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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

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

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

The week between Christmas and New Year is pretty slow.  This gives me a chance to clean out files, gather my year-end financial information, line up meetings for January, and take a look at some of the articles that have been laying around my office for a few months.  In my last blog entry, I noted that states are going to be short of revenue overall in the coming fiscal year and that sales tax will get special attention for closing the revenue gap.

I was looking at the fall 2010 NASBO report and decided to compare this to the fall 2008 NASBO report.  The contrast was dramatic.  For Fiscal 2008, the states were reporting sales tax, individual income tax, and corporate income tax collections of $541.4 Billion.   For Fiscal 2010, the states are reporting only $496.9 billion from the same revenue sources.  That is a decline of $44.5 billion or 8.2%.  For Fiscal 2008, sales tax revenues were 39.6% of the total revenue.  For Fiscal 2010, sales tax revenue is estimated to be 41.6%.  That is a 5% increase in sales tax revenue in a 2 year period of time.  Individual income tax stays pretty constant at 51%.  Corporate income tax receipts declined from $5.2 billion to $39.3 billion. That is a 9.3% decline.

These numbers support my thesis that sales tax is quickly becoming the tax of choice for states as a way to raise revenue.  This increase in sales tax comes from increased rates, increased enforcement, expansion of the tax base, and expansion of the taxpayer base.

In 2011, you should expect more of the same.  More enforcement, more rate increases, more tax base expansion, and more taxpayer base expansion.  Many companies are completely unaware of the unrecorded liabilities they face by not paying attention to the sales tax rules in the states where they operate.  There is so much in correct information being circulated on web chat rooms about sales tax. There is also a lot of incorrect information being distributed by well meaning CPAs who really don’t know what they are talking about.

If you any questions or even suspect that your company has a sales tax issue, give me a call.

Happy New Year

Ned Lenhart
President
States Rely More on Sales Tax Revenue

I finally broke down and joined the social media network twitter.  You can follow me on twitter at @salestaxpro.  I was really surprised how easy it is to set up a twitter account. It’s hard to do a lot of content in only 140 characters, but I’ll give it a try.   Here is what I will be doing on Twitter:

1. Posting updates to my blog

2. Announcing technical updates to my document library and other resources

3. Alerting you to new issues that may be of interest.

4. Once I get enough followers, I’ll be announcing special technical webinars and phone calls for only twitter followers.

If you are already a twitter member, I’d appreciate you re-tweeting my messages to your groups.  There are just a few sales tax folks on twitter and I seem to be the only consultant. The others are either bloggers or software companies.

Thanks for your help and support.

Ned Lenhart
Now on Twitter @salestaxpro

There is discussion within the Streamlined Sales Tax Program to develop a uniform sales tax refund period.  Some discussion is to make this a 1 year look back.  Most states allow the refund period to be the same as the assessment period which is 3 years.  The states are well within their right to limit the refund period under their soverign ammuity laws.  Technically, there is no requirement that states allow for refunds at all, however that would not set well with the public.

Limiting the look back to 1 year could have some uninteneded consquences.  First, it may flood the system with refunds-some legitimate and some not.  If you know that you only have a 1 year look back, you may only have time to throw everything into the refund claim and then sort it out later.  This could back up the system.

The other consequence would be a decline in current revenue collections if businesses adopt a very conservative approach to what is taxable and what is not.  Companies would be more aggressive at claiming exemptions or flat out not paying use tax on purchases.  If they know they can’t get a refund, why pay in the tax in the first place. 

Neither alternative is good, but I believe they could be real possibilties.

Ned Lenhart
President
Sales Tax Refunds

Georgia House Bill 1093 was signed into law recently.  This bill is in response to some legislators’ belief that tens of millions of tax dollars are going uncollected in Georgia because of unregistered state domiciled businesses.  In an effort to cooperate with the local governments, the state is now requiring that each city and county that has a local business tax ordinance to gather and submit additional information to the Georgia Department of Revenue.  The goal is to identify businesses that are registered for business tax that should also be registered for collection and remittance of sales tax.

During the hearings, someone legislators speculated that over $300 million of sales tax was going uncollected because of unregistered local businesses and that if the counties and cities would help identify these law breakers, there would be a windfall for them also.  If you do the math, at 7% sales tax rate that is over $4 billion in untaxed but taxable revenue.  I have serious doubts that this is a legitimate number.

The bill requires that the municipalities gather the following information from taxpayers:

1. Name and address
2. Sales tax ID if one exists and if the business is required to have an ID

The municipality then will submit this information to the Georgia DOR.  That’s it.

The bill does not require any action on the part of the DOR.  There is no call to action once the data arrives or any mention as to what follow up steps the state or the municipality will take.  There is no matching required to take place to ensure that the unregistered businesses actually register.  Nothing.

This bill also dodges the biggest problem completely.  It assumes that the business knows whether it is required to have a sales tax ID.  If the business is required to have an ID but does not know it has such a responsibilty, what good is this program?

Ned Lenhart
President of Sales Tax Advisors of Georgia
Georgia Tax Enforcement