Oh, to live in a world where all sales and use tax questions are easily answered! Unfortunately, such a tax utopia does not currently exist. In reality, sales tax matters can be very complex, with limited state guidance on certain issues. It may be even more difficult to find an answer when your situation is unique. What’s a well-meaning, law-abiding taxpayer to do? Following are some ways in which taxpayers go about finding answers to their state and local tax questions and the pitfalls they encounter.
1. Ask a vendor, customer, or other business people how they treat the transaction.
Although a vendor, customer, or other business person may have good intentions about giving advice on tax treatment, they often have just as many questions as you do about the proper treatment of a transaction. Based on results seen on a number of audits, vendors and taxpayers with similar businesses do not always treat a transaction correctly. It could be a case where there is higher than average turnover in accounts receivable or, conversely, a case where a vendor treats a transaction a particular way because “that’s the way we’ve always treated it.” Some vendors are more intentional about staying current with changes in tax laws than others.
Customers may be able to help steer you in the right direction by appropriately supplying a properly completed exemption certificate, but they often assume vendors are treating transactions correctly and are not always consistent about reviewing the details of an invoice for any changes.
In the event you do rely on advice from a vendor, customer, or other business person that results in an audit assessment, you as the taxpayer will be responsible for paying that assessment, with no assistance from those who advised you.
2. Call a Department of Revenue representative.
Calling someone from the Department of Revenue can seem like the most straightforward approach to finding an answer. After all, what’s easier than having the Department at your fingertips, ready to answer your most pressing and complicated sales tax questions in a matter of minutes? While Department of Revenue employees strive to give you the appropriate guidance regarding your question, you may not always be talking to the person who is the most knowledgeable about a particular topic or who has the level of experience to know when to ask additional questions or consult with another representative. Arriving at conclusive sales tax treatment is extremely fact dependent. Are the facts laid out properly to include any pertinent details? Are you using the proper terminology in your question? For instance, if you say, “We lease a vehicle,” do you mean that you are the lessor or the lessee? Or if you say, “We paid sales tax,” do you really mean that you collected and remitted it? The quality or accuracy of the answer you receive hinges not only on what questions you ask of the Department, but also on what questions the Department asks of you.
Even if you are able to talk with a knowledgeable person who is able to address your question correctly and completely, the Department is not legally bound by verbal guidance given over the phone. When under audit, some taxpayers will refer back to phone conversations they had previously with “someone” at the Department “a couple years ago” and on whose response they subsequently relied. In an audit situation, the auditor might be sympathetic to the fact that you were well-intentioned in attempting to find an answer. In the end, however, an assessment will stand in the absence of written authority to support your position. If you do call a Department of Revenue representative and note this person’s name and the specifics of the conversation, it’s possible that representative will no longer be available to comment on the previous discussion. If calling a Department of Revenue representative is your best option at the time, it is a good idea to request to speak with either an auditor or a technical expert. It is also a good idea to ask the representative for references to the written guidance upon which he or she is basing the conclusion so you can read the same guidance and determine whether you arrive at the same interpretation.
3. Look for guidance on the state’s website.
A good place to start is to look through what information is available on the state’s Department of Revenue website. Some states’ websites contain a wealth of information and offer detailed written guidance on a variety of subjects. Other states’ websites are not as robust and may furnish little more than basic information on general topics of interest. Written guidance may include publications, articles, fact sheets, periodic newsletters and updates, or common questions. However, many states have limited resources, both in terms of people and money, and the website may not be updated immediately to reflect new rules. Guidance on a particular issue may be delayed or even not be addressed unless a significant number of taxpayers are inquiring about it. State websites typically have links to state laws, cases, and rulings, but searching through the documents to find information that is on point can be cumbersome.
If you are successful in finding pertinent written material, the advantages are twofold. First, the information has been reviewed and approved by the Department for dissemination, so you can feel more comfortable relying on it. Second, written guidance can be printed or saved and referred to at a later time; you don’t need to rely on your memory or cryptic notes to recall how the discussion unfolded, what information was or was not provided, or what conclusion was reached. For written guidance that is more general in nature, however, your unique situation may not mirror the facts on which the guidance is given and may render the written guidance ineffectual.
4. Use a research service.
For those who prefer to do the legwork on information gathering and have access to a research service, use of that research can give you more options for obtaining detailed guidance regarding your question. Research services typically make available the most current information on changes in law and include not only statutes and regulations, but also case law, annotations, and rulings for all states. Charts covering a variety of topics can make it easier to locate the statutory or regulatory language that addresses a specific situation. Research services, however, are not inexpensive, and you may not have enough questions and potential tax savings to justify the expense of maintaining that service.
5. Consult an accountant or attorney who is experienced in state taxes.
If you do not have access to a research service, accountants and attorneys who work in the state and local tax arena have access to a number of them and are experienced in finding answers to a variety of questions of a transactional or administrative nature. They may be able to provide information quickly and easily, thereby saving hours of your time and effort.
There may, however, be times when the answer to an issue is not well defined, even after consulting the available research. At that point, there is the option to forward the question in writing to a technical expert at a state’s Department of Revenue. Accountants and attorneys often have contacts at the Department for those types of questions and are able to recommend when a question can be addressed by email or when it rises to the level of a ruling. They are experienced in laying out the facts of a particular situation to include those which are important and to exclude those which are irrelevant. If the issue rises to the level of a ruling, an accountant or attorney can determine whether the letter needs to name you as the taxpayer or whether it can be unnamed in order to be binding to the state in question. Last, but not least, accountants and attorneys who help their clients defend sales tax audits see regularly how a Department of Revenue treats a particular transaction in practice. This insight can be invaluable, especially in a case where the tax treatment is gray or controversial.
Ultimately, the level of authority you seek will depend on what’s at stake and how comfortable you are with areas of uncertainty. Consider the potential tax impact of the answer. Does your question relate to a low-dollar, recurring transaction where the tax effect could add up over time? Or is it a high-dollar, isolated transaction? Is this an expensive issue previously raised on audit, on which you are trying to keep abreast of any new developments? In addition to the tax effect, evaluate the related interest and penalties that might result from incorrect treatment.
Since there will never be a crystal ball to foresee every possible sales tax outcome, it is important for businesses to be able to quantify sales or use tax risk and understand when it is sound business practice to consult an expert about your sales tax situation. Wipfli’s State and Local Tax experts can help you bring clarity to the often murky world of sales and use tax.