March 2015

During the past week, I’ve been contacted by several companies located throughout the U.S. about their concern with multistate tax matters.  After asking a few pointed questions about their business operations and their current sales and use tax procedures, I’ll offer up a few general comments about their situation.  After an awkward period of silence I hear the common phrase “but that’s not what my CPA told me”!  I try to give my fellow CPAs credit and explain that multistate tax is complicated, or that the rules change frequently, or that maybe they didn’t have all the facts when you asked them the question.  What I’d like to say is “boy, did you get bad advice”!       https://www.salestaxstrategies.com/firm-overview.html

In one situation, the company offers an entertainment or amusement service and advertised their business as an amusement service.  They asked their CPA if that was a taxable service in state X.  The CPA said that because the company was not selling any tangible personal property their charges were not taxable.  A perfectly reasonable and logical answer because state X primarily taxes sales of personal property.  However, the answer was 100% WRONG!  State X also specifically taxes “entertainment and amusement services, and all forms of admission charges”.  The services provided by the company are taxable and sales tax should have been charged on the fees collected for the past 3 years.  By the way, the company is about to begin an audit and was just calling me to confirm that they were OK!!    All the CPA had to do was crack open the state code, or call the DOR, or make some extra effort to find the answer.  It wasn’t hidden.  It wasn’t buried in some set of state regulations.  The answer was in plan sight if they had only looked.  In fact, the company revealed that he called 3 CPAs and got the same wrong answer on 3 separate occasions.   Stunning.

Had another call yesterday from a CPA colleague who called about a new client.  After a few minutes on the phone with the client, I stated what was obvious position any moderately informed CPA would give concerning the company’s nexus in multiple states.  Again, I was met with the statement “but that’s not what our old CPA told us!”  Again, you got bad advice.  The issue was around nexus for sales tax and income tax.  The company has a team of salesmen who travel throughout the U.S. soliciting sales of property for sale.  The company also has a group of technicians that perform repair and installation services in most states in the U.S.  This activity has occurred for the past eight years.  After learning this information, I made the assumption that the company was aware of their vast need for filing sales and income tax returns.  The response I got was, “our old CPA told us we didn’t have to file any tax returns in any state unless we had an employee living there”.  Again, a stunning and completely wrong answer.    If the company had been given the proper advice and had completed some type of risk analysis and concluded that they were only going to file return in certain states, that’s one thing.  That’s the right way to do this.  But to be given such incorrect information has put the company and its owners at a huge financial risk.

The list could go on.  I’m not trying to throw CPAs under the bus. We are busy and the rules are very complicated.  If you are a CPA reading this please understand that the rules around state taxation are complicated and are very different from federal tax rules.  No longer can you rely on your “gut feeling” about these matters.  Most clients don’t care if you don’t personally know that answer.  What they expect is that you have a resource you can call who does know the answer.  For the benefit of your clients and for your own malpractice risk, get the help you need on these “out of the ordinary” situations.

If you ever have a question or an issue, call me.  See my website for contact information.   Plenty of CPAs consider me to be their firm’s sales tax resource.  https://www.salestaxstrategies.com/firm-overview.html

Ned Lenhart, CPA
President

In my blog post from January 8, 2015, I outlined how the state fiscal crunch was going to catch up with the states and that tax reform would be needed to keep pace with the growing expenditures.  Well, its started.

So far this legislative session, discussion drafts, proposed legislation, and comments in “state of the state” addresses have addressed tax reform head-on.    For example, the Alabama Governor has proposed a series of income tax, sales tax, and tobacco tax measures to help bridge the state’s $700 million budget shortfall.  The Pennsylvania Governor has proposed changes to increase personal income tax and sales tax, but reduce corporate income tax and property taxes.  Nevada’s Governor has proposed legislation to impose a “hybrid” business tax system and move to a progressive fee structure away from a flat $200 per business license fee.  Nevada does not have a corporate income tax.

In Georgia, legislation has been proposed to increase sales tax rates, expand the tax base to more services, remove the exemption from food, and impose a new 5% communications tax.  Not sure if that will fly, but it does show that tax reform is being seriously considered in some corners.  The state of Louisiana has called for a study to “overhaul” the states tax system.  Many states are also considering adopting unitary reporting over the separate reporting for corporations doing business in their state.

How much progress is made this year on these initiatives is uncertain, but, as predicted, states are seriously looking at making changes to their tax structure and sales tax changes is a central part of these changes.  Stay tuned!

Ned Lenhart, President