This question came in over the weekend and I just answered it. I’ve sanitized it, because it’s worth mentioning to those of you who are relatively uninformed about this:

Found your Sales Tax Guy blog while doing some research. I’m hoping you can answer a question for me.

I own a small retail store in New Jersey. I recently discovered that my now former accountant was underpaying the amount of sales tax I owe. We collect the correct amount (8.75%) but it looks like we have been sending about 7.75% to the state every month for the last three years!

Should I just forget about the past shortages (we’re paying the correct amount now) and hope that the state doesn’t discover the error? How could the state discover the error anyway unless I brought it to their attention?

Doreen, of all of the possible mistakes that you can make, this is dang near the top of the “really bad” list. Have a look at these articles.

You need to get professional help from someone who knows their way around sales and use tax. It’ll be expensive but not as expensive as the price you’ll pay if you ignore this. And New Jersey is broke, so they’re even more aggressive about finding unpaid taxes.

They’ll find you. It’s called a “sales tax audit.” And this particular problem is one they’ll probably find in the first hour or so of the audit. Snap.

Find some help.

This also brings up an issue I’ve talked about before. While your accountant may be highly knowledgeable at income taxes, there’s a good chance that he or she knows virtually nothing about sales and use taxes. But the eventual responsibility will rest with you. So make sure that whoever you take advice from on this topic actually knows something about it. And make sure they’re doing it right.

Jim Frazier is The Sales Tax Guy
Read his blog at: http://salestaxguy.blogspot.com

The California Assembly introduced two bills this week aimed at remote retailers. 

Amazon.com Nexus - AB153

One bill (AB 153) is an Amazon.com nexus bill similar to New York, Rhode Island and North Carolina.  It is also similar to bills introduced in Illinois, Mississippi and New Mexico this year.

The bill changes the definition of a retailer engaged in business in this state to include:

any retailer entering into agreements under which a person in this state, for a commission or other consideration, directly or indirectly refers potential purchasers, whether by an Internet-based link or an Internet Web site, or otherwise, to the retailer, provided the total cumulative sales price from all sales by the retailer to purchasers in this state that are referred pursuant to these agreements is in excess of $10,000 within the preceding 12 months, except as specified.

The bill would further provide that a retailer entering specified agreements to purchase advertising is not a retailer engaged in business in this state.

Nexus Presumption and Notification Requirements - AB155

The other bill (AB155) would impose nexus presumption standards for members of commonly controlled groups, and impose notification requirements similar to those currently in effect and adopted last year by Colorado.

The bill would revise the definition of “retailer engaged in business in this state” to mean any retailer that has a substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon which federal law permits this state to impose a use tax collection duty. The bill would also include specified retailers as retailers engaged in business in this state and would eliminate an exclusion.

The bill would also require each retailer that is not required to collect use tax to provide notification on its retail Internet Web site and any catalog that tax is imposed on the storage, use, or other consumption in this state of the tangible personal property purchased from the retailer and is required to be paid by the purchaser, as provided.

The bill would require every person not required to register with the board that sells tangible personal property the storage, use, or other consumption of which is subject to use tax to file a report with the board regarding those sales, as specified. The bill would also require those persons to annually send a notice to each purchaser showing the total amount of purchases made by that purchaser in the prior calendar year and informing the purchaser of the obligation to file the appropriate use tax returns, as prescribed. The bill would impose specified monetary penalties for failure to comply, while excluding from these requirements persons whose receipts from those sales do not exceed a specified amount.

What’s Next?

Its only January 21st, and we have had four states introduce Amazon.com legislation (IL, MS, NM and CA).  The “use tax” gap is a problem in every state, and Amazon.com nexus is an easy target as a solution.  Amazon.com nexus is just a way of collecting use tax that is already due to the state.  Unfortunately, there are negative side effects that occur for individuals and businesses that operate in affiliate programs. 

With states budgets in crisis mode, states will be looking at cutting expenses, increasing taxes and increasing incentives for businesses to expand in their state and/or create jobs. If budget pressures continue to increase, new governors and state legislators may have no choice but to overlook protests from individuals and businesses that operate in affiliate programs, and adopt Amazon.com nexus standards. 

Keep watching to see what’s next.

I’ve talked about many of these particular issues, over the years. So I thought I’d compile a master article so that you can, at a glance, see if you’re doing anything really, really wrong.

First of all, I should define what I mean by “trouble.”

1.  Big assessments and big fines

2.  Embarrassing assessments that, while not crippling the company, will nevertheless do bad things for your career

3. Large-scale overpayment of taxes. See item 2 regarding career impact.

So let’s begin our hall-of-shame of sales tax mistakes.

1. Making sales that are taxable and you didn’t know it. Do you perform taxable services? What about non line-of-business sales? Do you, for example, sell a lot of used equipment? Do you maintain a company cafeteria? You’re probably selling more than just what’s on the top line of your income statement. And don’t even get me started about the other states you sell to. See below.

2. Related to 1 - making taxable sales in states where you have should have been collecting tax and didn’t realize it. In other words, you have nexus in a state but you don’t know it. And you don’t even know what are taxable sales in that state. It’s a very common problem, and the states would really like to catch you.

3. In another instance of making sales you didn’t know were taxable, beware of making intercorporate sales. Depending on your company, your business model, how you handle your paperwork, and the volume of the transfers, this may or may not be a problem. But you need to make sure. Of all of the assessments I’ve heard of, the biggest were in this category. And the only possible alternative for one taxpayer was bankruptcy.

4. Not collecting exemption certificates on your sales. This will mean more work for you when the audit hits, as well as embarrassment with the auditor, your management, and your customers. And you’ll pay some taxes, interest and penalties.

5. If you buy a business, make sure you don’t inherit the seller’s sales tax liability. If you buy as a  bulk sale,  you will, unless you do it right.

6. Not accruing taxes on your taxable purchases where no taxes were collected by the seller. AP generally knows this one, but may not have good systems in place to be sure of catching all of these invoices.

7. Overpaying taxes on invoices that you thought were taxable, but weren’t. More tips are in our Best Practices file.

8. Who is the person in your organization who is most knowledgeable about sales and use taxes? It’s usually the controller, but it’s often the AP staff. But note how many of the above problems are related to the sales and marketing departments. And how many of your sales and marketing people have any knowledge or understanding of sales and use taxes? Right. That’s what I thought. Here’s one example of what they can learn.

9. Relying on bad resources for answers. Calling the state is a no-no. So is believing the auditor without getting something in writing. Here are good sources of information.

10. Finally, collecting sales tax, but failing it remit it to the appropriate state. Frankly, if you’re doing this, you shouldn’t bother reading this blog anymore. What’s the point? Get measured for an orange jump suit instead.

Here’s a link to some horror stories that will make excellent bedtime reading.

If you sell goods at retail, or wholesale a product which you manufacture, or sell services in Florida, can you be sure you are collecting the appropriate amount of sales tax on the sale of your goods or services? Do you purchase supplies for your business from out of state vendors or via the internet? If the answer is “yes” to any of these questions, you might be targeted by the State of Florida for a sales and use tax audit.

Florida has increased its audit activity to the point that state tax audits now outnumber Internal Revenue Service (IRS) audits significantly. Those companies that seem to be at greatest risk for a sales tax audit are manufacturers, retailers, and service businesses that make significant purchases of supplies for their company. So, your business could be the next target for a sales tax audit. 

Manufacturers face a myriad of complex sales tax rules which can often make even the most seasoned expert grimace. Many manufacturers are under the false impression that they are afforded generous sales tax exemptions. While Florida does offer certain tax breaks to manufacturers, the state imposes sales tax on most of a manufacturer’s purchases of materials for its business. In certain cases, Florida imposes a sales tax on the cost of labor to make a product. In effect, your business must self assesses a tax on its fabrication costs. That could be an additional 6% or more in overhead for your business especially if you are subject to the sales surtax. Some manufacturers have been required to pay sales tax on up to 100% of their labor costs. 

Retailers can’t escape being targeted for sales tax audits because they often fail to properly address sales tax on “out-of-state” sales. many retailers also do not properly calculate the Florida sales surtax or handle exempt sales properly. These errors serve as red flags, and can cost the mid-size retailer a significant amount in tax dollars. Retailers with significant growth in their business are also likely targets for a sales tax audit.

Businesses that do not collect sales tax on their product or service are also being scrutinized by the Florida Department of Revenue for sales tax audits because these companies generally make significant purchases of supplies for their business. Florida imposes sales taxes on purchases of tangible goods and certain services. Did you know that purchases made from out of state might nonetheless require businesses to accrue and pay use tax?

Why should business owners be concerned about use taxes? Use taxes can add up for a small to mid-size business owner, constantly looking to minimize its overhead. If you fail to pay those taxes, it can spell financial disaster. If you overpaid sales taxes, you could be losing a lot of money. Whether you are a manufacturer purchasing materials and supplies to make your product, a retailer or a service provider purchasing goods included as part of a non-taxable service, this tax affects you. For a small to mid-size business, the tax dollars involved could put a company in serious financial trouble.

What can be done to ensure compliance with Florida sales tax rules to ensure a smooth and painless audit from a financial standpoint? We will begin by reviewing your sales tax filing history and compliance to identify tax exposures as well as overpayments that can lead to refund opportunities.

At Daszkal Bolton, we have a proven track record in helping clients assess their compliance, identify refund opportunities and minimize total tax liability in the area of state and local taxation.  We can analyze your historical exposure to sales and use taxes.  We can forecast prospective sales and use tax exposure and help your company achieve maximum success.

Faith L. Gorman, JD is a Senior Manager in our Tax Services Department.  She is a nationally recognized expert in the area of state and local taxes.  She can be contacted directly at fgorman@daszkalbolton.com or by phone at 561-367-1040.
 

As your company or clients discuss year-end planning, I want to remind you that this is a good time to address state and local tax issues and opportunities.

The following is a brief list of some ideas that might apply:

Nexus and FIN 48: At this time of year, it is a good time for companies to address their nexus position in advance of their FIN 48 analysis. Operations may also be able to be restructured in advance of 2011. If your company or client utilizes telecommuting employees or independent contractors and hasn’t addressed their nexus position in a while, this may be a good time. Also, more states have adopted economic nexus standards and “bright line” nexus standards that may come into play.

Sales and Use Tax: It is also a good time to conduct a reverse sales tax audit to identify sales and use tax refund opportunities and potential exposure. If your company or client has started to sale items over the Internet, we should talk. If your client has purchased any software, SaaS or cloud computing recently, they may want to confirm there is no sales or use tax exposure.

Income Tax: For C corporations, a reverse income tax audit could identify state income/franchise and gross receipts tax refund opportunities and potential exposure. Combined reporting and apportionment issues or opportunities may exist.

Income Tax: For flow-through entities, a reverse income tax audit may be helpful on major states such as Texas, Michigan, Washington, Pennsylvania, etc.

Credits and Incentives: If your company or clients are entering into new states, hiring new employees, building new facilities, retaining employees, “going green,” involved with renewable energy, etc. this is a good time to identify and capture credit and incentive opportunities.

Transaction Due Diligence: If your company or clients are entering into any acquisitions of other companies or assets, state and local tax issues should be reviewed to determine exposure, successor liability, and nexus impact.

Residency Issues: For individual tax clients that have changed their residency to another state or are considering such a change, guidance should be provided in regards to what records they need to maintain, etc.to support their residency or domicile.

Employee Misclassification: If your company or client utilizes a high volume of independent contractors, contracts should be reviewed to mitigate exposure of those independent contractors being reclassified as employees.

If you would like assistance with any of the above, please contact me.

Here’s a sneaky situation involving the manufacturing exemption.

There are quite a few states who require that, in order for the exemption to work, the use of the exempt items must be within the state. This makes logical sense, given the purpose for the exemption. But there are a couple of situations (that I can think of) where a problem would occur:

Situation 1

The reason I even thought about this rule was because of a guy in the class who ran a truck routinely from his plant in state B to pick up manufacturing equipment at a dealer in state A. He had asked an unrelated question, and I started thinking about it and realized that there was a problem.

Let’s say you’re the seller in state A. Your customer, from state B, comes in and picks up manufacturing equipment. You try to charge him state A’s sales tax, but he waves around his exemption certificate from state B, maintaining that he’s going to be using this equipment in manufacturing. But in YOUR state, the manufacturing exemption only applies to manufacturing equipment that will be used in state A. The “use-it-here” rule.  Since the purchase will not be used in state A, the customer’s state B manufacturing exemption is worthless.

Even if the buyer fills out state A’s manufacturing exemption form instead, it won’t be valid because he’s not “using it here.”  And you will owe state A the sales tax you should have charged your customer.

The solution is easy - simply ship the equipment to the customer in state B. Then, since it’s a shipment out of the state, state A has no jurisdiction, and the delivery is in state B. Everybody happy.

A similar problem exists if state A didn’t have any manufacturing exemption at all. In that case as well, the buyer’s state B certificate is irrelevant. Same solution.

Situation 2

You purchase equipment and have it shipped to your location in state B. There’s a manufacturing exemption in state B, so no sales or use tax. But you then reship the machine to state C. Since you never used, or intended to use, the purchase in your plant in state B, and state B has a “use it here” restriction, you will owe use tax on that machine to state B.

Note that state C has a manufacturing exemption, but state B doesn’t care. And since you stored (used) the equipment in state B, they get to nick you for the use tax.

Remember, not every state has this “use it here” rule, so check it out first.

And if you can think of any more situations where this “use it here” rule would be a problem, please let me know.

In addition to publishing the Sales Tax Guy blog, Jim Frazier has been leading sales and use tax seminars all over the U.S. for over seven years. If you are interested in having Jim do an on-site seminar for your organization, or if you’d like to join one of his public seminars or webinars, contact him at Take Charge Seminars.

More than ever, CPAs are finding the need to ramp up marketing and business development efforts.  One of the best – and simplest - ways to keep your pipeline full is to conduct meetings with your referral sources on a regular basis. 

Establishing mutually beneficial relationships with referral sources can be a win-win-win for you, the referral source, and the clients you serve. 

If you don’t have the right referral relationships now, begin by visiting your local bank branch and asking to speak with their small business banker.  Let them know that you would like to talk about the possibility of getting to know each other better and share your ultimate goal to make recommendations to your clients who may require their services as well as serve as a reliable and trusted resource for the personal banker’s clients.  Other potential sources for referral relationships are attorneys and other service professionals. Many times, these individuals are looking for a trusted CPA to recommend to their clients, and if you have reached out to them recently, you should be top of mind.

Although asking for these types of meetings can feel somewhat awkward at first, it will start to feel more natural the more practice you get.  Local networking groups and online communities such as LinkedIn and Ryze are also great places to find potential referral partners.

When you qualify your referral source prospects, consider learning:  
• About the products and/or services they offer
• Their target client industries or niches  
• The geographical area their organization covers 
• How they would describe their organization’s culture
• Their philosophy toward client management  
• How many clients they have and an average client profile, including size and revenue
• Who they are currently aligned with in terms of referral relationships
• How they would approach managing shared client relationships with an alliance partner, including revenue sharing, communications, etc.
 
Keep in mind that you may need to meet with several potential referral sources before you find a resource you can trust and feel comfortable referring.  If it doesn’t feel right or you wouldn’t feel confident referring your clients to the prospective source, simply thank them for their time and move on to other sources until you do find the right fit. 

Referral sources are long-term relationships where mutual respect and trust are present.  These deeper relationships take time to develop, so you should plan to meet with referral source potentials regularly and over time before they begin to refer clients to you.  You only need a few real referral sources to really generate opportunities, so be particular about who you choose to partner with.

If you already have some strong referral sources you haven’t met for awhile, it is important to schedule regular meetings, perhaps as often as quarterly, to make the most of the relationships.

Meeting with one referral source per week for lunch (rather than eating at your desk) will give you an opportunity to strengthen your relationships with your referral partners, uncover potential new business, and break up the week by getting away for some proactive relationship building.  Track your referral source meetings and outcomes to help you identify where you should be investing more (in the productive relationships) and where you may need to develop new referral sources (when others are not progressing).

Don’t forget that referral source meetings are also an opportunity to teach your people and “succession plan” by developing rapport between your younger people and the next generation within referral sources’ organizations.  Invite one of your team members to lunch and ask your referral source to do the same to make an introduction, teach them what happens in those meetings, and begin building new relationships so the alliance between your two organizations continues into the future.

When you proactively seek the most beneficial referral relationships for your firm and then nurture them with regular follow-up, you will build your business and be able to better serve your clients!

Jennifer Wilson is a partner and co-founder of ConvergenceCoaching, LLC, a leadership and marketing consulting and coaching firm that specializes in helping leaders achieve success.  Learn more about the company and its services at www.convergencecoaching.com.

If you do a google search for “Texas and Amazon” you will find several articles about the $269 million dollar sales tax assessment Texas is litigating with Amazon.  Check out TechFlash’s Article.

Here’s the excerpt from Amazon’s 10-Q filing:

In September 2010, the State of Texas issued an assessment of $269 million for uncollected sales taxes for the period from December 2005 to December 2009, including interest and penalties. The State of Texas is alleging that we should have collected sales taxes on applicable sales transactions during those years. We believe that the State of Texas did not provide a sufficient basis for its assessment and that the assessment is without merit. We intend to vigorously defend ourselves in this matter.

Apparently, Amazon operates a distribution center in Texas, but the distribution center is owned by a subsidiary and not the Amazon entity that sells goods online.  Therefore, Amazon has argued that the online company does not have nexus in Texas.  Texas seems to disagree.
 
Amazon has been under attack for the past few years with New York, North Carolina and Rhode Island and their “Amazon.com nexus” laws.  In addition, other states like Colorado have tried to make their compliance requirements so burdensome that out of state “non-collecting retailers” will voluntarily collect sales tax on their sales. 
 
Stay tuned for the continuing saga.
 
For more info on Amazon’s “trials and tribulations,” check out another article by TechFlash.
 
Also, check out my other posts on Nexus.

A New York statewide trade association representing the interests of all sizes of food stores petitioned the state of New York for an “Advisory Opinion” as detailed in  NY TSB a10(49)S. The petition resulted from reports that the trade association’s members in New York City were being fined by the New York City Department of Consumer Affairs for charging sales tax on the retail sale of Red Bull Energy and Sugar Free Shots. The NYC Department of Consumer Affairs claimed that the drinks labeled as dietary supplements are not subject to the sales tax.  The sellers, by collecting a tax on the sales of these beverages were deemed to be in violation of the NYC Deceptive Trade Practices Act.  After analysis of the container labeling the state affirmed the petitioner’s assumption the beverage in question was a non-carbonated beverage that is marketed primarily as an energy drink.

While Tax Law section 1115(a)(1) offers an exemption for “…beverages, dietary foods and health supplements, sold for human consumption, but not including soft drinks and sodas, unless they are sold for 75 cents or less through a vending machine activated by the use of coin, currency, credit card or debit card. Soft drinks and sodas include carbonated and noncarbonated beverages, carbonated water, dietetic beverages and cocktail and other alcoholic drink mixes.” Red Bull shots are soft drinks or dietetic drinks. Thus, Red Bull shots are subject to state and local taxes because they do not qualify for the exemption.

Similar drinks such as Awake and Gatorade have previously been classified as taxable as detailed in Publication 840, A Guide to Sales Tax for Drugstores and Pharmacies, page 27, and Publication 880 Taxable and Exempt Foods and Beverages Sold at Retail Food Markets and Similar Establishments. The food stores must continue to collect the state and local taxes on their sales of Red Bull shots.

Effective for tax years beginning on or after January 1, 2010, any companies, partnerships, and S corporations that derive income from Connecticut or have a substantial economic presence within Connecticut, in either case attributable to the purposeful direction of business activities toward Connecticut, will be subject to tax in Connecticut.

To provide guidance to taxpayers, Connecticut released an “Informational Publication 2010(29).”  The publication provides answers to several questions taxpayers have about the application of Connecticut’s economic nexus standard. 

According to the publication, the purposeful direction of business activities toward Connecticut will be evaluated based on the frequency, quantity and systematic nature of the business’s economic contacts in Connecticut.

The publication also provides taxpayer examples and a “bright line test.” 

A company, partnership or S corporation that is not otherwise subject to income taxation or a requirement to file a return in this state under Chapter 208 or Chapter 229 of the Connecticut General Statutes shall not be deemed to have economic nexus for a taxable year if the frequency, quantity and systematic nature of the business’s economic contacts with the state are such that it has receipts from business activities that are less than $500,000 attributable to Connecticut sources during such taxable year. This bright line test does not preclude the Commissioner from contending that a company, partnership or S corporation has an obligation to file a return or pay a tax under Chapter 208 or Chapter 229 of the Connecticut General Statutes as a matter of law other than attributable to the Economic Nexus Legislation. Note: The determination as to whether a pass-through entity, including, but not limited to, partnerships and S corporations, satisfies the bright line test shall be made at the entity level.

Regardless of the economic nexus standard, it is important to remember that Federal Public Law 86-272 does provide protection to businesses that have economic nexus in Connecticut against Connecticut taxation.  According to the publication, P.L. 86-272, 15 U.S.C. 381-384, restricts Connecticut from imposing an income tax on income derived within its borders from interstate commerce if the only business activity of the business within Connecticut consists of the solicitation of orders for sales of tangible personal property, which orders are to be sent outside Connecticut for acceptance or rejection, and, if accepted, are filled by shipment or delivery from a point outside Connecticut. P.L. 86-272 protection is not afforded to transactions other than sales of tangible personal property. In addition, P.L. 86-272 does not apply to taxes that are not based on income.

Example: Catalog Corp., an out-of-state corporation that is not otherwise subject to Connecticut income taxation, remotely solicits (i.e. by mail and telephone) orders for the company’s tangible products from Connecticut customers. Sales are approved and shipped via common carrier from outside Connecticut. Although Catalog Corp. may have a substantial economic presence within Connecticut, it is nevertheless immune from Connecticut income taxation pursuant to P.L. 86-272.

As stated in other posts, the “economic nexus” standard is a growing trend among states.  If you have questions how this standard impacts your business, please contact me.

Brian Strahle is State and Local Tax Practice Leader at Baker Tilly Virchow Krause, LLP, in addition to being the Founder and Author of LeverageSALT, the State and Local Tax Blog at http://www.leveragestateandlocaltax.com/. He can be reached at brian.strahle@bakertilly.com.