Sales taxes made the Drudge Report!

Imagine my surprise when I saw that my favorite topic (well almost my favorite topic), made the Drudge Report. Here's the direct link. Apparently Rhode Island is getting a little nasty with sales tax enforcement.

Sales Tax Guy

FAQ: International Shipments

If you ship out of a state, it really doesn't matter if you're shipping from Missouri across the Mississippi River to Illinois or a little further to Australia. The fact remains that you've shipped out of Missouri. Therefore, based on this golden rule and this golden rule, Missouri tax doesn't apply. You might have to worry about Australia taxes, but that's not my problem.

Conversely, if you're in Australia and you ship to Missouri, and if you have nexus in Missouri, the Missouri taxes will apply, even if you're a loonnggg way away in the land down-under.

Sales Tax Guy

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Picture note: the picture above is from St. Louis Missouri and 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. I've never been to Australia, so...

The Four Loopholes (Loophole Number 2)

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 Vendor Makes a Mistake

The vendor (Steve) sells Mike a machine and, for whatever reason, fails to charge Mike sales tax. What will happen to Mike when he gets audited and the eagle-eyed auditor notices that there is no tax on the invoice? Hmm?

[I'm trying to recreate a seminar experience here, folks. So I need someone to blurt out the answer. ]

[Waiting....]

Yes, absolutely correct. Gold star for Mary! The auditor will make Mike (the buyer) pay the use tax. In most states (but not all) the buyer, for all intents and purposes, has the burden of the sales tax imposed on him. If it is not, the buyer will have to pay the use tax. But the buyer's burden is usually relieved by simply having a receipt from the seller showing that sales tax was charged.

Since Steve (the seller) didn't charge Mike tax and therefore Mike has no tax receipt, Mike will get burned at audit time. Or, if Mike has a good AP specialist, he (or she) may have spotted Steve's mistake and accrued the tax in the meantime. Either way, the state gets their money. They either get it from Steve (the vendor) when he does his job correctly. Or they get it from Mike (the buyer) later.

The loophole was that if the seller didn't charge tax, the state couldn't get the money from anyone but the seller. But when they invented use tax, they had a mechanism to get the tax from the buyer as well. Nifty.

Here's a question though. Did Steve screw up? What if he absorbed the tax? Or what if he knows the item isn't taxable? If the AP specialist, or the auditor, simply reacts to the invoice not having tax, then Mike might over pay his use tax. Heavens!

That's another article.

Sales Tax Guy

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Picture note: I wanted a picture the shows a mistake clearly being made by someone.

We're a foreign company....

I got a version of this question this week:

"We're a non-US company who has, up until now, avoided a physical presence in the US. We ship products to US customers (usually distributors and dealers) but have no reps, warehouses, plants, offices, etc. anywhere in the States. We're considering establishing warehouses in a few places and figure that will give us nexus in those states. Where do we find advice on making this decision that isn't going to be expensive?"

That last question makes this question pretty much applicable to all of you...

There really isn't a cheap solution. The best (and most expensive) one is to hire one of the giant CPA firms and have them do a study for you. It would take into consideration sales and use tax rates, complexity, audit friendliness, rules about nexus, certificate requirements, drop shipping, any possible and unusual exemptions you might be able to take, etc.

For example, there's at least one state that has an exemption for warehousing equipment, conveyors, racks, etc. That's unusual, but something that someone in your type of business may be able to use.

The big problem is a common one that I've talked about over and over again: it's amazing that even the big CPA firms often do not have anyone who really knows sales and use taxes inside and out (at least handy to where you are). For example, the resident expert may not know that there's that one state that has that warehousing exemption!

So make sure you're talking to the top sales tax expert at the firm, regardless of their physical location. And make sure they look for any industry specific exemptions.

And, much as I hate to admit it, pay attention to the other potential taxes as well:

Income taxes (both corporate and personal - you'll have staff there)
Gross receipts taxes
Business occupation taxes
Employment taxes (your list mentioned California - beware!)
Property taxes
and other too-numerous-to-be-mentioned-here taxes

And many of these are administered at the county, city or district level, so it's not just about the state.

That's the best solution.

The cheap solution...

Pick your locations purely on operational grounds. Then buy a copy of the American Bar Association's Sales and Use Tax Deskbook. It's close to $300, but is the best single source of SUT laws that I've seen. You can get a pretty good idea of what's going on by using this book. Review the chapter for the state you're considering. If it looks too messy, then move on to the next state.

Another nice thing about this book is that it gives you the chapter authors for every state. Expensive, but well qualified people who can help you.

In other words, do your own research, but use a good tool to do the research.

Unfortunately, that doesn't help with the other taxes. And they can be nasty.

I think, in the long run, you'd be safer using the expensive approach - hire some pros. But make sure they actually are experts at sales and use taxes, dang it!

Sales Tax Guy

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The Four Loopholes (Loophole Number 1)

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.

Purchases in another state
Say the rate where you are, in Vancouver, Washington is about 9%. But if you cross the bridge and go to a mall in Portland, Oregon (a 15 minute drive), you'll pay zero % sales tax. Where are you going to buy your big screen TV? Something tells me that, per capita, there are a lot fewer appliance stores in Vancouver than there are in Portland. Just a guess.

There's not a whole lot Washington can do about your buying that TV in Oregon. It's not like they can post border guards. You might leave a trail however. A woman in Washington bought a TV with a store account in Oregon, took the set home, and three months later, got a letter from Washington demanding the use tax.

She left a trail. The store filed a lien on the TV in Washington, where those records are computerized. So all the Washington revenuers have to do is scan the liens looking for one filed by an Oregon seller. Bingo. Revenue!

Pay cash though, and all that exists is the paperwork in the seller's offices. Unless they get audited..... Not that I'm suggesting this method of avoiding your proper Washington taxes, though. I'm just sayin'.

And I know of no state that routinely audits individuals for use tax. First of all, individuals don't keep sufficient records of all their purchases and receipts (except for the more anal among you). So there isn't anything to audit. Plus it's politically unwise to audit taxpayers (and voters) for a tax they didn't realize they owed. Most people who go to Oregon to buy their stuff don't know about use tax. They just think they're avoiding sales tax legitimately.

But if you're a business, oh, yeah. They'll find you. It's called "being audited."

The problem for the states is that they can't charge you sales tax since the sale occurred in another state and they can't reach that transaction. But they can impose use tax. You did, after all use that TV once you unloaded it in your driveway.

So if you buy something in one state where the rate is lower than the one where you will eventually use it, the state will impose use tax on your use of it in that state.

Use tax therefore plugs the loophole of your buying stuff in another state.

Sales Tax Guy

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Picture note: the picture above is of the Columbia River, just east of Portland, Oregon and 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.

Making sales you didn't know were taxable

Part of a continuing series

I had a guy in my seminar in state "A". He was an equipment rental company. He had stores in both state A and also the next-door state "B".

The tax rate in state A is about 9%. The tax rate in state B is about 6%. If you're renting a very expensive piece of equipment, you just might be thinking you'll rent it in state B, bring it back to state A and save yourself 3% sales tax on the rental.

Unfortunately, for the guy in my class, he didn't realize that the vast majority of the states require that you charge the sales tax on rental of tangible personal property (TPP) based on where it's used, not simply the location it is rented from.

So, this guy got audited by state A. And they nailed him. If I remember, the assessment was in the neighborhood of $500,000. That's half a million dollars, folks. For a really bad mistake.

Frankly, I'm surprised that someone in that business hadn't known about this rule. Could it possibly be because his CPA and lawyer didn't know what they didn't know and gave him bad advice? Or no advice at all? Nah.

So if you're in the rental business folks, watch where your equipment is being used.

By the way, you're probably asking how the rental company could have known where the equipment was being used. How could they have known to charge the tax for state A as opposed to the rate in state B where the store is? Because most of the time, the rental company delivered the equipment to the job site. Ahem.

Sales Tax Guy

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

Photography

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