August 2012

Be alert to the state sales tax rules where out-of-state customers come into your home state to take delivery of products for delivery back to their home state. 

If the products being sold are for “resale”, make sure you get the appropriate resale certificate.  This might require that your customer first register with your state to obtain a valid number.  The failure to obtain a valid resale certificate will make these sales taxable in your state.  It’s tough to get tax collected after the sale has been completed.

If the property sold is taxable in your state, then your obligation is to charge sales tax.  It is irrelevant that the property purchased may be exempt in the state where it will be used.   This often happens with manufacturing machinery and equipment.  The out-of-state purchaser comes to your state to take delivery of machinery which will be exempt in their “home state”.  However, the state where the buyer takes possession of the equipment does not have an exemption for machinery or only allows the exemption for machinery which is used in that state.   

In most cases, the “export” sales tax exemption only appies to items place on common carriers for their delivery or are delivered outside the state by the seller’s vehicle.  There are some specific exemptions for aircraft and other common carrier vehicles.

Ned Lenhart, CPA
President

It’s hard to image, but many companies find themselves in the very uncomfortable position of having collected tax from customers but not remitting the tax to the state.  I’m currently working with 4 clients that have this scenario.  In one case, the tax collections only go back a few months.  In the other 3, the collections go back several years.  Over the years, I’ve helped many companies deal with this situation.  My first question is always the same: “How did this happen?”  The answers are varied.  In most cases, sales tax or billing software is to blame.  In other cases, the sales tax obligation was given to an individual who had no experience with sales tax and they just failed to understand what needed to be done.  So far, I have yet to find anyone who admits to intentionally collecting the tax as a way to improve profits or cash-flow. 

Before I outline steps to resolve this issue, I want to briefly outline ways to prevent this issue or shorten the lentgh of time it may exist.

1. Make sure sales tax collected is recorded in its own account and do monthly reconciliations.  This will show if you are remitting all the tax collected to jurisdictions where you are filing or whether you owe tax to a jurisdiction where you are not filing.  

2. Make sure all your tax billing data feeds are going into the tax account.  I had one large client that had four billing systems each with its own tax engine.  Unfortunately, only 3 of the billing systems were transferring data to the sales tax payable account on a monthly basis.  

3. Make sure that all sales tax staff are knowledgeable in the rules on when to remit sales tax.  They need to alert executives if there is a problem.  

You have collected tax but don’t know what to do.  Here are some steps I’ve used in the past

1. Return the money to the customer.  This can have some unintended consequences, but it may be the best solution in some cases.  Works best if this is an isolated case and one that’s recent.  I would not suggest this if the tax was collected 2 years ago. 

2. Enter into voluntary disclosure with the states.  Even in situations where the tax has been collected, states will routinely allow the waiver of penalty through the VDA process.  New Jersey and Florida impose a small penalty for taxes collected, but it’s still a lot less than the 25% they could impose under audit. For taxes collected there is no “limited look back” for the VDA. 

3. Prospective tax registaiton only.  This might work best if the tax has been collected within the past quarter or so.  It’s not ideal, but its a practical solution to the problem and it gets the cash out of your account.  This would involve registering and including the taxes collected on the first return filed. 

Each of these options should be analyzed with the help of a sales tax specialist familiar with your business and these issues.  In most states, the failure to remit sales tax collected can result in criminal penalties as well as civil penalties.  Becoming paralyzed about your situation will not make matters better.  Once you recognize that there is a problem, you need to move on it.  If your customers are audited and the state sees sales tax on your invoices but does not see that your business is registered, you will have serious problems.

Regards

Ned Lenhart, CPA
President