Some times it pays to overpay

I spoke with a contractor in my seminar last week who described a different situation. Because they're very small with limited ability to do the necessary bookkeeping, they have essentially been double paying their sales and use taxes. They knew they were, but the cost to hire someone to do it right would be more than what they're overpaying. The silver lining is that, when they were recently audited, they pointed this out. The auditor gave up really fast when she realized that anything she came up with would be offset by the overpayment.

I'm not recommending intentionally overpaying your taxes to run off an auditor, but if you do know that you're overpaying, keep this in the back of your mind when you're sitting down with the auditor.

Sales Tax Guy

The Decision Tree

This blog post has been replaced

The Standard Contractor's Rule

First of all, a definition: in this discussion, "contractor" means a construction contractor - someone taking tangible personal property and turning it into real property.

In most states the standard way these situations are taxed is that the contractor pays tax on his building materials - the stuff that goes into the building. He does not charge his customer tax. The logic is that the contractor is actually using those materials to perform the non-taxable service of building real property.

The other view is that the contractor is the last person to buy the building materials as taxable tangible personal property. Therefore, he pays the tax. Either way, states have gravitated towards the treatment of the contractor's purchases as being taxable.

Of course, the cost isn't eaten by the contractor. She will pass it on to her customer as part of her materials cost. But the sale to the customer is not a taxable sale and therefore there should be no tax on it, as such.

This same treatment is usually used for contractors that repair or improve real property as well.

Maybe half of the states have an exemption that allows the contractor to purchase their building materials tax free if the project is for an exempt organization, like a church or a school. But it is not universal.

Finally, there are states that do not do it this way. They either consider the entire sale from the contractor to the buyer to be taxable, the services to be taxable, or some combination thereof.

And then there are a couple of states that have a contractor's occupation tax. Sigh.

Sales Tax Guy
See disclaimer and make sure you check the rules in YOUR STATE.

Two Different Types of Property

[THIS ARTICLE HAS BEEN UPDATED, OVERHAULED AND REPLACED!]

Seems like we should have these cleared up for future purposes
While there are variations, these are pretty good definitions in most states.

RP - Real property

Real property is generally property that has been:

1. permanently
2. affixed
3. to other real property (like land and buildings) and
4. integrated into the value or use of that real property.

Factors that that are considered for item 4 include whether the additional property extends the life, or increases the value of the existing real property. One test that I've seen used, which is pretty good, is: if the building was purchased, would the new owner probably retain the addition, or would they probably tear it out?

TPP - Tangible personal property

Tangible personal property is property that is perceptible to the human senses (tangible), and is not real property. See above.

Note that, in general with lots of exceptions and variations, sales of real property are not taxable, but that sales of tangible personal property are, by default, taxable.

And then there's a third type of property: intangible personal property.

---

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.

---

Commercial Refrigeration Equipment

I saw this article recently involving a ruling from Pennsylvania. It caught my eye because, well it's my job. But also because this very question has come up more than once in the last year or so. And it sticks in my mind that it came up in Pennsylvania. So, you PA folks out there, pay attention.

For some of you, this might be interesting as a guide to how YOUR state might treat this equipment. And for the rest of you, who are wondering why you should care about commercial refrigeration (haven't typed this word yet without misspelling it) equipment, the theory itself is interesting.

The problem involves installing those big units in grocery stores. Do they become real property or not? In other words, is the sale of the equipment treated as a sale of installed TPP and therefore taxable. Or is the resulting installation considered RP (real property)? In which case, the contractor rules kick in (contractor pays tax on building materials, does not charge customer tax).

PA came up with, what I think, is a pretty good test. If the refrigeration unit (there, I spelled it right) is self contained with the compressor being inside the unit, then it's considered the sale of TPP and the seller would charge the grocery store sales tax. However, if the compressor is located outside of the unit, probably someplace else in the store, then it's considered RP. In that case, the contractor pays tax when he buys the unit and he doesn't charge tax to the grocery store - the standard contractor treatment.

The theory, for the rest of you, is that when you are installing big equipment, one test for whether or not it's a real property contract and therefore taxable to the contractor but not to the buyer, is whether or not the equipment is self contained and can function on it's own. If so, it's a sale of TPP and therefore taxable to the buyer.

But if it still needs other equipment in the building to be able to function, then it might be considered a real property contract and treated under the normal contractor rules.

Like I said, interesting. No, fascinating!

Sales Tax Guy
See disclaimer.

Charging Taxes Instead of Raising Prices

Here's a new scam that, frankly, makes sense - if you're a felon.

There was a case recently where a seller charged tax on a non-taxable service. He didn't call it "sales tax" - he just called it "tax." But he put it on the invoice where you'd typically see sales tax. And his employees used a sales tax rate card in the presence of the customer to calculate the "tax." He knew the service wasn't taxable, he was just trying to make more money. He wanted to raise his price but he couldn't because he had competition. So he decided to just start charging "tax."

The problem is that the state asked him where the money was. If you're going to charge your customers tax, even if incorrectly, then you're expected to pay the money to the state. Which, of course, kind of defeats the purpose.

The article I read did not indicate the penalties assessed by the state. I hope they were high. I wonder though, if the state took any action to get the customers, who had been illegally charged tax, their money back.

Probably not.

The moral of the story is that you need to be aware of the taxability of what you're buying. And if the seller is charging tax on something you don't think is taxable, then yell. And threaten to call the revenuers.

Tanning Salons

I recently heard of an interesting audit practice.

One of the things that sales tax auditors want to do is make sure that a business is not making unrecorded sales on which they should have paid sales taxes. In the particular state where I heard this, tanning services are taxable. But to make sure the salon was actually reporting all of their sales, the state reviewed their electric bills for the last few years. Why?

The answer? Since the major use of power in a tanning parlor is the tanning bed, then you can see a pretty close relationship between the use of the bed and the electricity cost for the business. Once you know the ratio (which the state has probably already calculated), then a simple comparison of the power use of the store versus the reported sales of tanning services will give the state a good (but not bulletproof) idea of whether or not all of the sales have been reported.

Occasionally, they have a flash of brilliance. What are ya gonna do?

Sales Tax Guy