Ned Lenhart

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

When consulting with clients who provide services on a multistate basis, the focus of my discussion quickly turns to Texas.  This state appears to have the broadest reach of sales tax on services.  This always seems to catch clients off guard both when they provide these services and when they are in Texas as the purchaser of these services.  At a high level there appear to be about 20 specific services that Texas will tax when these are consumed in the state.  This does not include services like production labor, shipping, handling, and the like when they are included in the sales price of products.  Here is a quick list of some of the “business services” that companies should be aware of both as the provider and consumer of these services.  The broad reach of the real property services can pull in a lot of contractors who might otherwise think they are in good shape in Texas.   Texas also broadly taxes data processing and information services which can be troublesome. These are taxed only at 80% of the saeles price.

Credit reporting
Data Processing
Debt Collection
Information Services
Insurance Services
Internet Access
Vehicle storage fees
Nonresidential Property repair, restoration, and remodeling
Personal property maintenance
Pest control, garbage collection, landscaping service
Security Services
Telecommunications Services
All fabrication labor
Temporary staffing services under certain conditions

 Ned Lenhart, CPA
President

Now that the Sate of Georgia has become a full member of the SSTP, there is a need to update many of its sales tax regulations to come into compliance with the program.  Two proposed drafts have been issued by the Georgia Department of Revenue.  The links to these regulations are below.  

One regulation deals with grocery and prepared food items and the other regulation deals with drugs, prosthetic devices, and durable medical equipment.  Both regulations, in my humble opinion, are flawed in some respects. The current food exemption provides an exemption based on the “point of consumption” and not on the “prepared vs non-prepared” food distinction.  The current practice is easy to administer and works fairly well.  The proposed regulation makes the sales tax determination on food much more difficult to deal with. 

The same for the drug regulation.  There is an improvement in how the exemption for prescription drugs is administered which is good.  However, the exemption for prosthetics, DME, and mobility enhancement equipment is cumbersome and adds some new requirements that are not in statute.  I am not sure if the Georgia DOR is attempting to increase revenue by changing these regulations or is just unaware of how radical their proposed changes really are.  Neither is very comforting.

Ned Lenhart
President

Food Regulation

https://etax.dor.ga.gov/inctax/proposed_regs/1-30-12%20%20Sales%20Tax%20-%20revised%20order.pdf

Drug Regulation

https://etax.dor.ga.gov/inctax/proposed_regs/2-8-12_Promulgation%20Package_for_Proposed_SUT%20Regulation–560-12-2-30.pdf

On May 11 and again on June 20 the Virginia Department of Revenue issued rulings indicating that the burden of proof is on the seller of software to prove that it was electronically delivered.  In a 2005 Ruling, the Tax Commissioner stated that invoices for the sale of electronically delivered software must contain language that “certifies” that the software was delivered electronically.  If this language is not on the invoice, then the taxpayers face an uphill challenge to conclusively prove that the software was delivered electronically. 

This is the most aggressive stance I’ve seen on this issue.  Given the shortage of revenue in most states I’d expect to see more of this positon being taken.  In working with software companies over the years, there has always been a challenge in providing conclusive proof that the software was delivered electronically. 

If you sell software electronically and have Virginia customers be sure your invoice language is in accordance with the Virginia standard or that you can conclusively prove that the software was delivered.  If not, your clients and you could be in for a surprise on your next sales tax audit.

Ned Lenhart
Interstate Tax Strategies, P.C.
Nlenhart@salestaxstrategies.com

I recently received a phone call from client who had heard about using a “No Nexus” letter as a way to stop suppliers from requesting resale exemption certificates in states where drop-shipments were being made.  This issue surfaces every 5 years or so, so it took me a minute to understand what they were wanting to accomplish.

In a 3rd party drop-shipment the supplier asks their distributor to ship property to supplier’s customer in some remote state.  This happens all the time.  In this situation, the transaction between the supplier and their distributor is a purchase for resale transaction.  As such, distributor needs to obtain a valid exemption certificate in the state where the sale is made (customer’s state).   The distributor’s request for a resale certificate will be based largely on where they have nexus and where they are registered. If the distributor has nexus in the state where supplier’s customer is located, then distributor will require that supplier provide them a resale certificate valid in that sate.  

Again, depending on the rules of the state, the ship-to state may allow the supplier to give the distributor a certificate from the suppliers “home” state, or it may accept the “home state number” on the ship-to state form, or it may require supplier to provide a certificate with the “ship to” state registration number.  In either case, the requirement for giving the distributor an exemption certificate is driven by distributor’s  nexus and not the supplier’s nexus.

If the supplier does not have nexus in the ship-to state and the ship-to state will not accept any type of “home state” number, there is a problem.  If distributor has nexus in the ship-to state it has 2 easy options:  1) require an exemption certificate or 2) charge tax.    I’ll discuss option 3 later.   This is where the concept of the “No Nexus” letter comes into play.  Some suppliers erroneously believe that if they simply give the distributor some letter that says “we don’t have nexus and don’t need to register to get the proper exemption certificate” that the distributor will take this and move along.   Think again.  With the exception of a very narrow provision in one or two states, the use of the “No Nexus” letter to avoid registration is unlikely to be accepted by the state.  As a seller, this puts you at risk for making a “sale for resale” without a valid resale certificate.

As a supplier, if you don’t want your distributor to charge you tax in the ship-to state then you have two options 1) register in the ship-to state even if you don’t have nexus.  (that’s what the states want anyway) or 2) have the distributor ship the goods to another state where you do have an exemption certificate and then pay the fee to ship the goods yourself to the customer.  That’s it.   Any use of a “no nexus” letter must be specifically authorized by the state.  

Ned Lenhart
President
Interestate  Tax Strategies
404-403-6540
nlenhart@salestaxstrategies.com

In a Special Session, the Missouri House passed HB 2 which would provide an opportunity for taxpayers to pay the past due taxes without interest or penalty.   The Bill was sent to the Senate where it is expected to pass.    The amnesty program would run from January 1, 2012 until February 29, 2012.  Once registered, the taxpayers would need to comply with state tax laws for the next 8 years.  Under HB2, the amnesty applies only to tax liabilities unpaid as of December 31, 2010.   As such, no 2011 liability will be covered by this plan. 

Although this may be an attractive opportunity, companies need to carefully assess the overall difference between pursuing an  amnesty and a Voluntary Disclosure Agreement.   As with other amnesty programs, all of the past due tax must be paid and the state will waive the interest and penalty.  If you don’t owe taxes for many years and interest savings is more than the tax payment, it might make sense to pursue the amnesty.

However, if you owe taxes for a number of years (including 2011) and want to limit the look back, the Voluntary Disclosure Agreement (VDA) program may be a better approach.  Under this approach, you would generally get a shorter look back on the taxes paid (3 years) as well as the penalty abatement.  You would still have to pay interest. 

This becomes a numbers game as to what will provide you with the best tax answer.  Don’t just assume the amnesty program is the best deal.  Once you do the math, there may be better options.  Plus, under the VDA program, there is no mandatory filing length of time after you register.

If you have questions about what might be right for you in Missouri or any other state where you have a historical liability, please contact me at nlenhart@salestaxstrategies.com

Ned Lenhart
President
Interstate Tax Strategies