Taxability (Pt.2)
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…
Mike Fleming and Ellie Moffat discuss and answer questions about taxability.
Here’s a glimpse of what you’ll learn:
What is Tangible Personal Property?
How is TPP incorporated into real property? What is real property in that instance?
How does taxability affect TPP that’s used or consumed in manufacturing?
What are some taxability recommendations?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here is your host, Michael Fleming.
Michael Fleming: 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 everybody's favorite topic, which is of course sales tax. And today we're gonna delve a little bit into taxability. But before we do, let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hey everyone, really great to be here. Thank you for listening. Don't forget to like and subscribe. And before we get started, I'll do a quick introduction for Sales Tax and More. We are a full service consulting and solutions [00:01:00] firm, and 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, consultations, research, audit defense, exemption certificate management, and like our name states more. So if you have questions about our services, please reach out and ask. We would love to hear from you and we would love to work with you as well.
So Mike, can you give us a definition of TPP? And if you just listened to our other taxability podcast, we're a little bit picking up where we left off on TPP, but can you give us a quick definition of TPP?
Michael Fleming: Yeah, absolutely. TPP stands for tangible personal property. And tangible personal property in direct contrast to real property like buildings and real estate or digital property or intangible property.
Tangible personal property is something that's [00:02:00] perceptible to the senses. Something that can be touched, something that can be smelled, something that can be seen. It's something that can sit on a shelf, be stored in a warehouse. That's what we're talking about when we say TPP. Now the word personal trips up a lot of people in there.
And as we mentioned on the last podcast it's not just things we can carry around on our person. It's something like a plane or a truck or a tractor. These are things that are perceptible to the senses also. So don't let that word personal trip you up.
It's anything that is pretty much perceptible to the senses now. Something else. Sometimes states define in their statutes what can be considered TPP. For example, electricity. When I think of electricity, I don't really think of that as tangible personal property, but in many states it's identified as [00:03:00] tangible personal property.
If you stick a fork in a socket, I guess it's perceptible to the senses. But that's something that. I generally would not think of or downloaded software. If I'm downloading something, I usually think of an intangible property or a digital property. Yet some states define software no matter how it's delivered as tangible personal property.
So sales tax doesn't always follow common sense. We have to look at the way that states are interpreting certain things. And if they define software as tangible personal property, that's how they're going to treat it. And tangible personal property, as we mentioned in the in the last podcast, is going to be taxable unless there's some sort of specific exemption.
Ellie Moffat: Perfect. Thank you so much Mike. So talking about TPP, can you talk more about how it's incorporated into real [00:04:00] property and explain what real property means in this instance?
Michael Fleming: Yeah. Real property is real estate. Could be land, could be building, could be warehouse and warehouse is a type of building.
But real properties generally not taxed. And if you're taking tangible personal property and incorporating it, that simply means making it a part of the real property. Since real property is not generally taxable and you're making something a part of the real property, then it's not gonna be taxable either.
So generally the person who's incorporating it, usually a contractor, they're the ones who are considered the final consumer. The tax is paid by them on any of the materials or supplies they use to incorporate it into real property. Now let's get an example of something. Maybe you buy a door.
And you have someone install the [00:05:00] door into the house. Now that door is part of the house. So that's what incorporating it into real property means. So you wouldn't charge the customer tax on that door. The person installing the door is usually responsible for either paying the tax at the time of purchase or paying a use tax when they go ahead and incorporate that door into the real property.
Ellie Moffat: All right. Thank you so much. So what about TPP that's used or consumed in manufacturing?
Michael Fleming: Yeah. Tangible personal property that's used or consumed in a manufacturing property is often exempt also. Now the problem is every state defines the manufacturing process a little bit differently. So when we say defines the process, when does it begin?
When does it end? Something that's exempt in one state may not be exempt in the next. I'll give you [00:06:00] an example. Here in Texas, if you purchase a forklift, you gotta pay tax on that. Where in other states it may be tax free because if you're using that forklift to move items from one part of the manufacturing process to another state. That's still considered part of the manufacturing process. Here in Texas that's not considered part of the manufacturing process. That's considered interplant transport, so it's not being used in exempt manner. So same forklift could be same manufacturing process, two different states, one's taxable, one's not.
I'll give you another example. We were at one point doing a audit defense for a company and they had purchased two cranes and they purchased them both tax free. And when an auditor comes out there, they don't just look at your sales to make sure that you're collecting the right amount of tax and remitting all the tax that you collect.
They're [00:07:00] also looking at your purchases to make sure that you're paying tax on all the items you purchase where tax should have been paid. Just because the seller doesn't charge you tax doesn't mean it's tax free. Sometimes you have to self-assess and remit it as a use tax if you didn't pay a sales tax.
So these, these two cranes were about maybe 25, 35 yards apart, and one of them was used to move items from one part of the manufacturing process to the next, and the other one was used to move items from when they came off the assembly line into trucks at the loading dock there. 50 yards apart, same exact crane moving items.
The one that was being used in the manufacturing process they were correct. They could have purchased that one tax free and they did. However, the one that was loading the trucks that was [00:08:00] outside of the manufacturing process so they should not have utilized an exemption for that.
They should have paid tax on that, so they had to pay the tax as part of the audit. Now, if that crane was being used to load something, taking it to temporary storage. That's a whole nother story because in a lot of states, the movement of items to the storage area is considered part of the manufacturing process.
The loading of a truck for delivery to customers, not part of the manufacturing process. So how something is used, where is it in the manufacturing process? In that later example, both of them are taking finished products off of the manufacturing line or the assembly line, but one is putting them in a truck.
One is helping move them to storage. So again, taxability can get very granular. Facts matter [00:09:00] and same exact items used slightly differently can have a big impact on taxability.
Ellie Moffat: Thank you so much, Mike. Anything else you wanna add in here?
Michael Fleming: Now, just something we mentioned on the last podcast.
In general, tangible personal property is going to be taxable unless there's some sort of specific exemption. And services are generally gonna be exempt unless they're specifically identified as taxable. Now, as soon as I say that, people say services are not exempt. That's not true. More and more services are being taxed by more and more states every year.
And I don't know of a state out there that does not tax at least some services. Let me rephrase that 'cause someone called me on this. I don't know of a state with a sales tax that doesn't tax at least some services. Someone will always come up and say the state of Delaware doesn't have a sales tax.
And they don't tax any [00:10:00] services. Absolutely. All states with the sales tax though tax at least some services.
Ellie Moffat: And Mike, one more question for you really in here. What would you say to somebody who's having taxability issues, that's listening to this podcast? 'cause they're completely lost? What's next for them?
Michael Fleming: I can tell you generally what not to do. Generally you don't want to call a state and ask them, is this taxable or not? Because a verbal answer from a state doesn't hold any weight in an audit. You can't say the state told me this. Because the auditor's gonna say did you get it in writing?
So you don't wanna be calling the state unless you ask the state to put it in writing. And generally they're not gonna do that. What you can ask them is, Hey, this is a great answer. You really helped me out, my boss is gonna really wanna see something in writing. Is there any publication or statute that you can point me to that [00:11:00] documents what you're saying?
And when they do that, you gotta look at it. Because what they point you to may directly contrast what they just told you. The people who answer the phones at the states, some are smarter than others. Some states are better than others, but you can call a state five times in a row. Get five different people and get five different answers to the same question.
So that's what you don't want to do. The other thing is you don't wanna use AI. Everyone thinks that, oh, I've got AI now and I can just go to the internet and have AI do a search. The internet is full of misinformation, especially when it comes to sales tax. If you're asking an AI, all an AI does at this stage is search the web a heck of a lot faster than you can.
So that's really what an AI is doing. So if it's looking at faulty information, [00:12:00] it's gonna give you a false sense of confidence because it's gonna tell you, Hey, here's the answer. And it could be an absolutely wrong answer. I've also heard about stories of some AIs making things up. So at this stage, I would not call the state and accept a verbal answer.
You gotta ask 'em to put it in writing or where in writing is it? And then you gotta check and make sure the writing is the same thing that they've told you. You don't want to, do an online search or use AI. What you gotta do is some old fashioned research and you can do that yourself.
Some states have a lot of great information on a website. Other states not so much. There are research sources out there. We actually have three or four different that we subscribe to. They're not cheap though, so if you don't have a need for a lot of answers maybe you wanna reach out to someone like us and ask them to utilize their research [00:13:00] subscriptions in order to get you the answers that you need.
Another thing you don't want to do is play follow the leader. A lot of people say, hey, this company's a big company and I'm gonna do the same exact thing that they're doing, assuming that they're going to be right. And unfortunately, that's not the case. A lot of times the bigger companies have a lot of turnover and someone may be brand new at their job and they're getting it wrong or someone may be there for 30 years and they're doing it the way that it used to be done for a lot of different reasons. Big companies get things wrong also. They're not going to pay any of the penalty or interest if you get audited. So you generally don't wanna just copy what they're doing. I can give you example after example where someone was playing follow the leader. And they said everybody in our industry does it this way. And the state says well tell me some of your competitors and we'll go after them also. [00:14:00] A lot of times the state will target a specific industry because they know that everyone in that industry is doing it wrong.
So you don't wanna play follow the leader. The only other way to get taxability right is by doing old fashioned research. And you can do it yourself or you can hire someone like us to do it for you.
Ellie Moffat: All right. Thank you so much, Mike, for all that information. If you have sales tax needs and services, if you wanna hire us to help with your taxability issues, please reach out.
You can reach out to me directly at E-M-O-F-F-A-T at salestaxandmore.com. You can also go to our website, salestaxandmore.com. And if you have anything in addition to our services that you need, check out our free webinar series and the free resources on our website as well along with what we call our SALT Vault, which is a paid resource.
So thank you again for joining us and thank you, Mike.
Michael Fleming: Thank you everyone, and we hope to see you on the next [00:15:00] episode of the Sales Tax and More Podcast. Bye-bye.