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Give Your Business a Sales Tax Check Up

Kyle Brehm and David Tibbals

Fredrikson & Byron Attorney Kyle Brehm is a tax attorney with more than a decade of experience working with companies to resolve a broad spectrum of issues related to state and local tax matters. His email is [email protected].

David Tibbals is an associate at Fredrikson who assists clients with a variety of commercial, corporate, and state and local tax law matters. He can be reached at [email protected].

Why should your business care about the difference between a Twix bar and a Snickers bar?

We all have our eccentricities, but those of us who are sales tax attorneys can be particularly maddening. Let’s consider a brief hypothetical. Imagine purchasing a Snickers bar and a Twix bar from your local retailer at an agreed-upon $1 each. When the clerk asks for payment, you see a total of $2.15, which includes sales tax. Most people facing this situation swipe their credit card and move on. But not a sales tax attorney—a sales tax attorney is officially triggered because in several states that tax calculation is incorrect.

Why is that wrong?

Because the Snickers bar is subject to sales tax, whereas the Twix bar is exempt from sales tax.

That’s ludicrous. Why?

It is. But many states have specifically exempted purchases of groceries from sales tax.

Okay. But how is a Twix bar any more or less of a grocery item than a Snickers bar?

It’s all about the flour, and the amount thereof. Just like licorice, which is also typically exempt as a grocery item, a Twix bar has more flour and is thus considered a grocery item. A Snickers bar is considered a taxable candy. And, yes, they’re both delicious.

And… what does this have to do with someone reading a business magazine?

All businesses and industries need to understand that words matter, especially when it comes to sales tax.

Why should I care about sales tax being complicated?

Having a plan for sales tax is important for businesses, because of its effect on your bottom line. For example, we have worked with manufacturers of varying sizes across the United States on issues surrounding sales tax. Many states have exemptions in place, allowing manufacturers to purchase certain items exempt from sales tax—based on the state and the type of an exemption could save a manufacturer between 2.9% (Colorado) and 12.95% (Sterlington, Louisiana) on purchases of exempt manufacturing equipment.

So, why don’t I just tell my vendors to stop collecting tax?

Makes sense, but which vendors? And for which purchases?

What do you mean? For all of my manufacturing purchases…right?

Based on the state, manufacturing could mean just machines that touch the product during the production phase, or it could be items used to handle the product as a raw material or a finished good. Some states may include quality control and/or R&D equipment. What about computing systems? Utilities?

So, what do I do?

Go get a cash tax refund (read: above the line) of historical overpayments, and work with your systems and vendors to stop overpaying moving forward.

How do I know what to do?

As you’re probably realizing, sales tax is complicated. And states can be vastly different when it comes to sales tax impositions and exemptions, as well as audit rules and the required processes to obtain historical refunds. Considering this, we think it is wise that you give your business a sales tax “check-up” every so often. Here are a few ways you can do that:

Consider the nature of your business. Although the general rules of sales tax apply across all businesses and industries, the nature of your business may have certain rules of thumb to apply and exemptions to consider. For instance, are you a service provider? If so, your sales of services are generally not taxable unless specifically enumerated by state statute. If you’re a seller of tangible goods, are you a retailer or a wholesaler? If you’re a retailer, you should generally be collecting sales tax from your customers, but if you’re a wholesaler, your transactions will typically be exempt from sales for resale.

What industry are you in? We earlier mentioned manufacturers, who may benefit from exemptions on certain investments in assets and purchases of supplies. States also typically apply similar rules to producers of agricultural products. Are you in the construction industry? Then you have a unique set of rules concerning tax on items incorporated into real property to consider. Sales tax statutes are often long reads, but the nature of what you do will bring certain sections into focus.

Identify your business’s footprint. Where your business is active will dictate what sales tax statutes you need to comply with. If you’re in the Red River Valley, you’ll likely need to pay particular attention to both North Dakota and Minnesota sales tax laws. Fortunately, the two states are generally quite similar in how their sales tax statutes are structured. If you’re active in South Dakota, you’ll need to keep in mind that its sales tax statute is particularly broad, including taxing the sales of most services, primarily to compensate for the state’s lack of an income tax.

Speaking of South Dakota, it was the catalyst behind a major development in sales tax law across the country just a few years ago. In its decision in South Dakota v. Wayfair, the U.S. Supreme Court determined that states may impose a responsibility on out-of-state businesses to collect sales tax if they have a specified economic presence in the state. Practically speaking, this generally means that if your business is making at least $100,000 in sales into a state, you need to collect sales tax from your customers in that state, although the exact thresholds vary by state.

Confirm your vendors’ sales tax determinations and invest in processes. Procedurally, sales tax statutes rely on businesses to collect tax directly from their customers and later remit those amounts to the state. Considering this, state tax administrators will regularly audit businesses to ensure that they’re doing this properly. But as we’ve established, sales tax is complicated, and businesses of all sizes make mistakes and can be assessed tax liabilities (plus penalties and interest) on audit.

With this in mind, make sure you’re incorporating into your procurement and accounts payable processes some level of confirmation of your vendors’ collection (or non-collection) of sales tax. Are your vendors collecting tax when they shouldn’t? Then there may be opportunities for you to seek refunds either directly from the vendor or through the relevant state tax administrator.

There are a lot of nuances to consider when it comes to sales tax and the subtleties of each state’s rules surrounding impositions, exemptions and processes. Hence your authors’ eccentricities! Fortunately, some contemplation of the character of your business, identification of your business’ footprint, and confirmation of your transactions can help you focus on the most significant compliance responsibilities and savings opportunities. In closing, the next time you stop at a convenience store, make sure you’re not paying sales tax on that Twix bar!

 

Written by Fredrikson & Byron

Fredrikson & Byron is a 290-attorney law firm based in Minneapolis, with offices in Bismarck, Des Moines, Fargo, Mankato, St. Paul, Saltillo, Mexico, and Shanghai, China. Fredrikson & Byron has a reputation as the firm “where law and business meet”. Our attorneys bring business acumen and entrepreneurial thinking to work with clients, and operate as business advisors and strategic partners, as well as legal counselors.

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