All Posts By

Ned Lenhart

Aug 10
0

Sales Tax on Internet Sales? Maybe, if Congress gets its way!!

By | Legislative

On August 1, 2011, Sen. Dick Durbin of Illinois introduced Senate Bill 1452 “Main Street Fairness Act”.  This Bill is identical to a Bill introduced in the previous Congress that essentially adopts the Streamlined Sales Tax Program (“SSTP”) and allows states that are Members of this association to require out-of-state remote sellers to collect sales tax on sales made to customers in their state even if they do not have nexus.   The SSTP has been floating around for over a decade with about 20 states signing up.  For the most part, this movement has been primarily involved with establishing uniform definitions and processes and has not done much about determining the actual uniform taxation of goods and services.  SB 1452 does have an exemption for “small sellers” but the criteria for this have not been set. 

This Bill is simply the latest in a long line of legislation that has been introduced for over 20 years in an attempt to allow states to force companies that do not have nexus to collect sales tax.  There is no dispute that uncollected use tax is a serious issue for the states to deal with.  Use tax continues to be one of the most widely assessed tax on audits.   In the past these Bills have died in committee.  The Direct Marketing Association (DMA) is a powerful lobby and has been successful in arguing defending or modifying this legislation.   In the past, however, the state revenue situation has not been as bleak as it is now and a Bill like this might just pass this time. 

In addition, I would not be surprised to see some type of attempt to impose a small federal sales tax on remote commerce as way to increase federal tax revenue.   Who knows how creative these folks may get?

Ned Lenhart, CPA
President
Interstate Tax Strategies

Taxation of Internet Sales

Aug 01
0

Georgia Increases Audit Staff- (7-31-11 AJC Article)

By | Retail, Tax Audit

On Sunday, July 31, 2011, the Atlanta-Journal Constitution (AJC) reported on page 1 of the Business Section that the Georgia Department of Revenue had recently hired 90 new auditors and 40 additional collection staff.  I’ve noted this increase in previous entries.  The article stresses that these auditors are not targeting specific industries, but we all know this not a fully honest statement.  There is a concerted effort to audit contractors, restaurants, bars, hotels, and other service oriented businesses where the state knows they will likely have a collection.  For the most part, manufacturers are not being audited since there is so little tax to be collected from them now that Georgia law exempt most of the manufacturing related items they purchase.

One of the items noted in this article is that restaurants are being assessed tax on mandatory gratuities.  Yes, these are taxable in Georgia and most other states.  The fact that they are separately stated does not matter since these servcies are integral with the sale and delivery of the meal.  Also, these fees are paid to the restaurant and are not given direclty to the server.  Optional or voluntayr gratuities are not subject to sales tax. 
If you are a restaurant or have restaurant clients, make sure you have this area covered. 

As simple as this sounds, many restaurants are not taxing these items. This is creating a liability for tax, interest, and penalty.  It’s amazing how many companies are missing some of these basic issues which create liabilities for the company.    Given the increased number of auditors the odds of your company being audited or one of your clients being audited has increased dramatically.  Don’t wait to check to see if you are doing things correctly.  By the time the auditor contacts you, it’s too late.

Ned Lenhart
President
Interstate Tax Strategies, P.C.

 

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

Apr 25
0

Beware of Rate Changes

By | Retail

Over the weekend I was catching up on some old emails, and saw that there were 111 sales tax rate changes so far during the month of April.  Most of these were local tax rate changes.  It should be no surprise that 107 of these 111 changes were rate increases.  Only 4 rate decreases.

I’m sure this trend will continue for quite some time.

Ned Lenhart

Apr 20
0

Sales Tax Issues with Groupon and Similar Services

By | Retail, Technology

My wife recently started using Groupon to get some good deals at restaurants and for some other services.  I started to explore this site a bit more and saw some very interesting and attractive deals.  As a sales tax consultant, I tend to look at these situations with a curious eye on what type of sales tax consequence could be involved.

As I understand Groupon, they are an electronic marketing co-op that offers discount coupons and discounted prices for good and services.  Groupon charges the merchant a commission or placement fee and then sends the retailer the difference.   For example, a local restaurant recently was selling $20.00 coupons for $10.00.  This was a great deal since we go there all the time.  For sales tax purposes, this coupon was treated as some type of gift card.  When we used the card our bill was $35.00 plus 6% sales tax for a total of $37.10.  We used the $20.00 Groupon and paid the cashier $17.10.  In this case, the retailer handled all the sales tax on the transaction.

In other Groupon situations, the services offered are not coupons but are the direct purchase of the item.   For example, we recently bought a carpet cleaning service for $50.00.  That’s all we pay.  This is not a coupon but is just a discounted purchase of a product.  There are also haircuts for discounted price, moving services, inflatable toy rentals, bed & breakfast rentals, and hotel stays.   These are not just coupons, but are the payment for the service.  My question is how sales tax is or should be handled?

We have yet to purchase a taxable service on Groupon.  In the list above, hotel rentals are clearly taxable in Georgia.  As I looked at the site, I didn’t see any mention of sales tax.  Because this is not a coupon, I think a strong argument could be made that Groupon is acting as a retailer of hotel rooms and should be collecting sales tax and lodging tax on these transactions.  I know nothing about Groupon’s nexus footprint, so it’s impossible for me to say that they have the obligation.  However, I’m curious how the hotel is handling these situations.  Are they paying sales tax only on what Groupon sends them as their portion of the sale or are they remitting tax on the full sales price of the transaction?  Hard to tell.

I’d love your comments on this topic.  I can see that this model is going to be building quickly.  As such, the sales tax folks can’t be far behind.

Comments please

Ned Lenhart

Groupon Sales Tax

Mar 15
0

Multistate withholding tax-hidden liabiltiy for many companies

By | Sales Tax, Uncategorized

During the past several weeks, I’ve spoken with multistate companies that are completely unaware that they may have (and probably do have) a responsibility for withholding income tax on the wages their employees earn outside of their home state.  About 15 years ago, this issue surfaced in the consulting industry following an issue that Andersen Consulting had with not handling withholding properly for employees who traveled and worked extensively in other states.

A quick look at the rules shows great diversity in what companies need to do.  Some states require withholding starting day-one of employment in their state.  I’m not aware of anyone who does this.   Other states-like Georgia- set some deminimis limits.  $5,000 of wages or 23 days per quarter before withholding is required.  Other states have similar limits.

To the employee, this would mean filing multiple state income tax returns.  Their home state would give credit for taxes paid to other states, so their may not be an actual tax cost unless the home state is Florida, Tennessee, Texas or a similar state that does not have an income tax.

In general, states are allowed to tax income earned or sourced to their state.  This rule applies equally to companies and to individuals.  This problem has usually been discussed in the context of athletes or entertainers, but the rule applies equally to consultants, contractors, or engineers who work in multiple states during a year.

For companies that have failed to do withholding, they may be 100% liable for any tax, interest, or penalties that should have been paid.  For example, if an employee who lives in North Carolina but comes to Georgia to work for 3 months during the year and earns $30,000, that employee would owe Georgia income tax on the $30,000 and would file as a non-resident.  North Carolina would allow a dollar for dollar credit for the Georgia tax paid.  His employee would need to do withholding on the wages and would send a W-2 with multiple state withholding being shown.  If the employer did not do this, it is highly unlikely the employee would make Georgia estimated payments.  Under audit, the employer could be held liable for the tax that should have been withheld and would be fined with penalties and interest.  This liability could go back many years.

As states continue to struggle for revenue, they may focus more on this tax. For companies that routinely deploy employees to other states to work for extended periods of time, this could be a large and completely hidden tax liability.

Ned Lenhart

Multistate income tax witholding

Mar 01
0

Fellow CPAs-Stop telling clients that servcies are not taxable

By | Retail, Tax Audit

During the past month I’ve been amazed at how many people I’ve talked with who have been advised by their CPA that “services are not taxable” so don’t worry about charging tax.  This statement has been provided without any research or thought as to what the company may be doing.  Especially when we are dealing with multistate services.  True, Georgia does not tax a lot of services that other states do, but they certainly tax a wide variety of transportation, amusement, and entertainment services that could include what your clients do.

Each state taxes different services.  Texas, for example, taxes a wide variety of real property services including certain remodeling services.  I’m trying to help unwind a mess that a company has because their Georgia CPA made a blanket statement that services were not taxable and there was nothing for them to worry about.  They later stated that they really never looked at the Texas rules, they just assumed that everyone was like Georgia.

If you are a CPA please take some time to carefully evaluate what your client’s do before you jump to the conclusion that the services they provide are not taxable.  Many states tax lots of services–New York, New Jersey, Florida, Texas, Pennsylvania, Washington DC, Washington, Ohio, Connecticut, and many more.

Ned Lenhart
President
Taxation of Services

Feb 10
0

SEC Imposes $200,000 Fine for Inadequate Sales Tax Controls

By | Tax Audit

On January 10, 2011, the Securities and Exchange Commission imposed a $200,000 fine against Hudson Highland Group for failing to have adequate internal controls around its sales and use tax collection and remittance procedure.  This is the first time I have every heard of the SEC weighing in on any type of sales tax matter.

In its ruling, File No. 3-14182, the SEC stated that Hudson violated Section 13(b)(2)(A)  and (B) of the Exchange Act which requires that reporting companies make and keep books, records, and accounts which accurately and fairly reflect their transactions and dispositions of assets and have adequate internal controls.  Because Hudson did not put systems or procedures into place which would have prevented a material sales tax liability, it was in violation of these provisions.

This ruling has great significance for any company that makes filings with the SEC.  If you are a CPA who has clients that are publicly traded or have any type of SEC filing responsibilities, you should address these issues immediately.

Ned Lenhart

Jan 16
0

Why Wholesalers Need to be Registered for Sales Tax

By | Retail, Tax Audit

Over the past 20 years my position on the need for wholesalers to be registered has changed. My original position was based on the assumption (which I know is now false) that wholesalers have valid exemption certificates for all the sales they make.  Over the past several years, I have been shocked by the failure of multistate wholesalers to have the exemption certificates they need to have. Over the years, this failure has cost these businesses a huge amount of sales tax, interest, and penalties that was paid on audit. As states continue to be short of revenue, they are looking for the easiest source of audit assessments.  They have zeroed in on wholesalers who they know are missing exemption certificates for the sales they make.  Why?

One of the pillars of the state sales tax system is the presumption that all sales of tangible personal property are taxable until the seller has documented proof that the sale is exempt.  One of the largest exemptions is the “sale for resale” exemption.  When wholesalers sell to retailers, the transaction is not taxable as long as the retailer provides the wholesaler the proper exemption certificate.  How hard could this be?  Apparently it is much harder than I had originally believed.  Wholesalers, in their effort to make the sale, are quick let their customer promise to give them an exemption certificate after the fact.  This often times never occurs which leaves the wholesaler fully exposed for any tax that was not charged.  In the eyes of an auditor, it may make no difference that the retailer sold the merchandise and collected tax on the final retail sales.  The point is, that the wholesale transaction was not properly documented which makes it a potentially taxable transaction.

So how does this align with the need to be registered.  In short, “statute of limitations”.  Many wholesalers have been operating for years in states without being registered for sales tax.  No tax was ever due on their sales and they didn’t feel any obligation to register just so they could file “Zero Returns”.  The states have wised up to this strategy and are now auditing these wholesalers.  If nexus can be established, the states are going back 5 to 10 years and asking for exemption certificates for the untaxed sales.  In many cases, the wholesalers cannot provide them and are assessed back tax, penalty, and interest.

I’m encouraging wholesalers to get registered and to file returns just so they can limit the audit look back to 3 or 4 years.  This is also forcing them to collect and maintain exemption certificates.  I’m also encouraging wholesalers to consider a voluntary disclosure even when no tax is due.  A VDA could limit the look back for potential liability to just a few years.  This could be a huge saving for the company.

If you are a multistate wholesaler and have nexus in several states, make sure you have all the resale exemption certificates you need to support your non-taxed sales.  If you don’t and your customers are out of business, you may want to evaluate ways to come into compliance.

Ned Lenhart
President

Wholesaler sales tax registration