Buy a new car on Obama! (sort of)

Here's an article from the Washington Post that popped up on an income tax credit for sales taxes on new cars that's part of the stimulus package. Go out and buy a car!

Here's another article from examiner.com, one from KFVS12 and one from the Middletown Journal. If you'd like to look for more, here's the Google search.

While I try to restrict this blog to discussions about state sales and use taxes, everyone once in a while ya gotta broaden your horizons. Particularly if it's timely.

While we're on the topic of news articles, here's a hilarious one about a guy who was trying to pay $1.50 in taxes that the store didn't charge. Beware of your government, Floridians!

Sales Tax Guy
Buy a CAR, dang it!

Don't forget our coming events!

picture note: Yes, that's me with my baby. She's getting a little old, but is still is sufficient for the use she gets.

"So, what's this use tax?"

I get this question all of the time and I just realized I've never written about it directly.

Use tax was invented to plug loopholes in the law where sales tax didn't get collected. Essentially, the law works this way: if you have purchased something that should have been taxed, and it wasn't, then you owe use tax.

The best example is a book from Amazon. com. In most states, they won't charge you tax. But you're not off the hook. It should have been taxed, but Amazon.com didn't have to (that's another long story involving nexus). Therefore, you as the buyer must pay use tax.

The states really don't expect individuals to pay the tax, although they give you the opportunity and they're kinda ticked off about it. In many states, there's a line on your state income tax return, usually near the bottom of the second page, where you're expected to put something in there. Most people don't. And states generally have a form for you to fill out to report your use taxes. This is probably one of the least downloaded forms the states have. If you feel a pang of guilt, and want to start filling it out, it often has a name like "consumer's use tax return." Look on the state's web page under forms.

But businesses, who will get audited eventually, need to worry about this. They will eventually get caught. See this golden rule.

Sales Tax Guy
See disclamer


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Accounting Tests for Nexus

One of the things with nexus issues is that the people who are likely to create the most problems for your organization in this area will be the sales and marketing folks. And they NEVER have a clue. I know they don't come to my seminars, and I'm sure they're not doing any outside reading. So it kinda falls to the accounting folks to keep an eye on this.

Since nexus is created by having a physical presence in remote state, then accounting should look for clues:

1. Paying bills to contractors for installation of your product in other states. That's the kind of thing that gives you nexus.
2. If you own, lease or contract your own delivery trucks, look at where they go. Delivery in your trucks usually gives you nexus.
3. Look at any bills for warehousing charges in other states. That indicates you have inventory being stored in a remote state.
4. In the same vein, look for any space rental charges in remote states.
5. If you have goods drop-shipped from a shipper in another state, that may give you nexus there.
6. Are you writing commission checks to independent sales reps or marketing firms based in remote states?
7. And, of course, if you're reimbursing people for their expenses incurred in other states, you've probably got a nexus problem there.

Enjoy making sales and marketing miserable.

Sales Tax Guy
See disclaimer.

obg

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*picture note: Does this remind you of your sales staff?
This is Dirk of "The Swordsmen"
Bristol Renaissance Fair, Kenosha Wisconsin August 2008
www.theswordsmen.com/index.shtml

Repair Labor and Maintenance Contracts

Here's the deal on maintenance contracts and repair labor.

Many states impose sales and use taxes on the labor to repair tangible personal property. In other words, if you get your rocket engine (see picture) repaired, you're gonna pay tax on the parts AND the labor. No surprise there, unless you're in a state that doesn't do this. In which case, you're probably shocked beyond all belief. Sorry. Hope you didn't spit anything on your laptop.

Anyway, the next question is whether or not maintenance contracts get taxed. Usually, maintenance and extended service contracts are taxable in states where the repair labor is taxable. And not taxable in states where repair labor isn't taxable.

However, if the contract includes a regular supply of materials - such as toner and paper in a copier contract, that will usually make the contract taxable. Even in states that don't tax repair labor. These types of contracts essentially become a pre-purchase of TPP and become taxable.

Finally, some states differentiate between a maintenance contract sold by the company who's going to be doing the service vs. a third party who will simply contract out the work when necessary. In the latter case, those are often considered insurance policies as opposed to maintenance contracts and not taxed.

Sales Tax Guy
See disclaimer

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Here's more information on the picture, if you're interested.

How AP can figure out where the company has nexus

In many organizations, Accounts Payable gets stuck with all of the sales and use tax responsibilities. The problem is that many companies have nexus problems, which usually doesn't have much to do with AP. The sales and marketing people won't think of this in a million years. So, it falls to Payables to raise some red flags.

Here's a fun procedure for Accounts Payable which will ruin the days of all those sales and marketing folks.

One way organizations typically acquires nexus is by having people visit a state frequently enough that they can be determined to have a "physical presence" in that state. And AP knows about this! How, you might ask? Because they process the expense reports!

So, as you're paying invoices for contractors installing your product, sales reps making calls on customers, and management speaking at industry events, etc. , note the states that they're spending time in. Keep a list of the states and, when a state starts getting visits more than a couple of times a year, make noise about how your company might have nexus in those states.

Oh, this is going to be so much fun!

More on this in a few days.
The Sales Tax Guy

See disclaimer and research the issues thoroughly before making decisions

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Watch those numbers

Beware of the numbers you receive from your customers on those exemption certificates. The most common mistake they make is to put their Federal Employer Identification Number (FEIN) on the forms. That is usually NOT the number. But it's the number they give because most accounting folks know their FEIN by heart. It's the first thing that comes to mind when anyone seems to need a longish ID number.

Most states assign their own numbering sequence and don't use the FEIN (which is assigned by the IRS*). The number on the resale certificate provided by your customer should usually be the number they received from the state when they registered as a retailer/dealer/reseller. And, except for a couple of states (MI and NY for example), it ISN'T the FEIN.

And if the state assigns other numbers, such as for non-profit organizations, again they are rarely use the FEIN.

If you're not familiar with the numbers used by the state you're getting the certificate for, then ask your customer to give you the number off of their license or permit, off of the sales tax return, or off the document they received from the state.

Picture note - I found a random number generator on Google and pasted it into an old picture I had. Cool, huh?

Sales Tax Guy

*I like to think of the FEIN as a company's "social security number". It's used in the same way for tax filing purposes and to identify the company, and has the same number of digits. And just like the SS number, it's become a more universal ID number for other purposes besides those of the IRS.

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