SALT Shakeups

Questions and Quandaries about State and Local Taxes

 

If you are a multi-national company that sells all over the world or just an entity that sells in one state, SALT is on the table daily. Company financial offices must deal with state and local tax issues at every level from purchasing to accounts payable to the tax department itself. For nearly every company, major taxation categories include income tax, property taxes, and transaction taxes.

This article deals with the main components of transaction taxes: sales and use taxes.

If an entity transacts all of its business within the boundaries of one state, the state tax issues are not as complex as they are for companies that transact business in multiple states. It is rare, however, to find an entity that operates in only one state in this highly mobile society in which we find ourselves. If a company has salesmen, property, or sends catalogs into a state, that state may determine that the business has established "nexus", or representation, in that state. If nexus has been established, the state taxing authority will demand that the business collect sales tax on sales to customers located within that state.

The problem is that many companies learn they have established nexus when the state auditor shows up on-site to conduct an audit---not the best sequence of events. It behooves a company to determine its sales tax responsibilities before selling in a state. It can be quite difficult to request payment of a tax that was not collected at the time of the transaction.

Overpayment or underpayment of taxes on sales and purchases is equally troublesome to remediate. A proactive state and local sales tax audit can help. A proactive sales and use tax audit consists of reviewing the procedures for administrating and collecting the tax, an audit of a sample of transactions over the previous year, and training for the employees who are involved in the sales tax decisions process.

For example, a proactive audit revealed that one large company had been over-accruing use taxes at an average of $100,000 per month. A review of the company's procedures led to the discovery of a troublesome issue. We determined that a vocational program student working in the accounts payable department had been making sales tax decisions based on electronic Purchase Order form submissions. When the purchasing agents filled out the POs, they were checking a tax check box on the forms, yet that very box did not appear when the accounts payable workers viewed the forms on their screens. Due to the computer glitch and the fact there were simply too many invoices to ask about tax on each one, the student decided that it would be more prudent to accrue the tax than risk the penalties and interest that would result from tax underpayment.

Upon our recommendation, the company changed the system so that the sales tax box showed up on the accounts payable screen. We then conducted training for all employees who might encounter sales tax as a result of their job duties. The next year, a follow-up proactive audit found that the company experienced a 95 percent improvement in the tax determination process.

In another example, a company leased a printing press that was used solely to print materials for another organization. Despite paying a lot of money for this press, they never used it for printing their own internal documents. Due to the sales tax laws regarding manufacturing in the state of Texas, the business was exempt from paying tax on the lease of the printing press, yet they were unaware of this situation until a proactive audit determined that they had paid tens of thousands of dollars in sales tax that they, in fact, did not owe.

Use tax can be tricky, too. Companies need to be aware of the requirement to accrue and pay use tax on items purchased for their own use on which they did not pay sales tax. Many companies believe that the seller of the product or service knows the sales tax law and will add sales tax to the invoice if it is required. However, if a product is shipped across state lines, the seller may not be required collect the tax. In this case, the purchaser is then required to accrue the tax (called a use tax) and remit it to the state themselves. A proactive audit can help determine if a company has exposure in its use tax responsibilities. Yes, the tax would still be due, but the company will save by not having to pay penalties and interest if they remit the tax instead of an auditor discovering and assessing it.

Avoiding such quandaries and assuring sound solutions is just what preventative programs designed by SB&F are here to provide. As a start, we'd like to spend our own four to eight hours and take a look at your business. It will not cost you a thing. After our look, if we believe there is a way we can help, we will let you know how we can work together. Various structures can apply to your project, from fixed-fee contracts to, in some instances, contingency compensation that can reduce the fixed fee. Bottom line: we are confident we can identify savings though our audit and planning recommendations.

Finally, should a state audit put you in a sensitive position, you can count on SB&F for audit defense. We will discuss these situations more in a future article.

So, no matter the size of your company or the range of its revenues, making sure you pay no more tax than is due can be a big deal. Sales tax rates are at 8.25% in Texas and higher in other states, so they materially impact a company's financial condition. Before SALT issues shake up your business, give us a call. We have answers to your sales and use tax questions and want to create excellent solutions to your sales and use tax problems.

Douglas McDougal, CPA, is a new Tax Manager for Sanford, Baumeister, and Frazier PLLC, a Fort Worth-based accounting firm. Doug McDougal focuses on federal, state and local tax issues for businesses and individuals. With over 21 years of tax and accounting experience in government, industry and public accounting, he's worked in food, manufacturing, and energy industries both for corporations and for PricewaterhouseCoopers as a Tax Consulting Manager. He also served the Texas Comptroller of Public Accounts as an auditor and reviewer. A graduate of Texas A&M University in College Station, Texas, Mr. McDougal received his Bachelor of Business Administration in Accounting.