Surprise!!--New York City Raises Sales Tax Rate

Flash!! Surprise--New York City has been given permission to raise it's city sales tax rate to 4.50% from 4.0%.  That is a 12.50% rate increase.  In addition to this change at the city level, the state has now repealed the sales tax exemption on clothes costing over $110 and now subjects the transmission and distribution fees paid for electricity and natural gas to the full New York City Rate.  I apologize for the sarcasm but it comes as no surprise that New York City or any other taxing jurisdiction for that matter will be increasing its tax rate and expanding the tax base to make up the short fall in revenue.  For businesses these costs just get passed on to customers in the form of higher prices.  For consumers, these additional taxes is just lost purchasing power.  I call it "taxflation"-the loss of purchasing power due to increases in transaction based taxes.  In New York City, your purchasing power just decreased by 12.5%.  That's $5.00 on every $1,000 of purchases you make in New York City.  It may not sound like much, but over time and in the aggregate, it amounts to millions of dollars of income that was diverted from actual consumption into taxes. These changes are effective August 1, 2009.

For a business that does not have good tax collection systems in place, this will also make tax assessments 12.5% higher in the future if they fail to collect and remit the proper amount due. 

New York is becoming very aggressive on audits and in their rulings.  As reported last week, New York now has a provision that requires franchisers to report the income of franchisees. This tactic is going to be used to desk audit the sales tax returns of every fast food restaurant in the state without actually having to leave the office.  I'm sure that these audits will be fair and accurate.

Get used to it folks, techniques like these and many others not yet discovered is the new sales tax frontier.  Once these provisions are in place, they are not going away. 

Your thoughts? 

New York Franchisors Beware--New Reporting is required

New York A.B. 157 became effective April 7, 2009 and with it came a new level of reporting for franchisors with franchisees in New York.  Under the new provisions, any franchisor with at least one franchisee in New York who is required to file sales tax returns, MUST, file file an annual information report showing the sales made by each franchisee.  The purpose of these filings is obvious.  The state wants to use franchisor information to verify the sales tax information reported by franchsisees.  This will surely lead to an uptick of sales tax audits against restaurants and service franchisees that are taxable in New York.  It also adds a large amount of compliance on the franchisor.  The reports must include the income from the franchisee and the sales made by the franchisee and reported to the franchisor. 

Just to make sure that franchisors abide by this new rule, the state is imposing some penalties ranging from $500 to $10,000 in extreme cases. 

The first return is due September 30, 2009 which covers period March 1, 2009 to August 31, 2009. The next return is due March 20, 2010 which will cover the period September 1, 2009 to February 28, 2010.  From thereon, returns are due March 20 of each year. 

This type of legislation has huge implications for franchisees and for franchisors.  With this type of information, it will be easy for desk audits to be performed on every fast food restaurant in New York state and I can see the assessment notices flying out of the New York Department of Taxation and Finance. I would also expect more states to add this burden to franchisors. 

Comments?  let me know

Why Are Sales Tax Audits Taking so Long??

It is no surprise that states are looking for tax revenue from every available source.  But lately, I've spoken to several clients and non-clients about the inability for states to close sales tax audits.  I spoke with a friend who has been under audit by CA for over 3 years and the auditor has not identified any new liability since the first week she was in.  She keeps coming out and looking at new documents and keeps submitting new data requests and fails to identify anything new. Then she disappears for a few month.  I've heard similar stories about Washington state and New York auditor. 

At this point in time, I would think the auditors would be focused on covering the most ground as possible and not trying to make each audit a precise and scientific exercise.  When I was the manager of sales tax audits for the Missouri DOR, it seemed like the 80/20 rule would apply.  That is, auditors would usually identify 80% of the deficiency in the first 20% of their time with the client.  My beef then and now was why waste more time looking for the additional 20% of the liability.  No audit will ever find all of the liability anyway so why not get in and get out as fast as you can and move on to another audit?

I'd love to hear about any audit stories you have or if you are having similar problems.  In this day and age, audit managers should be focused on auditing strategic companies and finding ways to be as efficient as possible. 

Let me know your thoughts

Are you Paralyzed by the Sales Tax Issues Facing Your Business?

As we talk to companies about the sales and use tax issues they are confronting, there seems to be a disturbing theme developing from our discussions.  Few of the folks we meet are bold enough to say there is nothing wrong with the sales and use tax systems or processes they have in place.  Many folks openly express the anxiety they have with knowing there are sales tax problems and the anxiety they have with not knowing there are sales tax problems.  The anxiety does not seem to be the knowledge or suspicion of a sales tax problem, the anxiety seems rooted in their inability to confront the problem and resolve the problem. 

Sales are off, cash is short, resources are stretched, budgets are being squeezed,...sound familiar? With these problems, how can a business possibly consider devoting any time and effort to resolving sales tax problems?  After all, most of the problems have been around for years and no one has bothered you yet.  Just lay low and keep your fingers crossed.

That's not much of a strategy, especially when states are facing a $248 billion shortfall for this year alone and they are looking for every non-registered business they can find to make up that short fall.  Let's review some of the sales tax basics that could impact your strategy:

1. There is usually no statute of limitations related to un-filed sales tax returns
2.. Penalties can be 25% to 50% of taxes due and interest on underpayments is about 10% a year
3. Many states have corporate officer or responsible party personal liability that could apply if the business doesn't have the money.
4. States are ramping up audit resources and actively seeking unregistered businesses
5. Information sharing arrangements between states makes it harder for multistate businesses to stay under the radar.
6. Being pro-active in approaching the states or in understanding and correcting your weaknesses may save significant time and money when compared to being audited by a state.

When it comes to increasing sales tax revenue, states have businesses in their bulls-eye.  Their goal is to extract as much uncollected sales tax, penalty and interest from you as possible given the laws of their state.  In some cases, the auditors are stretching the law to meet their needs. 

Now is no time to be paralyzed concerning your businesses exposure to sales tax risks.  In some cases, you may actually find out you are over paying tax and could seek a refund.  If you have questions, get some help.  If you have a question about what you should do, give me a call.  Its free!!  877-893-5304 ext. 702

State Budget Woes to get Even Worse

Today's Wall Street Journall reports that states are facing an aggregate revenue shortfall of over $230 Billion from 2009 through 2011.  California, New York, Illinois, are all facing multi-billion dollar budget shortfalls for this year alone.  In this consumer driven economy sales tax revenues are down considerably and the personal and corporate income tax base is eroding quickly as profits languish and unemployment continues.   Compound the revenue shortfall with increased costs of services and decline in investment income, the states are running out of options for balancing their budgets.

So what does this mean to you as a business owner or manager?  A lot!!  It seem logical to me that if states are running short of sales tax revenue then they need to bridge that gap.  This will be through increasing tax rates, expanding the tax base, increasing enforcement, or all three.  I'm thinking all three
. 
Increasing enforcement may be the quickest and easiest thing for states to do.  This can include increases use of nexus questionnaires and an increase in audit activity.  For businesses that are doing things correctly these activities may pose no problem to you.  If your business is not in full compliance you should be concerned.  It only takes one  sales tax audit to inflict significant financial damage to your business.  Being proactive is essential. In many cases, states also have corporate officer liability and successor liability so you really can't hide completely from the sales tax problems that are confronting your business. 

Tax rate increases are never popular and will likely be the last resort.  Expanding the tax base can include removing or sunsetting sales tax exemptions or expanding the tax base to include more services.  This is already happening with regard to taxing digital products and expanding the tax on other technology products and services.  Another way to expand the tax base will be fo press Congress to require remote retailers (on-line and catalog) companies to collect tax in the destination states.  Legislation like this has bounced around for decades  but has usually not taken hold.  The time may be right for this now.

As I read articles like the one in the WSJ it causes me concern for the small businesses that could be ruined when they are audited by a state. Don't ignore the sales  tax issues your company may have.  Deal with them while you can still manage some of the outcome. 

Wisconsin to Tax Digital Goods

Effective October 1, 2009, Wisconsin sales and use tax will be imposed on the sale and purchase of digital goods.  The tax is imposed on:

    digital audio works
    digital books
    greeting cards
    finished artwork
    periodicals
    electronic games
    pre-recorded music
    pre-recorded books
    news programs
    ring tones

This law seems pretty consistent with the Mississippi rules on taxation of digital information which became effective earlier this year.  At this point, there are only a handful of states that tax digital information but there does certainly appear to be some momentum in the states expanding their tax base to include these items.

As with other areas of electronic commerce, the actual amount of tax collected by this law will probably fall short of the estimates provided to the legislature.  Many of the companies providing this digital content probably don't have nexus in Wisconsin. That pushes the compliance burden to the individual consumer.  We all know the degree of use tax compliance by individuals is nearly zero.

If you are worried about this issue, load up on your I-tunes now while you can save sales tax. 

Note to Small Businesses: State Auditors are Looking for You

Since the first of the year, our firm has encountered many significant sales tax deficiency and non-compliance situations involving small multistate businesses.  These have been technology companies, retailers, and service providers.  The scenarios are somewhat similar.  Each business has been operating for a number of years (7 to 10 years), has taxable sales of property or services and clearly has nexus in multiple states (10 to 30 states), and is registered for sales in just a couple of states.  From our discussions each of these businesses agree that there is significant risk of tax liability to the company and to themselves as corporate officers, that the problem will only grow unless they do something about it, and each is concerned about what would happen if they were ever caught.

The other troubling similarity between these businesses is that none of them intend to do anything about the problem.  We have worked up some rough tax liability numbers, made some suggestions to mitigate liabilities by verifying non-taxable customers, and trying to work through some of the state amnesty programs.  None had an interest in these alternatives.  It seemed that our efforts to help them deal with the problem only solidified their resolve to pretend that they would never be caught or that they would somehow attempt to negotiate with a state if they were ever caught.

As a small business owner myself, I can clearly understand the resistance of paying sales tax out of my pocket to satisfy liabilities that may rightly belong with my customers or may have already been paid by my customers through use tax accruals.  However, as a fundamental risk management technique I would also recognize that taking some steps to slowly resolve the issues would be better than doing nothing. 

The forcast for state tax revenue is bleak for the next several years.  As such, the pressure for state auditors and state nexus units to identify unregistered taxpayers will increase.  In the situations above it would not be unexpected for the state to audit a company for the past 5, 7, or even 10 years given the nature of their business activities.  Add on penalty and interest and you have a significant situation for a small company.  Then multiply this by 15 or 20 states. 

Sales tax is as much and art as it is a science.  There are risks worth taking and risks to avoid.  The scenarios outlined above are not unique to "small businesses".  We see the same things at mid-sized and large companies also. 

If you are a small or mid-sized business and you operate in more than one state, you need to take very seriously your responsibility for whatever multistate sales tax issues you may have.  This might be as simple as just collecting valid resale exemption certificates from customers.  Without an independent assessment of your company's sales tax responsibility, you may never know what options there are for you to proactively manage your risk. 

Don't let the states be the first ones to tell you that your business has a multistate salse tax responsibility.

No More Sales Tax Free Internet Sales...Maybe!!

About a year ago as the economy began it slow decent to levels we never thought would be reached, I predicted that the perfect storm of economic events would converge to push Congress to modify federal statutes so that states could begin taxing remote retailers who don't have a physical presence in that state.  Over the weekend, there was news that such an event could actually happen. 

Apparently this week some brave Congressmen will introduce (again) legislation that could give states more latitude in forcing non-resident retailers to collect the destination state's sales tax if certain conditions are met.  From the press releases I read, it sounded like it was focused on Internet sales, but in reality it would have to apply to catalog sales as well.  It would also likely apply to companies who may have some type of physical connection with a state but, for whatever reason, the company has concluded that nexus would not be created. 

Now, just because Congress passes a law and the states adopt it, that does not mean the every Internet retailer is going to automatically register and begin collecting sales tax on day one.  There will be plenty of companies, despite what the law may say, that will ignore the rules and operate on the fringe. 

On the opposing side of the states, is the Direct Marketing Association (DMA) which has put up a great fight for the past 30 years.  Over that time, the DMA has stopped many attempts by Congress to do this very thing.  The entire Streamlines Sales Tax Project was designed to accomplish this also.  Depending on what Congress does, it could renew the SSTP efforts or just put it out of its misery once and for good.  This effort has been underway for 10 years or more and seems to have stalled out. 

I'll keep updating the blog with informaiton as it becomes available.  Let me inow if you hear something or have any questions.

More Amnesty Programs On the Way

States need cash fast and there are plenty of taxpayers who owe it to them.  During the past month several states have announced tax amnesty program.  From the info I have, it looks like Alabama, Arizona, New Jersey, Connecticut, and soon Maryland will all have some type of amnesty program. 

I'm not surprised by this movement at all.  Amnesty programs can be effective at infusing cash into the system and getting new taxpayers enrolled.  After amnesty programs expire, the states usually have more restrictive use of voluntary disclosure agreements and other non-amnesty type of voluntary payments.  Most amnesty programs don't provide for payment plans and the look back can vary from 3 years to unlimited. If an amnesty program is too restrictive it may keep some taxpayers away if they perceive they cannot afford the liability. 

During these tight economic times, the last thing your business can afford it a surprise hit from one or more departments of revenue.  If you even suspect you have a prior liability you should evaluate the amnesty programs or voluntary disclosure.  The more uncertain you are about your historical liability the more you should consider the voluntary disclosure program.  Most states limit the look back to 3 years and will abate all the penalty.  Under audit, states are going back 5 to 10 years with limited waiver of penalty.  Don't take the risk on letting an auditor determine your liability.  Be proactive and participate in the amnesty programs or the voluntary disclosure programs.

Mississippi Taxes Digital Products

Effective July 1, 2009 Mississippi sales tax will be due on the sale and use of "specified digital products" when sold or consumed in the state of Mississippi.  House Bill 1461 has been sent to the Governor for signature.  This bill defines "specified digital products" as electronically transferred digital audio-visual works, digital audio products, and digital books. 

Under these definitions, the sale of music, ringtones, movies, and e-books are now taxed as other sales of tangible personal property. The law does provide for a 'resale' exemption so long as the purchaser provides the seller with a valid resale certificate. 

For the most part, this tax may be more of a use tax issue since many of the companies that provide this type of service do not have nexus outside their home state.  It will also mostly apply to individuals who tend to purchase most of these digital services.

It seems to me that this is a noble attempt by Mississippi to expand its tax base.  I would also suspect that more states will adopt this methodology.  Unless it is possible to establish between nexus between the the seller and the state of Mississippi so that the collection of tax can be consolidated, it may be tough to generate any significant revenue from this new law.

Your thoughts?