The Sales Tax Guy

Friday, February 25, 2011

An Interesting Issue with Rental of Tangible Personal Property

I came across an interesting item when I was browsing New Jersey's sales and use tax rules today. It's regarding the leasing and rental of tangible personal property.

First of all, to recap the general rule in most states: the rental of tangible personal property is a taxable sale. The lessor must charge sales tax on the rental charge of the TPP. But this also allows the lessor to buy the equipment "for resale" so he doesn't have to pay sales tax on his purchase. All he has to do is provide a resale certificate to his vendor. Done.

Now this particular glitch is one I noticed because it was clearly spelled out for New Jersey. But it probably applies in the other states as well.

The lessor buys equipment to rent. He pays no sales tax. He charges his customer tax. But what happens when there's an operator involved?

Now we have to figure out if the real transaction is the hiring of the operator, with the equipment becoming incidental to the real purchase of the operator's services. Or are we still renting a machine and the operator is just there because we don't know what levers to pull?

There are a couple of different ways that the states handle this:

1. If the operator has control over how the machine is used, it's no longer a taxable rental (with some variations on what is meant by control).
2. If the cost of the operator is more than the cost of the rental, it's no longer a taxable rental.
3. If there's an operator, it's no longer a taxable rental. Period.

Here's the glitch: Let's say you routinely provide your equipment with an operator. And based on the way the state's law works, the rental becomes non-taxable. Then you really can't be purchasing the equipment with a resale certificate anymore, because you're really not buying for resale. You're not charging sales tax anymore because you're not making taxable sales. You're really using your equipment, or rather, your operator is.

So, if you're the lessor, you should have had your vendors charge you tax (or you should have paid use tax) when you bought the equipment you rent with an operator. Which means, if this is new to you, you owe the state a bucketload of money.

Interesting huh? I wonder how many leasing companies do this; Or have gotten busted on this. And I wonder how many auditors even check for this.

This illustrates a larger issue. Many sales tax exemptions are based on how you will use the purchase (or not use it, in the case of the resale exemption). But if you change your mind later, you lose that exemption. How many of you are paying attention to this? Here's another example where sellers get burned all of the time.

Hope I didn't ruin any weekends.

Well, OK, yeah, I kinda do. (grin)

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

Get these articles in your inbox - subscribe at 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.

Friday, February 18, 2011

Felony Watch: Links

Putnam businessman arrested for failing to pay over $1 million in sales taxes
This may be the biggest I've seen yet - the tab is over a million on a couple of masonry supply yards. Don't all of these assessments make you wonder, when the vendor charges you sales tax, if the money is going to the state, or going into the vendor's pocket? midhudsonnews.com

St. George restaurant owner faces sales tax evasion charges
It's a pizza place and the tab is $90,000 (pure amateur compared to the item above). standard.net

Ex-Anderson Mayor Rex Lynch arraigned on felony charges
This time they get an ex-mayor. The article talks mostly politics, but the gist is that he allegedly evaded sales tax on some vehicle sales. knoxnews.com

Albany bar owner, Rankins, gets six months in jail for not paying sales tax
Yeah, some orange jumpsuit time! Nice to see. The tab is $132,000. What a surprise, a bar owner. troyrecord.com

Brooklyn Park business loses sales tax permit
The tab is $92,000. And this is different - a landscaping business. hometownsource.com

Missouri moves to close Comfort Inn Kansas City Airport in sales tax dispute
Supposedly, they didn't have a sales tax license before they opened. You'd think that would be one thing on the "franchise opening a business checklist." bizjournals.com

Ontario County Man Charged In Theft Of Sales Tax
Former cop, allegedly didn't file returns, then was contacted, under reported collections, quit filing again, and now is in court - maybe jail. The tab? $240,000 What kind of business? Pizza place. oneidadispatch.com

Monday, February 14, 2011

A Sneaky Sales and Marketing Trick - Revisited

Listen up sales and marketing people. Since I'm currently working on educating you, here's an important tip that I wrote back in June 2010.

If the following conditions are happening to you, you really, really need to read that article.

1. Do you have an out of state competitor who regularly steals business from you because they don't have to charge tax, but you do?

2. Do you know, or at least suspect, that they have nexus in your state?

3. Are you sneaky and nasty? Actually, that's kind of a silly question if you're in sales. I kid.

Then take the steps mentioned in this article. You probably didn't know you could do these things (neither do most accounting types, so don't blame them), but depending on your state's laws, you can at least make some trouble for that competitor.

Enjoy.

Wednesday, February 09, 2011

Sales and Use Tax for Sales and Marketing People

OK, for the record, I used to be in sales. I've had several careers, and I spent 12 years in sales and sales management. And I now own my own company, which counts as sales too. So I know from where I speak. I'm not just some guy from Accounting trying to make your life miserable.

Well, actually, I am trying to make your life miserable. But that's a side benefit. You see, I've never lost my accounting roots.

There are a few things that you folks need to know about sales tax. First of all, it's a SALES tax. Doesn't that sound like something you that you should be familiar with?

This project is going to take more than one article to cover, so I'm going to start with the most important points, and then add links to additional articles as they get written. I'm sure your accounting people will forward you the link whenever an article pops up. In the meantime, you can subscribe to this blog (see the box on the right at the top of the column) or you can follow me on Twitter. I actually post other stuff besides sales tax on Twitter. Like Dilbert.

Here are the first two points, and they're closely related.

If you have offices, warehouses, property or even people in a state, then you may have to start collecting taxes on stuff you sell and ship there. Even if your people don't live in that state, or maintain an office in that state, you may have "nexus" in that state. You may be required to charge that state's tax on what you deliver there, and follow their rules on what's taxable and not taxable.

This may be disappointing for you because one of the major reasons you're making sales in that state is simply because you always thought you didn't have to charge tax. Bummer. Now you do. You're going to have to start working harder.

Which brings up another problem. What you think is taxable or exempt isn't the way it is there. Every state taxes things differently. For example, let's say you sell computer equipment and you're based in Chicago. You send your sales people and installers up to Wisconsin on a frequent basis, but you don't maintain an office there. That is, unless you consider the passenger seat of your sales rep's car to be her office.

You now have nexus in Wisconsin. Which means that everything you deliver in Wisconsin needs to have Wisconsin tax imposed.

But wait, there's more (salespeople love that term, don't they?).

You know all that service and installation work you do in Wisconsin? You should be charging Wisconsin tax on that too! Wait a minute! You're thinking that repair labor charges and installation charges aren't taxable. They aren't. In Illinois. But you're in Wisconsin now, bub. And they are taxable there. See what I mean about it being different there?

So to recap: you can make your company subject to the jurisdiction of another state by having facilities, people or property in the state. In other words, a physical presence in that state. When this happens, you have nexus in that state. And then you have to collect that state's tax and follow their rules, which are probably completely different from the rules in your state.

Here's another example, then I'll send you on your way.

In most states, contractors pay sales tax on the building materials that go into the job. This is the case in New Jersey. But New Jersey has a "flow-through" exemption. This means that if they're doing a project for a non-profit organization or a government agency, the construction contractor can get an exemption for the sales tax on the materials for that particular job.

But Pennsylvania doesn't have a "flow-through" exemption. And many contractors from New Jersey get jobs in Pennsylvania. And they bid on the jobs assuming that there is a flow-through exemption. They didn't know it's different there. Then they start having materials delivered to the job site in Pennsylvania and discover that it's all taxable! And they have now underbid the job. I hear about this every time I do a seminar in New Jersey. Contractors are getting burned on this all of the time.

Always remember, it's different there.

Ok, you can now go back to making sales. But stay tuned. There will be more articles written just for you (and anyone else who finds them useful)

Thursday, February 03, 2011

Would you like an on-site seminar? Right now!

Interested in having more than four or five people trained?

Interested in having your people have a more interactive seminar experience?

Then you just might want to have us come to your business and do an on-site, customized seminar for you.

We've reduced our pricing, and included more in that price to make on-sites more attractive. Our fee is only $1200 and that includes customization to your state with a little extra adding and deleting as well. You can't beat that (really, I don't think you can beat that). Travel is extra, of course, but if you're within 8 hours of Chicago, you can even reduce that cost.

Maybe you don't have enough people in your company, but know of another organization in the area that could use some training? If a few companies want to join together to bring us out, we're thrilled.

So make some calls, run the numbers, and bring us out. We'd love to hear from you. Please contact us at jfrazier@gadwall.com or 630-406-5861.

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.

Monday, January 31, 2011

FAQ: What if I underpay my taxes?

This question came in over the weekend and I just answered it. I've sanitized it, because it's worth mentioning to those of you who are relatively uninformed about this:

Found your Sales Tax Guy blog while doing some research. I'm hoping you can answer a question for me.

I own a small retail store in New Jersey. I recently discovered that my now former accountant was underpaying the amount of sales tax I owe. We collect the correct amount (8.75%) but it looks like we have been sending about 7.75% to the state every month for the last three years!

Should I just forget about the past shortages (we're paying the correct amount now) and hope that the state doesn't discover the error? How could the state discover the error anyway unless I brought it to their attention?

Doreen, of all of the possible mistakes that you can make, this is dang near the top of the "really bad" list. Have a look these articles.

You need to get professional help from someone who knows their way around sales and use tax. It'll be expensive but not as expensive as the price you'll pay if you ignore this. And New Jersey is broke, so they're even more aggressive about finding unpaid taxes.

They'll find you. It's called a "sales tax audit." And this particularly problem is one they'll probably find in the first hour or so of the audit. Snap.

Find some help.

Jim

This also brings up an issue I've talked about before. While your accountant may be highly knowledgeable at income taxes, there's a good chance that he or she knows virtually nothing about sales and use taxes. But the eventual responsibility will rest with you. So make sure that whoever you take advice from on this topic actually knows something about it. And make sure they're doing it right.

Jim

Tuesday, January 18, 2011

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.

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

Get these articles in your inbox - subscribe at http://salestaxguy.blogspot.com

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.

Articles You Need to Read!

Welcome to the Sales Tax Guy, a production of salestax-usetax.com.

If you're new here, you may wish to start your exploration with our article on Sales Tax in a Nutshell and our subject index.

We've also written master articles on sales and use taxes:

a Guide to The Sales Tax Guy

the various Taxing Policies,

Things that will get you in the worst trouble,

the Golden Rules of Sales and Use Taxes, and

the Essential Actions you need to take.

And here are the best resources for finding answers to your questions as well as our seminars!

Disclaimer

Please keep in mind that our purpose is to provide general information to familiarize you with certain issues. The information we provide may not apply to your particular situation or to the applicable state, may oversimplify an issue, or may omit a point that is relevant to you. In addition, exceptions, unwritten rules, and different interpretations abound. And every state (and sometimes local jurisdictions) will do it differently. Therefore you should not rely on the information provided for your specific needs.

After reading any of our material or participating in training or coaching, you should always consult with an attorney, CPA or tax adviser who is a local expert in sales and use taxes for the applicable state, and/or do your own research in authoritative publications before applying the principles or suggestions mentioned.

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