to me from a seminar last week in Pennsylvania. I've edited and sanitized it for you to enjoy.

My company has requested exemption certificates from all of our customers. However, it's been a while, and they have not all been returned. If we do not charge tax when we don't have a certificate, and we get audited, are we responsible for the tax to the state?

If you don't have the exemption certificates when you get audited, you will probably be held responsible for the taxes. That's why you get them - to prove why you didn't charge tax like you should have. Depending on the state and the auditor, you may be given some time (usually a couple of months) to scrounge them up. But you will lose money because you won't be able to get the certificates from everyone. Some sales were probably taxable, some customers will be uncooperative, and some will have gone out of business.

On the flip side, as a customer, we supply our exemption certificates when requested, however we have not been required to do so by all of our vendors. What happens when we get audited?

As a customer, if the vendor screws up and doesn't get the certificate from you, it isn't your problem (assuming you've paid any appropriate use taxes on your own). But be prepared for a phone call or letter in a couple of years when they get audited.

Sales Tax Guy
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Sunday, April 19, 2009

Recordkeeping - the fundamental concept

Part of a series on essential actions you need to take

Remember, the audit is not going to be tomorrow, when things will be fresh in your mind. It will be three years away. That's three vacations away. Three Christmas's away. Three Fourths of July away.

You have to document things so that you'll be able to figure it out in three years. A good way to do so is to prepare your notes as if you won't be the person reading them, and trying to explain things to the auditor. And you probably won't.

There's a good chance you're going to be doing something different in three years (hopefully you got promoted out of having responsibility for sales and use taxes). And even if the poor sucker, audit contact is still you, you're going to have forgotten everything anyway.

So document like it won't be you.

Sales Tax Guy

Wednesday, April 15, 2009

So, what triggers an audit?

Here, in no particular order, are some reasons why the auditor might pay you a visit:

-They find invoices from you to your customers where you haven’t been charging tax. If you’re shipping from within the state, why the heck aren’t you charging tax if it’s a taxable sale? And if you’re from out of state, the auditor might believe you have nexus in their state, particularly if your customer mentions that your rep visits every week.

-They find invoices to you in your vendor’s files. And the vendor didn’t charge you tax on a taxable sale. They may decide to audit you to see if you’ve accrued the use tax.

-There are certain industries that just get pounded because the taxing policies are so complicated that it’s guaranteed that errors will be made (eg. manufacturing and construction). Remember though that the auditor isn’t looking for the errors that were made in the state’s favor. They’re only looking for situations where you failed to pay enough.

-And if one of your competitors gets audited, they may say something like, “well, everyone else does it.” And you know what’ll happen then.

-Some states have wised up to the fact that some professional services organizations (like architects, CPA’s and lawyers) haven’t been paying use tax on their purchases. And they had no clue because, since they didn’t have to file a sales tax return, they didn’t even see the line on the return that talks about how they owed use tax on their purchases.

-Asking for a large refund or credit is sure to attract that attention of an auditor.

-If you get audited for nexus by one state, and they find stuff, and they find you have nexus in other states, you'll get snagged by those other states. If you get nailed by one state for nexus, immediately contact a SUT professional to deal with the situation before the other states call you.

-And the final reason you get audited…they threw a dart and hit your name.

Sales Tax Guy

Monday, April 13, 2009

There are no cheap answers

One of the most common questions I get is, “where I can find reliable, compiled information for every state on the web?” And they want it for free.

Folks, it doesn’t exist and here’s why.

First of all, the information is there. But most of it will cost you money. Therefore, not FREE.

There are a few Web pages that will compile some state related information for you. But it’s not terribly reliable. Usually people give away free information on the Web because it’s their hobby (not many people are “into” sales tax), or they’re trying to sell advertising (that would be me) or services (me again). But the problem is, if they’re not directly making money at actually providing detailed state by state compiled information (in other words, subscriptions), keeping it up to date becomes one of those things that they’ll get around to when they get around to it.

That’s why I actually try to avoid giving you that level of detail. Because people who get paid to do it are much more reliable and authoritative then me. I have done this kind of research for certain specific issues, but I’ll put a disclaimer on it that it’s only intended to show the trend, not the specific, authoritative law that applies to you.

So, that’s the answer. The only authoritative, free information at the state level will be the states’ individual web sites. Anything free that compiles that information for all states will probably be of minimal value and may go out of date by the time you read it. If you want reliable compiled multi-state information, you’re going to have to spend money.

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. Here's more information

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Friday, April 10, 2009

A Guide to the "Sales Tax Guy"

Here is a guide or index to the various articles we've written on this blog:

First of all, there's Sales and Use Taxes in a Nutshell - a very basic article to give you a picture of the topic in 5 minutes or less.

Then there are the Golden Rules of Sales and Use Tax...what I consider to be the fundamental principles of the topic. Things you really ought to understand. The Golden Rules tend to be pretty consistent regardless of the state you're discussing. But the taxing policies vary enormously from state to state leading us to a motto: It's different there. It almost always will be.

We give you some ideas about policies and procedures and tips and techniques that you should at least consider implementing in your organization. In particular, these are things you really should do.

And we constantly hear about some sales you may not have realized were taxable. There are other tax traps. But we also try to find ways to reduce your taxes.

Auditors make your life miserable. Here is a guide to some of the odd audit interpretations and practices we've come across, along with how to deal with the audit itself.

Sometimes, we just gotta rant and rave about something. And there are some pretty silly laws that we've paid our politicians to write.

Sales and use tax information comes from a lot of different sources. We evaluate good ones and bad ones. And we give you information on finding good advice. It also behooves us to let you know that we offer seminars and webinars as well.

We occasionally do an Internet search to see who's going to jail because they didn't pay their sales and use taxes. That's always fun. And there are stories about people getting caught who didn't necessarily go to jail. They just paid a lot of penalties.

There's the occasional news item that catches our eye - and that we think should catch yours too.

And as we come across terminology that needs to be defined, we'll try to do so for you. We occasionally find a useful link as well.

Of course, there are frequently asked questions

And probably our biggest category of articles is on sales and use tax issues. Because this is, after all, a sales and use tax blog.

The Sales Tax Guy

Updated post

I've made some minor updates on this post about finding a local consultant

Sales Tax Guy

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Thursday, April 09, 2009

Taxability of Foreign Sales

Recently, for whatever reason, I have had more than a couple of people ask me about foreign sales and their taxability. Remember the golden rule that shipments out of the state are not taxable in that state whether they're going to Pennsylvania or Peru.

Now, it’s relatively easy to figure out what to do in the destination state, but what the rules are in that other country? Have fun with that one. I’m outta that discussion! US taxes are hard enough.

One thing to keep in mind though, when you’re shipping out of the country, is if it stops in a port at a freight forwarder. You could have an issue with whether or not the shipment has "come to rest" and you are now using the TPP in that state. It’s not a big worry though, because it’s been my experience that most states that actually have a port, will also have rules about use tax not being imposed if the shipment really is in transit. There’s going to be paperwork and t’s and I’s that need to be crossed and dotted, so make sure you do your research.

Sales Tax Guy

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Monday, April 06, 2009

Taxing Policies

This is another master article listing many of the taxing policies that vary from state to state. Over time, I’ll be developing articles going into the details in links. And when everything on this page has a link, I'll probably be finished, and I’ll publish a book. Then I'll be rich. ;-)

Absorption and separation
Art (fine art, paintings, etc.)
Bad debts
Basis of tax
Boats and Watercraft
Broadcaster equipment
Bulk Sales
Cabinetry dealers
Carpet dealers
Charter fishing
Commercial art
Commercial fishing
Common carriers
Construction contractors
Data processing services
Digital media
Direct pay permits
Discounts (cash, term, or early payment)
Drop shipments
Drugs, medical supplies, and durable medical equipment
Employment agencies and staffing companies
Extractive industries like mining, oil, forestry
Enterprise zones
Environmental or green exemptions
Exemption certificates
Fabrication services
First Americans
Foreign Sales
Freight charges
Funeral directors
Gold, investment metals and numismatic items
Government agencies
Government contractors
Handling charges
Historic sites
Hospitals, nursing homes and inpatient healthcare facilities
Holidays (sales tax)
Information services
Installation charges
Intercompany transfers
Interstate commerce - property brought in
Interstate commerce - property brought in for temporary storage
Interstate commerce - property shipped out
Janitorial services
Laundry services
Local jurisdiction discretion, returns and enforcement
Lodging and meeting room rental
Lumping rules
Medical practitioners
Motor vehicles
Movie production equipment
Non-profit organizations
Nursery and horticultural
Occasional or casual sales
Personal services
Professional services
Real property services
Refrigeration equipment
Refunds and returns
Rental of real property
Rental of tangible personal property
Repair of tangible personal property
Research and development
Responsibilities of the buyer
Responsibilities of the seller
Security services
Service and maintenance contracts
Situs or sourcing rules for local taxes
Schools and education
Statutes of limitation
Tile and flooring retailers
Tips and gratuities
Trade ins
Vending machines
Withdrawal from stock (conversion to use)

There you have it. All the taxing policies consolidated into one place. Isn't it exciting?

Sales Tax Guy

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Wednesday, April 01, 2009

Sales and Use Taxes in a Nutshell

What every business owner, CEO, executive director, executive, requisitioner, purchasing agent, sales manager, and accounting person needs to know about sales and use taxes - in five minutes or less.

The problem for all of you is that you don’t know what you don’t know. My objective here is that you will at least know what you don’t know. Then you can ask more intelligent and pointed questions of the people you rely on for tax expertise.

So, here we go:

1. Those people you rely on for tax expertise probably don’t know much about sales and use taxes. They do know about income taxes, but they didn’t have to know anything about sales and use taxes to pass the bar or CPA exam. And a one hour break-out session at the annual CPA state convention really isn’t enough.

By the way, included in this list of people who aren’t necessarily experts are the sales tax auditors, and the people back at the department who answer the phone. Blame poor training and a desire to make the state’s payroll next week. These folks don’t memorize the law, and they’re much more likely to find situations where you owe taxes, rather than where the state owes you money. There won’t be any pats on the back if they return to the office having to give you a refund.

2. Forget everything you knew about income taxes. They just don’t count here. There are a couple of rules the states will sometimes use that come from the Internal Revenue Code, but that’s only so they don’t have to reinvent the wheel. For example, some states will classify non-profit organizations as exempt from sales tax if the organization meets the IRS rules (eg. 501c3 organizations). But most states use their own rules.

3. Sales and use taxes are not an option. If you make taxable sales, in most states you must charge your customers tax. And you must remit that money to the state. You can't "borrow" it. And buyers, if the vendor didn’t charge you taxes for some reason, then you must pay the use taxes in most states.

4. What's taxable. By default, the sales and use of tangible personal property are taxable. Most states will tax the sales and use of some services (see below) and some states will actually tax real property as well. Here's a checklist of the different taxing policies

5. The state you ship from is irrelevant. In the vast majority of transactions, the state whose rules and rates you have to follow, and taxes that apply, will be where the product is shipped to, where it is delivered, where it is first used.

6. And if you have any kind of physical presence in that state where the delivery occurs, you may have to register in that state, collect their taxes and file their returns. And you don’t get any brownie points for collecting the tax and remitting it to your state. The other state won’t give you credit for collecting and paying the wrong tax.

States can be pretty creative about what will give you that physical presence in their state (this is called nexus). For example, do you have a sales rep, consultant, trainer or some other person visit the state a couple of times a year? That may be enough. Note that they don’t have to live in that state. They just have to visit. Or do you have a piece of equipment sitting in a state? One BIG state says that’s enough to have nexus. Do you sublease hotel rooms and re-lease them to others? Then you may have facilities in the state…in other words, nexus.

7. There are 46 states, including the District of Columbia, that have a sales and use tax. And they all do things differently, sometimes dramatically differently. But they generally follow a similar structure, which I’ve taken to calling the golden rules of sales and use tax. And many of them do have similar taxing policies.

8. Services are often taxable. Probably the most commonly taxed are rental of tangible personal property, utilities, printing and fabrication, and repair labor. Remember, just because it’s not taxable where you are doesn’t mean anything. Remember, what counts is where it’s delivered. In the case of services, the delivery point can mean either where the service was performed, where the customer received the benefit of the service, or both. In other words, the destination state is what counts. And there are services that are only taxed in a few states, but they are taxed (eg. accounting and attorney fees, headhunting fees, insurance appraisal services, etc.)

9. States impose use tax on any use of tangible personal property in the state. This means that if you’ve bought property in one state, then move it to another state, you may owe use taxes in that new state. It gets even nastier if you have inter-corporate transactions. In those situations, you may be making brand new taxable sales if you “sell” equipment from one corporation to another corporation within the same company.

10. You should assume everything you sell, and everything you buy, is taxable until you can assure yourself that it’s not taxable. There are obviously going to be exemptions. But your thought process should be to assume it's taxable, then look for the loopholes. This is the approach the auditor will take, so you might as well get in that mindset. Here are some examples of sales where the seller got surprised by something that was taxable and they didn't realize it...until the audit.

11. Just because you make sales that aren’t part of your line of business doesn’t mean you aren’t making taxable sales. What about your cafeteria? Vending machines? Do you regularly sell surplus equipment? Do you make convenience sales to your customers? Do you sell logo merchandise to customers and employees? Do you have an annual clearance sale for employees?

12. You’re overpaying sales and use taxes. But the sales tax auditor will never point that out to you.

13. Just because you paid tax on something when you bought it doesn’t get you off the hook for charging tax when you sell it. If you’re making a retail sale, the fact that you mistakenly paid tax on it doesn’t mean anything. You should have bought it for resale.

14. When you get audited (notice I didn’t say “if”) you should be nice. Most auditors that I've talked to tell me that if you're professional in your treatment of them, they'll be professional in your treatment of you. And get professional guidance. The sales tax auditor may not know what he or she is doing, you don’t know what you don’t know, and your “normal” CPA or lawyer isn’t much better. This is not a good formula. Consider getting a sales and use tax professional involved early in the process.

15. By the way, get it in writing. Make the vendor who insists that your purchase is taxable show you where it says that. And make the auditor show you where the law says you owe a gazillion dollars. And be prepared to provide people with proof when you tell them something they didn’t know.

16. There are lots of exceptions. Remember, there are 46 different states doing it their own way. And within each state, there may be different taxing jurisdictions (eg. Colorado), and complicated laws written by politicians who are either corrupt or stupid.

Now what do you do? Get at least one person on your staff trained on sales and use taxes. Make them the designated expert. Before you assign Accounts Payable to this, note that this tax crosses ALL departments. The person you assign better be able to talk to sales, operations, etc. with some authority. I repeat: this is not just an AP issue. Bookmark this blog and read it regularly. Go to seminars. Invest in a library of reference materials. Sign up for webinars. Find a professional who knows something about this.

And I apologize to just about everyone in the world who've I've offended in this article.

Sales Tax Guy

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