Category

Tax Audit

Jul 27
0

Sales Tax Audits-Taxpayers Beware!

By | Tax Audit | No Comments

Sales tax audits are an effective way for the states to collect underpaid sales and use tax.  I’ve been involved in helping clients manage audits for over 30 years and I’ve seen a wide range of audits and auditors.  Most audits are pretty straightforward and are handled efficiently.  The business has the correct records for the auditor to review, the auditor is prompt and capable, the taxpayer errors are not that controversial, and we can complete them in short order.   Over the past few years, I’ve seen this pattern take a dangerous turn as the states are becoming more desperate for revenue and are having a hard time hiring and training auditors.

https://www.salestaxstrategies.com/sales-tax-audit-defense/

For the past year, I’ve been working on audits from most state in the Southeast.   Based on my exposure (albeit limited to these specific audits) I’m seeing several troubling changes occurring.  These changes may not be obvious to most businesses that are being audited, but failing to understand these audit trends may cost taxpayers huge amounts of tax, penalties, and interest.  The following are a few of the trends I’m seeing.

1. Improper (or creative) sampling methods, 2. Undertrained auditors,3. Unsupported legal positions,
4. Unwillingness of auditors to consider non-standard audit procedures, and 5.  Auditors not really understanding the nature of the business, its customers, and data.

Without taxpayers knowing that these things may be happening “right before their eyes”, there is no way to properly challenge the audit.   Taxpayers need to make sure that the auditors understand their business, their customers, and their data.  I’ve seen auditors quote statutes and regulations with gusto as fully supporting their audit position.  In some cases, the taxpayer just agreed with the rules that the auditor was using.  This is a huge mistake.  Don’t accept anything the auditor says without asking for the exact provision and then reviewing it yourself.  You may be surprised to find that the auditor cherry picked the provisions that works to their favor and eliminated provisions that benefit the taxpayer.

The state is not your friend and has no interest in providing you with guidance to mitigate your situation.  Get help if you need it.  The deck is stacked against small business taxpayers that may never have been audited before and may be putting some level of trust in the auditor.  This trust is often misplaced. 

If you get an audit notice get help before the auditor arrives.  You may be completely blind to mistakes you are making and you may want someone other than the auditor to point these out ahead of time.  This is even more true if you are being audited by a state that is not your ‘home’ state.  

Apr 01
0

States Expect 4.5% More Sales Tax Revenue in 2014!

By | Legislative, Retail, Tax Audit

I just finished reviewing the 2013 National Association of State Budget Officers 2013 Budget Survey.  Even though some elements of this may be estimates, I still believe that the information is directionally accurate in showcasing where the revenue will be coming from. https://www.salestaxstrategies.com/sales-tax-issues.html

For 2013, the report shows total estimated revenue of $572.882 Billion.  Of this amount, $219.340 billion is from sales tax, $307.768 is from personal income tax, and $45.774 billion is from corporate income tax. As percentages, this is 38.29%, 53.72%, and 7.99% respectively.   For 2014, the reports shows a 4.5% increase in sales tax revenue ($9.886 billion) and a decrease in personal income tax of about $1 billion.  Corporate income tax is expected to grow by about 3% or $1.43 billion.

The state leading the pack for expected increases in sales tax are California, Florida, New Jersey, Ohio, and Texas.  Unlike the personal income tax projection, no state showed any decline in sales tax collections.

The growing reliance on sales tax as the primary source of new revenue for 2014 likely comes from a combination of the following events:

1. Increases in tax rates
2. Increases in tax base (expansion of tax to services, removal of exemptions, expansion of tax base to digital products)
3. Expectation of increases tax collection and remittance from remote sellers
4. Increased enforcement from auditors and delinquent tax collection people
5. Increased awareness and voluntary compliance by multistate businesses

As I’ve reported for the past several years on this site, sales tax is quickly becoming the revenue of choice by states as they continue to seek revenue to cover the expansion of state services required by new state programs and the imposition of rules by the federal government.  In most cases this burden will fall on your business, either as the consumer of taxable items or as the seller of taxable items and services. Either way, the cost of non-compliance can be significant and catastrophic to your business if you are not fully aware of your responsibility.

Please contact me if you have any questions.

Ned Lenhart, CPA
President

 

 

Jan 16
0

Alabama Local Tax Nexus-Another Confusing Case!!

By | Retail, Tax Audit

On January 3, 2013 Judge Bill Thomson issued yet another ruling on the nexus rules for Alabama local sales tax.  I’ve lost count of how many rulings he has issued.  In this case, as with most of the others, the Judge held that the retailer did not have nexus in the city where the services were performed becuase they did not have “significant physical presence” in the city where the sales occured.  His decsions are always tied to the Yelverton decision issued by the Alabama Court of Appeals in 1997.  He hates this decision and takes every opportunity to comment about how out of date their ruling is and how the Alabama Department of Revenue has not updated it’s regulation on local tax nexus since the Yelverton decision was issued.

Under the Yelerton rule, a retailer has sales tax nexus with a home-rule city only when it has property located in the city or when the sales activity occurs in the city.  That’s it.  You can perform services in the city and not create nexus, you can delivery property on your own truck and not create nexus, and you can meet with cusotmers on technical issues and not create nexus.  In the January case, the company was headquartered in Montgomery, Alabama and made sales calls over the phone for team photography.  The photographer would then go the the towns and take the phototos and then sell packages to the team and families.  Only on 4 occassions did the company go to a town for a “sales presentation”.

Based on the Yelverton rule, the company did not have nexus in the cities where the sales call was made over the phone.  Even though the photography service was performed in the city, the nexus is determined by the sales activity.  In the 4 cases where an “inperson” sales visit was made, the Judge held that even thought they were in the city, he did not believe that 1 sales visit was sufficient to create nexus.  Great, well what about 2 visits, or 3 visits or more.  How many visits are sufficient to create nexus in a home-rule city for sales tax?   Is this also the rule for state sales tax?  https://www.salestaxstrategies.com/tax-consulting-services.html#salesTaxNexu

Each year Judge Thompson issues at least one ruling on this topic.  I fully expect to see more during 2013.  Despite these rulings, the auditors hired by the home-rule cities to audit taxpayers seem to assert that everyone has nexus and that local tax is due on every transaction.  Be alert to this labarinth of rules related to local tax jurisdiction.

See Paris John Van Horn (Sport Shot Photography) vs State of Alabama Department of Revenue Docket 12-863

Ned Lenhart, CPA

 

Sep 14
0

Tricky New York Sales Tax on Capital Improvements

By | Contractor/Repair Services, Tax Audit

The NY Department of Finance issued an updated Bulletin on the application of New York sales tax to capital improvements.  New York, as expected, makes this a challenging element for sales tax administrators to deal with.

In general, capital improvement projects are not subject to sales tax.  These must meet the following 3 tests: (1) substantially adds to the value of the real property, (2) becomes par of real property or is permanently affixed to real property, (3) is intended to become a permanent installation.

If the project qualifies as a “capital improvement” the contractor must obtain form ST-124 from the customer or be able to defned the nature of the project as a capital improvement.  If the item is a capital improvement, tax is paid by the contractor on the items purchased and no tax is collected from the customer.

If the project is not a capital improvement but is a “repair”, then the project is taxable on the materials and the labor charges. 

If out-of-state vendors are working in NY and are doing work that does not qualify as a capital improvement and they have paid tax on the materials used, then there could be significant tax implications and double taxation related to materials.   Be sure to carefully identify the nature of the projects you perform in NY to determine whether they are taxable repair services or nontaxable capital improvements.

Ned Lenhart, CPA
President

 

 

Sep 11
0

State Budge Gap Persists-Taxpayers Beware!

By | Tax Audit

According to the Center on Budget Policies and Priorities, 31 states are projected to have a $55 billion revenue shortfall for fiscal 2013.  This is smaller than in the past, but it is still extremely large by historical standards.  This short fall is likely caused by a revenue shortfalls from the slow economy and increased spending needs on current state projects and those projects where federal funding has ended and the states are not expected to pick up the tab themselves.  The states with the most significant shortfalls are California, Nevada, Oregon, Texas, Minnesota, and New Jersey.  Other suffering states include most of the east-coast and New England area.  Also hard hit is Arizona.

So what does this mean to you?  If you are in these states you can expect to see higher taxes and more cuts in state services.  You can also expect to see more audits and more assessments of tax.  You should also expect to see an expansion of the sales tax base to include the taxation of more services and also an uptick in state tax audits.

I’ve been talking about revenue shortfalls for the past 5 years and there is scant evidence to suggest that the situation is improving at all.  If we hit another recession in 2013 or the economy continues to grow at the anemic rate of 1.5%, then we are in for a very long and painful state revenue shortfall.  This will continue to put pressure on state legislatures and audit groups.

Ned Lenhart, CPA
President

Oct 28
0

“Taxing the Cloud”-Excellent Article

By | Tax Audit, Technology

I don’t often find really good articles about the sales tax implications of SaaS transactions, but the following link takes you to an excellent article in CFO.com.  This article outlines the real and significant sales tax issues and risks associated with providing SaaS or other “Cloud Computing” services.  I am working with many companies on similar issues and plan on using this article to help solidify the need for these services. 

http://www.cfo.com/article.cfm/14605332?f=search

Please contact me if you have any consulting needs in this area

Ned Lenhart, CPA
Interstate Tax Strategies, P.C.

Sep 19
0

Don’t overlook credit card statements for use tax obligations

By | Retail, Tax Audit

Met with a client this morning to prepare for an upcoming audit.  General AP looked good.  However, when we got to the corporate AMEX and VISA cards, there were significant use tax issues.  Because of the nature of their business, the IT folks would just purchase some of the smaller items they needed from online vendors. There were also a number of Amazon transactions that showed up.  There were also entries for subscriptions and some other fees.  The volume of taxable transactions was surprising and no use tax had been paid.   Since the audit is starting next Monday, there is not a lot to do with these now other than manage the audit process.

Just a reminder that credit card statements are common documents for review by auditors and that use tax is due on items purchased over the Internet.  If the item would have been taxable if you purchased it locally, then it will be taxable if you purchase it online.

If you have questions about the taxation of items purchased or would like assistance setting up a use tax accrual system, please contact me and we can discuss your options.  nlenhart@salestaxstrategies.com

Ned Lenhart, CPA
President

Sep 12
0

California’s new nexus rule for Internet marketers–does it really close any loophole?

By | Legislative, Retail, Tax Audit

On June 28th, 2011, California Governor Jerry Brown signed into law a budget bill that expands the state’s nexus creating activities to out-of-state retailers based on the presence of in-state Internet affiliates and (in some situations) certain commonly owned companies.  There is no surprise that this bill was aimed squarely at Amazon.com.  The state is not subtle at all in its attempt to force Amazon to collect California sales tax on shipments made to California residence.  Under this bill, the goal is to create an agency relationship between the California based retail associates and Amazon.

The Bill adds a provision that changes the definition of the term “retailer” to include anyone who pays a commission to a California based “person” for any-type of referral of potential purchasers through the use of an Internet Link or an Internet Web site.   There are some de minimis provisions that would exclude small out-of-state businesses.   However, unlike some other states, the new nexus standard does not apply unless (1) the fee for the advertising is a commission or otherwise based on sales and (2) the in-state person also “directly or indirectly solicits potential customers in Californai through use of flyers, newsletters, telephone calls, e-mail, blogs, microblogs, etc.”  As such, in Internet affiliate in California that merely advertising for an out-of-state retailer does not create nexus, even if the payment for the advertising is commission based. 

Given this unique 2 prong test, I wonder how much additional revenue California expects to get from Amazon (or anyone else).  From my understanding, all of the advertising between the out-of-state retailers and the in-state is done via the Internet and does not involve any of the other types of promotional efforts outlined in the Bill. 

Ned Lenhart
President
Interstate Tax Strategies

California nexus standards 

 

 

 

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.

 

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