Part 3: Most Helpful FAQ at Sales Tax and More
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
If you’re a business owner or online seller, you might have a few questions when it comes to sales tax compliance. Are sales to a business taxable? What do I do if customers keep short paying tax on invoices? And, a frequently asked query: what do I need to know about exemption certificates?
Exemption certificates help a business or individual avoid payment of sales tax on transactions that are exempt. However, they have to be valid in order to serve this purpose. In some states like Connecticut and Maryland, these certificates expire in 3 and 5 years respectively, while in many other states they don't expire at all. In this episode, the team at Sales Tax and More reveals everything you need to know about exemption certificates, sales tax compliance, use tax responsibility—and more!
In this third part of the frequently asked questions episode of the Sales Tax and More Podcast, Michael J. Fleming and Ellie Moffat share their expertise about exemption certificates and whose responsibility it is to pay sales tax. They also discuss the grounds for rejection of a sales tax certificate, what to do when a customer short pays the tax on an invoice, and whether or not sales to a business are taxable. Stay tuned.
Here’s a glimpse of what you’ll learn:
Do exemption certificates expire?
Can I write into my agreements or invoices that the customer is responsible for paying sales use tax?
If the vendor does not charge sales tax, does the purchaser need to pay use tax?
If the purchaser is required to pay use tax, can I tell my customers to pay the use tax?
Do I need to register when I am over one transaction threshold but not the other?
What should I do if my customer keeps short paying the tax on the invoice?
I have heard that sales to a business are not taxable. Is this true?
Do I have to accept a certificate, whether it be a resale or exempt entity certificate?
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now here is your host, Michael Fleming.
[0:26] Mike: Hi, Mike Fleming here, founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite topic, which is, of course, sales tax. Today, my co-host, Ellie Moffat and I are going to be going over some frequently asked questions. We got some great feedback on the last two episodes where we covered seven frequently asked questions in each of these podcasts. So we're gonna do another seven today. But before we get started, let me introduce you to Ellie.
[1:00] Ellie: Hi everyone. Mike, I'm excited for this episode, we really did have great feedback on those last two. So if you haven't listened yet, go back and listen, they are incredibly helpful. And before we get started, I am going to do a quick introduction for Sales Tax and More. Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. So we do a lot of sales tax returns, sales tax registrations, sales tax audits, consulting, research, and like our name states more. The end of the year is coming up so if you need help with those services, please reach out and ask. We will give you plenty of ways to do so and we would love to help you. Back to you, Mike.
[1:45] Mike: Okay. All right. So the first question is, do exemption certificates expire? And rather than say it depends like you make fun of me so often. I'm gonna say some do and some don't. So you've got some states like Connecticut that expire three years, Michigan expires four years, Maryland, five years, Florida one year, lots of states do expire. However, most states do not. And for those states that do not as a best practice, we suggest updating your certificates every three or four years. And the reason why is because that certificate may have been acceptable, it probably was acceptable when it was issued. But a lot can change in three or four years. And we see so many times where something happens. And that certificate that was valid when it was issued is no longer valid. And in the worst-case scenario, I was doing an audit of a company. And they hadn't changed a certificate in 27 years and there were multiple events. The company even changed states at one point. So that certificate is definitely not going to work for that. But it changed entity types, it changed ownership, it changed names. So anytime you know, there's a change in a sales tax number, that certificate becomes invalid. And other times the name can change the number may or may not change that sales tax number. However, it's a red flag if you don't update the certificates and we don't want to give auditors any more red flags, then we have to so even for the certificates that do not expire as a best practice every three or four years, we say every three or four years because that's the audit cycles of the states. So three years is better at the outside, update those certificates every four years.
[3:54] Ellie: Thank you so much, Mike. I'm going to jump right into this next question here. So a question we get often can I write into my agreements or invoices that the customer is responsible for paying the sales use tax themselves? The answer is yes. But it will not protect you from the state. The state does not allow you to contract away from your tax collection responsibilities. If you are audited, you will need to prove that your customer paid the tax. If not, you will generally be responsible. The agreement will help you recover the tax from your customer in a lawsuit. But the state will generally not let you off the hook for this if they want their money.
[4:43] Mike: Very great point Ellie. So thanks for sharing that question. This next two-part question. And if the vendor does not charge sales tax, does the purchaser need to pay a use tax? This is someone I think they're angling in. And we hear this often but angling how not to collect sales tax. So the answer to that first part of the question is if the vendor does not charge the sales taxes, the purchaser needs to pay use tax? And the answer to that is yes. If it's taxable, just because the vendor doesn't charge, it doesn't mean that it's a tax-free purchase. Now, here's the part of the second part of that question. If the purchaser’s required to pay use tax, if so, can I just tell my customers to pay the use tax? And I think this ties into your question, Ellie? Can I put it in my agreements? Or can I put it in there? And the answer to that is no. Because, you know, if you have a responsibility like Ellie was saying, You can't contract away that responsibility, and the state may actually go after both you and your customer. So you can't just tell all your customers to pay to use tax. The state, in theory, it can only collect the tax once. But you know, you're gonna have to prove that it was paid by your customer, in order not to pay it yourself. So that tax may actually end up getting paid twice. You know, if you're not getting that proof from your customers, so you know, that's not a great situation to be in. So if you have a responsibility to collect the tax, you must collect a tax or a certificate in lieu of the tax. So we can't rely on other people doing what they should, businesses get audited. But most businesses don't, or I should say most, a lot of businesses don't pay their use tax, because use tax is one of the leading causes of large assessments in audits. So companies, you know, a lot of companies just don't pay the use tax when the vendors are not charging them the sales or use tax. And if your customers happen to be consumers, individuals, if you're selling on a B2C basis, virtually any of those customers, you're going to be paying the tax. So you can't just contract it away like Ellie was saying. You can't just say, oh, well, they're gonna pay it because they're responsible for paying it as a use tax. You know, the state will come after both you and your customer. And it's up to you to prove that the customer paid it, otherwise, you're going to be paying it out of your pocket, even if your customer did and you can't prove it.
[7:39] Ellie: Yeah, thank you so much, Mike. And yeah, I'm going to address another question here that we have, we've seen a lot in our webinars, really, there seems to be a lot of confusion around here. The question is when we are over one transaction threshold, but not the other, do we need to register? The answer to this is yes. Yes, it's not it depends. We have a lot of yes or no questions, answers today, Mike, it's a miracle. So the answer is yes, not all states have a transaction threshold. But in most of the states that do the word you're looking for is or so if you cross either threshold and what you sell is taxable and your exposure is material, you should absolutely register in the states that use the word “or” the thresholds are generally what we've seen, they've all kind of gone up and down or not up, they've gone down this year, the threshold is generally $100,000 or 200 transactions there, right now are only two states that are an exception to this rule. Connecticut and New York, and these states, the word you're looking for is “and” which means you need to cross both. So in Connecticut, it's $100,000 in 200 transactions, and in New York, it's $500,000 and 100 transactions. So just to circle back here, because just make sure everyone understands here most of the time you're looking for the word “or” it means yes. If you cross one of those thresholds, then you do need to register only two states with the word “and” there which means both. So, Mike, you're cracking up over there.
[9:29] Mike: I'm sorry. I'm just given a lot of great information out there. And I'm looking at our next question. And I'm saying okay, how do I answer this without using the words it depends, because we're on a roll.
[9:43] Ellie: We really are this never happens, so.
[9:47] Mike: Yeah, that's my favorite answer. Ellie always gives me a hard time…it depends. So the next question is my customer keeps short paying the tax on the invoice. What should I do? So, you know, this is a tough one. First of all, not everyone may know what short-paying is. So short paying an invoice is when they pay the entire invoice except for the tax. So they short pay. And, you know, some companies don't, you know, realize this, I don't know how you don't realize it. But we had one situation where there were three or four years’ worth of short pays from a lot of different customers. And, you know, when you pay the tax, you're paying it on an accrual basis, not when you collect the tax. So you've remitted all this tax to the state, but your customers are not paying it. And it's their responsibility. Now, if you're catching this in the short term, you can ask for refunds if or take credits, if the tax is not truly due. But in this situation, this company had over a million dollars in tax that was paid but that was short paid. And some of this was actually due to the tax not actually being due. And it was falling out the back end, it was expiring, I mean, you have a statute of limitations to ask for a refund. In some states, it's three years, in some states, it's four years. So we actually saw a million dollars a month for falling out of statute. That's how bad this had become for this one state now, I know none of you out there are going to be in this bad of a situation. But if someone is short paying, you've got to find out why. And maybe they're exempt for some reason. And then you got to explain to them, an exempt sale is only an exempt sale if it's properly documented. So if they, if they are saying this is exempt, they've got to get to the documentation, you got to you know, help them understand that if they can't get you the documentation, then they've got to pay the tax. Now, even after this explanation, some companies just don't understand or they don't want to comply, and they're not going to pay the tax. And what do you do at that point? Well, at that point, it becomes a business decision. And you've got to decide, you know, is this customer important enough? Are they so important to the vitality of our business, that we've got to keep this client and accept the risk? Now, if you're accepting the risks, you got to remember, it's not the tax just on that one invoice, or for that one customer, because audits are done on a sample basis, you know, it has a much bigger impact, because you gotta, you know, extrapolate that error percentage across the whole population. So even one missing certificate, I mean, the example I use is, in one audit, we were involved with, we got all the certificates, except for one, we couldn't get it excluded from the, but we'd already used up all of our favors. And this one certificate that would have been, excuse me, this one invoice would have had $8,000 on it, which is a large amount, but when they extrapolated it out across the population, $270,000. So you got to realize, if you're making an exception for the client, it's not just the tax on that one invoice, or on all the invoices for that client you got to worry about. But it could have a much larger impact because of the way that the audits are performed. So you gotta make that decision. You know, if they're a smaller client, I just don't think the risk is worth it worth it. And you got to let them know, Hey, if you're not going to pay the tax, and you can't be our customer, and that's a tough conversation to have. So you got to do everything you possibly can to help them understand that exempt sales are only exempt sales if they're properly documented. Now, you've got to know how to help them get to the correct documentation. Maybe they really are exempt, they just can't figure out how to fill out the paperwork so you can coach them and help them. When I say coach them, you know, they've got to tell you what exemption they're eligible for, and then you can help them fill out the correct paperwork.
[14:41] Ellie: Thank you so much, Mike. And now that I just gave you such a hard time about saying it depends. It's an answer to my next question. So the next question we have here is I have heard that sales to a business are not taxable. Is this true? And like I just said, Mike, it depends.
[15:04] Mike: Oh, okay. All right. I'm sorry that you broke our… we were on a roll but at least I didn't say the word it depends.
[15:15] Ellie: Yeah, it's a necessary answer right now. So let me get into it a little bit here. So all sales of TPP are by default taxable unless there is an exemption. And so everybody knows out there, we use the word TPP all the time, it means tangible personal property. And just to get a little bit more about exemptions, exemptions are generally for use or by entities. So for example, a sale for resale is exempt if a proper resale certificate is provided. Proper means it is on the correct form allowed by the ship to state and completely filled out. So nonprofits are sometimes allowed to make tax-free purchases. And again, only if properly documented, our little theme we have going on here. And in most other instances, businesses are required to pay sales tax, there are some very specific limited exemptions. So in New Jersey, software that is delivered electronically and used exclusively in the business is exempt from proper documentation. If any TPP that tangible personal property is transferred, the exemption is not allowed. And if any personally use the exemption is also again, not allowed. So there is my big it depends on answer for this question. And now you're free to say it Mike, haha.
[16:38] Mike: Oh, well, you now understand why I use the word depends so much. I mean, you yourself are using and it really, hey, you gave a lot of information there. And it really depends on the specific scenarios. So some sales to businesses are taxable, and some are not. And generally, the answer is if it's being used by the business insight for the business's own purposes, then, yeah, it's taxable. So I, you know, sometimes it's not, but there are very specific circumstances. So great job, great use of the word depends. Thanks. All right, so I'm gonna wrap this up, and in, I don't think we need to talk about the pens. Do I have to accept the certificate, whether it be resale or, you know, exempt entity certificate? And the answer is, it is absolutely not as a matter of fact, in some instances, you are required to reject the certificate. So this ties into the last two questions. When you're accepting a certificate, you're accepting it in what we call a good faith, which means that you don't have to put on your detective's hat. So long as you know, it's on the right form. And it's completely filled out, like Ellie was saying, one thing that we want to add there is that it has to make common sense. So for example, one of the spaces on a certificate asks what line of business you're in, the purchaser. And if they tell you, they're a software company, and they're buying one desk from you, does that make common sense that they're actually going to be reselling that desk, maybe they're starting to sell desks, but then they need to put that in their business description. If they're telling you their software company, they're probably buying that desk, to use in their own business. So that's where common sense comes in. We do have to, you know, use common sense in order to get that good faith acceptance. So in this instance, my recommendation would be to actually reject the certificate and charge the tax, no one is granted a god-given right to an exemption, you can reject it. It's your responsibility, you have to be comfortable with the transaction when accepting certificates. Good faith is important. Because if there are any problems with a certificate, if you've accepted it in good faith, then the state will go after your customer generally. And not only are there civil penalties but there can be criminal penalties for the improper use of a certificate or the improper issuance of a certificate. So, you know, you want that good faith acceptance. Now, if you're not accepting something in good faith, and this is becoming a bigger issue. If you knowingly accept a certificate where there is false information on there, and this was a big case, just in the papers about Sotheby's up in New York, they were helping someone use resale certificates when these weren't sales for resale. And it was, they turned it into tax evasion, they were helping their customers evade the taxes. So these criminal penalties can apply to sellers who are accepting the certificates. No, it's not just all on the person issuing the certificate. And in New York, since, you know, the seller should have known better the purchaser they hit with $10 million worth of back tax, fines and penalties and the like. For Sotheby's, it was three times that, so almost $27 million. So can be a much bigger issue for the issuer, it's sometimes you get salespeople out there responsible for collecting the certificate saying, you know, they don't understand how important this is, you know, they really want to make sure they hit their quotas or whatever. So they're teaching people how to avoid the sales tax. Big no no there because it doesn't matter. If you do it, you know if anyone at your company is helping someone to evade taxes, which is really what you're doing, when you're coaching someone on how to get an exemption that they are not responsible… that they're not eligible for. And that's, that's a major note. So not only can you reject a certificate, in certain instances, you must reject that certificate. So if you're not comfortable, you don't have to accept it.
[21:38] Ellie: All right. Thank you, everyone, for listening in today. Thanks, Mike, for going through these questions with me. I'm just gonna wrap this up by letting you guys know that if you have questions about any of our solutions or services, please reach out to me directly at emoffat@salestaxandmore.com or visit our website, www.salestaxandmore.com. In addition to all the services we offer, we have a whole series of free webinars, we have a lot of resources on our website, we have a paid portion on our website. That's a great research source. So again, if you have questions, please reach out and thank you again.
[22:27] Mike: Thank you, everyone, for attending this episode of the Sales Tax and More Podcast. We hope to see you again soon. And give us some feedback. Let us know how we're doing. Are there any particular types of guests that you want to see? You know, we want to provide you with information that you want to know. So thanks again, and look forward to seeing you next time.
[22:51] Outro: Thanks for listening. Be sure to click subscribe and check out all the resources we have out on the web.