Monthly Archives

June 2011

Jun 30
0

Missing Exemption Certificates Could Cost You a Bundle on Audit

By | Sales Tax, Uncategorized

For many years, non-taxable “sales for resale” were just accepted as being exempt if the auditor knew the purchaser was in the business of selling the type of products being sold to them by the vendor.  Those days are gone.  Now that states are short of revenue, every non-taxed sale must be supported by and exemption certificate valid in the state of the sale.  The failure of the vendor to have the appropriate resale exemption certificate can create a liability for them under audit.  In most cases, the auditor will allow the vendor to secure any missing certificates from the customer.  However, if the customer is out of business or refuses to provide the certificate, then the vendor is liable for tax.  This can be a huge, unexpected, and unnecessary expense of the vendor.

The issue is compounded when dealing with 3rd party drop shipments.  That is, when the supplier ships goods to the state where their customer’s customer is located.  This happens a lot when dealing with large equipment or other items that are expensive to ship.  Because the exemption certificate must be valid in the destination state, the vendor must obtain a certificate from their customer in the shipping state not the state where the customer is located.  The exemption certificate requirements are different for most states and this can be a real challenge.

I recently reviewed the exemption certificates for a company and determined that there was over $1.3 million in sales tax liability due to missing certificates.  Once they secure the required certificates, this liability will be reduced to $0.00.  If you or your clients are missing the documentation to support any type of exempt sale, the burden is on them to support the exemption if they are audited.

This may be the easiest sales tax solution to fix. It’s also the easiest to overlook.

Ned Lenhart, CPA
Interstate Tax Strategies

Jun 17
0

Beware of Home Rule Jurisdictions

By | Retail

For local sales tax purposes, most cities and counties that have their own tax administration must follow the substantive tax rules outlined by state sales tax law.  This is not the case, however, with “home rule” cities.  These are mostly found in Arizona, Colorado, and Louisiana.  In a small way, you may see some issues in Alabama also.

The difference between state and local tax rules became very evident for a client recently who assumed the tax base in Phoenix, AZ was the same as the tax base for the state of Arizona.  The difference was brought to his attention by a city auditor.  The “Model tax Code” used by most of the home rule cities in Colorado broadly defines the term “gross income” to include many of the services that are excluded by state law.  Primarily separately stated postage and delivery charges.

A similar issue exists with another client who sells machinery to customers located in Denver, Colorado.  For state purposes these sales are exempt under the manufacturing equipment exemption.   For Denver purposes, they are taxable because Denver does not exempt machinery used in manufacturing.

Be alert if you do business in Arizona, Colorado, and Louisiana.  Do not just assume the tax rules are the same for state and local tax purposes.

Ned Lenhart

Interstate Tax Strategies
Home Rule