State Tax News

Why Was My Company Selected for a Sales Tax Audit?

September 21, 2021 by Frank

So you have received a notice from a state informing you that your company is being audited for sales (and use) tax compliance. The first question that usually comes to mind is “Why me?”

The Most Common Triggers for a State Audit Exam

Mark Friedlich (Vice President, U.S. Government Affairs, Wolters Kluwer Tax & Accounting North America) interviewed many state revenue authorities across the country, as well as companies that have been through a sales and use tax audit over the past 12 months. These interviews and additional research surfaced a top 10 list of the most common sales and use audit triggers across most industries and states.

Here are the top 10 triggers for audits:

1 Prior sales and use tax audit liabilities – some taxpayers don’t learn or falsely believe that once audited, the odds of being audited again are slim.

2 Pattern of late or irregular sales and use tax filings – this is like waving a red flag. The taxpayer is demonstrating that it lacks proper procedures.

3 Amount of exempt sales compared to gross sales reported on sales and use
tax returns – states use analytical studies to compare your exempt sales to total sales for your industry. If the percentage of your exempt sales to total sales is greater than the norm, the state will want to understand why.

4 Industries that are frequent sales and use tax audit targets – certain industries may receive a large percentage of their sales revenues in the form of cash rather than credit card sales. The former is prone to under-reporting and would be of a greater interest to state sales tax auditors.

5 Type of business entity – historically, sole proprietorships are subject to greater scrutiny than corporations.

6 Changes in a state’s sales and use tax law – some businesses do not have or provide for the necessary resources to track sales tax rate changes and changes to exemptions and taxable items. The Supreme Court’s Wayfair decision very significantly changed the nexus rules as to how states can tax businesses.

7 Business closure, dissolution, or bankruptcy – the clock has begun on the time when the state can audit a taxpayer as the taxpayer may not be found going forward. There is no time like the present in such situations.

8 Supplier or vendor sales and use tax audits – if one of your business “partners” is audited, the state may have found something of interest and wishes to audit your business, or your business “partner” “ratted you out” rather than take the responsibility for the transactions between you both.

9 Regularly scheduled audits for a state’s largest taxpayers – some states like to periodically audit those taxpayers who remit the highest amount of taxes, especially if prior audits resulted in sizable assessments.

10 Whistleblowers or referrals from third parties – don’t be surprised if a competitor or a dissatisfied customer shares your practices with a state authority, especially if there is a monetary reward for doing so. Many states belong to state compacts and share audit information with other states. It’s possible that an audit in Oregon of another taxpayer could generate an audit of you by your state.

Tax Tip #1

Tax laws are constantly changing. Periodically, engage your tax professional to review you business operations to determine if you have established nexus in a state that previously you did not have nexus with, check for revised sales tax rates for your state(s), and review your internal procedures on how you are identifying and capturing taxable sales tax transactions.

Tax Tip #2

If you were audited by a state and were assessed for unpaid taxes, take immediate action to review your current procedures with the state auditor and request guidance as to how best to get in compliance. Then work with your tax professional to implement those changes.

Tax Tip #3

Immediately upon receipt of an audit exam notification letter, share it with your tax professional and consider engaging your tax professional to represent you. The tax professional can provide invaluable advice regarding audit techniques, sample audits, scope of engagement, and negotiating penalty abatement.

Tax Tip #4

Work with your tax professional to create a sales tax operating manual that spells out taxable versus non-taxable transactions, how invoices need to constructed to avoid non-taxable sales being treated as taxable sales, support needed to support your sales tax returns and for how long these supporting documents must be maintained by the business.

Tax Tip #5

If a customer claims to be exempt from sales tax, work with your tax professional as to how to properly document that exemption and for how long you must retain that notice of exemption and how frequently you need to request that it be renewed.

If you would like to discuss your business or personal tax planning, tax preparation, audit concerns or other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA Announces PPP Proceeds Are Non-Taxable Income

February 6, 2021 by Frank

Gov. Wolf Signs Senate Bill 109 Into Law

PA has enacted into law (Act 1-2021) to help PA businesses better weather the Covid-19 pandemic. While the business community says it will help, they are asking for more relief including allowing their businesses to be open to the public.

Paycheck Protection Program (PPP) Payments Are Excluded from PA Definition of Taxable Income

PPP payments received which are excluded from federal gross income under the Covid related tax relief act of 2020 are likewise considered non-taxable for PA tax reporting purposes.

Disallowance of Deductions?

PA has also announced that no deduction may be disallowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan.

Tax Planning Tip

If you were a recipient of a PPP loan and already filed your 2020 PA tax return and reported the loan proceeds as taxable income, you should immediately contact your tax professional to discuss the filing of an amended PA tax return.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander, an Enrolled Agent and a Certified Tax Resolution Specialist, is an affiliate member of the Suburban West Realtors® Association, a member of the American Society of Tax Problem Solvers (ASTPS), PA Society of Tax & Accounting Professionals (PSTAP), the National Society of Accountants (NSA) and the National Association of Tax Professionals (NATP). He is the author of “How to Resolve Your IRS Tax Debt Problems” as well as a book on how to start your own business. He has been practicing in Exton for 19 years. His firm serves clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

If not a subscriber to his blogs, http://www.taxexpertblog.com and http://www.stopmytaxproblems.comyou may wish to do so as he discusses various pertinent tax and business issues.

For individual tax payers, real estate professionals, contractors and other self-employed individuals with IRS tax debt issues or tax planning issues, feel free to contact me at (610) 594-2601 or by email at info@keysolutions.us.

Keystone Financial Solutions, Inc. specializes in providing innovative tax planning, tax preparation, and solving IRS tax debt problems. The company’s web site is https://www.keysolutions.us and its telephone number is (610) 594-2601.

By visiting our website you can learn about the 5 Secrets the IRS Doesn’t Share and order a FREE SPECIAL REPORT: Should You Represent Yourself or Hire a Tax Professional.

Interstate Commerce Speed Trap – Wayfair Supreme Ct. Decision Rears Its Ugly Head

February 11, 2020 by Frank

Bensalem PA Business Owner Receives $1.6 Million Sales Tax Bill from California

Background

It was reported by the Philadelphia Inquirer that Brian Freifelder, who sells clothing, shoes, and groceries on Amazon.com out of a small warehouse in Bensalem, received an assessment notice from California that he could owe as much as $1.6 million for sales tax (just for the first six months of the year). CA says he is liable for the tax that he didn’t collect from consumers who bought his goods through Amazon. His tax attorney called this “an interstate commerce speed trap.”

Freifelder is among what is believed to be hundreds of thousands of third-party merchants on Amazon who were informed by the CA Department of Tax and Fee Administration that they should have been collecting taxes on sales to CA residents as far back as 2012.

When Amazon opened its first warehouse in California in 2013, it escaped the obligation to collect the taxes on sales by third-party merchants on the company’s site, apparently by convincing state officials that it was not the retailer obligated to collect sales tax in those cases — a distinction that has since been undermined by court decisions in South Carolina, Pennsylvania, and elsewhere.

CA’s position is that when Freifelder’s goods showed up at an Amazon warehouse in CA, he had the same obligation to collect sales tax as any retailer with a store there — even if he had no idea where Amazon was storing his goods.

Current Tax Rule

CA and other states now require “marketplace facilitators” to collect sales taxes. PA has issued its rules in Sales and Use Tax Bulletin 2019-01 which became effective for transactions that occurred on or after July 1, 2019. We discussed the revised economic nexus standards for PA and Philadelphia in our August 7, 2019 blog and NJ and PA’s reaction to the Wayfair court case in our December 19, 2018 post.

The Wayfair nexus standard not only affects sales taxes. PA Updated its corporate income tax nexus standard as we discussed on November 7, 2019.

We discussed the 2018 U.S. Supreme Court Wayfair decision on July 24, 2018 which did away with the decades-old standard that states could force retailers to collect sales tax only if they had a physical presence in the state, making marketplace facilitator laws possible.

Tax Planning Tip:

If you are a seller of tangible goods and you have not already contacted your tax professional to evaluate your nexus tax exposure, do so today rather than wait to receive your $1.6 million tax assessment notice.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Individual (Responsible Person) Is Personally Liable for Company’s Tax Liability

December 10, 2019 by Frank

U.S. Supreme Ct. Wayfair Nexus Decision and Responsible Person Rules – Employees Can be Personally Liable for their Company’s Uncollected Sales Tax on Interstate Sales

Background

If you are a business owner who has interstate sales (sales to customers outside of your base state of operations), you need to be intimately familiar with the U.S. Supreme Court’s June 21, 2018 finding in S. Dakota v. Wayfair. To become familiar with Wayfair, we suggest you read our July 24, 2018 posting as to how this court case dramatically impacted how states will use its nexus rules to tax out-of-state vendors.

As we predicted, this case “will likely have very significant tax consequences affecting both business owners and consumers.” We stated that the “short-term impact of the decision is that states will likely act quickly to amend their sales tax statutes to reflect the holding of the Court and begin levying sales and use tax on any interstate commerce that has substantial nexus.”

States are using Wayfair’s economic benefit standard to expand its application beyond sales tax. Some states are using this case to find out-of-state companies with enough economic nexus to be subject to those states’ income taxes. We discussed in our November 7, 2019 blog how Pennsylvania updated its nexus standard with respect to PA’s corporate income taxes.

What are Trust Fund Taxes?

“Trust fund taxes” are taxes that the collector holds “in trust” for the state until remittance. The two most widely known trust fund taxes are payroll and sales and use (S&U) taxes. With respect to S&U taxes, these are imposed not on the seller, but on the purchaser or user. As such, the laws passed in the wake of Wayfair do not increase tax liability for sellers but allow states to shift the collection and remittance obligation from the customer to the seller.

States with S&U taxes usually have rules that impose responsibility for tax liabilities on certain parties when their associated businesses cannot satisfy their obligations. Many of the rules expressly allow the respective state to file a demand for payment against any responsible person.

Who Is a Responsible Person?

The answer to that question will be determined on a state-by-state basis. S&U tax obligations, however, do not necessarily stop at the entity level, so even conducting business as a corporation does not necessarily protect owners from liability. Business owners who formed corporations or limited liability companies (LLCs) specifically to shield themselves from personal liability for business debts are often unaware of this exposure.

Responsible parties might include owners, officers, directors, controllers, tax managers, or other employees with tax filing responsibilities. The definition of a “responsible person” can be very broad and far-reaching. It could conceivably include any person who is under a duty to act for such corporation, partnership, limited liability company or individual proprietorship in complying with any requirement of the S&U taxes.

Why Is This Blog of Importance to You?

If you are a business owner who isn’t concerned about nexus, you need to be very concerned! Chris Hopkins, in his article published in the Journal of Accountancy, stated that “it is not only sellers of tangible property and their employees who could get caught up in the expanding web of economic nexus and tax liability. Sellers of services and digital products — including cloud computing, information services, data processing, audio and video content, and various online subscriptions — are now more vulnerable than ever, leaving individuals who are responsible persons for those companies at a greater personal risk.”

Tax Planning Tip #1:

States are implementing new registration requirements. If you are required to register in any state, the rules for collecting and reporting your sales (and tax obligations) will very likely differ by state and you will need to implement proper procedures to ensure compliance.

Tax Planning Tip #2:

Business owners with interstate sales need to have a tax professional evaluate their company’s and personal exposure. States may not have been interested in your sales activities in prior years because you did not have a physical presence in their states, but those states may now realize you have an economic nexus and will be “knocking on your door”. It is better to be proactive when it comes to identifying your tax liability exposure.

Tax Planning Tip #3:

If your business has material prior-years tax exposure, you should consider pursuing voluntary disclosure agreements to mitigate your tax audit and assessment risks. Some states “reward” those who come forth by reducing the number of past years for which taxes are due and some will abate penalties and reduce interest assessments.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA Updates Its Corporate Income Tax Nexus Standard

November 7, 2019 by Frank

PA Adopts Wayfair Nexus Decision that Physical Presence is Not Needed for PA to Tax Out-of-State Corporations that Receive an Economic Benefit from Their PA Marketplace Presence

Physically Presence is Not Required

PA declares that corporations do not need to be physically present in Pennsylvania in order to have nexus for corporate tax purposes. Out-of-state corporations doing business in Pennsylvania must file tax reports if they are taking advantage of the Pennsylvania economic marketplace.

Wayfair Decision

As reported in our July 24, 2018 blog, the U.S. Supreme Court decision in South Dakota v. Wayfair would have a profound affect on the nexus standard. “Nexus” being the amount of contact a business would have in a state before being subject to that state’s taxes. Whereas the former standard that a business needed a physical presence in a state before the state could tax it, Wayfair replaced the physical presence test with an economic test.

Pennsylvania states that the decision in Wayfair v. South Dakota made certain that no physical presence standard exists to limit the ability of a state to impose a net income tax on an out-of-state taxpayer. The decision confirmed that out-of-state corporations are doing business in the Pennsylvania and/or carrying on activities in Pennsylvania to the extent they are taking advantage of the economic marketplace. Taxpayers taking advantage of the economic marketplace will be required to file tax reports if they meet the minimum nexus thresholds under the U.S. Constitution.

Economic Presence Test

Pennsylvania will require taxpayers with economic nexus to file corporate tax reports after 2019. Pennsylvania will presume taxpayers without a physical presence have to file a corporate net income tax report if they have $500,000 or more of direct or indirect gross receipts sourced to the state. The presumption is rebuttable.

The gross receipts must be from the:

sale, rental, lease, or licensing of tangible personal property;
sale of services; and/or,
sale or licensing of intangibles, including franchise agreements.

amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

The PA Department of Revenue recognizes that taxpayers with or without physical presence in the Commonwealth can still potentially claim exemption from the imposition of the Corporate Net Income Tax under the provisions of P.L. 86-272. Taxpayers claiming P.L. 86-272 (physical presence) protection should still file a tax report and complete the necessary schedules to claim the exemption. Corporation Tax Bulletin 2019-04, Pennsylvania Department of Revenue, September 30, 2019.

Tax Planning Tip #1:

States will continue their efforts to tax out-of-state businesses rather than face the wrath of in-state business when taxes are increased. If you have not already consulted with your tax adviser to determine if you have nexus exposure, you need to do so.

Tax Planning Tip #2:

While reading this post, keep in mind that other states have already changed their nexus standard from physical presence to an economic benefit test, or are considering doing so, thus your activities outside of PA may be creating nexus in those states where you have activities. Refer to Tax Planning Tip #1.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

NJ Amends its Sales Tax Law Regarding Transient Accommodations

October 29, 2019 by Frank

Rental of a Transient Accommodation Obtained Directly from the Owner is No Longer Subject to NJ Sales Tax

Background

In our blog post of October 30, 2018, we alerted our readers that New Jersey had enacted legislation that imposed a fee on transient accommodations on or after October 1, 2018. The new law imposed Sales Tax, the State Occupancy Fee, and the Meadowlands Regional Hotel Use Assessment on charges associated with the rental of transient accommodations.

This law supposedly targeted homeowners who rented their investment properties themselves (classified ads, referrals from friends and family, rental signs on the lawn, Airbnb, VRBO, etc.) rather than using a realtor.

Amended NJ Sales Tax Law on Transient Accommodations

Beginning August 9, 2019, the rental of a transient accommodation obtained directly from the owner is no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees, unless it is a professionally managed unit, as defined below.

A rental obtained through a transient space marketplace, which now includes a travel agency, or a rental of property that is considered to be a professionally managed unit, is subject to the applicable taxes and fees.

What is a Transient Accommodation?

The amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

Therefore, a transient accommodation that is obtained through a transient space marketplace or is a professionally managed unit is subject to New Jersey Sales Tax, the State Occupancy Fee, and other applicable taxes and fees.

What Type of Rental Is NOT Subject to the NJ Amended Sales Tax Law?

The following rentals are no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees as long as the owner does not offer three or more units for rent (a professionally managed unit):

A rental of a transient accommodation obtained directly from the owner (such as through local newspaper ads, personal referrals, signage, etc.); or
A rental of a transient accommodation which is not obtained through a transient space marketplace.

In addition, rentals executed by a real estate broker remain not subject to the taxes and fees.

When Is a Rental Considered Obtained Through a Transient Space Marketplace?

A rental is “obtained through a transient space marketplace” where the agreement for the rental is made through the marketplace or travel agency and where payment for the accommodation is made through a means provided by the marketplace or travel agency, regardless of who receives the payment. Transient space marketplaces will continue to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees imposed on a transient accommodation when the rental is “obtained through a transient space marketplace.”

However, a transient space marketplace does not include a marketplace or travel agency that exclusively offers transient accommodations in New Jersey that are owned by the owner of the marketplace or travel agency.

What Is a Professionally Managed Unit?

A professionally managed unit is a transient accommodation that is directly or indirectly owned or controlled by a person who offers three or more units for rent in New Jersey, and the rental unit does not share living or sleeping space with other units. A professionally managed unit is a transient accommodation that is subject to the applicable taxes and fees, regardless of how the rental is obtained.

An owner who offers three or more units for rent in New Jersey and who directly rents (such as through local newspaper ads, personal referrals, signage, etc.) continues to be required to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees because the transient accommodation is a professionally managed unit.

Are Lessors Required to Register with NJ?

An owner who offers three or more units for rent in New Jersey must be registered to collect the applicable taxes and fees unless all of the rentals are obtained through a, transient space marketplace or through a real estate broker. In addition, transient space marketplaces, including travel agencies, must be registered to collect the Sales Tax, the State Occupancy Fee, and other applicable taxes and fees on all transient accommodations obtained through the transient space marketplace. However, d address any conflicts; work with the Office of Chief Counsel to see if they need legislation to use tax data to identify potential conflicts; and better manage the OES, both in terms of requiring employee compliance and management review.

Tax Planning Tip #1:

Lessors of rental properties in NJ need to consult with their tax advisor ASAP. Determinations need to be made if the lessors are subject to the amended NJ sales tax law on transient rentals, if they need to be registered to collect the sales tax, if they need not be registered by nevertheless are required to collect and remit the sales tax, and due to the effective dates of the previously enacted law and the amended law, renters may be entitled to refunds and how lessors should handle those refunds as well as the filing of a Final Tax Return if appropriate.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.