Great Article: Solving the Pains of Sales Tax Returns

from Avalara

A pretty good overview of why you may wish to get rid of doing sales tax returns.  This whitepaper covers the challenges of doing them yourselves, and the benefits of outsourcing.  Yes, there's a page on Avalara, but the rest of the piece is "sales-free."  Enjoy the article.

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This link is part of a series called "Excellent articles that I wish I had written."  The short name is "Great Articles." 

The Sales Tax Guy
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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Great Articles: Exemption Certificate Management

from Avalara - two related articles.  The first is on whether or not you need exemption certificates in states where you don't have nexus. The second is a white paper on exemption certificate management processes, including a handy and comprehensive checklist, best practices and workflow.  And there's a bit about certificate management software too.  Hey, someone's gotta do it.  Enjoy the articles.

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This link is part of a series called "Excellent articles that I wish I had written."  The short name is "Great Articles." 

The Sales Tax Guy
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.

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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. 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.
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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Documentation when you ship out of state

Once upon a time, there was a jeweler who got audited. He was questioned on a whole bunch of sales that he hadn't charged sales tax on. The jeweler claimed that he shipped those items out of state. He pointed out, to the auditor, that the ship-to addresses were in different states, and that he had charged the customer for the shipping charges.

The auditor then asked the jeweler for actual proof that he had shipped the goods, as opposed to the more likely situation where the customer was in the store and arranged to have the items "shipped" with a minor freight charge.

The jeweler came up with the Fed Ex bills of lading.

The auditor then asked to see the actual invoices from Fed Ex, or the tracking reports.

The jeweler couldn't seem to find those records.

The jeweler had to go to bed without his supper.

Remember, the delivery point defines that state that gets to make the rules and gets the taxes. If the delivery is in the store at the counter, then obviously the state where the store is located gets the taxes.

A common scam is for dealers of expensive, but cheap-to-ship consumer goods to "ship" the goods and then just hand them to the customer in order to evade the sales tax. Sharp auditors simply ask for proof that the items actually were shipped. And Fed Ex bills of lading aren't enough. There's no signature, no stamp, no evidence at all on the typical form that the goods have even been touched by Fed Ex. The scam could simply involve preparing the Fed Ex bill of lading, and attaching it to the sales paperwork. And I wouldn't be surprised if that's pretty much what happened in this case. But as we've seen, that's not enough. You need proof.

Whenever you ship taxable goods out of state, the auditor will (hopefully) realize that they don't get to tax that shipment, assuming the seller shipped it out of state. You need to maintain adequate records to prove that:

• Invoices from the freight carrier
• Tracking logs
  
• Signed bills of lading
• Export paperwork

The standard Fed Ex form isn't enough.

A seminar participant once incredulously asked, "you mean I have to attach all that stuff to every invoice in my files?" My answer was that, no she didn't. But she should have an audit trail to be able to get to that paperwork, if the auditor needs to see it.

Remember, the auditor needs proof. Which isn't an unreasonable request considering the amount of potential taxes to be evaded using this scam.

Note, I'm aware of a further evasion that is almost foolproof. I'm not going to mention it here, because it is pretty sneaky and hard for the state to catch. Which is why I'll pass on mentioning it. But the truly nefarious among you have probably already figured it out.

This blog will be silent for the rest of the week. Have a good Thanksgiving.

Sales Tax Guy

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.

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Some Recordkeeping Tips

1. Determine the state that has jurisdiction over the transaction. This will control the statute of limitations, which controls how long you should keep records. For most states, it's three or four years. You'll need to prove where control was transferred, so you're going to want to hang on to sales paperwork, purchase orders, shipping records, bills of lading, etc.

Remember, there is NO statute of limitations protection if you've never filed a return in a given state.

2. If you didn't charge tax on a sale, you need to substantiate the reason.

• Make sure you have a well organized and complete file of exemption certificates. And have a procedure to demonstrate how you get them.
  
• If you didn't charge tax because the sale was shipped out of the state, do you have the necessary paperwork (see above)?
  
• If the sale wasn't taxable, do you have sufficient backup if you are questioned. Keep a file of your research so that, when the auditor challenges you, you can whup it out. We used to call this a CYA file. If you don't know what that acronym means, email me.

3. If you didn't pay tax on a purchase, you need to substantiate the reason.

• If you've determined that the purchase wasn't taxable, show the reason on the invoice. This is likely to be because of how you will use the purchase (resale, manufacturing, agriculture, research, etc.) You're going to have to prove that exemption. Can you?
• Do you have sufficient documentation for your decision about taxability. You know, the CYA file?
• And if you've paid the use tax, you need to document this as well. Hopefully, you've coded the invoice so that the fact that you've accrued the tax is obvious to the auditor, and all they have to do is trace the invoice back through your system to the return.
  
• See this article for an idea to help with the above bullet points.
• On a practical side, remember that, if you're stapling paperwork to an invoice, this stuff tends to fall off - particularly the bottom items. The invoice is a good place for transaction specific backup, but be careful.
  

A couple of more general items...

4. If you've gone through a system conversion, keep your old software and data if the newer system doesn't support the old one. You need to be able to provide the auditor with the information, even it presents a technical challenge. And make sure you keep sufficient hardware and documentation to be able to get at the data when you need it (this is a very common mistake).

5. If you acquire a company, make sure that the technology and skills remain intact to get at the records that come with the acquired company. People leave and their knowledge departs with them.

6. Finally, remember the fundamental concept. The audit won't be tomorrow. It'll be two or three years from now. You're never going to remember.

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

Golden Rule - The Invoice is Your Record

Most states require that the user pays use tax. But, the user is off the hook if they can show they've already paid tax to the vendor. And how do they show this? The invoice. In other words, if the seller has put tax on the invoice, then that document is not only the receipt for the payment, but is also the buyer's receipt for having paid the tax.

And if you've gone through an audit, you'll know that sitting in a room, paging through invoices looking to see if taxes were charged, is a significant part of the auditor's routine.

Note, however, that the tax must be billed by the vendor. A scribbled comment on the invoice that you've paid the tax separately probably isn't going to work.

Another thing to keep in mind...and this is more record-keeping. When you do need to make notes for the file that will help during an audit, try to make the notes on the invoice itself. If you make it easy for the auditor to see the explanation, you'll have less questions from that auditor, and will probably keep issues from getting out of hand. And you'll build credibility by having good records.

If you simply staple the paperwork to the rest of the material that's already attached to the invoice, it may get lost. I've worked at some companies where the AP specialists would need to order special, heavy-duty staplers just to keep all of the paperwork in place. And we've all seen those odd pieces of paper sitting in files and wondered, "I wonder what paperwork this goes with?"

If you are going to attach it, attach it well. AND, attach it close to the invoice as opposed to in back, so it will be less likely to detach itself and get lost. AND make a note on the invoice indicating that the paperwork is there.

Sales Tax Guy