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.

tax

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.

Sales + Use Tax: E-Commerce Happened

There are more than 10,000 local taxing jurisdictions in the United States. Not to mention, the tax rules in each of these jurisdictions can be different (ugh!). So bottom-line, the tax rules surrounding e-commerce are too complex to cover within the context of a blog. However, we can make you aware of some of the issues surrounding sales and use tax in e-commerce.

Nexus: Brick + Mortar to E-commerce

Let’s be honest, the tax system is old. Back in the day, most sales took place under the brick and mortar business model; customers came to you to purchase tangible goods (we’re talking about goods you could physically touch). Every sale was taxable and only one local (county, city) jurisdiction applied; unless an exemption was applicable.

When e-commerce happened there were concepts like virtual, intangible, etc. that weren’t defined by the tax rules. In addition, determining nexus became more complex. As a result, we began to see a marketplace in which not all sales were taxable.

So, what changed?

The customer’s shopping habits changed. Now, customers can (and a lot of them do) shop online. Not all of the online sales transactions are even taxable. It it all depends on nexus and the rules aren’t even the same everywhere.

Speaking of selling online… if you use a fulfillment agency (like Amazon), ownership is the key to determining nexus. If you retain the ownership of your goods while they are stored in the fulfillment warehouse, you have created nexus in the taxing jurisdiction in which the warehouse is located. If the fulfillment agency purchases the goods from you, the transaction does not create nexus in the taxing jurisdiction in which the warehouse is located.

Intangibles

How goods are delivered changed. Now, goods have become intangible (those are goods you can’t physically touch but still have value) such as cloud-based software, mobile applications and online paid content (we’re talking newspapers and magazines delivered online).

Thinking back a few years, customers bought software off the shelf at the store or had their newspapers or magazines delivered to their homes. These were both tangible goods (and the tax rules knew how to handle that). Now, customers download software from the cloud or view their newspapers or magazines online. So depending on where you have nexus, those rules apply (and yep, they aren’t the same everywhere).

Virtual Employees

Where our employees could work from changed. Now, having virtual employees is easier than ever. But this complicates your responsibility to collect sales and use taxes because those virtual employees create nexus.

Moral of the Story…

There are plenty of other considerations when it comes to e-commerce because (in case you hadn’t guessed), the sales and use tax rules are far from straightforward (in many cases). That’s why we recommend having a sales and use tax expert on your side (and there are some online solutions that can help too). Don’t forget, we have experts who are ready to help your business comply.

Kickstarter and Its Tax Implications

Need funding to get your idea off the ground? Turning your idea into a Kickstarter project just might be the ticket to getting the funding you need. Just don’t forget about the tax implications of using a fundraising platform such as Kickstarter.

Income Tax

Generally speaking, the funds received through a fundraising platform are reportable as revenue for income tax purposes. That makes sense, right? You’re getting money and most money is taxable.

Sales + Use Tax

If you’re thinking about offering a gift for a contribution (maybe it is the product you are trying to fund), you might create a sales or use tax obligation.

Can’t remember what the difference between sales and use tax is? Click here to find out.

While sales tax typically applies to the sale of goods or select services, use tax typically applies to gifts. So if you’re offering a gift, you may need to pay use tax to the appropriate state. The use tax is generally calculated based on the cost to produce the product, not the retail price.

What’s with typically and generally? Remember, your responsibility to remit sales and use tax depends on whether or not you have created nexus. Doesn’t ring a bell? Click here to find out more.

Let’s take a look at an example. Suppose you live in North Dakota and are doing a Kickstarter project for a new granola bar. Individuals contributing $50 to your project will receive five granola bars, because you’re nice like that. You will be selling the granola bars for $4/bar (retail), however, they cost you $2 to produce. When you gift the granola bars (meaning you take them out of your inventory at $2/bar), you are on the hook to pay use tax to the State of North Dakota in the amount of $2 times the applicable use tax rate.

What if the individual contributing is in Iowa? North Dakota tax still applies.

The Bottom Line

Taxes aren’t easy. If you are thinking about starting a Kickstarter project (or another similar fundraising platform), consider speaking to your tax professionals before you start your project. And remember, you might need both an income tax expert and state and local tax (SALT) expert in your corner. If you don’t have them, we’ve got them and they love this stuff.

 

 

State and local tax issues when buying or selling a business

You’ve always dreamed of owning a business. Now you’ve found the perfect one to purchase. You ask all the questions you can think of, come to an agreement on price and now you’re ready to go, right?

One major thing that sometimes gets overlooked is something called “successor liability.” This is the idea that when you buy a business, or the assets of a business, you generally also inherit all the liabilities associated with that business or the assets.

Some of these liabilities are pretty easy to figure out, but others may be hidden and difficult to know about or quantify. For instance, you can be audited for periods before your ownership and you can be assessed for sales or other taxes owed by the last owner.

Don’t believe us? Here are some common examples of successor liability discovered after the purchase of a business:

So what are some issues that could create tax exposures for you and your new company?

  • Company had the duty to file but failed to do so
  • The return was filed, but tax was not remitted
  • Company failed to pay use tax
  • Company did not have all the correct exemption certificates
  • Local taxes were ignored

So what can you do to reduce your risk when purchasing a business? Perform the proper due diligence. Due diligence can take a number of different forms, but generally includes reviews of the following:

  • Is the seller filing in the states where it has a duty to?
  • Are the returns accurately and timely?
  • Are taxability decisions correct?
  • Is the proper tax rate being applied?
  • Are exemption certificates accurate and up-to-date?
  • Has the seller been audited or received inquiries from any state?

Hiring a professional to assist you with a due diligence study can help you properly assess the potential liabilities and arrive at a more informed decision. Plus, it will hopefully save you some headaches later on.

But due diligence doesn’t just apply to buying a business. Let’s say you’ve finally made it to retirement and want to sell your business. Performing a due diligence study can help you be sure you have handled all these tax issues correctly and nothing will pop up unexpectedly that may scare away a potential buyer.

No matter what side you’re on, a little additional work upfront could potentially prevent some difficult, timely and expensive mistakes later.

Sales Tax 101: Sales Tax versus Use Tax

(We are assuming your business operations are in North Dakota therefore specific examples within this blog may be different based on the tax regulations in your state.)

We are sure you have heard of both sales tax and use tax. But, do you know how they’re different?

SALES TAX is typically imposed on the sales price of a good or service (if taxable) at the time of the sale. The purchaser pays the sales tax and the seller remits the sales tax. In addition, sales tax only applies to retail transactions; wholesale transactions are purchased tax exempt. This is the type of tax most of you are acquainted with already.

USE TAX, on the other hand, is typically imposed on the use or consumption of a good or service (if taxable). The purchaser pays and remits the sales tax.

Here are a few scenarios to help explain this further (note, these are just examples, not an all-inclusive listing). You’re welcome.

Scenario One: If you purchase an item for wholesale (meaning you purchased it tax exempt) and use it personally or within your business operations.

Generally, the end user of the item is responsible for paying tax. The definition of an end user is not all that simple (but then again, when is tax ever simple?). For example, let’s say you’re in the business of selling flooring and your customers can purchase the flooring in one of two ways:

  1. The customer will purchase the flooring only.
  2. The customer will purchase the flooring and have you install the flooring.

In both cases, you, as the retailer, purchase the flooring at wholesale. The end user in purchase option one is simple, your customer. Therefore, your invoice to the customer would include the sales price of the flooring and itemized line for sales tax. In purchase option two, you are the end user. Now we know what you’re thinking. My customer is getting the flooring not me. However, once you put on the “contractor hat” and are installing real property (that’s not always simple to determine either), you become the end user and you must pay the tax.

So how does that work?

  1. Calculate the tax on the materials that were purchased tax exempt, like the flooring and used in the installation. Remember to calculate the sales tax using the tax rates for the jurisdiction in which you used the materials as opposed to where you received the material (these could be the same).
  2.  Include the use tax on your sales tax return (there is even a line for the state portion on the return; it’s been there a long time).
  3. Invoice your customer for the total price of the flooring installed. Do not include an itemized line for sales or use tax. Make sure you specifically denote that it was installed on the invoice (this will be handy in the case of a sales tax audit).

Want another example? Let’s say you sell pens in your retail store (you’re the owner). The pens are generally sold to your customers so you charge sales tax at the point of sale. However, today your pen broke so you run over to the aisle that houses the pens and grab one. You let accounting know that you took a pen for business use (because if it were taken for personal use, that would need to be accounted for differently). Accounting does an inventory adjustment to decrease the inventory and increase the office supplies expense for the cost of the pen. You’re good to go, right? Nope. Remember that you need to account for, and pay the use tax, on the pen.

Scenario Two: If you use an item in a tax jurisdiction that is higher than the tax jurisdiction in which you purchased the item.

You guessed it … you need to pay the difference.

However, it works both ways. If you use the item in a tax jurisdiction that is lower, you can request a refund from the state. For example, your business is in Fargo, North Dakota which has a tax rate of 7.50%. You purchase a piece of equipment from a dealer in Moorhead, Minnesota which has a tax rate of 6.875% and bring it back to Fargo, North Dakota to be used. You would be responsible to pay and remit use tax in the amount of 0.625% of the purchase price. Don’t forget that in North Dakota there a local maximum tax rates. For more information, check out our blog.

So what’s your takeaway? Often, sales and use tax are thought to be the same thing. They’re not. Taxable transactions will always include either sales tax or use tax, but never both.

Confused much? Don’t worry. Sales and use tax is not a simple matter. We have full-time people that are SALT (State and Local Tax) experts. It’s what they deal with day in and day out. There are also great resources out there as well. For instance, you can check out your state’s website for guidelines and publications. As always if you have questions, we would love to help.

What You Want to Know: Sales & Use Tax

We want to give you a better experience, where you feel connected to your financial journey and confident that you’re making the best decisions for your business. As part of this, we’ll feature blog posts on frequently asked questions. No question is a dumb question, so if you want to learn more about something, just ASK.

You started your business with a dream. Now you’ve created a product people love and they want to buy it. As you get ready to sell, the first thing on your mind is sales tax right?

Don’t worry, we’re here to help. While it might not be as sexy as creating or selling your product, sales tax is important … and it can cost you dearly if you don’t pay attention to it.

First a few definitions …

NEXUS = a responsibility to collect tax

Typically, nexus in a state occurs if you:

  • Own or rent property in the state
  • Have employees including salespeople or independent contractors in the state
  • Employees make deliveries
  • File an income tax return in the state

Sales tax

A tax imposed by your friends at the government on the sale of goods and services. Sales tax is typically levied (collected) at the point of sale (when you purchase the product or service). The sales tax is collected by the business and then passed on to the government. A business must charge sales tax if it has nexus in that particular area (hence why we explained nexus first).

Use tax

To correct the price advantage out of state retailers have over retailers who have to collect sales tax, there’s a little thing called use tax. This is also a tax imposed by your friends at the government and is assessed at the same rate as sales tax. So how are they different? Well use tax is applied not when a product or service is sold, but after the sale. In other words, tax was not paid on the initial purchase, so instead it is paid to “use” the product.

Exemption Certificates

Some customers may claim to be treated as exempt (off the hook) from paying taxes. However, you should never take them at their word. Rather, always treat them as taxable until you are provided an exemption certificate.

As a rule of thumb, update your exemption certificates every three years.

We now further convolute this by saying that there are different types of exempt organizations (see this list) and not every item is subject to tax as there are different tax rules in every state. So (you guessed it) it’s best to work with your accountant when it comes to exempt organizations and items, as well as sales tax in general.

So how do you know when sales and use taxes are applied and when they’re not?

The answer is a little less than simple. But here’s the basic gist:

You should consider all sales subject to tax unless:

  • You do not have a responsibility to collect tax (cough nexus cough) in the state of delivery
  • Purchaser presents a valid exemption certificate.
  • Item is exempt from tax at point of delivery.

Use tax applies to all taxable purchases including:

  • Office equipment and supplies
  • Paper
  • Staples
  • Computers
  • Pens
  • Office furniture

Do you really need to be concerned?

Sales and use tax rules are constantly evolving and growing more complicated. This lovely complexity makes it vital for companies of all sizes to understand their environments so they’re in compliance with tax obligations.

Here’s just one example. Certain activities, such as selling a product over the Internet, or advertising through an online marketing company, can inadvertently establish nexus in a state, making you subject to that state’s tax laws. What does that mean for you? Well, if you have unknowingly established nexus, you can face responsibility for back sales tax, as well as super fun things like penalties and interest.

So yeah, you should probably pay attention to sales and use tax. The best way is to work with a trusted accountant who can help you see where you’ve established nexus, where you might potentially have issues, and help you track your tax obligations.