The Sales Tax Cap

It’s time for a facelift. Last summer, we posted a blog about the North Dakota sales tax cap, and to this date, we still get tons of views on it. What does this mean? It’s a hot topic that’s important to business owners! So, we decided to bring it front and center again so you can get all the info you need without having to dig too far (we’re nice like that).

If you’re doing business in the state of North Dakota, there’s some important tax issues you need to know about: local sales tax cap and minimum tax.

There are multiple cities and counties in North Dakota, which means there are multiple local sales tax jurisdictions that have a max amount of sales tax you are responsible to pay – or, in other words, the refund cap. However, it’s not the vendor’s responsibility to cap the sales tax on your purchase.

The good news? You can submit a claim for a refund with the State!

So, how does all this cap stuff even work? Let’s look at an example:

Gary is working on a project, and bought $10,000 worth of lumber. He had the lumber delivered right to the job site – which is located in Fargo. He received a bill from the vendor, with the total being $10,750. This included sales tax at a rate of 7.5%, which was properly imposed.

Material Cost    $10,000.00

            Sales Tax                 750.00     

            Total                 $10,750.00

Gary went ahead and paid the bill for $10,750. However, in this case, the sales tax on the purchase is in excess of the maximum tax. This means Gary should apply for a refund. But how is the sales tax more?

Well…

The Fargo sales tax rate – which is the 7.5% that was applied to the purchase – is made up of three components:

State of North Dakota   5.0%

            City of Fargo                2.0%

            Cass County                  0.5%

The maximum tax for the City of Fargo is $50, while $12.50 is the maximum tax for Cass County (the State itself doesn’t have a maximum tax). In other words, the sales tax only applies to the first $2,500 of your purchase. Let’s recalculate Gary’s bill using the tax cap:

Material Cost    $10,000.00   

            Sales Tax               562.50

            Total                 $10,562.50

Confused about where the $562.50 came from? State tax = $500 ($10,000*5.0%), City tax = $50 ($2,500*2.0%), and County tax = $12.50 ($2,500*0.5%).

This means that our good friend Gary is eligible for a refund of $187.50 from the State of North Dakota – and who doesn’t love getting money back?

So how does Gary go about getting his refund?

Easy as cake (which Gary could definitely indulge in with his refund money)!

  1. Visit https://www.nd.gov/tax/salesanduse/forms/
  2. Under “Other Forms” click on “Claim for Refund Local Sales and Use Tax Paid Beyond Maximum Tax
  3. Follow the instructions to complete and send back

A few other things to keep in mind with maximum tax include:

  • The refund claim must be postmarked no later than three years from the date of the invoice. (This means if you weren’t aware of the cap, you can look back three years and see if you have any claims to submit!)
  • You need to include with the form a copy of all invoices covered by the claim.
  • The refund claim only applies on properly imposed sales tax – which means the sales tax needs to be right in order to claim a refund from the state.
  • The refund claim applies to a single transaction, not an item on a transaction or total purchases for a month.
  • Not all cities and counties impose a maximum tax. The claim for refund form has a table which outlines the cities and counties that impose this tax.

If you still have questions, let us know. We have tax people who can help make taxes a little less… taxing.

Common Mistakes on the Sales & Use Tax Form

In our line of work, we have the privilege of working with numerous businesses. This exposure gives us insight into what’s working, what’s not working and what are common mistakes.

Recently, we have run into some confusion surrounding the preparation of sales and use tax returns (we know, this stuff can be confusing); specifically understanding the correct information to enter into the boxes.

The following example is specific to North Dakota, however the moral of the blog is applicable in all taxing jurisdictions.

The first step of a North Dakota return requires you to enter the information for the system in order to calculate the State portion of the sales and use tax. See below for a visual representation.

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Section 1: Sales Tax

Remember, these are the taxes imposed at the time of the sale.

Total sales: Your gross sales (taxable and nontaxable).

Nontaxable sales: The amount of your gross sales that is nontaxable.

Net taxable sales: The amount of your gross sales that is taxable (this is calculated for you based on the preceding information entered).

We have noted instances where businesses are only reporting their taxable sales in the total sales box (ignoring the nontaxable sales). While you still arrive at the correct sales tax amount, the report itself is not being prepared properly.

Let’s take a look at an example. You own a store that provides both retail (taxable) and wholesale (nontaxable; the customer is a reseller and you have their current exemption certificate on file). In December, your total sales were $10,000. Of that amount, $1,000 was purchased by wholesalers and $1,000 was sold to a MN customer. This means that this $2,000 is nontaxable sales. The remaining $8,000 in retail sales is your North Dakota net taxable sales.

Section 2: Use Tax

The next section relates to use tax. Remember, these are the taxes are imposed on the use or consumption.

Items subject to use tax: The amount subject to use tax.

In this scenario, we will say that your store purchased $100 worth of office supplies online. There was no sales tax charged at the time of the purchase. The office supplies are considered taxable in North Dakota; therefore you would need to report $100 as items subject to use tax. Although having no items subject to use tax is possible, we have noted instances where businesses overlook the use tax portion because they do not understand the concept of use tax.

Want more information on the difference between sales and use tax? Check out our blog on the topic here.

The moral of the story…

With over 10,000 different tax jurisdictions it would be impractical to cover each jurisdiction (which is why the example is specific to North Dakota). However, no matter the taxing jurisdiction, it is important to understand the components of the sales and use tax return to ensure you are reporting your numbers correctly. As always, if you have questions, our trained professionals understand (and enjoy!) this stuff, and are always ready to help you.

North Dakota’s Adoption of the Revised Uniform LLC Act: What It Means

Guest Blog by Wayne W. Carlson, Michael S. Raum & Elizabeth L. Alvine, Fredrikson & Byron

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The state of North Dakota recently adopted the Revised Uniform Limited Liability Company Act (RULLCA), which directly affects the law governing LLCs. Minnesota has already adopted this change. This is important as, over the last 15 years, LLCs have become the dominant form of business entity in the state of North Dakota.

As a reminder, LLC stands for limited liability company. It’s a form of business entity that combines the pass-through taxation generally found in a partnership with the limited liability of a corporation.

The RULLCA made some pretty substantial changes to the law governing LLC’s. Specifically, there are two points in particular that you need to take notice of:

First, RULLCA imposes a default management structure, which is equal among all members. What this means is that, unless they have an agreement to the contrary, all members of the LLC are given an equal voice in management, no matter their level of ownership interest. This is a distinct difference from the prior act, which called for voting rights distributed in proportion to ownership interest, similar to that of a corporation.

Second, RULLCA’s default rules require making interim distributions on an equal, per capita basis for all members. This means that, if an LLC had two members, it would distribute $100 50/50 between the two, regardless of how much capital each contributed, unless the LLC had an agreement to the contrary. Again, this is a distinct difference from the previous act, where interim distributions were made in proportion to the amount of capital contributed by each member.

So are you stuck with these default rules of RULLCA? Well, it depends on one thing. Does your business have an operating agreement? New LLCs which have operating agreements will be able to operate under almost any set of rules the owners choose.

If you don’t have an operating agreement, however, it’s a different story. This is a typical scenario for many LLCs formed without legal assistance and guidance. Without an operating agreement, RULLCA essentially becomes your operating agreement and now governs the management structure and interim distributions of your entity.

The moral of the story is two-fold. One, keep these rules in mind when forming an LLC or working with an LLC, especially if they don’t have an operating agreement. Second, there are a lot of DIY tools when you’re forming an entity. It’s important to have a trusted business advisor alongside you on this journey to help ensure you have the proper protections and safeguards in place.

Sales Tax 101: North Dakota Cap

Are you doing business in North Dakota? Have you ever heard of a local sales tax cap or maximum tax?

In North Dakota, there are numerous local sales tax jurisdictions (we’re talking cities and counties here) that have a maximum amount of sales tax you are responsible to pay (a.k.a. refund cap). However, it is not the responsibility of the vendor to cap the sales tax on your purchase. So now you’re probably thinking, that’s just great. Good news is, you are able to submit a claim for refund with the State!

So how does the cap work? Let’s use an example:

Gerald purchased $10,000 in lumber for his project and had it deliver to the jobsite (located in Fargo). When he received the bill from the vendor it totaled $10,750 which included sales tax in the amount of 7.5% (which was properly imposed).

Materials                     $10,000.00

Sales Tax                                750.00

Total                              $10,750.00

Gerald went ahead and paid the vendor $10,750. However, the sales tax on this purchase is in excess of the maximum tax so Gerald should apply for a refund. How so?

The Fargo sales tax rate of 7.5% is made up of three components:

State of North Dakota          5.0%

City of Fargo                            2.0%

Cass County                             0.5%

Total                                            7.5%

The maximum taxes are $50 and $12.50 for the City of Fargo and Cass County, respectively (there is no maximum tax for the State). In other words, sales tax only applies to the first $2,500 of your purchase. Let’s recalculate the bill using the cap:

Materials                     $10,000.00

Sales Tax                                562.50

Total                              $10,562.50

State $500 ($10,000 * 5.0%), City $50 ($2,500 * 2.0%), and County $12.50 ($2,500 * 0.5%) = $562.50

That means Gerald is eligible for a refund of $187.50 from the State of North Dakota.

Awesome right? But how does Gerald get his refund:

It’s easy as 1, 2, 3…

  1.  Log-on to https://www.nd.gov/tax/salesanduse/forms/
  2. Under Other Forms click on Claim for Refund Local Sales and Use Tax Paid Beyond Maximum Tax
  3. Complete and send the form as instructed.

Here are a few other notes on maximum tax:

  •  The claim for refund must be postmarked no later than three years from the date of the invoice. (That’s right, if you weren’t aware of the cap, you can go back three years and submit a claim now!)
  • Copies of all invoices covered by the claim must be included with the form.
  • The claim for refund only applies on properly imposed sales tax (that’s right the sales tax needs to be right to claim a refund from the State).
  • The claim for refund applies to a single transaction (not an item on a transaction or total purchases for a month).
  • Not all cities and counties impose a maximum tax. The claim for refund form includes a table which outlines the cities and counties that impose a maximum tax.

Still have questions? We have people. Let us help you.