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7 Sales Tax Mistakes to Avoid in Alabama

author photo of Ned Lenhart

On December 15, 2014, the Alabama Tax Tribunal issued its decision in the case of Randy Henson vs State of Alabama. At first blush, there is really nothing earth shattering about the conclusion reached by Judge Thompson in his decision. Mr. Henson owned Friendship Automotive which was a car repair shop. The business did oil changes and other small repairs. The business performed taxable transactions and failed to collect and remit the tax. Conclusion, Mr. Henson owes $38,000 of tax and $10,000 of penalties. End of story!

A closer review of the case facts, however, reveals a series of taxpayer errors and missteps that lead to this unfortunate conclusion. These missteps started the day he opened his business and continued through the entire audit process. By pointing out and discussing the errors Mr. Henson made, perhaps other Alabama businesses can avoid the same fate the befell Friendship Automotive.

Mistake 1: Taxpayer started his business in July 2009 but did not receive an Alabama sales tax permit in until October 2010. Even after applying, the taxpayer failed to file returns.

Mistake 2: When contacted by state as to why returns were not filed, taxpayer claimed he was not open for business (even though he was clearly open). Lying to the state is not a recommended strategy!

Mistake 3: Taxpayer charged customers a “lump sum” fee for oil changes that included the materials and labor.

Mistake 4: Taxpayer failed to maintain sales and purchase records for the complete audit period.

Mistake 5: Taxpayer failed to provide suppliers with a resale certificate which forced him to pay tax on his purchases and failed to maintain all the records showing what tax had been paid on purchases.

Mistake 6: Taxpayer allowed the auditor to set the sample period and projection method without understanding the consequences of the projection.

Mistake 7: Taxpayer claimed he did not “mark-up” the purchase price of the oil and other supplies sold to customers. Again, taxpayer had no documentation or proof to support the assertion.

The situation described above occurs countless times a year in each state that has a sales tax. Small businesses operate on the fringe of the sales tax rules either believing they are in compliance or hoping that they will never get caught. Clearly, the failure to understand the rules carries a heavy price.

Here is some helpful (and perhaps obvious) advice to other small businesses in Alabama and other states based on Mr. Henson’s missteps:

  1. If you register for a sales tax number, file returns-even if they are $0.00 tax due filings. Failure to file returns when due can attract penalties.
  2. Don’t lie to the Department of Revenue!
  3. Understand the tax rules in your state. Separately stated labor charges in Alabama are not taxable. A huge tax savings would have occurred if the taxpayer had only checked the rules.
  4. Keep your records and keep them organized. The burden is on the taxpayer to provide the documentation. This applies to purchases and sales.
  5. If you buy materials to resell, give your suppliers a properly executed resale certificate.
  6. Understand the sampling method used by the state. The Department or Revenue auditors have one goal and that’s to collect as much revenue as they possibly can. It is not their job to educate the taxpayer on sampling methods and the consequences of these methods. If you don’t understand, get help from someone qualified. Spending a little money on professional services can really pay off if you can manage the sample and the audit process.

This is a really bad situation for Mr. Henson. I’m sure he does not have an extra $48,000 sitting around to pay the state this money. Who knows what type of effort the state will take to get their money. For other Alabama businesses and their advisors, please you can learn a lot from Mr. Henson’s mistakes.

Over the years I can’t count the number of people who tell me “it’s only sales tax, how hard could that be!” Well, it’s not very hard if you understand what to do and you do it! For businesses that don’t understand or don’t want to understand, then the consequences can be catastrophic. Just ask Mr. Henson.

If you have any questions or comments please feel free to submit below – or reach out to me directly.

Ned Lenhart, CPA

Ned Lenhart, CPA is the founder and President of Interstate Tax Strategies, P.C. (“ITS”). Ned has over 28 years of varied state tax consulting experience including roles as the Director of Compliance for the Missouri Department of Revenue, SALT Manager for Arthur Andersen in Kansas City, and Director with Deloitte in their Atlanta office from 1994 to 2003. He started ITS in 2003 to assist local and national companies by helping them develop proactive strategies to managing their multi-state sales tax obligations.

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Comments

4 Responses to 7 Sales Tax Mistakes to Avoid in Alabama

  • Posted by Kayleigh on August 10, 2016 9:22am:

    My husband is an artist and he sells items at conventions around the state. We're about to do our first convention this year in Sheffield, Alabama and we want to make sure we pay sales tax. Do you need to have a business license to register for a sales tax number?

    • Posted by Author photo of Ned Lenhartnedlenhart on August 10, 2016 10:08am:

      A business license is not required in order to obtain a sales tax permit, however getting a sales tax permit may trigger a business license obligation from the city. Because this is just a convention it is not likely you will need a business license. You will need to register with the AL DOR in order to pay the state sales tax and you may have separate registrations to remit any local tax.

  • Posted by on March 31, 2015 9:03am:

    Please assist with this drop-shipment reseller question.
    Supplier/Manufacturer sells a machine to GA Reseller, who is located in GA. GA Reseller arranges a sale with AL Customer, and wants Seller/Manufacturer to drop-ship the machine to AL customer.
    Is a standard Resale Tax Exemption Certificate sufficient for the Seller/Manufacturer for GA Reseller to avoid paying sales tax on the purchase from Seller/Manufacturer? Is GA Reseller required to register for a sales tax number in AL, and to collect the tax from AL Customer and pay it to AL DOR? Is the sales tax the same if the transaction between GA Reseller and AL Customer is a lease or a purchase?
    Thank you for your assistance.

    • Posted by Author photo of Ned LenhartNed Lenhart, CPA on March 31, 2015 2:59pm:

      Thank you for your question.
      Because the equipment does not physically enter the state of Georgia, the only state that is of concern is Alabama. Part of the answer turns on whether the manufacturer/seller has nexus in Alabama. If the equipment is used in manufacturing in AL the the state manufacturing use tax and the local manufacturing use tax will be due on the transaction. The question is who is required to collect and pay the tax. If the equipment is not manufacturing equipment, then the full rate of tax will apply.
      Here are two scenarios:
      If the manufacturer/seller has nexus in AL, their obligation is to charge the Georgia seller the full Alabama sales tax unless the GA seller can provide them with an Alabama resale certificate. This will require that the GA seller become registered in AL and provide the equipment seller with the AL resale certificate. This will avoid the Georgia seller from being charged Alabama tax. However, this will now require the Georgia seller to collect the appropriate state reduced used tax on the manufacturing equipment. County/City may also be due. In the alternative, the GA seller can just absorb the Alabama tax that will be charged by the seller, and attempt to pass this through to the purchaser in the form of a higher price.
      If the manufacturer/Seller does not have nexus in Alabama then they would have no obligation to collect the Alabama tax from the Georgia Seller. If the Georgia seller does not have nexus in Alabama then there is no reason for them to become registered in the state. In this scenario, the Georgia seller should probably provide the suppler with a Georgia resale certificate just to document the exempt nature of the transaction, but there would be no reason for the Georgia seller to register in Alabama or to collect tax. The purchaser would have to pay AL use tax on the purchase. If the Georgia seller does have nexus in Alabama then they should try to obtain a direct pay certificate from their customer to avoid having to charge the AL sales tax on the sale. Otherwise, the GA seller may be obligated, due to their nexus, to collect the state and possibly the local manufacturing use tax.
      Drop shipments are challenging. If you have more specific questions, please feel free to contact me directly
      Ned Lenhart

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