Monday, January 31, 2011

FAQ: What if I underpay my taxes?

This question came in over the weekend and I just answered it. I've sanitized it, because it's worth mentioning to those of you who are relatively uninformed about this:

Found your Sales Tax Guy blog while doing some research. I'm hoping you can answer a question for me.

I own a small retail store in New Jersey. I recently discovered that my now former accountant was underpaying the amount of sales tax I owe. We collect the correct amount (8.75%) but it looks like we have been sending about 7.75% to the state every month for the last three years!

Should I just forget about the past shortages (we're paying the correct amount now) and hope that the state doesn't discover the error? How could the state discover the error anyway unless I brought it to their attention?

Doreen, of all of the possible mistakes that you can make, this is dang near the top of the "really bad" list. Have a look these articles.

You need to get professional help from someone who knows their way around sales and use tax. It'll be expensive but not as expensive as the price you'll pay if you ignore this. And New Jersey is broke, so they're even more aggressive about finding unpaid taxes.

They'll find you. It's called a "sales tax audit." And this particularly problem is one they'll probably find in the first hour or so of the audit. Snap.

Find some help.


This also brings up an issue I've talked about before. While your accountant may be highly knowledgeable at income taxes, there's a good chance that he or she knows virtually nothing about sales and use taxes. But the eventual responsibility will rest with you. So make sure that whoever you take advice from on this topic actually knows something about it. And make sure they're doing it right.


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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Tuesday, January 18, 2011

Illustrations and Parables: Don't overcharge the tax.

Fire PlungerThis article is based on a recent story about a retailer who kinda screwed things up. I’m not going to identify them, or give you a link to the original story because I’m going to severely mock them and I don’t need no trouble with no lawyers. Consider this fiction “inspired” by actual events.

1. The store has been overcharging their customers for nine months by 1 percentage point. The correct rate was 7% and the store was charging 8%. No mockery here…this stuff happens.

2. This is not just one store. There are several other stores in the chain. So I’d assume they have competent accounting folks. This, as it turns out, is a big assumption.

3. The extra money wasn’t paid to the state. The error was at the cash register, but they were remitting tax to the state at the correct rate. So they were holding on to all that overcharged tax. The owner wasn’t sure how much was over-collected, but estimated it was a couple of thousand dollars. Wasn’t sure? Does he have accountants, or monkeys with pencils?

4. A customer finally noticed the error (after nine months) and called the store. The assistant manager said there was no error, because the store was in a special taxing district; and that’s why the rate was a point higher than expected.

5. The customer then called the city and found out there was no special taxing district. In other words, the assistant manager was, er…wrong. What a surprise.

6. The customer then called the store again and was told, again, that the store had not made a mistake. Amazing how much trouble those assistant managers can get you in. They’re OK for checking restrooms and time cards, but you really should never let them near the phone. And if a customer calls about the same issue twice, maybe the problem should get escalated. I’ve never done much customer service training, but that seems like an obvious idea.

7. The customer called the local newspaper and they called the store. This time the assistant manager awoke from his stupor and got the owner involved. Within an hour, the owner called the paper, admitted they had made a mistake, had reprogrammed the cash registers, and was pretty embarrassed about it. He guessed that the mistake was when the last rate change had occurred (which makes sense). Amazing what a call to the local media will do.

8. The customer (and me for that matter) can’t understand why it took nine months for anyone to notice this. It seems like there was a general ledger account that had a whole lot of extra cash sitting in it. Heck, I wasn’t the world’s most detailed-oriented controller, but even I would notice that.

9. The owner said he’d issue refunds to anyone with receipts (who keeps those for very long?) or who is signed up for the store’s rewards program, which tracks purchases. But the rest of their customers…there shall be no refunds for them.

10. The owner then said he’d donate the remainder to charity. But the state said, “Not so fast, buckaroo.” The law (which is pretty typical in most states) says that, if too much tax is collected, it must be turned over to the state. The state did say that they’ll refund him the money after he refunds it to the customers; if he provides proper documentation. But the state gets the money first, and the excess stays with the state. Here’s a tip for the owner…before you start babbling to the media about a topic (sales tax) for which you obviously don’t have a clue, you might want to do some research. Or call those people with the letters after the end of their names.

OK, enough with the mockery. Here are three pieces of advice for those of you who collect sales and use tax from your customers. And these will be getting added to our best practices webinar as well.

1. Balance!
Every month, someone in accounting should be reconciling the amount of taxes you collect to the amount of taxes you pay. This should be one, relatively easy part of the normal sales tax return preparation. Unless you’re really sloppy, I can’t imagine that this would take more than a few minutes.

There, was that hard? But doing this will avoid these kinds of embarrassing and tough to solve mistakes that will really tick off your customers. And you’ll avoid the press calling your boss. We don’t want that.

2. Double check when the rates change!
Whenever there is a rate change, expect that this kind of thing will happen. So check your sales for the first few days or weeks to make sure that every system (or sales person’s price list, manual, etc.) has been updated with the correct rate change. If you overcollect the tax, refund it immediately. Usually if you do it within the same month, the state doesn’t care.

3. Escalate tax issues quickly
Don’t let non-financial personnel make decisions or talk to customers about sales and use tax. They really don’t know what they’re talking about. And you probably want to get a sales tax pro involved quickly.

Remember, this is not an uncommon occurrence. Don’t let it happen to you.

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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Don't forget our upcoming seminars and webinars.

Picture note: the image above (I’m thinking that’s the assistant manager) is hosted on Flickr. If you'd like to see more, click on the photo.

Thursday, January 06, 2011

Sales and Use Tax Links

Wow, I haven't done one of these for a while.  Sorry about that.  Let's catch up.

Streamlined sales tax effort stalls, for now
Written from Arkansas' perspective, but a worthy commentary on the current state of affairs.

Seven questions you should ask before choosing the right returns outsourcing provider.
I'm not sure all of these questions should be actually asked of your sales tax vendor, but they should be investigated nevertheless.

Wisconsin Wants You To Have Your Cake and Pay Tax on It Too
They changed the rules about ice cream cakes.  Oh the horror.

Is Vermont's Sales Tax Driving Shoppers Accross The Border?
In the category of "duh", a study has concluded that New Hampshire's lack of a sales tax is stealing business from Vermont.

Medical-marijuana sales tax nets $2.2 million for Colorado this year
Cool, man.  What's really hilarious though is that, every time I Tweet an article on this, I pick up a couple of legalize-marijuana followers.  Do they even look at the rest of the tweets I've posted.  Oh.  Wait.  Or, to give them the benefit of the doubt, I guess they could be into sales tax.  denverpostcom

Largest Sales and Use Tax Delinquencies in California
California lists businesses who owe over $100,000.  Amazing how many car dealers are on the list.  Hmmmm.

How to Survive a Sales Tax Audit
1.  Allow lots of time.  This is gonna take a while
2.  Keep good records.  Too late now.
3.  Be prepared to appeal.  Don't take the auditor's word for it. 
January Sales and Use Tax Rate Changes

City contract for private sales tax auditors in final stages (Oklahoma)
I'm bothered by the payment plan - it sounds like it's results-based.  Not a good thing.  tulsaworldcom

States Eye Digital Property as Source of Additional Revenues
Nice, short article on the topic.  bnataxcom

Reverse Audit Reveals Georgia Owes $1 Million
If you haven't considered a reverse audit, maybe you should. It worked for the City of Augusta. avalaracom

Mississippi Introduces Click Through Nexus Bill  sabrixcom
Illinois moves to tax online purchases
The Bad Math of the 'Amazon Tax'
Sigh.  Nothing convinces me more of the collective low IQ's of state legislators like their continuing attempts at this. 

This is just the best of the links I send out via Twitter on an almost daily basis.  You can get them faster by subscribing to my Twitter feed. You will get more than sales tax links though.  Just warning you.

The Sales Tax Guy

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Tuesday, January 04, 2011

Things that will get you in the worst trouble

Lady with a Pink GunI've talked about many of these particular issues, over the years. So I thought I'd compile a master article so that you can, at a glance, see if you're doing anything really, really wrong.

First of all, I should define what I mean by "trouble."

1.  Big assessments and big fines

2.  Embarrassing assessments that, while not crippling the company, will nevertheless do bad things for your career

3. Large-scale overpayment of taxes. See item 2 regarding career impact.
    So let's begin our hall-of-shame of sales tax mistakes.

    1. Making sales that are taxable and you didn't know it. Do you perform taxable services? What about non line-of-business sales? Do you, for example, sell a lot of used equipment? Do you maintain a company cafeteria? You're probably selling more than just what's on the top line of your income statement. And don't even get me started about the other states you sell to. See below.

    2. Related to 1 - making taxable sales in states where you have should have been collecting tax and didn’t realize it. In other words, you have nexus in a state but you don't know it. And you don't even know what are taxable sales in that state. It's a very common problem, and the states would really like to catch you.

    3. In another instance of making sales you didn't know were taxable, beware of making intercorporate sales. Depending on your company, your business model, how you handle your paperwork, and the volume of the transfers, this may or may not be a problem. But you need to make sure. Of all of the assessments I've heard of, the biggest were in this category. And the only possible alternative for one taxpayer was bankruptcy.

    4. Not collecting exemption certificates on your sales. This will mean more work for you when the audit hits, as well as embarrassment with the auditor, your management, and your customers. And you'll pay some taxes, interest and penalties.

    5. If you buy a business, make sure you don't inherit the seller's sales tax liability. If you buy as a bulk sale,  you will, unless you do it right.

    6. Not accruing taxes on your taxable purchases where no taxes were collected by the seller. AP generally knows this one, but may not have good systems in place to be sure of catching all of these invoices.

    7. Overpaying taxes on invoices that you thought were taxable, but weren't. More tips are in our Best Practices file.

    8. Who is the person in your organization who is most knowledgeable about sales and use taxes? It's usually the controller, but it's often the AP staff. But note how many of the above problems are related to the sales and marketing departments. And how many of your sales and marketing people have any knowledge or understanding of sales and use taxes? Right. That's what I thought. Here's one example of what they can learn.

    9. Relying on bad resources for answers. Calling the state is a no-no. So is believing the auditor without getting something in writing. Here are good sources of information.

    10. Finally, collecting sales tax, but failing it remit it to the appropriate state. Frankly, if you’re doing this, you shouldn't bother reading this blog anymore. What’s the point? Get measured for an orange jump suit instead.

    Here's a link to some horror stories that will make excellent bedtime reading.

    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

    Get these articles in your inbox - subscribe at

    Don't forget 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.