Coupons

This is one of a series on how to handle items that affect the "basis" of tax.

There are two types of coupons (in the sales and use tax world, anyway): manufacturer's coupons and store coupons.

A manufacturer's coupon is one of those things you get in the mail, typically issued by the manufacturer, giving you some discount on your purchase.

A store coupon is also a piece of paper, and you may get it in the mail. But it's fundamentally different.

The difference is that the store coupon essentially acts as a price or quantity discount. The store (the seller) is actually giving you a discount, just like a mark-down in the store. You just have to do a little coupon clipping to get the discount. But the key thing is that the store is incurring the cost of the honoring coupon.

In the case of a manufacturer's coupon, you hand them the paper, and they give you the discount. But the store (seller) will be reimbursed by the manufacturer for the discount offered by the coupon, plus a little extra for processing. The key thing here is that the store incurs no cost to honor the coupon. That cost is born by the manufacturer.

In effect, the store is receiving the full amount of the selling price! They're receiving some money from you. And they're receiving the rest of the money from the manufacturer. So they really sold you the item for the full amount, as far as they're concerned.

While there are exceptions, most states consider manufacturer's coupons to operate the same way as rebates - they do NOT reduce the basis of the tax. The tax you pay will be on the original selling price before the coupon.

But store coupons are almost universally treated just like price and quantity discounts. They reduce the selling price.

Don't believe me? Next time you're in a big store, like Target, or your local chain grocery store, see how they handle that manufacturer's coupon on the receipt. The tape will show that they gave you the discount, but they charged you tax on the original selling price.

That is, unless you're in one of the few states that treat both types of coupons the same. In those glorious places, both coupons reduce the selling price.

Sales Tax Guy

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News Links and An Editorial (more or less)

Philadelphia's local tax went up, bringing them to 8%, while the suburbs are at 6 and Delaware, which is basically a suburb of Philadelphia, is still at 0. The mayor says there will be no "material impact." Like he knows. He also says that it's just temporary- for five years. OK, who's willing to bet? In six years, that "temporary" tax will still be there. There really are no "temporary" taxes. It also looks like some retailers will eat the tax rather than pass it on. Which is absorption and illegal in Pennsylvania. Wonder if they're going to enforce that? kyw1060 philadelphia.bizjournals.com and others

Oh, and without comment, the Virginia energy efficient sales tax holiday starts on 10/9 taxfoundation and newsadvance.com

Sales Tax Guy

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Nutty Drop Ship States

Part of a continuing series on drop ships

[listed revised on 5/26 - not completely overhauled]

This is one of those things that has been rattling around on my articles-to-write list for a while. And I needed to update the list I use in my seminars and webinars

Herewith is, as of today, a listing of the "nutty drop ship" states. These are states that are either explicitly "nutty" or I failed to have the necessary language (in RIA's sales tax database) that makes them "not nutty." In other words, my default is that a state is "nutty" unless I can find enough information to make them "not nutty." This article explains "nutty."

Note that some of the states listed offer wiggle-room. Some will accept special paperwork or certificates. Several differentiate between interstate and intrastate shipments. FOB points may come into play. However, the states marked with an asterisk* appear to offer very little wiggle-room, if any.

You always need to do some research to determine the drop ship rules in the delivery state.  Also, remember what I've said about information in tabular format. Check everything out yourself before making any serious decisions. See the disclaimer.

NOTE: This list is for illustrative purposes.  It's out of date.  Do your own research.

Alabama
California*
Connecticut
DC
Florida*
Hawaii
Illinois
Louisiana
Maine
Maryland*
Massachusetts*
Mississippi*
Nebraska
Nevada*
North Dakota
Oklahoma
Pennsylvania (new rule in Feb 2010)
South Dakota
Tennessee
Virginia

Sales Tax Guy

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Sales and Use Tax News Links

North Carolina did a last minute increase to the tax rate, but they haven't gotten the revised forms to retailers. So retailers may not be charging the right tax and may not remit the right tax. This is a frequently a problem with fast tax changes - there's sometimes not enough time for retailers to implement the change. And they may not even know about it in time. And whose fault is that?
newsobserver.com

So, is the sale of marijuana taxable? In Colorado, which allows medical marijuana, the question is whether it's medicine or an herbal supplement. vaildaily.com

Felony watch: Jeweler didn't collect sales tax for over 3 years totaling $102,729, and has to pay $207,926. jckonline

So what makes a retailer?

As promised, let's talk about what the states usually use as criteria for determining that someone is a retailer. As we saw, this is an important thing to determine because, if the seller is a retailer, then they must charge tax - the sale is taxable. Which means that if the seller doesn't charge tax, then the buyer must pay use tax (as we saw in this loophole).

Some states make it pretty easy. Their laws say that anyone in the business of doing anything is a retailer of anything they sell. So businesses in these states can't make occasional sales at all.

Other states use some sort of numeric test. For example, you might become a retailer when you have had three sales events in a year; or if you make sales of more than $5,000 a year.

But other states will use a mix of the following tests. Some of them are "mushy" and subject to interpretation, others are not so mushy:

1. Does the seller generate a great deal of revenue? This is relevant concern if you're trying to decide if a sale outside of the seller's normal line of business qualifies as a retail sale. If a retailer of structural steel components generates $500,000,000 in revenue every year, and they also sells $100,000 worth of computers, this is a pretty small percentage of their total revenue. But as an absolute number? $100,000 is a respectable amount of computers and would very probably qualify them as a retailer of computers just on that number alone. Let's say it was $5,000 worth of office furniture. Now the number becomes almost irrelevant. But read on.

2. Does the seller keep books and is she able trying to make a profit on the sales?

3. Does the seller hold herself out as a retailer, with advertising and signage? Does that steel company have a sign out in front saying "surplus computers for sale?" Not good.

4. Does the seller have staff assigned to selling the items? If our structural steel manufacturer was just getting rid of surplus computers by selling them only to employees, that $100,000 number might not be a problem. But if the company has staff assigned to make the sales, deliver and install the computers, then they're probably a retailer.

5. Is the item sold related to the seller's business? Let's say that the steel company has written software to help bridge-builders calculate how much steel they'll need. And they sell this software along with the computers. That's pretty seriously related to the business. Now the sales are unquestionably made by a retailer, and therefore taxable.

6. Do they compete with other sellers of the same products? In other words, do the other computer vendors in town look at the steel company as a competitor? If the steel company merely sold the computers to their employees as surplus, the computer dealers in town might not even notice what's going on. So this might not be a problem. But if they put that sign out by the road and sold to anyone who had the cash...problem.

But here is the final, and absolute test:

7. Does the seller buy items specifically for resale? If the steel company is merely selling surplus computers to their employees, that they had purchased for the company's use, this test isn't met. But one of the others listed above might be, so the company's not off the hook yet. On the other hand, if the seller is buying those computers with the specific intention of selling them to others, than no other tests are necessary. The seller is a retailer of computers and they're making taxable sales.

Remember, if a seller meets the test of being a retailer, then they are making a retail sale. They have to charge tax to the buyer, and, if they don't, the buyer is on the hook for the use taxes.

But if the seller isn't a retailer, then there's no tax. Period (subject to the wrinkles mentioned here).

As you can see, it's in the state's best interests to make you a retailer. So they'll interpret those above tests in ways you won't like.



Sales Tax Guy

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Sales and Use Tax News Links

Georgia SUT holiday this weekend! examiner.com and northfulton.com

More on protests over the "arts" tax in PA philly.com, myfoxphilly.com and a whole lot more

Refreshing to see someone getting creative about collecting use tax. Too bad it's a city and not a state. MohaveDailyNews.com

Commission recommends overhauling CA taxes, eliminating SUT and imposing a gross receipts tax. Yeah. Sure. AP

Sales Tax Guy

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Occasional Sales

As I've talked about in this golden rule, "generally [in order to be a taxable sale], the sale must be made by someone who is in the business of selling the product or service. If they're not in the business, then they're making an occasional sale." Occasional sales will sometimes be called casual sales - same thing.

So if Joe sells this piano out of his living room to Marlene, Joe doesn't have to charge Marlene sales tax. Joe is not in the business of selling pianos, and therefore the state doesn't require him to collect sales tax.

However, what about Marlene? You might think that this loophole would be the state's justification for going after Marlene for the use tax, since the Joe was not required to collect the sales tax. But remember this golden rule - in order for there to be any tax, the item must have been purchased in a retail transaction. This piano wasn't, because it wasn't sold by a retailer. Therefore, Marlene doesn't have to pay the use tax to the state

So, even if the piano is a $5,000,000 antique that Mozart owned, as long as it's sold in an occasional sale, the seller doesn't have to charge sales tax and the buyer doesn't have to pay use tax.

There are some wrinkles though.

1. Remember that it's only an occasional sale if the seller isn't normally in the business of selling the item (in this case, a piano). But the states' rules are usually pretty broad in defining what is "in the business." So if you sold a couple of pianos in the same year, and the state was missing out on a LOT of sales tax revenue, the auditor could get pretty aggressive about whether you're "in the business" or not. Soft, mushy rules make for interesting audits. I'll cover this more in a future article.

2. In a some states, the effect of the laws is that a business can't ever make an occasional sale. Therefore, if that piano was sold by a sludge manufacturer who simply had it in their lunch room for the employees' entertainment, they would still have to charge sales tax.

3. There are a couple of states where, in an occasional sale, if the buyer is a business, then the business would have to pay use taxes, even though Marlene (not a business) would not have to pay the use taxes. Yes, businesses aren't treated the same as individuals. What do you expect? Businesses don't vote so they're fair game for the politicians who really only care about votes. Oops, I put on my editorial hat for a second.

4. Finally motor vehicles and other purchases that are required to be registered are handled differently (this will be the topic of a future article).

As usual, you need to check the rules in the delivery state.

The moral: if all the conditions are met and the t's are crossed and the i's are dotted, an occasional sale causes zero tax liability - no sales tax and no use tax. Remember this when you hit the garage sales this weekend. You don't have to worry about paying use tax on your purchases. Because I'm sure you were.

Sales Tax Guy

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