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WV Energy Star Holiday

CT ST holiday

Absorption in MA
Since the sales tax holiday went away, retailers are offering to pay the sales tax. They've found that there's a law against it (absorption). Interesting to see the legislators scramble to try to fix the "problem."

Selling animals means sales tax
No matter how much we may think of little Muffin as part of the family, pets are considered tangible personal property and therefore taxable.

The Four Loopholes (Loophole Number 4)

There are four loopholes which created the need for use tax. Over a short period of time after inventing sales tax, the states started discovering that there were some situations where they weren't able to get the sales tax revenue they were expecting. We'll use this series of posts to discuss each one.

The state can't "reach" the seller - they have no jurisdiction over the seller

In other words, the state can't get the seller to collect the sales tax from the buyer, so they invented use tax to get it from the buyer instead.

The most common example of this is our good friend Amazon.com or, for that matter, any other mail order or online retailer.

If you're in most states, when you buy from Amazon.com, they don't have to charge you tax. The short answer is that they aren't in your state. There are no stores, warehouses, offices, facilities, delivery trucks, representatives, etc. In order for a state to impose their laws on a potential taxpayer, that taxpayer must have nexus in the state - a physical presence.

Amazon.com doesn't have a physical presence or nexus in most states. According to this page on Amazon.com's web site, they do have nexus in these states (WA, ND, KS, and KY) and charge tax. They also charge tax in NY, but that's a weird situation. Someday, I'll write an article about it, but don't hold your breath.

So Amazon.com doesn't have to obey most state laws and doesn't have to charge their buyers tax. So what is, say, Alabama supposed to do? They want that tax revenue. Mail order and online sales are a big part of the economy, and they can't simply write off that segment.

Alabama and all of the other states therefore close the loophole by imposing a use tax on the buyer. That use tax doesn't get paid very often, particularly by individuals. But for businesses, this is the primary objective of the audit that will hit you at some point. They will want to see if you've been paying your use taxes. Hopefully, regular readers of this blog are.

Another related way this loophole works are sales by the Federal government. States generally can't make the Feds collect sales tax on their sales. But many states will say that, if the buyer gets something from the Federal government, and it wasn't taxed, the buyer owes use tax. This is about the only other example of a situation where the state can't "reach" the seller.

The fourth loophole for why states have a use tax is to plug situations where they can't make the seller collect the tax.

Sales Tax Guy

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Picture note: I wanted to illustrated interstate sales and I don't have any pictures of semi-trucks. But this is one of my most popular train pictures. Enjoy it on Flickr here if you want to see it larger.

Pet Store Shut Down (PAY YOUR TAXES!)

Part of a series on essential actions you need to take

This article would have just gone out on my new Twitter feed, but as I read this news article I got more and more ticked off and decided it required the full Sales Tax Guy treatment.

In case the article disappears, the essential facts are below.

There have been several stories recently about Rhode Island suddenly closing over 1000 businesses because they haven't paid their sales and use taxes.

That's the first thing to be ticked off about. Why do they pick the depths of the recession to close businesses and increase unemployment? Sounds like the RI revenuers need a reality check. Maybe some targeted state layoffs would do the trick.

But, it's not all entirely the state's fault either. As I read the article about this pet shop owner, I really can't feel sorry for him either. Now, I am assuming the article is correct which is a big assumption. So if I'm wrong here, I've seen other situations where the facts were pretty close to as described. So, at least we'll considered it a teaching opportunity.

1. Business hasn't been good for the pet shop for a while.
2. The owner quit remitting his sales taxes and started keeping the money to run his business, figuring he'd pay it back someday when business got better. The quote in the article is “I used that money to stay in business." [my emphasis]
3. He apparently hasn't been filing returns on schedule either.
4. He has had problems with the IRS too.
5. While not mentioned in the article, I'm betting he got more than a few letters from the state inquiring about when he was going to pay up.
5. He has virtually no assets.

And he wonders why the state won't give him a break and lenders won't give him money. Talk about a bad credit risk. The amazing thing is that he still has employees coming to work to take care of the critters. Hey, I'm in favor of taking care of the critters, but how is this guy paying his employees? Is he going to have to deal with unpaid wage claims at some point too?

While I'm a big appreciator of persistence, there is a signal that any business should heed when considering its viability. If the management can't (or won't) remit their sales taxes (which have been collected in trust for the state), and choose to use those funds to keep the business going, then it's probably time to rethink the business plan. This situation is not the beginning of the end. It's pretty much the last ledge before the business falls into the abyss.

And if I was working for a company where this was going on, I'd be asking for daily paychecks and hitting the bank on the way home to cash them.

Is it right to steal from the state, and defraud customers to keep the business going?

Stealing from the state? Yeah. The taxes weren't collected for the business's benefit. The seller, in most states, in merely the collector and is holding the taxes in trust. If the seller doesn't send the funds in, it's theft as far as I'm concerned.

Defrauding the customer? The customer didn't pay the business an extra few percentage points for the business's profit. They paid it under the assumption that the state would get that money. If the business isn't going to send the money in, then the business defrauded the customer.

The same thing applies to taxes you withhold from your employees' paychecks. If that money doesn't get deposited quickly... Well, let me just say this. I've heard that the IRS agents who audit companies for this particular problem - not making tax deposits - carry guns. Because people who violate this particular law, tend to find themselves wearing orange jumpsuits.

Bottom line folks. If you're small business, don't think that sales tax money sitting there waiting to be sent to the state is available for interest free loans you can take care of later. It isn't. And you won't. You'll probably wind up just like this poor pet store owner.

So if you've collected taxes, PAY THEM!

See, way more than what I could have squeezed into a Twitter post.

Sales Tax Guy

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Picture note: The cat is Pewee. She wants YOU to pay your taxes. More on Flickr here.

You Must Build a Taxability Matrix

In a previous article, I mentioned that you should have a taxability matrix. This will help your purchasing agents, requisitioners, and anyone else who needs to decide on the taxability of a purchase.

The matrix will be a listing of items that you typically purchase, and the taxability of them based on these factors. This isn't easy. Few people like to write policies and procedures, but this is one of those you really should have. This is the core of any sales tax manual. It'll accomplish a few important things:

It gives your people the information they need to determine the taxability of a purchase, whether they're in Purchasing or some guy out in shipping who needs to order forms. All they have to do is look at the matrix and they can figure out what to check on the "taxable?" box on the requisition or PO.

The matrix gives you the ability to get changes out to these folks as well. Let's say you discover a mistake, find out from sales that you're dealing with a new state, a new law is passed, etc.; you simply republish the matrix. And if you're hip, groovy, and in the 21st century, this isn't even on paper, it's on your intranet someplace.

The matrix will gives you something to hand to the auditor that says, "here is how we do it." Instead of having to pull 10,000 invoices to figure that out, the auditor may need to pull a lot fewer since they can see how you say you do it. They just have to test to see if the procedure is being followed. They can argue if a particular item on the matrix is correct or not, but if you've done the backup research as you were developing the procedure, you're going to be so prepared for any argument.

You know, I kind of feel sorry for any auditor who walks into the buzz-saw of an organization with a good taxability matrix.

So, aside from inertia and the overwhelming power of procrastination, why aren't you developing that taxability matrix?

This article has been written from the perspective of the buying side of the business. A similar taxability matrix should be developed for what your company sells. I'm guessing it'll be somewhat shorter since most companies sell a smaller variety of goods and services than what they buy, and certificates may make the job easier. But developing the protocol still should be done.

Sales Tax Guy

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Picture note: OK, I was going for the "Matrix" look. If you've lived under a rock and you only come out for sales tax seminars and training videos, you won't know what I mean. Click here for more information.

The Four Loopholes (Loophole Number 3)

There are four loopholes which created the need for use tax. Over a short period of time after inventing sales tax, the states started discovering that there were some situations where they weren't able to get the sales tax revenue they were expecting. We'll use this series of posts to discuss each one.

Withdrawal from Inventory (or Conversion to Use)

What's the fundamental and almost universal exemption?

OK, I'll tell you. Resale! Because sales and use taxes are generally intended to be imposed on the final consumer, the retailer shouldn't have to pay taxes on his or her purchases that will be resold to others. Read more in this incredibly well written article. And we have a lot of articles connected with this topic - including this one.

The loophole arises when a retailer buys stuff to resell, then turns around, changes their mind, and uses it. A lumber yard uses some building materials to build a new shed. A store takes picnic supplies out of inventory for a company outing. A computer store takes a price tag off of a laptop and gives it to the new guy. And the car dealer gives sales reps demos to drive.

These are all examples of withdrawal from inventory or conversion to use. I prefer the second term, but you'll see the first term more often in your research.

This was a loophole. If the state only has a sales tax, they don't have an obvious way of recovering the tax that the retailer should have paid at the time of purchase - on the building materials, picnic supplies, laptop or car. So the states invented use tax. When the retailer uses his goods by withdrawing untaxed stuff from inventory, the states can now get their money.

And if you read the instructions for your sales and use tax return, you'll usually see this particular item mentioned as one of the types of things that belong in the "use tax on your purchases" line.

More on this topic, with more illustrations, here.

Sales Tax Guy

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Picture note: I thought you'd enjoy the Christmasy shot - only a few days left till Christmas! The picture above is hosted on Flickr. If you'd like to see a larger version, click here, then click on the "all sizes" button above the picture.

Twitter!

Today, based on recommendations from friends, I set up a twitter account for Sales Tax Guy. Yay!

I'll use twitter to announce blog updates, news about sales and use taxes, seminar and webinar information, etc.

http://twitter.com/salestaxguy

The Process

Here is the entire process (at a very high level) for making sure you accrue for sales and use taxes.

- The user sends in requisition to purchasing.

- Purchasing orders and decides at that time on the taxability of the purchase (yes, purchasing makes the decision -- I hear wailing and gnashing of teeth).

- The vendor ships or performs service and bills you.

- AP reviews the invoice and the PO and determines if taxes were charged and if they needed to be charged.

- If taxes weren't charged, and item really is taxable (contact your vendor to make sure you don't over-accrue), then AP codes and enters the invoice with a debit to tax expense and a credit to use tax liability.

- The tax return is prepared by accounting and the use taxes on purchases come from the accrual by AP. You may want to have a system where AP forwards copies of accrued invoices to validate the accrual, but that's up to you.

Done. How hard was that? What could be simpler?

Oh, yeah. Purchasing is the one who gets to make that decision about taxability (there's the wailing and gnashing of teeth again).

Why? Because purchasing already knows what was purchased and how it is being used. These are two things that AP doesn't necessarily know, and it probably isn't obvious from the paperwork or accounting codes. So they have to contact Purchasing. Which annoys everybody. If purchasing knew what the rules were, problem solved. "But wait!" you say, "Purchasing doesn't know the rules." That's where a taxability matrix comes in handy (don't worry, future article).

Hmm, I wonder how many of you AP folk are emailing this article to your purchasing pals right now. Go ahead, you know you want to.

Sales Tax Guy

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Here's information on our upcoming seminars and webinars

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Picture note: the picture above is hosted on Flickr. If you'd like to see a larger version, click here, then click on the "all sizes" button above the picture.