Sales tax concerns when buying an existing business

Sales tax concerns

Sales tax concerns

If you’re looking to take over an existing business, it’s important to prepare for the transaction ahead of time. There are several sales tax issues that can come up both during the purchase of the business and when you start running your new company. Be sure to review the solutions to these common sales tax concerns before buying a new business so you don’t get caught off guard during the process.

sales tax concerns when buying a new business

Purchasers need to thoroughly investigate potential tax liabilities before buying an existing business.

Unpaid sales taxes from a previous owner

Before an owner sells you their business, he or she is supposed to be current and compliant with the sales and use taxes. This doesn’t always happen though and it’s possible to buy a business with unpaid tax liabilities. In these cases, you are likely to be held responsible for paying these taxes even though they were incurred by the previous owner. That’s why it’s very important to verify that a business doesn’t have a sales tax liability before you make and deals.

Also keep in mind that you could be held responsible for unknown sales and use tax debts discovered during a state audit. You should carefully examine what types of sales the former owner made and identify any possible nexus issues they may have overlooked. Audits can look back many years into the past and if unpaid taxes are discovered their payment and fines could quickly put a new owner out of business while the former owner walks away.

Researching sales tax liability

State governments make it fairly easy for you to verify whether an existing business owes any sales taxes. Typically, you just need to submit a form to the state government department in charge of taxation. In New York, you file a Notification of Sale Form while in Texas you file a request for a Certificate of No Tax Due.

On these forms, you’ll need to list basic information on the existing business like its name, the name of the current owner, and your contact information. The government officials will check whether the current owner has paid all owed sales taxes and will let you know the results.

Dealing with unpaid sales taxes

If you find out that the previous owner still owes sales taxes, be cautious proceeding with the purchase. The New York government recommends that you don’t go through with the purchase until you get notice that all taxes have been paid. Texas officials say you could go through with the sale but ask that you withhold enough money from the sale price to cover the unpaid taxes. Even if you pay the full sale price there is no guarantee the former owner will pay the tax bill and then it could fall on you as the new owner.

Paying sales taxes on business assets

When you buy a business, you’ll also owe sales taxes on some of the business assets. What you’ll owe sales taxes on depends on your state’s tax laws. For example, in Washington you’d owe sales taxes on the value of machinery, equipment, furniture and office supplies but not on business real estate and inventory.

The previous owner is supposed to collect these sales taxes from you as part of the sale. If the previous owner does not, you are supposed to pay a use tax yourself directly to the government agency in charge of taxation.

Collecting sales taxes for your new business

As part of the purchase process, you’ll need obtain a valid Sales and Use Tax Certificate from your state. Most of the time you won’t be able to just take over the permit of the previous owner even though you’re taking over an existing business. You’ll need to apply for a new one in your own name in order to legally collect sales taxes as the new owner.

While taking over a new business can be an exciting process, you need to take your time and make sure to handle all these sales tax issues properly. This way you’ll be able to start your new business without any looming tax problems.

The bizarre world of sales tax law

sales tax law

sales tax law

When you think about it, sales taxes shouldn’t be that complicated. You make a sale and the appropriate locality adds a fixed percentage to the price for its share. In a simple system, this would just be a grade school multiplication problem but do you think our governments ever keep things simple?

The truth is that over time, state and local jurisdictions have created all kinds of exceptions and special situations for tax laws. Some of these rules make sense, some are confusing, and some are just plain bizarre. Let’s take a closer look at the complex world of sales tax law.

 

What is taxed normally?

Sales taxes get complicated because they are controlled by state governments, not the federal government. As a result, each state has different rules for what transactions are taxed and which are not.

Generally, most states charge general sale taxes on the sales of tangible goods like furniture, toys, and jewelry. This is because many sales tax codes were created when the economy was based primarily on manufacturing. Now that we buy more and more services, states are starting to change tax codes to include services but this is still less common. A good rule of thumb is to assume that most tangible goods will be charged sales taxes and other purchases depend on your state’s specific rules.

 

Common exceptions to general rates

You’ll also see certain types of exceptions to sales tax law show up around the country. Many states waive sales on essential household goods. State governments often don’t charge sales taxes on groceries, clothing and medicine because they want to help taxpayers afford these necessary goods. Many unprepared foods are tax exempt or charged at a lower rate. However, state governments often charge full sales tax on prepared meals because these are more of a luxury than a necessity.

Sales of goods that are going to be resold are often exempt from sales taxes as well. Since the purchaser will resell the item and collect taxes then, the government doesn’t want to double-tax the transactions.  Many governments also try to subsidize certain industries like farming, manufacturing, and nonprofit organizations by offering sales tax exemptions or reductions.

On the other hand, state governments often charge higher tax rates on certain products like cigarettes and alcohol, offhandedly called “sin taxes”, to discourage their purchase.

You can see a pretty common theme here. The government waives sales taxes on activities it wants to encourage and support while increasing taxes on activities it wants to discourage. That makes perfect sense. As you go through these rules though, you start to see situations that leave you scratching your head.

 

Bizarre tax laws

Every state has its own strange tax laws. In New York, if you buy an unsliced bagel it counts as unprepared food and is tax exempt. However, if as soon as the seller slices the bagel, it is considered prepared and becomes taxable. Residents need to decide the extra convenience is worth another few cents in taxes per bagel.

packaging tax rules

Colorado doesn’t charge sales tax on essential food packaging items. However, packaging that is considered nonessential is taxed. Restaurants and vendors don’t need to collect taxes on cups or paper plates, but do need to collect taxes on lids and napkins.

Following the reasoning of essential versus nonessential, Colorado doesn’t charge sales tax on essential food packaging items. However, packaging that is considered unessential and possibly wasteful is taxed. In theory this makes some sense, but can you guess how it plays out? Restaurants and fast food vendors don’t need to collect taxes on cups or paper plates, but do need to collect taxes on cup lids and napkins. This ends up being more confusing than helpful.

Tax laws for religious materials also create problems. Most states exempt religious publications from sales taxes. Where do you draw the line at religious publications though? New religions are constantly coming up and often their publications fall outside the state guidelines and are taxed. What if a pastor buys a Dr. Seuss or Harry Potter book to make a point for a sermon? You can see how a well-intentioned tax law can create all kinds of controversy.

Location of the seller and buyer also complicates tax issues. Most states tax businesses that have a nexus in the state, meaning they have a physical presence in the area. For years, online businesses have been able to avoid state tax laws by never having a physical presence. However, several states have closed this loophole as legislators believe it gives online companies an unfair edge over brick and mortar companies. The Marketplace Fairness Act is also being considered by congress to mandate that online companies collect sales taxes in every Streamlined Sales Tax-conforming state.

There are passionate supporters on both sides of this issue.

Who says that tax law can’t spark exciting conversations?

The Marketplace Fairness Act update: where does this bill stand?

Fairness Act

Fairness Act

Marketplace-Fairness-Act

The Marketplace Fairness Act continues to gain momentum in Congress. On May 6th, the U.S. Senate passed this bill by a vote of 69-27. This puts the United States that much closer to collecting sales taxes on remote sales. The current Senate bill gives an idea of what this future tax environment could look like for every U.S. business.

Applies to nearly every business, not just internet retailers

While the Marketplace Fairness Act (MFA) is discussed as a bill impacting internet retailers, it could have implications for nearly every business making out-of-state sales. As written, the bill says it applies to “remote sellers” and doesn’t use the words “internet” or “online” anywhere. This creates a very broad definition and could include any business that makes sales in any state where it does not have nexus, which would apply to both brick and mortar and online retailers.

Small seller exemption

The current bill has a provision that would exempt retailers if their prior-year gross U.S. remote sales total less than $1 million. Any business making sales in states it doesn’t already collect tax in totaling $1 million or more collectively would be subject to collect and remit taxes to any state that has collection authority – chiefly the states signed on to the Streamlined Sales Tax Agreement.  This gross total includes all sales, not just taxable sales. There is also no minimum sales amount per state, meaning  that even a single $10 sale would require the remittance of the tax along with a sales tax return.

Concerns over foreign competition

The motivation for the MFA is that it is supposed to level the playing field for brick and mortar retailers by taking away the “unfair advantage” internet sellers have enjoyed by escaping out-of-state taxation. However, some critics are wondering if this law would now simply shift this advantage solely to foreign companies.

Right now, the bill doesn’t say whether non-U.S. based companies will be expected to collect sales taxes from American consumers. If they don’t, foreign retailers would have an advantage over American retailers. This could also create an incentive for American companies to move overseas.

What happens next?

Now that the MFA has cleared the Senate, it moves  on to the House of Representatives (H.R. 684) where it will go through a formal committee review before it is brought to the floor for a vote. During this stage, the bill could be changed significantly or could stall completely. Some believe the bill is likely to pass the House as it has a fair amount of momentum and lobbying power behind it. On the other hand, several key representatives have voiced strong opposition to the bill and could take steps to block or alter it during review.

What is particularly important to retailers is what happens to the small seller exception. There is a push to raise the minimum sales amount so more businesses would be exempt from the requirement to collect  the tax.

While the MFA still has a long way to go before becoming law, it’s now gone farther than any of the other internet sales tax bills that have come before congress to date.

We’ll post updates as this legislative process continues or you can follow the bill’s progress.

The taxability of warranty repairs

taxability of warranty repairs

taxability of warranty repairs

As a vendor, it is your job to collect sales taxes according to state laws. This can seem a bit confusing for a service like warranty repairs that is sold and delivered at different times. If your business handles repairs in multiple states, these transactions can be even more confusing because of nexus rules. Fortunately, the sales tax laws for warranty repairs are relatively consistent.

Sales taxes for warranty repairs

taxability of warranty repairs

Warranty repairs are subject to sales tax and will probably create nexus for your business if you perform the repairs across state borders.

The time to collect sales taxes is when you sell a warranty repair contract to a customer. Later, when the customer comes in for a repair covered under the warranty, you don’t charge sales taxes. However, if the customer must pay a deductible as part of the contract, you need to charge sales taxes on the deductible.

If you don’t handle the repairs yourself but pass them off to a third-party, the third-party should charge you sales taxes on the repair. Since you’re reselling the repair to the customer, you’ll get a sales tax exemption on this transaction.

Determining your nexus for warranty repairs

Generally, you need to collect sales taxes in any state where your company has nexus, which is a connection or tie to the area. In the past, this meant having a physical location in a state. Today, this definition has been expanded quite a bit.

Regarding warranty repairs, most states consider just the act of providing warranty repairs within that state as enough to create nexus. This means that you generally need to collect and file sales taxes for every single state that your company provides warranty repairs in.

Exceptions

A few states have exceptions to the standard nexus rules for warranty repairs. In Arizona, your repairs only create a nexus if you have an employee in the state for more than two days. In California, you don’t create nexus if you hire an independent third party to handle your repairs in the state.

Utah considers your business to have nexus if you “regularly perform repairs” in the state. Since this is open to interpretation, you may want to contact the Utah Department of Revenue to see if your repair activity is enough to create nexus.

Besides these few exceptions, your business has a nexus anywhere it performs warranty repairs. Be sure to register your business with those states and collect appropriate sales taxes on all qualifying transactions so your business stays in compliance with state law.

Alabama sales tax rules clarified

sales tax rules

sales tax rules

The Alabama legislature recently made some of the state’s notoriously difficult sales tax rules slightly less burdensome.

The legislature has decided to adopt a centralized sales and use tax filing system which will allow Alabama businesses to file in one location rather than having to file separately with each and every local jurisdiction in which they did business. The central filing system should be implemented sometime in late 2013.

Secondly, a recent court ruling has clarified the definition of what creates nexus. While physical presence DOES create clear nexus, it has been determined that delivery alone or occasional sales by a single salesperson most likely will NOT create nexus within most local jurisdictions.

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