For Seminar Participants - New Handouts Available

If you've been waiting for the latest version of the handouts to be posted, they're now available at the URL you were given in the seminar.

Jim

NC Manufacturers - A Clarification

For those of you in the seminar this week from NC, manufacturers DO get an exemption from the tax. They don't have tax collected from their purchases, and they don't have to remit use tax. BUT there IS that derned privilege tax.

Jim

More on leasing with an operator

Here are a couple of more points to consider, which are VERY objective and may help with determining this transaction's taxability:

1. Was the equipment bought by the lessor for resale?
2. Is the lease payment based on how long the equipment is leased for as opposed to the successful completion of a job?

Sales Tax Guy

Leasing TPP with an operator

With the help of some folks in a recent seminar, I think I've hit on a useful "rule of thumb" for dealing with the question of leasing equipment with an operator.

In most states, leasing of TPP is taxable. But the question is, if I get an operator for the equipment, two different taxation situations arise:

1. Am I still leasing a piece of equipment? If so, it's taxable (in most states); or
2. Am I hiring the services of an operator (which may or may not be taxable) and the equipment is just incidental to her service.

The problem is knowing when you've gone from situation1 to situation 2.

Here's the rule of thumb:

When the operator ONLY has control over the actual operation of the machine (pushing buttons, pulling levers, etc.) and has NO control over what is actually done with the equipment, then you're in situation 1; you're still leasing a piece of equipment and it's taxable (in most states).

When the operator not only has control over the operation of the machine, but decides how and where to use it, then you're probably hiring the services of the operator, and then you look at whether her services are taxable.

To summarize, if their control is limited to the console or cab of the machine, you're still leasing a machine. But if their control extends outside of the cab to the actual use of the machine, then you're probably hiring the services of the operator and the machine is something THEY use to perform that service. Then the question is: is that service taxable?

Of course, the specific rules in every state will be different.

Clear? Yeah, right.

Sales Tax Guy

The usual disclaimers apply

Golden Rule - Which state has jurisdiction over the sale

The state that has jurisdiction over an interstate sale will be the state where delivery occurs.

This is usually where physical control or the right of control transfers from the seller to the buyer. Since, in an interstate sale, the only thing that can be taxed is the buyer's use of the TPP, and since use involves control over the TPP, then the delivery point determines, for all practical purposes, the state that gets to impose the use tax.

In other words, where is the delivery point?

Another way to look at it is where the seller completes their duties. This is particularly helpful when you're dealing with a situation involving a long installation.

A few (and I do mean a few) states use FOB points to determine the state that has jurisdiction. That can be overcome by the buyer negotiating FOB destination.

Use of this Golden Rule will help you resolve complex transactions to the specific state whose rules need to be followed.

There's a corollary to this rule

There's a little mini-course on this rule.

The Sales Tax Guy

Certificates

Here are some thoughts about accepting certificates (exemption and resale) from your customers:

1. GET THEM! Get them before you ship to avoid hassles down the road, and to assure that the sale IS exempt, and the sales rep isn't trying to slip something past you.
2. Make sure they are completely filled out, per the form's instructions.
3. Check the rules for the state where the delivery is made. If it's a "drop ship rule" state, you'll need the resale certificate (and registration number) from that state.
4. As a general rule, getting the certificate from the state where the final delivery is made is a good idea.
5. Make sure the registration number is from the correct state. Watch out for FEIN numbers, which are often used incorrectly.
6. Accept the certificates in "good faith." If there's something about the transaction that you know is not exempt, either because the certificate itself is obviously a problem, or you just know that what you're selling isn't exempt, then you should charge tax. You're not accepting it in good faith.
7. In certain situations, states put an added burden beyond good faith. To be safe, ask your customer to also provide you with a copy of whatever paperwork they got from the state (eg. the resellers permit). For even more protection, confirm the number is valid with the state. Some allow an automated process, confirmation by email, or may provide a look-up function on their web site.
8. Check expiration dates for the various states. You're probably in good shape if you refresh your certificates every three years. Simply go through your customer list and ask for a new certificate from one third of them every year. That way, you'll never have a certificate that's more than three years old.
9. Speaking of dates, make sure that the dates match your sale. It won't do you any good to get an exemption certificate that's effective in 2006 if your sales to the customer were in 2005.
10. There is software available to help you manage this process. I won't make any recommendations, but a web search may help you.
11. Follow the instructions, both on the form and on the state's web site when accepting certificates.

Sales Tax Guy
See disclaimer

States doing more to find you

In the April 17th issue of BusinessWeek (page 34), there's an article on how the states and IRS are using data-mining techniques to find you. In non-technical terms, the states are reviewing other databases and records to look for something fishy.

Texas, for example, has collected $5 million dollars in the last 6 months by comparing federal airplane registrations with state tax records to find companies that haven't paid their use tax on the planes. Bad, bad companies.

In the past, states didn't have the expertise, staff or equipment to do some of these projects. But now things are getting cheaper, easier and they're outsourcing.

Another interesting scenario was a typical pizza parlor. The state might compare the sales tax returns with the personal returns of the owner with the returns filed by other pizza shops in the area with sales by vendors TO that pizza shop.

It's getting tougher and tougher to fly under the radar.

Here are the states the article mentioned: Texas, Iowa, Virginia and Massachusetts. But beware, your state may read BusinessWeek too!