Monthly Archives

September 2010

Sep 30
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Pre-Audit Reviews Can Spot Sales Tax Problems Early

By | Tax Audit

States have set lose an army of sales tax auditors who’s job it is to collect as much revenue as possible. Their target is virtually any business operating in their state. For many of these businesses, this may be their first audit by that state.  For others, it may be a repeat audit with a new auditor.  In either situation, the deck is stacked in favor of the state and against the taxpayer. Businesses that are unprepared for an audit will not have a good experience.

I recently met with a company that is about to be audited.  It is their first audit and they were feeling rather confident that there would not be any problem.  I encouraged them to sit down with me to review some high level reports and discuss the processes they use.  In short, this exercise was eye-opening to them.  Not only did I spot significant process issues with how tax was being collected but there were serious use tax issues that had been completely missed.  There were missed refunds and missing exemption certificates. Having found these issues, we could then develop and approach to manage the audit to minimize exposure and to ensure the auditor understood the actual scope of some of these small problems.

Without this review, the company would have been playing defense from the minute the auditor walked through the door.  Now they know where problems exist and have already started to gather support to fill in the gaps in their processes and documentation. The best defense is a good offense.

Every company should have and independent pre-audit review once they are notified of an audit.  Company personnel are too close to the situation to be objective at spotting problems and understanding the consequences of these problems.  Further, many companies may be overpaid on tax and need to take actions to file refund claims before the auditor arrives.  Auditors are not hired to look for over payments!!

If your company has been notified of an audit, pick up the phone and call me at 404-403-6540.  DO NOT try to manage sales tax audits alone.  Invest a little time and money in a pre-audit review so that you will know the problems before the auditor arrives.  Only then, can you fully manage the audit process and minimize your liability.

Ned Lenhart
President
Pre-Audit Reviews

Sep 29
0

New York Suspends Clothing Tax Exemption

By | Legislative, Retail

The New York Department of Finance has issued a notice indicating that the state tax exemption for clothing items costing more than $110 will be suspended from October 1, 2010 until March 31,2011.  As such, state tax and MCTD tax (where applicable) will be due on all sales of clothing items.  If a local exemption for clothing exists, it will remain in force unless the local government also suspends their exemption.

New York is one of just a few states that has an exemption for clothing items.

Ned Lenhart
President

New York Clothing Exemption

Sep 24
0

“Load and Leave” exempt in Missouri!!

By | Technology

On August 20, 2010,  the Missouri Administrative Hearing Commission issued a 27 page ruling which concluded that software transferred under the “load and leave” method is not a taxable sale of software in Missouri.  The Department had issued a few rulings stating that “load and leave” was a taxable transfer of software.  In this case involving Filenet Corporation (part of IBM) the tax assessment was over $770,000 so the issue was worth litigating.

In reaching its decision, the AHC did an excellent job at outlining Missouri’s history of taxing software.  This started back in 1982 with the Tres computer case.  In short, for software to be taxable in Missouri there must be a transfer of tangible property from the seller to the purchaser.  So long as the purchaser does not take possession or control of the media that has the software before it is loaded onto the computer, then there is no taxable sale.  Under the facts in his case, the Filenet employee had control and possession of the software at all times and no one from the purchaser’s company ever touched the hard drive that held the software.

If your company has paid tax or has been assessed tax on “load and leave” software, now is the time to file a refund claim.

Ned Lenhart
President
Missouri Load and Leave Software

Sep 13
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“What is status of taxation of Internet purchases?”

By | Legislative, Retail

I was at a networking breakfast last week and was asked this question.  I’m sure this was intended as some form of icebreaker or as a way for questioner to show me that he was in tune with some of the sales tax current events.  About once a month, I get asked this question in one form or another so I thought it would be appropriate to post some sort of public response.

Even though it was not specifically stated, his underlying question was really “when will states be able to tax purchases of property made from Internet retailers?”  The answer to that question is quite easy.  Most states have had the ability to tax the purchases of property made from Internet retailers since the early 1960s when “use” tax was adopted by the states as a complement to the sales tax.   The taxation or taxability of the product purchase is not the issue.  The issue is how to collect that tax.

After explaining that all of the property they have purchased from Amazon and the myriad other e-retailers is taxable, I then ask when was the last time they filed a Georgia use tax return to pay the tax due?   This usually results in a blank stare.  And that’s the point.  Individual consumers don’t file use tax returns even though it is required.  Further, many, but not all, businesses file use tax returns but the accuracy of these reports is often suspect.

The “status of taxation of Internet purchases” is not much different than the “status of taxation of mail order catalog purchases”.  The product is taxable but until the retailer is required to collect the tax, only a small percent of the tax will ever be collected.  Some have estimated the lost revenue from this gap to be in excess of $10 Billion per year.

The next question is usually, “what is keeping the states from forcing the retailers to collect the tax?”  My response is simple: the U.S. Constitution!!  That’s all.  This is no place for a detailed analysis, but the U. S. Supreme Court has ruled that the Commerce Clause of the U.S. Constitution requires that the e-commerce retailer have some physical contact with the state before they are legally required to collect the tax.  This physical connection can take many forms.  Without some connection, the states can’t “force” the e-retailers to collect the tax and it cannot require the catalog companies to collect the tax.  Does that mean the property purchased is not taxable?  NO!!  It just means that the purchaser must file use tax returns with the state to pay the tax directly.

The state of Alabama recently reviewed is use tax filings and determined that less than 1% of Alabama taxpayers were filing use tax returns.  That seems about right!!  To raise this percent, the state is sending letters to taxpayers informing them of their use tax obligation.  Some states, like California, actually have a place on the individual income tax return for taxpayers to report their untaxed purchases.  I’d expect to see that in more states.

As states look for revenue, this is an easy target.  This is an enforcement issue not a tax policy issue. The question is not “whether” to tax purchases made from the Internet, but “how” to collect the tax that is due.

Ned Lenhart

President

Taxation of Internet Purchases