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New Sales Tax “Basics” Blog: 5 Hotspots You Need to Understand

author photo of Michael J. Fleming

I would like to take this opportunity to introduce Andy Johnson and myself.  We are both with Peisner Johnson & Company, a CPA firm that focuses exclusively on state and local taxes. Over the past 22 years (since we were founded in 1992), we have helped thousands of companies solve their state tax problems - and the majority of those problems involved sales tax.

In our experience most of the sales tax problems we see can be traced to one of five root causes – which we call “Hotspots”:

  1. Nexus - Nexus is the necessary link you must have with a state before the state can force you to collect or pay its taxes.
  2. Taxability – Taxability varies from product to product (or service to service) - as well as state to state.
  3. Rates - The sales tax rates can vary depending on where the product is delivered or the service is performed.
  4. Use Tax – If the seller does not collect sales tax on a taxable sale, it does not mean that it’s tax- free. The state expects you to pay it to them directly as a use tax.
  5. Exemption or Resale Certificates – Certificates are the documentation you must collect if your purchaser is claiming an exemption.

Over the coming weeks and months – Andy and I will be writing about these hotspots from a layman’s point of view. In other words, we will approach each topic as if the reader has no sales tax background. Not all of the subjects we cover will be basic (some will be fairly complex), but our intention is to present them as an introduction to sales tax - in an easy-to-understand format.

Have a sales tax question? We would like this new blog to be an interactive resource for you and invite your questions, suggestions and feedback.  Simply use the "comment" feature below. All questions will be answered – and we will dedicate discussions (based on good suggestions) to those making the suggestion.  (However, please rest assured that unless you ask to be identified – we will not post any identifying details.)

We truly hope that this new SALES TAX BASICS blog will become your “go-to” tax resource if you are trying to understand sales tax basics. We look forward to hearing from you!

Our first post (which will follow shortly) will discuss Hotspot #1 – Nexus...

Do you have questions about MULTI-STATE sales tax - or other state/local tax issues?

Michael welcomes inquiries from SalesTaxSupport.com users. Please call - or (ideally) if time allows, use the "Request a Consultation" link on this FIRM PROFILE page to submit your question and/or consultation request.

Other recent “Sales Tax Basics” posts by Michael J. Fleming:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

16 Responses to New Sales Tax “Basics” Blog: 5 Hotspots You Need to Understand

  • Posted by Teymour on June 5, 2016 5:13pm:

    I reside in Ontario, I've recently been hired by a company based in Quebec. My pay has Quebec provincial tax deducted from it. Being a resident in Ontario, when I file my taxes will I get any, some, or none of those deductions back?

    • Posted by Michael on June 5, 2016 5:20pm:

      Hi Teymore,

      While we work with all the Canadian 'transactional taxes", we do not do any personal income tax work and as such could not answer your question.

      Mike

  • Posted by Dan on May 4, 2016 12:49pm:

    We are a GA based company. I have a North Carolina customer that is insisting on paying NC sales tax. It's a school that says they are not exempt from paying NC taxes, regardless of where their goods come from. I told them we don't seem to meet any of the NC requirements for nexus but they wouldn't listen - they wouldn't put in the order without it! What do I do with the tax they will pay? If I remit it to NC I presume I have to register in some way, and worry that then creates a presumption of nexus and thus it will make all my future NC sales subject to their tax.

    • Posted by Author photo of Michael J. Flemingmikefleming on May 5, 2016 3:16pm:

      Hi Dan,

      This is a situation we are seeing more and more of. Companies do not want to deal with use tax, so they demand that their vendors charge them sales tax. As a matter of fact, we had a couple of companies contact us stating that John Deer had demanded the same of them. Unfortunately, in order to appease your client you will need to register to collect and remit the sales tax and as you correctly surmised, once you register you have a responsibility to collect sales tax on all your sales into the state.

      So, if this is a large customer, you may want to appease them. If they are a smaller customer, you may want to stick your guns and tell them you are not authorized to collect sales tax and they must self assess and remit the tax directly to the state of North Carolina on their own.

      In our John Deer example, one of our clients said John Deer was very important to them and they got registered everywhere to appease the customer. The second company, after hearing they had to collect tax from all their customers everywhere they registered, chose not to appease John Deer. John Deer wasn’t a big enough customer for them to justify the additional compliance costs.

      Bottom line, you can’t just collect the tax without being registered and the decision to get registered or not becomes a customer service issue. I hope I have been of assistance. If you wish to discuss this in more detail, feel free to reach out to us and schedule a consultation.

      Thanks,

      Mike

  • Posted by Irene on April 5, 2016 12:14pm:

    Do Sales Tax Exemption Certificates or Resale Tax Exempt certificates expire? I've been told by one manager that new ones need to be obtained every 5 yrs and a customer said their understanding was that they do not expire. Please help

    • Posted by Author photo of Michael J. Flemingmikefleming on April 8, 2016 7:47am:

      Hi Irene,

      Great Question. The answer is some states like Florida do expire while many other states do not. However, as a best practice, we actually suggest updating all certificates every 3-4 years. The reason is that a lot can change over 3-4 years that could potentially turn a certificate that was valid when you accepted it into a certificate that is no longer valid and would be rejected in an audit.

      When an auditor reviews certificates, one of the things they do is compare the information on the invoice to the information on the certificate. In many instances, changes are made in a company’s billing system and the changes never get reflected on the certificate.

      For example, I performed an exposure review for one company and found a certificate they had on file for 28 years. During this 28 year period, there had been multiple changes that would have invalidated this certificate. The company had changed names multiple times, changed entity types multiple times, changed ownership multiple times, and had actually relocated to a new state. Any one of those events by itself could invalidate a certificate. There are other changes I did not mention that could also invalidate a certificate.

      The problem with certificates is that you accept them in good faith, however, if they are kicked in an audit they are generally subject to additional verification. So if your customer has made a change, an auditor may not allow your certificate.

      For those companies that have a responsibility to collect certificates; missing, incomplete and invalid certificates are the leading cause of audit assessments. Because audits are done on a sample basis, even one missing or invalid certificate can have a major impact.

      We had one situation where one of our clients was audited and they had a 3 million dollar assessment of which about 60% was due to certificates. We were able to reduce the potential assessment to about $17,000 but still had one missing certificate. We were not able to locate the issuer of this one certificate, and the tax for this particular invoice would have been slightly more than $8,000. That is a large number by itself, but when projected across the sample it had over a $270,000 dollar impact. While this example may be extreme, it does illustrate my point.

      This is exactly why we suggest updating certificates based upon the average audit look-back, which is generally 3-4 years. You may get pushback from some customers, however, the benefits of such a policy generally outweigh the headaches. While customers generally do not dictate company policy, you can always deal with those customers who give the most pushback on a one-off basis. If they are large customers, perhaps you review their certificate to ensure it is still valid. For smaller customers, you may just want to let them know that it is company policy. I hope I have been of assistance. If you want to discuss any of this in more detail, feel free to reach out to us and schedule a consultation.

      Thanks,

      Mike

      • Posted by Ms on April 8, 2016 8:17am:

        Thank you, sir!!!!!!!!!!!

  • Posted by Kim on March 26, 2016 9:12pm:

    We are Georgia corporation, we are going to wholesale not only within Georgia but out of State as well. We do both direct and online sales. I wonder if there is sales tax to be collected for Internet online sale in Georgia and others States we are going to have transactions with? Thanks

    • Posted by Author photo of Michael J. Flemingmikefleming on April 5, 2016 4:29pm:

      Hi Kim,

      Thank you for your question. It is a great one and many companies don’t take into consideration that the activities of one sales channel can actually create nexus for another sales channel. While we don’t have enough information to answer your question in detail, here is some general information.

      Anywhere a company has a connection with a state [nexus] there is generally a responsibility to collect and remit sales and/or use tax on all taxable sales. In the state of Georgia, it is fairly clear that you have nexus with the state, therefore, the state will expect you to collect sales tax on any of your retail sales delivered in or into Georgia. So, any of your internet sales made to Georgia residents, you would generally want to collect sales tax for.

      In the other states, your wholesale activities may actually be creating nexus for your internet sales. If this is the case, then those states would require you to collect and remit sales tax. However, there may be some states or all states where you have no wholesale activities or at least no activities that create nexus. In any state where you do not have nexus, you generally do not have a responsibility to collect and remit taxes.

      I say generally, because there are two states that have recently passed statutes saying you don’t need a physical presence in order to create nexus. These states are Alabama and South Dakota. In these two states, if the total of your wholesale and retail sales combined exceed $250,000 and $100,000 respectively, then these states expect you to collect and remit sales tax.

      If you need a specific answer to your question, please reach out to us directly, and we can discuss your specific scenario.

      Thanks,

      Mike

      • Posted by Kim on April 5, 2016 10:16pm:

        Thank you very much for your answers, Mike. Very detail helpful and accurate based on my own researchers last couple days. I'm sure will reach you directly in the near future when our transactions are in the process. Kim

        • Posted by Mike on April 5, 2016 10:28pm:

          My pleasure.

  • Posted by Todd on February 22, 2016 11:31am:

    If I bought a camera for my company and paid $300 in sales tax, is that deductible from my sales tax total at years end?

    • Posted by Author photo of Michael J. Flemingmikefleming on February 28, 2016 4:03pm:

      Hi Todd,

      Great question. In general you don't deduct tax on your purchases from the tax you collected at year end. This is more the practice of income taxes rather than sales taxes. On an income tax you get to deduct expenses.

      When it comes to sales taxes, business must generally pay the sales tax on any items they use in their business unless there is a specific exemption.

      For what purpose did you purchase the camera?

      Sales tax issues can be complex. For those of you who need to walk through some of the basics or who have specific scenarios to discuss and don't want to do so in this forum , we offer a 1/2 hour consultation for $195 and a full hour for $350.

      To schedule a consultation you may email Brock Morrison at: bmorrison@peisnerjohnson.com

  • Posted by Vicki on October 6, 2015 9:51am:

    We are a PA corporation making a purchase in TX. Are we subject to PA sales tax or TX sales tax?

    • Posted by Author photo of Michael J. Flemingmikefleming on February 28, 2016 4:10pm:

      It depends. Are you physically going to Texas to pick up the product or is it being shipped?

      Products that can can be seen, touched, smelled or tasted are generally referred to as tangible personal property(TPP). This is in contrast to intangibles like a stock or a bond or real property like real estate.

      TPP is generally tax in the state where it is delivered. So if you picked it up while in Texas the tax would generally be due in Texas. If however the product was shipped to PA the tax would be due in PA.

      Sales tax issues can be complex. For those of you who need to walk through some of the basics or who have specific scenarios to discuss and don't want to do so in this forum , we offer a 1/2 hour consultation for $195 and a full hour for $350.

      To schedule a consultation you may email Brock Morrison at: bmorrison@peisnerjohnson.com

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