I hate to make you cry...but....

I was doing a seminar in southern state a few years ago.  And there was a young woman in the class who had just been handed the sales tax responsibilities for her company.  She was in AP and, I'm guessing, just a few years out of school.

She was pretty sharp and stayed with me for the whole day.  But at the end, when I started talking about nexus, she looked a little green.  After the class, she came up to me.

Nice woman: "Uh, we sell fishing tackle* and we have only been filing in our state, no others."

Mean me: "Uh, huh - then what you sell is generally going to be taxable"

Nice woman: "Right.  It certainly is in our state.  Uh, we have independent sales reps that are all over the country.  Do we have nexus in all of those states? They're independent contractors if that helps."

Mean me: "Probably in most of them.  And the fact that they're independent contractors generally doesn't make any difference.  Depending on the state, one or two visits a year will be enough to do it.  In other states, they're a little more laid back.  How often to your people visit the states?"

Nice woman: "Oh, way more than a few times a year.  Every state has outdoor shows and fishing tournaments.  Our people are at all of them."

Mean me: "I hate to say it, but I think you've got nexus in pretty much every state that has a sales tax.  All of them."

Nice woman: "But we only sell off our website."

Mean me: "Doesn't make any difference. Sorry."

At this point in time, tears started flowing.  I've been doing these seminars for over a decade and I have never made someone cry.  I can only imagine how terrified she was.  She was going to have to tell her boss that they have to go from filing a return in just one state, to filing returns in 45 more.  Ugh.

I spent about 45 minutes with her after the class talking about her options, giving her names of consultants that could help, and generally how to go about dealing with this.  Essentially, I was patting her on the shoulder and saying "there there."  I truly ruined her day.  And I never heard from her again.

Don't let nexus ruin your day.  If you ship to multiple states, make sure of your nexus status NOW.  Because we don't want your staff crying.

There's no crying in Sales Tax.

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*Fishing tackle was not the product. I'm substituting here to protect they're identity. And I used fishing tackle because I have LOTS of fishing pictures.

The Sales Tax Guy http://salestaxguy.blogspot.com

See the disclaimer on the right.

Don't forget our upcoming seminars and webinars. http://www.salestax-usetax.com and there's more sales tax news and links here http://salestaxnews.blogspot.com

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Can I just pass on the tax?

A reader today posed this scenario. 

Mark is the manufacturer and sells to the retailer

Rhonda is the retailer who sells to the customer

Calvin is the customer

Apparently, Mark is charging Rhonda sales tax. 

Rhonda therefore incurs the cost of the sales tax.

Rhonda would like to pass on this cost to her customer, Calvin.

Can she?

There is an obvious question here

Why can't Rhonda buy from Mark for resale? This would seem to be the obvious and legal solution.  Particularly since Rhonda is required to charge Calvin tax if the sale is taxable and she has nexus in the state.

Two exceptions spring to mind

It's possible that this is a drop shipment and Mark has to charge Rhonda tax but Rhonda doesn't have a way to charge Calvin tax since she has no nexus in the delivery state. 

It's also possible that Rhonda is a contractor.  In most states, she pays tax to her vendors for her building materials but doesn't charge tax when she bills Calvin for the job.

These are the obvious and common exceptions - there are more.

Other than the above exceptions, Rhonda should be buying for resale and charging tax, if the sale is taxable.

However, if she is incurring sales tax for some reason (like the two listed above) and she can't pass it on, or is not allowed to pass it on, then it's a cost of doing business, and she has the ability to fold the tax into the price of her goods.  The only obvious restrictions I can see are:

Rhonda doesn't price herself out of the market and

the customer agrees to the price

Note that these are not sales tax law restrictions...this is just business.  Rhonda can set her price at any point she wishes, as long as the customer agrees.

However...

Rhonda generally can't charge Calvin something called "tax" in a state where she isn't registered.  Rhonda might think this is a way to recover the money from the customer without having to negotiate a new price.  Unfortunately the law generally requires that you must be registered in a state before you charge that state's taxes.  In addition, if she were to be audited, the state would ask her why she has not remitted that "tax" money to the state.  If Rhonda needs to show a charge on the invoice, call it a "we're going to hold you upside down and shake money out of your pockets" surcharge.  But don't put the word "tax" on Rhonda's invoice to Calvin.

And if Rhonda is making a taxable sale to Calvin, then she is required to charge Calvin tax, if she has nexus in the state.  And she should obviously be buying for resale.

Bottom line

If Rhonda is making a sale to Calvin that is taxable and she has nexus in the state, she should be charging Calvin tax.

If the vendor is charging her tax, she should figure out why she can't buy it for resale.

If it's some other situation where she's incurring tax as a cost, she can't pass it on as "tax."  But she can fold that cost, like any other cost, into her price. 

Geez, this stuff is complicated!  If you're reading this and desperately waving your hand because Jim missed something, I know.  But the more holes I fill in, the less understandable this is.  Suffice to say, it's messy.

And don't even get me started on absorption

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The Sales Tax Guy http://salestaxguy.blogspot.com
See the disclaimer on the right.
Don't forget our upcoming seminars and webinars. http://www.salestax-usetax.com and there's more sales tax news and links here http://salestaxnews.blogspot.com

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

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Your taxes at work or why you shouldn't assume the auditor knows what they're talking about.

I was doing a seminar in the Capital of East Dakota a few years ago.

When I walked into the meeting room a couple of hours before the event, I was surprised by the number of participants that were on the roster. Usually, in a city the size of Snagglepuss (the capital of East Dakota, as if you didn't know), I would have expected about 20 to 30 people. But the list showed almost 80 folks. This was pretty close to a record for me. I've only seen crowds of that size in Manhattan. And this wasn't Manhattan. Not even close.

I took a look at the roster again to see if I could find any reason for the big numbers and immediately spotted the cause. Almost 50 people were from one organization...the East Dakota Department of Revenue.

I groaned. It's never a good thing when someone from the tax department is at one of my seminars. It's not that they interfere. In fact, they are usually complimentary about the program. What drives me nuts is that everyone else in the seminar shuts up. There's virtually no interactivity, no questions, no comments...nothing! After all, who is going to ask a question about their sales tax issues when there's an auditor sitting in the front row? And the auditor isn't going to ask any questions - they don't want to look like they don't know about sales tax. So it turns into a really boring seminar for the audience.

In this case, I had not just one auditor, which is bad enough. I had 50 of them, far outnumbering the civilians in the room. It did not promise to be a good day.

And it didn't inspire confidence in the East Dakota Department of Revenue either. As a seminar presenter, you can tell if your audience is getting the material you're presenting. You see smiles of comprehension, knowing nods, and people ask questions to clarify points as opposed to "Can you explain use tax again?" In this class, I was looking out on close to 50 people who were clearly lost. There were a lot of dull stares coming from the auditor part of audience. Their lack of understanding was confirmed by the questions they were asking at the breaks. I felt like saying, "Wait a minute, you guys are sales tax auditors?"

You may be wondering how the civilian part of the audience was doing. I saw nothing but pure terror on their faces. And they kept making sidelong glances at the auditors that were sitting among them.  Also interesting was how many of them had taken off their name badges.

During one of the breaks, I was chatting with one of the few auditors who I could see was getting the material and asking smart questions. I asked him, "Why are you guys here?"

He said, "Oh, this is our in-service training for the year."

I said, incredulously, "For the year???"

"Yep.  There's not a big training budget"

"Who's minding the store?"

He said that this was only about one third of the audit staff.

Now think about this...

The price of this class was $200 per person. Even if they got a deal from the seminar company I was working for, they probably still paid $7000 or $8000 for those 50 people.  And they were only a third of the staff.

For that same price, they could have had someone do a custom seminar for their entire audit staff, not just one third of them. Instead they got a seminar not designed for them, but for businesses and taxpayers.  And this one day general seminar was their only training for the entire year!!!

So there are two take-aways from this:

1. The auditors in your state may not be getting the training they need, so you should not assume they're always right.

2. The training department for your department of revenue may not be spending your money wisely.

Please keep in mind there are are lots of good, knowledgeable, and competent sales tax auditors out there. I have met quite a few. If you get one of these folks, your audit will be professionally conducted by a sharp representative of the state.

But there are a lot of dolts out there too. Particularly in East Dakota.  I mean, they named their capital Snagglepuss!

By the way, other than the made up geographical names (which I'm having fun with), this is an absolutely true story.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
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Illustrations and Parables: Intercompany Transactions

Bill* invented a machine to curry wockies.* His problem was that while he knew the machine would be a real boon to the wocky service industry, it was really, really expensive. He had a lot of trouble convincing the industry to use his machine because of the ridiculously high initial cost. Finally, one of his investors suggested a tactic that has been long used by inventors with money. He bought his customers and made them use the Frazier Wocky Currier*.

In the Great State of East Dakota*, which is in the heart of the wocky region of the country, he bought ten small little wocky service companies, spread throughout the state. Since he didn’t really want to get into the wocky service business, the typical deal was, “Here’s a pile of money for your company. You keep running it the way you like. You can even keep the same name on the sign. I don’t care. But, whenever a situation comes up where you need to curry wockies, you have to use my machine.”

From a financial perspective, he simply bought all of the shares in the corporations of these little service companies and let them stand as separate, but commonly owned, subsidiaries of his own company, The Frazier Currier Company*.

His corporate empire looked something like this*



The machine was a success. It was incredibly effective and the customers were thrilled. In fact, the local companies actively looked for opportunities to curry wockies, so they could use the machines even more. Everyone made money.

The Frazier Currier Company manufactured the machines and then shipped them to the service companies.



Business got so good that sometimes they couldn’t get enough machines. So they would move machines from one service company to another to meet local demand.



Then the State of East Dakota audited them.

And the auditor noticed that they were selling these very expensive machines from the parent to the subsidiaries and no sales tax was being charged. And that the subsidiaries were selling the machines to each other, and no sales tax was charged.

Frazier Currier Company argued that these were just movements of machines between branch locations, that they weren’t sales.

But the auditor pointed out that every branch, as well as the parent, was a separate corporation. And in East Dakota (and in most states), corporations are legal persons. Transfers of tangible personal property and taxable services between persons, are sales. Period. The assessment was over $10,000,000.

The only way the Frazier Currier Company was able to negotiate the assessment down, was by bringing East Dakota’s leading bankruptcy attorney to the negotiations.

So what’s the moral of the story here?

First of all, bring a bankruptcy attorney to the negotiations.

Seriously, you need to make sure, when you are transferring taxable goods and services among subsidiaries and parents, that you are properly taxing the transactions. In most states, they look at the form and nature of the transaction. Is there formal paperwork? That makes it look more like a sale. Is there just a note to the bookkeeper so he knows where the machine is? Maybe it’s not a big deal. Is it an occasional sale? That might get you off the hook. But you need to know.

And here’s the kicker. This is not well documented in most state’s statutes and regulations. This is one of those areas where you need a local consultant who knows the customs and audit practices of East Dakota or whatever state you're in.

The irony is that, of all of the accountants and lawyers that Bill used when he set up the business, he didn’t have a sales tax expert. That august personage could have told Bill to set up leasing arrangements so that every machine is owned by The Frazier Currying Company and is LEASED to the subsidiaries. Because, in East Dakota, there’s an exemption to the rule for intercorporate transactions if they're leases.

*I’m using fake names to either protect the innocent, the guilty or to just be funny.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
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Parables and Illustrations: Do you sell equipment?

If you sell old equipment, you may be making taxable sales.  Have you taken a look at this problem?

One particular construction company that I'm familiar with (heavy/highway) is constantly buying new equipment.  Constantly.  The owner really likes new equipment (he must have been a big fan of Tonka toys as a child). 

In the old days, as he bought new equipment, the owner would need to sell the odd piece of used equipment.  This happened a couple of times a year and the transactions were concluded over a beer at the local tavern.  These were "occasional sales" and wouldn't be taxable. 

But, as the years went by, and the company grew, they found themselves getting rid of more and more used equipment.  They added "selling equipment" to the job description of one of the purchasing guys and started paying him a commission.  They parked the equipment in front of the building, put a sign up, and installed lights so that the equipment could be seen at night.  The deals were now closed at the office, not over a beer.  The company had become a used equipment dealer.  But they did not realize that.  Until the audit.

The state came in and noticed the amount of cash being thrown off by the equipment sales.  They also noticed the lights, signs, etc.  The auditor said, "you know, you should be charging tax on all of those sales."  The company talked to a lawyer, who referred them to a sales and use tax lawyer, who told them they were screwed.  The assessment was over $300,000 with the interest and penalties.  The lawyer helped get that reduced, but it still hurt.

Another situation was similar, but not as painful. 

A hospital found themselves selling lots of used medical equipment.  They could afford to be spendthrift because of the patient mix in their service area (lots of private insurance).  They sold the used equipment to other, poorer hospitals, clinics, and physicians offices.

Yes, the hospital was a non-profit organization.  But sales by non-profits are usually taxable, other than fund-raising events.  So this hospital should have been charging tax.

"But wait! Weren't they selling the equipment to other exempt hospitals?  So the sales would still be exempt, right?"

Yep.  But remember that not all hospitals are government or non-profit operations.  There are for-profit hospitals too.  And they sold equipment to physicians and clinics who are generally taxable.

Luckily, unlike the construction company, this organization realized what they were doing and began collecting taxes before they got caught.

Not such a horror story, but illustrative anyway.

---

There are three major points to be made here:

1.  You may be selling so much equipment that you become an equipment dealer.  If you're doing more than selling the odd item over a beer, you should take a hard look at the situation.

2.  Your core business may not be your only source of taxable sales.  Other sales may be taxable without you realizing it.  Until the audit.

2.  Your company changes.  If you make a judgment about the taxability of something today, will the same set of circumstances and laws exist in five or ten years?  You need to frequently re-analyze what you are doing.  Don't just rely on the decision that was made in the good old days.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. 

---

Illustrations and Parables: A weird invoice where they paid extra California taxes for a shipment of non-taxable items to Idaho

The following is a true story.  I've randomly changed the names, states and products so that nobody, least of all me, will get in trouble.  But it had to be told.

I received a call from one of my previous class participants on Wednesday.  Doris had emailed me a question the day before, but it was so long and involved that I wanted to talk about it on the phone.  I had a long drive in Chicago morning traffic, so she called me back at the perfect time. 

Doris had sold some boxes to Sam in Idaho.  The boxes were containers for Sam's product so they were bought for resale and Doris had Sam's resale certificate.  Doris had billed Sam, with no sales tax on the invoice, since it wasn't taxable. 

But then Doris got a call from the Sam's distributor in California.  For some reason, they were going to pay the bill.  Here's the conversation:

Distributor: I have your invoice here for the boxes you sold to Sam.  Why didn't you charge sales tax?
 
Doris: It's not taxable.  They're boxes for his products so they qualify as exempt.

Distributor: No they're taxable.  You need to rebill us with California sales tax.

Doris:  You're wrong.  They're not taxable.  It's called the "container exemption."  I'd be happy to send you more information.

Distributor:  I need to have California tax on this invoice.

Doris:  But I can't bill you California tax anyway.  We aren't registered in California, don't do business in California and don't have nexus there.  I can't collect taxes for a state I'm not registered in.  Besides, the delivery occurred in Idaho, therefore it would be Idaho tax anyway.  But it's not taxable!

Distributor:  If you don't charge me California tax, we'll just add the tax to the payment.

Doris: If you do that, I'll just have to send you a refund check.  We can't accept that money.

Distributor:  We won't cash it.

At this point, Doris, realizing she was talking to a tree stump, gave up and sent me the email. 

After we went through the whole thing, Doris asked, "I'm right, aren't I?"  I said, "Absolutely!  The best chance you have is that the person who handles the refund check won't have heard from this idiot.  They'll deposit it and that'll be it.  Out of curiosity, what part of accounting was the person from?"

Doris replied, "She was the sales rep."

"Ah.  Now it makes sense."

If there's anyone who'll stick to their guns, on a topic they know nothing about, in the face of someone who clearly knows what they're talking about, it's a sales rep.  (I kid, I kid.  I spent years in sales)

I explained to Doris that she needed to keep very detailed notes on this situation because of two potential scenarios:  

1.  The California distributor gets audited by the state of California who discovers that taxes were paid to Doris.  The auditor will ask Doris what she did with the money, since she's not registered in California.  Doris will need to be able to document that she did refund the money.

or

2.  The California distributor hires a reverse sales tax auditor who comes across this weird invoice where they paid extra California taxes for a shipment of non-taxable items to Idaho. [Boy, as soon as I wrote that, I knew I had the title of this article.]

The auditor will immediately call Doris and demand a refund for the overpayment.  Again, Doris will need to be able to document the refund.

---

Now the other thing that the sales rep didn't know about (and many of you probably don't know either) is that refusing to cash the check doesn't really solve the problem.  After about a year or so, depending on the state, it will become an unclaimed property issue.  Doris will have to send a letter to the company telling them they have an uncashed check.  If they still refuse to cash it, Doris will then turned the money over to the abandoned property department of the state.  Her job will then be finished.  The money has been paid, in this case, to the state.

Now, when that reverse sales tax auditor calls about the overpayment, Doris can just say, "Yeah, that company you're working for refused the payment.  We had to turn it over to the state treasurer.  Call them.  Not my problem anymore."

But, as I said, Doris needs to document the heck out of this.  Because she'll be lucky if this doesn't pop up again in the next three or four years.

And here's a message for sales people, or any non-accounting folks out there.  If the accounting people seem to know what they're talking about, there's a chance they do.  I'm just sayin'.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. 

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Illustrations and Parables: Don't overcharge the tax.

This 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
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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.

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Sales Tax on Big Chickens?

You're on vacation and you stop in at an interesting looking art gallery.  A giant chicken catches your eye and you buy it for $10,000,000.  You're a collector of over-sized fowl and this one will be the crowning glory of your private art gallery.  It's a good thing you've got that really high limit on your MasterCard.

The dealer prepares the invoice.

Chicken.............$10,000,000

Sales tax (8%)..........800,000

Total...............$10,800,000

Oh, come on!  Whoever heard of paying $800,000 in sales tax?  This can't be taxable!

Actually, it is.  And you've just made the revenue department in this state very happy.

Let's use the golden rule of taxable sales:

1.  There's a sale
2.  It's tangible personal property.  It's obviously tangible.  You saw it and you sat on it. And it wasn't permanently affixed to the floor. So it's tangible personal property.
3.  The sale was made by an art gallery - someone in the business of selling art - a retailer.
4.  You're buying this for your home or office, not to resell, so you're the end user.

Congratulations, you owe sales tax.

Now, you didn't get rich by just throwing around $800,000 here and $800,000 there.   There's got to be a way out, right?

Hmmm.  Not really.  There are some common evasions, but no real and legal way out.

1.  You can ask the gallery to ship it out of state to your home in Gotham City, where all the best Big Chicken collectors hang out.  There's no sales tax when you ship out of the state, right?  The dealer, who just got audited last month, points out that he can't do that.  Since you're in the store, and effectively have control of the Big Chicken as soon as the sale is signed, you have taken delivery in the store.  That means that the state you're in has jurisdiction and will impose tax.  If the seller doesn't do this properly, he'll get nailed by the auditor (again) when she comes back in six months.

2.  Even if you convince the dealer (maybe he's new and hasn't been audited yet) to not charge tax and to ship it to your home in Gotham City, you will now owe use tax on that objet d′art in the great state of Gotham.  And since you're so stinkin' rich, you know they're going to audit you one of these days.  Actually, unfortunately this doesn't happen all that often.  You do owe the use tax.  Whether you pay it or not is more of a reflection of your character.  Bruce Wayne would pay the use tax.  Just sayin'.

A different scenario

Let's say you're driving down a dirt road while on vacation, and see a yard sale with that chicken standing there in all of its glory. In a cloud of dust you slam on the brakes and kind of casually ask the rube what he  wants for that "old chicken."

"Ah'll take $10,000,000 please.  Ah inherited that from mah Daddy and he durn told me whut it were worth."

Dang.  You write him a check since he can't take a credit card, and have him arrange for shipment to Gotham City.

Now, there's been a change in the situation.  It's no longer a sale by a retailer, it's an occasional sale.  Since the farmer isn't a retailer (he was having his annual yard sale) he doesn't collect sales tax.  And since you purchased the item in an occasional sale, you owe no use tax, either in the state where you bought it, or in Gotham.  Remember, the sale wasn't by a retailer, therefore it wasn't a taxable retail sale.

So in this scenario, you've saved the $800,000 in sales and use taxes.  Legally!  But only because you bought it in an occasional sale.  Buy it from a dealer, and you owe the tax.

As is usually the case, not every state does it in the ways I've described.  There are variations in several states on the way they handle in-store purchases that are shipped out of state, as well as use tax on occasional sales.  Do your research!

Which leaves us with the moral of this story:

If you're going to buy big chickens, stick to the dirt roads.

Yep, I know.  Sometimes these articles just write themselves.

This is our last article for 2010.  It has been a good year for us and I hope it has been for you as well.  We currently have January and February on our webinar schedule and will be adding March, hopefully by the first of next week.  Happy New Year!

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. 

---

Illustrations and Parables: Intercorporate Transactions

Businesses and organizations form corporations for a variety of reasons. The picture below shows a corporate shell around a variety of business activities.



There are excellent reasons for forming corporations:

1. There are obviously tax benefits.

2. Forming a corporation unifies and consolidates your business activities into one unit. That unit can then act as one, be sued, sue, purchase insurance as a unit, etc.

3. Corporations also limit the potential liability of the owners and facilitate easy changes in ownership (buying and selling stock,offering stock options, etc.).

When there is a transfer of tangible personal property (and certain taxable services) within that corporation (see picture below), there is no sales and use tax impact. Merely transferring such things within your company creates no taxable event. The might be some additional use tax owed if you move something from a low tax jurisdiction to a higher one, but that’s about it.



The problem occurs when you have subsidiary corporations within a larger corporation (see picture below). Those are all corporations that are owned, either partially or fully, by the parent. Now, when there is a transfer from one division to another, most states will consider that a sale. I repeat: a sale! That means that the transfer that you thought was just a journal entry on the books may become a taxable sale that you weren’t even aware of.



Companies form these subsidiary corporations for all of the same reasons that regular corporations are formed. And there’s one more reason – acquisitions.

Here’s the horror story:

Several years ago, a guy in, we’ll say, California invented a new machine. It was extremely expensive and it was new technology, so he was having trouble selling it. He finally got some venture capital together, and he started buying up small businesses all over the state and forcing the acquired companies to buy and use the machine. Since he wasn’t buying these businesses to be a tycoon, he left the previous owners in place as general managers, kept the local company names, and left the acquired corporations alone. All he was really trying to do was get his machine used.

He was successful. The machine worked wonderfully, did what it was supposed to do, and made the local businesses, as well as the corporate parent, a great pile of money. Yay!

The local divisions started moving the machines around. Sometimes a local office wouldn’t need one for six months, but the guy in the next county needed four of them for a year. So the machines got transferred from one division to another.

Then the revenuers came and all was lost:

1. When the inventor sold the machines to the local businesses, who, if you’ll remember, were separate corporations, he never charged sales tax. He, and his tax people, assumed that since they were all part of the larger parent corporation, sales tax wouldn’t be a problem.

2. When they transferred the machines from one subsidiary corporation to another, the state ruled that those transfers looked like sales. Which, obviously, nobody had thought of.

The assessment was for about $10,000,000.

I’ll just wait here for a second while you let that number sink in.



Yes, THAT bad.

When the company and their legal representation sat down with the state to talk, the state lawyers were confused. They didn’t know the lawyer across the table. Usually, at these conferences, it’s a sales tax lawyer and everyone pretty much knows everyone else. Who was this guy?

It turns out the owner had brought his bankruptcy attorney. They bluntly told the state that if they went through with the assessment, the company would have to go out of business. 

The variations that you'll see among the states, and that might help if you're in a similar situation include:

1.  Services between closely held companies may not be taxable in states where those services usually are taxable - leasing for example. In the above situation, if they had structured those transfers as leases, there may not have been any liability at all. And if the state didn't grant the leasing exemption, the tax liability would have at least been much less since it would only have been on the rental, not the cost of the machine every time it was moved.

2. States will frequently leave loopholes if the transaction between the two corporations doesn’t “look” like a traditional transaction – no exchange of consideration, the transaction recorded by a journal entry, etc. This probably would not have worked in this horror story since the owner had done nothing to integrate the accounting of the local corporations into the larger parent.  Remember, he left the locals alone.  All they had to do was buy and use his machines.


3. If the transaction meets the test of an occasional sale, the transaction may be exempt. That’s assuming you’re in a state where businesses actually can engage in occasional sales. In this situation, we're obviously not talking about occasional sales.

So the question is, are YOU making sales to your divisions? Are you transferring goods and taxable services from one unit of your corporate family to another part? If so, consider this as a warning…you better figure out what you’re doing. Look at your inter-company billing. Look at those transfer accounts. Talk to a good, local sales tax professional.

Some of the biggest assessments I've ever seen have been in this area. You've been warned.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/
Picture note: the images above are hosted on Flickr. If you'd like to see more, click on the photo. 

---

Illustrations and Parables: Bulk Sales

I was chatting with an old friend, and he was telling me a sales tax horror story that deserves repeating here. It involves bulk sales (ie. the sale of a business as a whole - lock, stock and barrel, as it were).

Don (not his real name) wanted to expand his computer business. He was based in Illinois, and heard about Arnie, who was in New York. Arnie said he wanted to retire and cash out. Don and Arnie both got their attorneys involved, and Don had his CPA thoroughly review Arnie's books. Don thought he had been very careful. And, because Don was buying the entire business including the inventory, fixtures, equipment, customer list and even keeping the employees on, it was a bulk sale. After the sale was closed, Arnie retired to his new boat in the south Pacific.

A short time after the sale, the New York Department of Taxation and Finance showed up to do a sales tax audit. And they assessed Don, the new owner, for $1,550,000 in sales taxes, almost all of which applied to sales that happened long before he had even heard of Arnie.

You see, Arnie had not been collecting tax on his sales of computer services. Hardware? Yeah, he was collecting on that. But not on the repair labor, which is taxable in New York. And Don, who was from Illinois where those services aren't taxable, didn't even think of this when he took over the business. He continued to make the same mistakes that Arnie had made.

Because Don had bought Arnie's business as a bulk sale, he bought everything from Arnie including any sales tax liability that Arnie had acquired. Don had to write a check to the state of New York that was more than half of the check that he had written to Arnie.

When you buy a business, and it looks like a bulk sale, the state will generally hold the new owner responsible for any sales and use tax debt from the previous owner. Even if the previous owner didn't know about it.

The way to avoid this problem varies from state to state. But it usually involves notifying the state revenuers that the business is about to be sold. The state then has a limited amount of time to either notify the parties that there is an outstanding liability, do an audit, or give the buyer a waiver. Remember, the process varies enormously, but that's the outline.

---

How many ways did this get fouled up?

1. I don't know a lot about business sales, but there's usually not a complete cash out. The new owner holds some of the money back just for this kind of contingency. Don didn't do that.

2. Don and the attorneys and CPA's didn't know about the bulk sale rule. Now they do.

3. Don and the attorneys and CPA's didn't know that repair services are taxable in New York. Now they do.

4. And of course, Don didn't call his old friend Jim. But it never occurred to him because...

5. ...Don didn't know what he didn't know.

---

The obvious question is did Don try to sue Arnie? Yep. But the former owner was in the south Pacific on a boat and not terribly accessible to the courts of New York.

So Don was, how to say this? Screwed. The business closed about six months later. With that gigantic audit assessment, Don didn't have enough cash flow to keep it going.

Truly a horror story.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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

Other relevant key words: mergers and acquisitions

---

Illustrations and Parables: The Steel Mill

I’ve told this story for years in my seminars, so if you’ve heard this one, I'm sorry. Just move along, nothing to see here.

A guy in the seminar was the controller for a steel mill – a BIG steel mill. They take raw iron ore and turn it into steel ingots. Since there’s not a big consumer demand for big chunks of steel, everything they sell is to other processors – for resale.

“We get resale certificates from all of our customers so we’re good there. Every month, we report something like $50,000,000 in sales on our return [it’s a BIG steel mill] and then, on the next line, $50,000,000 in exempt sales."

“We still send the state a fair amount of money every month, but it’s use tax on our purchases.”

One day, the sales tax auditor showed up. After an initial meeting where the controller and auditor seemed to hit it off, he showed the auditor to the usual conference room, gave him some starting audit fodder, and then left him to it.

After lunch, the auditor stopped by the controller’s office. “I think I gotcha,” were his opening words.

“What? You haven’t been here long enough to have ‘gotten us;’ you’ve only been at it for an hour or so.”

“Ah, but I had lunch in your cafeteria. Nice one and the food's good - cheap too.”

“Well, we’re out here in the sticks, so we’ve got to provide all those guys with some decent food. But what do you mean?”

The auditor inhaled, “They charged me $5.00 for the lunch. I also chatted with the manager there, and he said they’re all employees of the mill…you haven’t hired a management company to run the cafeteria.”

“Yeah…” the controller responded suspiciously.

“You are operating a restaurant. You’re making retail sales to your employees, albeit at a pretty reasonable amount. Now I just looked at your returns for the last few years, and you have NEVER reported a taxable sale. Not one dollar. Which makes sense given your business model. But you HAVE been making retail sales – out of that restaurant you’ve got downstairs. Where are you reporting those sales?”

"Uh..."

The final assessment was in the neighborhood of $200,000.

This amount wasn't catastrophic for a big company. But it certainly was embarrassing for that controller and not a particularly career-enhancing situation. You need to look at EVERY class of transaction and determine if it’s taxable or not taxable. This company didn’t even THINK of the cafeteria – they’re a steel mill! But over time, those $5.00 meals for three shifts add up.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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

---

Mistaken Manufacturer

I exchanged a couple of emails with a past participant yesterday. She'd been stung during a sales tax audit because one of her vendors hadn't charged her sales tax. So she wound up having to pay the use tax, plus interest and penalties. Standard stuff, of course.

What was interesting is that, after the audit, she called the vendor and asked why they didn't charge her tax. Their response was that they didn't have to, they were a manufacturer and therefore exempt.

What?

Now, to be fair, the product was odd enough that I can see there being some really arcane exemption lurking in the statutes. So I suggested she check on that. But it amazed me (I should learn to never be amazed) that a company would think that the manufacturing exemption would apply to what they sell.

Just to make sure, for some of you who may be reading this, when we're talking about the manufacturing exemption, it's for the purchases of the manufacturer who uses them in manufacturing. Every state has different rules of course, but that's the big concept. It doesn't grant an exemption to what the company sells! Sheesh.

Now, I'm sending a link to this article to (we'll call her "Jane") who gave me the idea for this article (thanks and a gold star to you!). But I'm going to have to chide her a little. I talk about the fact that, when an in-state vendor fails to charge you tax on something you think is taxable, you should call them and find out why. If she had made that phone call back when these purchases were made, she might not have convinced the vendor. But she would have known to accrue the tax, and thereby avoid the interest and penalties that she paid as a result of the audit.

And, as a consolation prize, I did tell her that the vendor was probably going to get audited. Let's face it. When an auditor comes across a few invoices from an in-state vendor where they didn't charge sales tax for any apparent reason, they're audit-bait.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Don't forget our upcoming seminars and webinars.
http://www.salestax-usetax.com/

Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo. And the subject of the picture has nothing to do with this story!

---

Another Reason Not to Call the State

I've talked about why you want to avoid calling the state with any sales and use tax questions. I've now got another reason. I was talking with a woman in a seminar earlier this month and she told me this story that should make you even more suspicious.

She worked for a hospital and had called the state to find out about the taxability of a particular item. She started describing the situation which involved an item being shipped from Michigan to her state, and how she worked for a hospital, and how....

The state employee immediately told her it was not taxable and essentially hung up.

The woman came to the class convinced that anything shipped to her state from out of state wasn't taxable - because that was the question she had intended to ask. I spent some time deprogramming her with the message that it's the delivery state that counts, not the ship-from state. It doesn't matter that it was shipped from another state. In other words, the answer she got from the state representative was completely wrong. And for the wrong reason!

We talked more and I realized what happened. As she was explaining the situation to the person on the phone at the state, she mentioned hospital. Well, that gave the headphone wearer all the information she needed. It was a purchase by a hospital! Hospitals are exempt*. The answer is the purchase wasn't taxable. Yay!

If the state employee had listened longer and asked more, she would have found out that the hospital was buying this item for one of their for-profit subsidiaries which was taxable.

In most telephone-bank jobs, particularly the ones where they don't care about customer service, employees are evaluated on how quickly they can close a call and move on to the next one. They're not rewarded for patience or even giving the right answer. So this operator heard "hospital" and she had an answer. Done! Move on to the next call.

So when you're talking to the state on the phone, in addition to all of the other reasons why you shouldn't rely on their answer, you also have to make sure they don't prematurely give you the answer before they've even gotten all of the information.

Remember, if you have to contact the state, try to email them. At least you're not dealing with the state employee's needing to get you off the phone fast.

*Another problem is that not all hospitals are exempt. There are for-profit hospitals that would be just as taxable as anyone else. It's not super-relevant to the story, but I wanted to forestall someone pointing this out. ;-)

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 http://salestaxguy.blogspot.com

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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

---

Be Careful with your Assumptions

I was talking with a friend the other day. As I like to do, I figured out a way to introduce sales tax into the conversation. I knew that his customers were usually wholesalers and dealers. Here's the way the conversation went:

Me: So, Bob, do you guys charge sales tax?

Bob: Nah. Everyone who buys our stuff is buying for resale. We never sell to the end user.

Me: Not even off your website?

Bob: Nope. The quantities are just too small. We're set up to ship skid-loads of material. We just refer consumers to a list of dealers on the website

Me: What about contractors. You do sell directly to big contractors, don't you?

Bob: Yeah. But they're buying for resale too.

Me: Bob, I'll bet you didn't know this, but contractors are, in most states including the one we're in, considered the end users of the building materials they buy. Therefore you should be charging them tax. As far as the law is concerned, they are NOT wholesalers or retailers. They're the consumers.

Bob: [long pause]

Me: And I bet you're not getting resale certificates from your wholesale customers either. When you get audited, you'll need those certificates, even if it's your business model to only sell wholesale.

Bob: Can I use your phone. I left mine in the car.

---

Folks, you must be careful with your assumptions. Make absolutely sure of the taxability of every sale you make. The safest way is to assume everything is taxable until you can confirm that it isn't.

Here is the golden rule of taxability, which states the defaults for sales of services and sales of TPP. And here are the exceptions. And here are the situations where you'll need certificates.

Note that, if Bob had asked his contractors for resale certificates like he did for the rest of his customers (ahem), he would have discovered his mistake. Most contractors would be nervous about providing a resale certificate. Bob would then have presumably realized he should be charging them tax.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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 information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

---

A Horrible Combination of Nexus and Unknown Taxable Sales!

The seller, in Indiana, sells complex machinery that often needs to be repaired and maintained.

Their customer in Wisconsin, calls with a problem - repair is needed.

Rather than maintain their own network of repair technicians, the seller contracts with local repair services to go and work on the equipment. So they call the Repair Service in Wisconsin who goes and repairs the machine in Wisconsin.

Repair Service has fixed the machine and sends the invoice shown below with sales tax on both the parts and labor to the seller in Indiana. Repair labor is taxable in Wisconsin.



Seller HQ will send this invoice to Customer Location. Note that they've added some margin and have NOT billed any sales tax.



To summarize:

1. Customer Location calls Seller HQ to get machine fixed.
2. Seller HQ calls Repair Service and assigns them the job.
3. Repair Service fixes the machine, making a taxable sale.
4. Repair Service bills Seller HQ charging sales tax.
5. Seller HQ bills Customer Location and does not charge sales tax.



I asked Seller HQ why they weren't charging Customer Location tax. She said that they didn't have nexus in Wisconsin and they had already paid tax to Repair Service.

"Ah, but you DO have nexus. Repair Service is acting for you and contracting for you to make repairs. Now if they were billing the customer directly, it might not be a problem. But they're billing you and then you're billing the customer. As far as the customer is concerned, Seller HQ is the seller of the repair service. It's a no-brainer. You have nexus in Wisconsin."

"Oh. But since Repair Service already charged me tax, I'm OK, right?"

"Nope. What you should have done is given them a resale certificate and then billed Customer Location the tax. You see, while Wisconsin got the sales tax revenue from Repair Service, they have not gotten the sales tax on the full sale to Customer Location, including your mark up."

"Are you sure?"

"Nope, I'm never sure. But there's another problem. When Customer Location gets audited by Wisconsin, the only invoice they're going to have is the one from you showing no tax was collected. Wisconsin will then make Customer Location pay the use tax, if they haven't already. Which means you've shafted your customer because you've already paid the tax.

"OK, so I'm supposed to give Repair Service a resale certificate and then bill Customer Location for the sales tax on my bill to them?"

"Yep. And that also means you're going to have to register as a seller in Wisconsin so that you have a resale certificate to give to Repair Service and so you can pay the taxes to Wisconsin."

"Uh, is this pretty much the way it works all over the country?"

"Yes. All of the 46 states that have a sales tax will want the tax, at least on the parts. And about half of them will also want the tax on the labor component too."

"Oh dear."

"Yeah.....?"

"We do this all over the US. That means we have to start doing this in 45 more states."

"Oops. You might want to call a sales tax consultant."

About once a week, when I do seminars, I come across a person who has nexus in every state. And they didn't know they were making taxable sales in any of those states.

The things to learn here:

1. If you sell all over the country, then you may have nexus all over the country if you have people representing you and acting for you. They don't have to be sales reps or employees. They could be independent contractors repairing your equipment for you. And if they're billing you and you're billing the customer, it's even worse.

2. You need to determine the taxability of what you sell in any state where you have nexus. If you have nexus in 20 states, you need to check 20 states. If you've got nexus all over the country, you should hire an assistant because your work load just increased.

3. It's usually helpful to look at the transaction from the customer's perspective. What is their AP department going to do with the invoice that they get from you? And what is the auditor going to do when they see the invoice? In this situation, Seller HQ would have immediately spotted the problem if they'd ask themselves those two questions.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

---

Illustrations and Parables: Garbage Cans

Sorry I haven't posted in a while. I was on the road last week and the week before was preparing for the road trip. And this week is, well, I'm just exhausted. But I wanted to let you know I was still alive.

Anyway, the road trip was productive, I picked up a couple of good stories for you.

One of the women in my class owned a garbage-hauling business. Now that's not a taxable service in this particular state, so don't get excited. But she did get audited, and was busted for not charging tax on the rental of her dumpsters. Apparently no one told her that rental of tangible personal property is taxable, which definitely includes those dumpsters.

By the way, the name on the dumpster pictured above was not the name of her company. It's just the only dumpster picture I had. And I always knew having a picture of a dumpster would eventually come in handy.

So the auditor assessed her $30,000 for the sales tax on the rent. Hers was a small company with only about 35 employees. So this was a pretty significant financial penalty

To add insult to injury, the auditor didn't mention to her that, since she was a lessor renting the dumpsters, she would be able to buy them tax free - for resale. Dang auditors.

What can we learn here?

1. She didn't check to see whether or not all of her sales were taxable. You need to carefully review all of your sources of cash, and see what the law says about them in the state where the service is performed, or the delivery occurs. Since the garbage hauling service wasn't taxable, she didn't even consider the fact that an ancillary service just might be taxable.

2. If you find out something is taxable, explore for other opportunities that the situation uncovers. Like being able to buy stuff for resale if you have to charge tax when you rent it to people.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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

Here's information on our upcoming seminars and webinars.
http://www.salestax-usetax.com/

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

---

A Policy a Day Keeps the Auditor Away

I was doing a class in Miami and we had just broken for lunch. I had been talking about why you should have sales and use tax policies and procedures. "Mike" came up to me as everybody else hurried out and said, "You know, that policies and procedures thing really works."

Sensing a good story, I sat down and encouraged him to continue.

Mike said that, a couple of years ago, he had gotten word that the Florida Department of Revenue was going to conduct a sales tax audit. About a month before the audit was scheduled to begin, the auditor shows up for the pre-audit meeting.

Auditor: I don't suppose you have a sales tax manual that I can look at, do you? (She really didn't expect it...she was just going through the questions on her checklist.)

Mike: Yes, as a matter of fact, we do. I've made a copy of our accounting manual for you, and I've put yellow sticky-notes on the pages related to sales and use tax (ta da!).

Auditor: Oh. Great (flipping through the binder).

Auditor (three days later, the auditor calls): Hey Mike, I just took a look at this sales tax manual. Wow, you've really covered the bases here. Heck, I've even gotten some good ideas out of it. Listen, honestly, do you actually follow these procedures?

Mike: Yes. You'll notice that there are revision dates on all of the procedures and we update them whenever there's a change. And we review the entire manual once a year.

Auditor: OK. Listen, we scheduled me in for six weeks. But let's change that to my coming in for just one week. I'll do some testing of your procedures manual and talk to some of your people, then we'll see how to handle the rest of the audit. Oh, and those 1,000 documents I told you to pull...just pull the first 100 for now.

Auditor (on Friday of the initial week of the audit): Mike, I've got nothing. You've got your ducks in a row, and you're not doing anything systemically wrong. There's no point in continuing. We'll call this audit closed and I'll put a note in the file that you guys have systems, policies and procedures in place. Now, I'm off to audit someone who doesn't have a good sales tax manual.

---

Having well documented systems gives you enormous credibility with the auditor. They want to be productive and, if you appear to have "your ducks in a row", they know they're going to be wasting time. So they might just cut your audit short and go bother someone else.

So the question is, do you have a good sales tax manual? Or is the auditor going to be cutting another audit short to come and nail you?

True story, by the way.

---

The Sales Tax Guy
http://salestaxguy.blogspot.com

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

Here's information on our upcoming seminars and webinars. Don't forget, we just announced our February to April schedule!
http://www.salestax-usetax.com/

---

Illustrations and Parables - Lori's Story

Lori bought a lot of propane by the tank from a gas supplier. After hearing me say, in a seminar, that you should ask your intrastate vendors why they didn't charge you tax, she did.

"How come you're not charging me tax on this propane."

"Because it's not taxable."

"Yes it is"

"No it's not."

Lori then showed them the law in their state that says gases, like propane, are not taxable when sold for residential use. Her purchases were for business use.

"So you're going to start charging me tax, right?"

"Yeah, I guess so. If it'll make you happy."

Lori happened to be at my next class too, and she told me the above story. She was pretty proud that she had been able to kick a little vendor butt based on my advice.

I said, "Lori, let's think about this. This propane vendor obviously thought that all of his sales were not taxable."

Lori said, "Yep."

"If that's so, then they had no reason to be registered with the state, since none of their sales were taxable, as far as they knew. So if they're charging you tax to make you happy, how do you know they're actually registered and paying it. Couldn't they just be charging you an extra 7% and pocketing it? Would they really go through the registration process just for you?"

Lori, who is really a nice person, said, "Those b_____s!"

In my previous article, I recommended that you ask for proof that your interstate vendors are registered in the delivery state if they charge you tax. But asking for that proof for your intrastate vendors seems unnecessary. But in Lori's case, the situation smelled a little funny.

Her plan was to demand that permit from the propane dealer when she got to work the very next morning. Unfortunately, she has never been at another of my seminars. So I haven't gotten the next chapter in the story.

The morals of this story?

1. Don't assume your vendor knows the sales tax rules for what they sell.
2. If you're suspicious, demand proof that they're registered in the delivery state. Even if they're located in your state.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

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

Here's information on our upcoming seminars and webinars. Don't forget, we just announced our February to April schedule!
http://www.salestax-usetax.com/

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Illustrations and Parables: They get sneakier and sneakier

I picked up this story a couple of years ago. We'll use Virginia and Pennsylvania for the states, but those are not the real states involved.

The company in Virginia got audited by Pennsylvania for nexus. It turns out that they did have nexus, never realized it, and the auditor nailed them for a couple of hundred thousand dollars. The taxpayer understood they had really screwed up, so the audit wasn't as confrontational as it sounds like it ought to be.

During the audit, she asked the auditor, "How did you guys find us?"

The auditor was feeling expansive.

"You know how when you go into a diner, there's usually a box sitting on the cigarette machine or by the cash register with entry forms. You know, where you might win a fabulous, all-expenses paid trip to Disneyworld?"

"Yeah."

"Well, one of your employees filled out the entry card. The card asks questions like, address, employer, job title, etc. It also sneaks in a couple of other questions, like how often do you visit the state, and whether or not your visits are business related.

"Your employee gave your company name, said he was a sales rep, visited Pennsylvania 12 times a year, and the visits were business related. Your employee gave us everything we needed to determine that you guys have nexus in Pennsylvania."

"OK, I get that. But how did you auditors get that information?"

"Because we ran the contest."

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OK, I left a few extra lines there to let you think about that for a moment.

The Commonwealth of Pennsylvania was smart enough, and sneaky enough, to front a couple of thousand dollars for a contest in order to collect information from anyone who spends time at a diner. Obviously most of the responses would be worthless, but they are going to find a few nuggets of gold.

What amazes me is that the politicians and bureaucrats would be smart enough, but also adventurous enough, to do this. This takes some real creativity to come up with something this sneaky. My hat's off to them.

By the way, please remember, this isn't Pennsylvania. That's just the state I've been using. It could be your state. And I'm not telling.

So you might want to tell anyone representing your company that, when they travel, not to enter those contests.

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The Sales Tax Guy
http://salestaxguy.blogspot.com

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

Here's information on our upcoming seminars and webinars. Don't forget, we just announced our February to April schedule!
http://www.salestax-usetax.com/

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

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Illustrations and Parables: The Generator

I was doing a seminar in Mobile, Alabama when I picked this one up.

Background

Mobile, if you don't regularly watch the Weather Channel, probably gets more than their share of hurricanes. This particular company had a plant in the area. They were far enough back from the beach to not have a problem with water or storm surges, but they were still subject to wind damage. And the biggest problem was power outages that apparently could last for more than a week. So they bought a big, honkin' generator to provide backup power.

However, they didn't keep the generator at the plant. It was an outside generator and they didn't want to worry about wind damage. They stored it in Houston, Texas at the facility of the dealer who sold them the generator. You see, the hurricane that would tear up Mobile, is not going to be the hurricane that goes through Houston. This is the ultimate in "off site" backup.

The Plan

After the storm passes through, they'll call up the dealer and tell him to deliver the generator. That would probably take a day or so. In the meantime, they'll clean up the site and do any other preparatory work necessary.

The generator arrives, they set it up, and voilà, power! They can start making stuff, shipping to their customers, and providing employees with a much needed paycheck.

The Problem

The state of Texas audited the dealership and noticed the generator (probably more than one - storing these things is probably a nice little side business for them). After finding out who owned it, Texas went after the company in Alabama asserting that they had nexus in Texas. After all, they did have a pretty big and expensive piece of equipment sitting in Texas. Which means they have a physical presence in Texas. Right?

The company believed the auditor and paid their back taxes, penalties and interest and registered in Texas.

Duh?

I asked the guy who was telling me this story, "And you believed the auditor?"

"Well, yeah. He's the auditor, he knows what he's talking about."

"Do you have any other physical presence in the state? And I reeled off the various factors."

"No. Just the generator," he said, starting to feel nervous.

I said, "You really need to get yourself a lawyer who knows their way around Texas nexus issues. I can't believe that generator gives you nexus in Texas. It's just one piece of equipment that has nothing to do with exploiting the Texas marketplace. It's merely being stored in Texas because that's where the dealer happens to be. I'll bet a lawyer would be able to beat this easily"

"But the auditor said..." I think I ruined his day.

Folks, please remember that the auditor is likely to be telling you stuff she learned about in a meeting back at the office. She's not a lawyer, and she has not reviewed the court cases herself. She's just trying to pry some tax revenue out of you. Never take the auditor's word for it. Get yourself a lawyer or CPA who is an expert at sales and use taxes. They'll be expensive, but they'll know a whole lot more than that sales tax auditor. And they'll be on your side.

This company threw money away in the direction of Texas because they didn't understand the way nexus worked, and they believed the auditor. Don't do it!

The Sales Tax Guy
http://salestaxguy.blogspot.com

See disclaimer and research the issues thoroughly before making decisions

Here's information on our upcoming seminars and webinars

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