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FOLLOW UP ON LICENSING AND SALES TAX
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Ken,
A follow up on your November 28 and December 5, 2016 articles about multi state licensing and sales tax.
Thanks for your informed answer regarding licensing and doing business in multiple states. As always there is plenty of misinformation out there. Each State is unique and has its own licensing rules and regulations, what works in one state doesn't necessarily work in another state. Ken's firm is a great resource for companies that want to "keep it legal" in multiple states.
Licensing issues aside, any company doing business in a new state should also consider sales tax implications. Just as licensing rules and regulations differ from state to state, so do sales and use tax codes. I am not saying that you shouldn't do business in a new state, just that you should know what to collect, when to collect, how to collect, and when, where, and how to pay. While many tax practitioners are well versed in the sales and use tax codes in their own states, they may not have a good knowledge of tax codes in other states. Add to this the fact that many don't know what Alarm companies do (you are a hybrid of contractor, communications provider, retailer, and other types of entity… or not) you may not find out down the road that you have a huge tax liability.
Many of you recall the member who asked if monitoring is taxable in Indiana. While it is in many states it is not in Indiana. I obtained a technical ruling from the state and published the results on Ken's blog. I was besieged by calls from dealers, and even CPA's who tried to explain that it is. It isn't.
When going into a new state your first call should be to Ken, the next should be to us. Angela Robertson of our firm is a CPA and a multi state tax expert with over 30 years of experience. We can keep you out of hot water.
Mitch Reitman
Reitman Consulting Group
Fort Worth, TX
817-698-9999
www.reitman.us
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RESPONSE
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Licensing and sales tax. Two complicated issues that are too often ignored, especially by the DYI operations doing business in many states. Even local companies need to be mindful when crossing state lines or doing a job for a buddy in a state in which they are not licensed.
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Another Comment - Business Not Sales Tax
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Ken,
I believe that you have provided an incorrect assessment of this case. I would urge you to review and revise your messaging to your email subscribers. Your assessment is causing confusion with our customer base, as well as our internal team.
The matter in this case is not sales tax levied against and collected from licensed alarm contractors by wholesale distributors in TN.
The matter at hand is Tennessee levies a tax on the privilege of conducting certain business activities in the state. The business tax is not a tax "on the sale as such", but rather is a tax on "the privilege of doing business". This privilege tax is calculated based on business gross receipts and is defined under TN Code Ann 67-4-701 to 730.
Therefore, alarm contractors licensed to do business in the state of Tennessee should review for any applicable business tax obligation they may have.
Thank you,
Derek Hagenhoff, CPA, Vice President
Security Equipment Supply, Inc
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RESPONSE
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I did include the full text of the case in the article as well as extensive quotes from significant paragraphs. I can see the confusion and I did equate the business tax with sales tax because the business tax was based on the sales. Looks and smells like a sales tax. Thanks for the correction.
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More Comments
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Ken
It has been "understood" and a generally accepted practice in Indiana, despite what the actual law states, that if installation is required for the use of the system then sales tax is not applicable.
So by pricing a Motion Detector Installed 100.00, would not require tax but separating the parts and labor would require tax on the parts. OK, now your article will prompt me actually look at the actual law so that we know. This is the way we sell our security systems and even point it out to the customer. We have been audited. Through a past audit we found we must charge tax on alarm monitoring and their category name for this is "sales lease". They did not try to recover anything from the past and were quite happy to have found the additional recurring revenue for their coffers. We have one customer that refuses to pay it....we just let that one slide.
sales tax snags that we face:
One of our distributors is across the border in Ohio. They ship to us almost daily and we do not pay sales tax but if we pick up at their store then we are obligated to pay the tax. Our distributor was more upset about this than we were when it happened the first time so now they fix it by checking shipped instead of pickup because they know we are reselling it.
If we as a contractor ask our distributor to drop ship and item into a state that we do not have a sales tax exemption for, we are obligated to pay sales tax. We drop shipped parts to a job out of state and had to pay California Sales Tax on our work materials.
Just received a PO last week from a corporate buyer on some surveillance cameras from a time and material quote that included sales tax. She included their sales tax exemption form but they don't qualify in this instance because they are not reselling them. If they provide the exemption falsely does it throw the burden of tax collection back on them?
We are supposed to pay sales tax on tools but this practice varies by distributor. We always pay sales tax on vehicles even though the vehicle is 100% consumed by the business. We have surrounding state agreements on sales tax. If we buy a vehicle out of state we don't pay tax at the dealership but pay our state's sales tax at the time of registration.
As far as harsh government response on poorly written codes, I think they will most likely seek corrective action going forward, the longer you have been in business the harder it is for them to go back on you. They freely accept whatever you send without question. What if you are charging sales tax when you should not? They still take it!
Ron
cei corp
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Ken,
With regards to the TN sales tax precedent, clearly this is a revenue fishing expedition by the DOR. Based on the logic of the decision, one could make a direct comparison to new car dealers, who do not "build" the car, but simply unwrap and prep it for sale to an end user. By that definition, the car dealer should be paying sales tax as well. While SES took the hit, companies like ADI are probably not far behind on the
Tennessee fishing tour. And we hope that other states don't discover the fishing hole as well.....
JJ Koehler
Illinois
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Ken
Wouldn't a competent attorney be able to successfully claim that the act of programming, wiring, monitoring, and/or combining products with labor constitter "further processing"? regardless, charging a reseller sales tax in any case sounds like double dipping to me.
AP
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RESPONSE
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Here is the risk regarding sales tax [and I am not a tax attorney or accountant]. I've heard [not been involved with] that a sales tax department [NY I think] determined that an business collected sales tax [some or all of the sales tax] from its subscribers incorrectly. The sales tax should not have been collected. The sales tax was turned over to the taxing authority, as it should have been. The taxing authority refused to pay any part of the sales tax back to the company and also required the company to reimburse its subscribers. So the company was penalized the amount it collected and paid in because it had to refund the tax without getting it back from the taxing authority.
I know I heard this, though it sounds more like a nightmare.
Only a tax attorney [and they are only relatively few of them] or accountant who specializes in the alarm industry [even fewer of them] would be qualifed to deal with the taxing authority. My original take on this was call Mitch Reitman. Sound advice.
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