SALT Newsletter - Summer 2013
Top 10 Issues That Will Prompt an Indirect Tax Audit
One of our intrepid state & local tax colleagues, Daniel De Jong, the State Tax Counsel for Tax Executives Institute, Inc. (TEI) recently posted a blog on the Top Ten Issues, That When Uncovered, Will Prompt An Indirect Tax Audit. An indirect tax is a charge levied by a jurisdiction on consumption, expenditure, privilege, or right but not on income or property. Examples include customs duties levied on imports, sales & use taxes or value added taxes because they are not levied directly on the income of the consumer. We took the top ten issues identified in Dan’s blog and added some insight to give our readers a better idea of what to watch out for:
Nexus but no registration. Nexus is the minimum connection a business has with a state that makes the business liable for sales & use tax collection and reporting. It is likely that you have nexus with a state if you have physical presence in the state or are paying payroll or other taxes. If you are not registered for sales & use tax, but do pay another kind of tax in that state, it is likely that you will be contacted for an audit. All a state has to do is perform a little cross-checking, which more and more states are doing on a regular basis.
In the phone book or on the web. If you cannot be found in the state’s taxpayer database, a simple check of the phone book or the internet can lead an auditor to call your business and inquire about your registration status. States have auditors scouring the internet looking for unregistered, out-of-state companies doing business in their state. Check with your sales and marketing personnel to learn more about what your website, social media outlets and marketing materials say about your business, and the scope and breadth of your presence across the country; or you may find yourself filling out a nexus questionnaire or getting a call from an auditor.
QUESTIONS? NEED MORE INFORMATION?
Contact one of the Tronconi Segarra & Associates State & Local Tax Services Team Leaders:
David E. Werth, J.D., CPA Partner
Andrew J. Toth, CPA Principal
Thomas E. Mazurek, Jr., CPA Principal
State and Local Tax Services
Audit Representation Reverse Audits Nexus Review Voluntary Disclosure Research & Analysis Managed Compliance Agreements Sales Tax System Development Outsourcing Merger & Acquisition Planning Compliance Management
Issued resale certificates. Resale certificates can be a major red flag, especially if you are using them to purchase items that will be used by the business, rather than resold. This can result in enormous penalties. If you have issued a resale certificate and are not registered for sales & use tax, you are an audit target if one of your suppliers is audited (see below) and asked to produce documentation for nontaxable sales.
Audits. If one of your vendors or suppliers has not charged proper tax and that vendor gets audited, then you will likely get audited in turn. Likewise, if you haven’t charged your customer the proper tax and they get audited, you may be a target for a future audit. Current audits provide the best sources and leads for future audits. The former state tax auditors on our staff can attest to this, and have said that some their most successful audits [from the state’s point of view] were generated during a prior audit.
Visual inspections. Auditors will often visit large construction projects and take note of the contractors on site. Audits can quickly follow. Additionally, if you are selling to a customer who is receiving sales tax exemptions or other tax benefits from the state for a specific project, they may have to list who they are purchasing equipment, materials or supplies from on reports required by the state, which can lead to issues as well.
Whistle-blowers. Auditors are always happy to take hotline calls from disgruntled employees, upset customers, aggressive competitors and even neighboring businesses who are concerned that you have not collected and/or paid taxes when they have.
Casual observation. Auditors are people, too, buying items and living normal lives. But that does not mean they turn off their professional antennae when purchasing from you. Just ask Amazon.com how Texas identified them for audit a few years ago. A sharp auditor drove past their warehouse one day and recalled that he wasn’t charged sales tax on his last purchase from the online retailer. He checked to see if Amazon was registered to collect in the state. They weren’t. An audit was conducted and Amazon was subsequently assessed $269 million in tax, interest and penalties for untaxed online sales in Texas.
Not remitting use tax. Companies that file sales tax without filing use tax paint themselves with a large target. As tax advisors, nothing makes us cringe more than reviewing a company’s sales & use tax returns and seeing no use tax being remitted on taxable purchases. States can and will specifically search for businesses that are not remitting use tax. In most cases, it is a clear sign that something is amiss and there’s potential for underpayment of tax.
High net sales. High sales volumes can harbor high volumes of errors and omissions. Hence, a successful and growing business can be fertile ground for an audit. With the complexities of the sales tax law and various tax rates that can be charged within a state on specific products and services, even the slightest rate miscalculation or taxability error, can lead to large assessments.
Exempt items. Companies that purchase or sell a lot of exempt items are another happy hunting ground for auditors, as there is ample room for misinterpretation, error, and fraud around what is exempt and what is not. After use tax not being reported on returns, the next thing that makes tax advisors cringe is seeing a business lack sufficient resale or exemption certificates to document nontaxable sales. This can be such a major issue during audits that we typically advise our clients to collect this documentation from all their customers, even in states where they may not be currently filing sales tax returns. You never know what the future might bring.
Marketplace Fairness Act
In early May, the U.S. Senate passed the Marketplace Fairness Act of 2013, a bill that would authorize a qualifying state to require remote sellers to collect sales tax on all taxable remote sales sourced to the state. The 22 states that are full members of the Streamlined Sales and Use Tax Agreement (SST) would automati- cally be granted this authority, while other states would be required to enact new tax laws meeting the minimum simplification requirements included in the bill. The Act defines a “remote sale” as any sales into a state, in which the seller would not legally be required to pay, collect or remit state or local sales & use taxes unless provided by this legislation. There is an exception for remote sellers with less than $1 million in total remote sales in the United States.
The Marketplace Fairness Act is the culmination of a ten year legislative struggle by the states to require out-of-state sellers, including internet retailers, catalog sellers and other businesses to collect sales tax on sales to customers in their states. Many supporters of this legislation argue that this will “level the playing field” for brick-and-mortar retailers by eliminating the “unfair” advantage internet retailers have by not collecting sales tax. Opponents of the legislation contend that it places an unreasonable compliance burden on small businesses who will have to potentially collect tax and file returns for 46 jurisdictions.
The legislation has been referred to the Judiciary Committee in the House of Representatives where it will face strong opposition from certain anti-tax members of the House. Even though Speaker Boehner has publicly come out against the bill, saying it would “put a big burden on some very small businesses,” the future of this bill remains uncertain. One thing in favor of the bill is considerable bipartisan support in the House, as there was in the Senate – a rarity in this administration. While it may be unlikely that the Marketplace Fairness Act is passed or even voted on in the House over the next few months, the legislation has gained serious momentum and will undoubtedly be reintroduced in future sessions.
Legislation was recently enacted in Florida providing a sales & use tax exemption for industrial machinery and equipment purchased by a manufacturing business that is used at a fixed location within Florida for the manufacture, processing, compounding, or production of items of tangible personal property for sale.
Strangely enough, this legislation is not effective until April 30,2014 and will be repealed after three years. “Industrial machinery and equipment” means tangible personal property or other property that has a depreciable life of three years or more, and that is used as an integral part in the manufacturing, processing, compounding, or production of tangible personal property for sale. If your business is planning to upgrade machinery and equipment used in manufacturing, and can put off the purchase until next May, then you can take advantage of a 6 – 7.5% discount on the purchase, depending on where your business is located in the state.
A number of states aren’t waiting for Congress to pass legislation authorizing the taxation of remote sales and are passing legislation expanding their nexus provisions for sales & use tax purposes.
Kansas, Minnesota and Maine have all passed “click-through” nexus legislation this year whereby an out-of-state retailer is presumed to have nexus in the state if they have an agreement with a resident of the state, under which the resident (for a commission or other consideration) directly or indirectly refers potential customers through a link on their website or otherwise, to the retailer’s website. This is also commonly referred to as the Amazon Tax after New York and a number other states passed legislation targeting Amazon.com and other online retailers who have (or had) similar agreements with in-state affiliates who referred customers to their websites.
Additionally, West Virginia, Kansas and Maine have enacted “affiliate” nexus legislation this year as well. Affiliate nexus is broader than “click-through” nexus and not limited to online activity. Under affiliate nexus, an out-of-state retailer is presumed to have nexus in the state if a person or affiliate performs certain activities or services for the retailer in the state. This can include soliciting sales, providing services to the retailer’s customers or operating a warehouse used by the retailer.