SALT: Warning Signs That A Review is Needed
Compliance with Current State Tax Law
State tax law is an area that many business people fail to fully appreciate. Instead of attempting to explain this vast body of law, these are a few of the most often-repeated statements that indicate that companies are losing money by not taking advantage of all available tax exemptions or may eventually receive a significant bill for incomplete compliance with state sales and use tax law.
We pay tax on everything.
This is wonderful if you owe tax on everything. Some businesses do not owe tax on all purchases. For example, if you manufacture materials, e.g. food, oil, wood products, etc. there are a myriad of state tax exemptions that are available.** Although exemptions are very narrowly construed, many manufacturers do not take advantage of all exemptions available to them and do “leave money on the table.”
** Exemptions granted to manufacturers vary by taxing jurisdiction. Also, the nature of businesses that are deemed to be manufacturers varies. For example, restaurants are manufacturers in Texas. Restaurants are not manufacturers in all states and are not allowed to claim exemptions available to manufacturers in all jurisdictions.
I trust my vendors to charge me the correct tax.
Your vendors may charge tax on some items that are exempt. Smart vendors charge tax when there is a question regarding taxability and/or the client has not issued appropriate documentation that an exemption applies. Vendors may collect and remit tax and have the client approach the state for any refund due. This relieves them of any liability associated with not collecting tax on taxable transactions. The client is in an unique position to know if transactions are taxable because the assessment hinges on (1) the identity of the items purchased and (2) how they are ultimately used. The Texas statute of limitations is four years as it relates to claiming refunds.
My staff is wonderful and I am sure I have no issues or my CPA handles that issue.
Having a state tax asset or liability is not a reflection on your staff’s or CPA’s competence. Most of our clients have wonderful staff and CPAs who understand their jobs and execute them with high degrees of competence. They typically know some state tax issues facing the company. However, they have other responsibilities that preclude them from staying abreast of all applicable changing state tax law and reviewing all invoices. Most companies have materiality thresholds. Amounts that are not considered material do not typically receive a great deal of scrutiny. Sometimes material amounts of tax refunds can accumulate based on the purchase of small dollar value items.
I bought items from out of state and the vendor did not charge tax so I changed the invoice and sent the tax. I have no tax liability.
When purchasing items from an out-of-state vendor that are being shipped to Texas, you owe use tax if the items and/or services are taxable if purchased from an in-state vendor. You should report the purchases on your state tax return and remit the tax directly to the state. Changing a vendor’s invoice and remitting the tax to the out-of-state vendor does not relieve your tax liability. Many businesses do not have a full understanding of use tax and get unexpected state tax bills because they did not address the tax issues involved with purchasing goods from out of state vendors.
