Write an Accounting Manual

You need systems - policies and procedures - for several reasons.

1. They help assure you that you're doing it right. By studying the issue, and then planning and writing down the correct way to do it, you help to assure that you actually are doing it the right way, as opposed to doing it by the seat of your pants.

2. Systems facilitate training. We've all been through the situation where the replacement barely gets any training. Often it's rushed with the trainee scrambling to take detailed (and later incomprehensible) notes. And, of course, the trainer is a short-timer and doesn't really care anyway.

And that's if you're lucky enough to have training at all. Unfortunately, all too often, the new person has to decode what to do, based on the trail that the previous person has left, with some assistance from the manager, who really isn't that sure about the details of the job anyway.

For example. Does the newbie understand that they need to worry about self-assessing use tax on purchases where tax wasn't charged? And even if they understand that, do they know which purchases are not taxable and which are? I've had people in my seminar who have asked me at the break, "Let me get this straight...you mean I'm NOT supposed to be accruing tax on our purchases for resale?"

Let's just say that their training was incomplete.

If you have procedures, then the new person has a resource to show them what to do. The systems show them that they need to check that tax was paid. And if tax isn't collected by the seller, what to do about it. The procedures will show what's taxable and what's not taxable. Systems facilitate training, and allow the replacement to easily pick up the job after the previous inhabitant has gone on to newer and better adventures.

3. Systems help with audits. Auditors are looking for companies (victims) who are going to be worth their time. They don't want to waste the effort with organizations who have it together. And one of the ways they can tell if you know what you're doing is if you have a good accounting manual. If they hit you with issues and questions that are dealt with in your handbook, and they can see that the handbook is followed, then they'd rather spend their time auditing someone who doesn't have a good policy manual. Like most of you reading this.

To give you a closing example:

Pilots have checklists. In other words, they have policies and procedures that they carefully use. These systems were developed by experienced pilots and mechanics showing exactly what needs to be done. They are then followed by pilots and mechanics to make sure they do what needs to be done in the correct manner. And they assure inspectors, who watch the pilots and mechanics doing the checklists, that the operations are safe.

What kind of plane would you rather ride on...one where the pilots are following checklists (policies and procedures) or one where they're operating off of various yellow sticky notes hanging all over the cockpit?

Go write an accounting manual!!!

The Sales Tax Guy

Check transaction taxability

The major risk that companies have is not paying use tax on their untaxed purchases. And we discuss this problem in the seminars. BUT, it's also important to NOT pay taxes when you don't have to. For example, I had a participant from Illinois recently tell me this story.

They bought services from a company that was also in Illinois. Because the vendor didn't charge sales tax, the AP department self-assessed use tax. Apparently, nobody asked whether or not this service was taxable (in many states it is). But in Illinois this service isn't taxable. If the AP department had simply asked the vendor why they weren't charging tax, they might have avoided paying taxes they didn't need to pay.

But nobody asked. And they self assessed use tax on these purchases for years.

Finally, someone asked a question about the invoice and a purchasing agent, who had been in my seminar, happened to notice that they were self-assessing use tax. She emailed me asking whether or not I thought this invoice was taxable. I replied that I couldn't imagine how it could be. She researched it further and discovered that they had OVERPAID the state of Illinois by almost $19,000!

The morals of the story:
1. Check the taxability of every transaction, particularly large or continuing ones;
2. When you have an in-state vendor who isn't charging tax, they might know why. Before you go self-assessing, ask them.
3. One of the reasons this mistake may have been made is because the person deciding on taxability may have been most familiar with another state and just assumed Illinois would be the same. Make sure your staff knows that the state rules vary from state to state. Assume nothing is the same.

The Sales Tax Guy

Issue: Product Testing - Exempt?

I had a call today from a seminar participant and as we were talking, I realized her issue would be a perfect puzzle to present to you.

The company makes engines. The engines are taken out of finished goods inventory and placed in a testing area. Are the testing equipment and supplies taxable or exempt under the manufacturing equipment exemption? In most states, inline testing of manufactured products would be exempt as part of the manufacturing process. But in this state, the manufacturing process stops once the product has been put in finished goods inventory (in most states, the process stops at the last machine).

So testing the engine, after it's been placed in inventory, would be outside the scope of manufacturing and therefore taxable. But here's the fun part: if they had intercepted the engines before being placed in the warehouse, then the testing would have fallen within the scope of manufacturing and would therefore be exempt. Stupid, huh?

In my conversation with the taxpayer, I suggested she contact a local expert. While a strict reading of the laws is all I can go with, a local consultant (CPA, lawyer, etc.) will be familiar with enforcement practices in that state. I can foresee an undocumented position of, "well, yeah, we know this is really inline quality control testing; it's just getting placed in the warehouse for convenience and you haven't made the journal entry moving it to FG inventory, so we'll let this one slide." It isn't documented (as near as I can tell), but it may be the informal position the state takes.

There are three lessons here:

1. understand the rules for the exemptions that your company takes advantage of;
2. interpret the rules very strictly;
3. engage a local expert to identify any undocumented positions that will help you.

The Sales Tax Guy

Are there any questions?

I'm actually don't bring my tank to seminars. Just so you all know.

A little sales tax humor, folks.

Sales Tax Guy

The Marshmellow Rule

I enjoy finding interesting and strange laws as I travel the country doing sales and use tax seminars. I discovered one in New York. They consider grocery store type food to be non-taxable. But as in many states, candy is considered taxable.

So what to do about marshmellows? You and I might not think this would be a big deal, but evidently the regulators in Albany felt the need to address this burning issue.

Miniature marshmellows are exempt as food. The big ones are taxable.

But a seminar participant last week brought up a good point: what about marshmellow fluff?

UPDATE: All marshmellows are now exempt in NY.

Days numbered for tax-free Net sales (CNET article)

While they don't get some of the important concepts regarding sales and use taxes, this article illustrates an important point that I missed. With a Democratic Congress, there is a higher likelihood that Quill will be overturned to some extent and the Streamlined Sales Tax Project will become more relevent. Worth a read.

Banks Owe Sales and Use Tax

Banks often get caught for SUT in a couple of areas:

1. The first is the obvious failure to pay their use taxes. Since they often don't file SUT returns, they don't realize they have this liability. This same problem exists for other organizations, particularly professional services firms, that don't sell taxable stuff or services (or don't realize they're making taxable sales).

2. Banks often sell stuff, which is taxable. A few things that come to mind include: checks, credit card swiping machines, rental of safe deposit boxes (taxable in some states), deposit bags, software, meeting room rental (taxable in some states), numismatic items, etc.

I call this gotcha the "non-core sales" problem. Companies that don't make taxable sales in their normal activities might still be exposed in other areas.

Beware

Sales Tax Guy