Sales Tax Creates Very Costly Mess for Janitorial Services Company By Michael J. Fleming
Originally Published on Sales Tax Support in May of 2018
I received a call this week from a potential client that perfectly illustrates a number of the topics I want to cover in this blog. I have changed the states, the service provided and some of the facts, to protect those involved and to illustrate some of the dangers service providers and/or their customers face. I get calls like this all the time.
In our scenario we have a family run commercial janitorial services company. It is a successful local business that has been operating for years in the state of Georgia (GA). One of the owner’s sons approaches his father and he believes he can leverage their reputation and grow their business exponentially by aggressively marketing nationwide through the Internet and then subcontracting out the jobs to local companies. The idea was a big success and suddenly the company was growing leaps and bounds. Everybody was happy.
That is until one of their customers was audited by the state of Texas (TX). Texas is a state, along with at least 17 other states who tax all or some commercial janitorial services. When a company gets audited the auditor not only looks at sales, but also purchases. If a seller does not charge you tax on a taxable transaction, you are supposed to self assess and remit the tax directly to the state yourself. It does not become a tax free transaction. During the audit, the customer is told by the Texas auditor that the service provider should have charged and collected tax because they had nexus.
The customer is furious with his accountant who did not know about use tax let alone janitorial services being taxable, but that is for another post. The customer was also furious with the GA company because they had to pay back tax, penalty and interest, when his vendor should have been collecting the tax all along. The customer calls the GA company and reads them the riot act. The customer also tells the GA company that the Texas auditor now has their information.
The father goes to their long time accountant who tells him not to worry as you would have to have nexus with Texas before they could require you to collect taxes, and besides janitorial services are not taxable. The father was feeling better and told the son who wanted a second opinion just to be safe. He was referred to me.
Unfortunately I had to break the bad news that they not only had an irate customer, but they had a whole lot of exposure all across the country, and at least the state of Texas was likely to come looking for them. Father and son both almost had a heart attack. They had almost $135,000 spread among the states in back tax, penalty and interest that they owed and could not pay.
They wanted to know how this could be, they were located in GA. How could they have nexus in Texas? I let them know that there is a US Supreme Court Case (Tyler Pipe v. Wash. Dept. of Rev., 483 U.S. 232 (1987)), that says third-parties, even if those parties represent multiple companies can create nexus if they are helping to establish or maintain a market place. The subcontractors were creating nexus for the GA company, who then had a responsibility to collect sales tax where their services were taxable. They were surprised any states taxed their service and now they were unhappy with their long term accountant who did not understand nexus or that janitorial services could be taxable in other states.
I let them know that multi-state taxation is difficult and that many accountants understand their home state or region, but didn’t really have the tools, resources to stay abreast of multistate tax issues and on a historical basis not even a need to know. The Internet is changing all of that.
For our new GA client we suggested they immediately request a voluntary disclosure agreement (VDA) in Texas, because once a state contacts you a VDA is not an option. A VDA is a program that helps reduce the amount of money owed. In Texas it waives 100% of penalty and interest. Once we have the TX VDA filed, we will work through the exposure in the rest of the states. We have a plan where we will use a combination of VDAs and registrations and will work with some customers to see if they have already paid the tax. We will also work out some payment plans.
This GA company will be OK, thank goodness to their customer who called to complain. If the customer had not called this could have been a lot worse. Don’t get me wrong it is still a costly mess, just one that can be handled.
I hope their unfortunate experience proves the point that we can not rely on old assumptions. When it comes to sales tax the rules are always changing and we need to test our beliefs from time to time.