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Sunday, October 5, 2014

Sales and Use Tax: An Integral Part of Any Corporate Tax Function


What is Sales Tax and What is Use Tax?

Sales tax is a tax on the sale at retail of tangible personal property and certain enumerated services. Leases generally fall within the definition of taxable sales. Use tax is a tax on the storing, using, consuming and sometimes distributing tangible personal property and certain services. Generally, you will be subject to the use tax in the state where the use occurs.

Who’s Affected by Sales/Use Tax?

All companies are affected by sales and use tax. Whether a company is selling taxable goods and/or services, or is purchasing goods and/or services for use in its business, sales and/or use tax will add to the expense of doing business in the form of higher product costs and costs associated with the administrative burden of complying with the various state and local sales and use tax laws.

Companies particularly affected by sales/use tax may include:

  • Retail Companies: Companies selling at retail in multiple states generally have complicated compliance systems and the daunting task of monitoring tax law and tax rate changes.
  • Manufacturers and R&D Companies: Various states offer exemptions for companies performing these activities. Proper documentation is essential.
  • Construction Companies: Sales tax rules for construction contracts vary by state and by type of contract.
  • Companies looking for an “Exit”: Companies which anticipate being sold to another company or which will go through the IPO process.
  • Expanding Businesses: Companies which add product lines and/or begin selling into additional states (e.g., via an acquisition).
  • Businesses Under Audit

What are the Benefits of Properly Administering Sales/Use Tax?

Benefits

  • “No Surprises!” When a company properly accounts for sales/use taxes, it can accurately track its cost associated with such taxes, and will avoid costly assessments when audited by a jurisdictional taxing authority.
  • By knowing what its sales/use tax expenses are, a company can proactively pursue planning strategies to minimize or, in some cases, eliminate the paying of sales/use taxes.
  • “Found Money!” By proactively reviewing its sales/use tax systems and taxing schemes, a company can often times identify areas of overpayments to vendors or taxing authorities and file claims for refunds to recover such moneys.

Consequences

  • Unforeseen liabilities can pop up if a company has not been paying close attention to the sales/use tax function. These liabilities can wreak havoc for a company and prolong the “Exit Process,” either as a sale of the company or initiating an IPO. If these liabilities are large enough, they can cause the IPO process to come to a halt until such time as these liabilities are cleared.
  • A company can be subject to severe penalties and/or interest if audited by taxing authorities and additional taxes are determined to be due.
  • In extreme cases, company officers can be help personally liable for unpaid taxes, and be subject to fines and/or imprisonment.

What are the Triggers of an Audit?

  • There are certain events which can lead a company to being audited. Some of these events include:
  • When a company is sold to another company. Auditors focus in on whether ALL liabilities have been paid prior to the sale and, often times, will impose successor liability rules to ensure that the taxing authority receives previously unpaid liabilities.
  • When a company receives a questionnaire/survey from the State Department of Revenue (e.g., California State Board of Equalization). These are “fishing expeditions” by the taxing authorities to identify when a company may be avoiding its legal obligation to pay sales/use taxes. This type of questionnaire typically focuses on purchases from out-of-state vendors.
  • When other companies are audited. An auditor may identify a purchase from your company or a sale made to your company, on which taxes were not collected or paid and initiate on audit on your company as a result. These audit leads are contributing to an overall increase in audit activity.

Because of economic conditions, auditors are becoming increasingly more aggressive and looking at every issue and are more likely to impose penalties.

How do I know if I’m at Fault for not Paying Sales and Use Tax?

In all cases, a company is ultimately responsible for maintaining books and records to properly account for sales/use taxes. The person administering sales/use tax for the company should have detailed records on what taxes were paid and documentation (e.g., resale/exemption certificates) on hand to support any claimed exempt sales or purchases. To determine if sales/use tax is properly being administered, a review of the company’s processes and procedures should be made, which should include a review of the systems used in the process. Further, a self-audit is suggested to identify potential additional liabilities and all potential overpayments for which a claim for refund can be made.

What Specific Way Can Armanino Assist a Company with this Change?

Armanino can review your company’s products and services to determine what is subject to sales/use tax in the jurisdictions in which you conduct business. Additionally, we can help determine whether sales/use taxes have been appropriately paid to tax agencies or vendors, quantify any underpayment or overpayment and assist your company with clearing past liabilities or filing claims for refunds.

Finally, Armanino can guide your company through the state or local sales/use tax audit process. The assistance we provide includes performing a pre-audit review to determine risk areas or refund opportunities, working with the auditor to set up a statistical sampling methodology that does not allow the auditor to “over audit” and representing the client during the administrative appeal/refund process.

When you are a client of Armanino, you will benefit from our firm’s many years of multi-state sales and use tax experience. Our sales tax professionals include former state sales tax auditors that can help set up processes and procedures to comply with the various state and local tax rules. Additionally, Armanino can provide sales tax structuring assistance so that your company can minimize its overall sales tax burden.

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