It’s no secret that sales and use tax is a confusing and complex area of tax law. With more than 7,500 jurisdictions across the country (including states, counties, cities, and special districts) imposing a sales or use tax on transactions that occur within their borders, it’s easy to see why. And, what might seem to be an insignificant detail can affect the taxability of a transaction.
In our years performing audits for the Wisconsin Department of Revenue (WDOR), and now in consulting with clients, we see the same common sales and use tax errors appearing time and again. Some of the issues below raise a “red flag” and can increase the likelihood you’ll be audited. Others are so widespread that they’re examined in nearly every audit. Your business should take steps to correct both types of mistakes now, in advance of an audit, to limit your exposure and possible penalties.
Many exceptions and exemptions can apply when it comes to calculating sales and use tax. However, here are five of the most common errors we see businesses making across the board.
- Not paying use tax on purchases. This is one of the most common errors found in audits. If you’re making purchases from out of state (or international) vendors, you are required to pay use tax on those purchases to the state of Wisconsin, if sales tax was not charged and an exemption does not apply. Make sure you are maintaining careful records in this area in case of an audit.
Does your business make purchases with a credit card? If so, it’s very important to keep all invoices with your credit card statements. If you’re audited and do not have a receipt or invoice to prove that all or part of a purchase was taxed or was non-taxable, you’ll likely be assessed use tax on the total amount of your out-of-state purchase. Keep those receipts and invoices!
- Not knowing which services you provide are taxable, and which are not. It’s critical to know the rules within your industry. Services that seem to be related or similar may vary in their taxability. For example, landscapers should collect sales tax on lawn maintenance charges, but not on snow removal. Also, the installation, repair, service, alteration, maintenance, and inspection of computer hardware and prewritten software, including internet access services, are subject to Wisconsin sales or use tax—however, web design and hosting are not taxable.
Auditors will be familiar with the most common mistakes within your industry, so it’s worth the time investment to make sure you’re following the rules. Errors here can result in liabilities that add up quickly.
- Incorrectly applying sales tax to labor. The physical location at which labor is performed, and what type of work it is, will determine its taxability. Construction and repair contractors are often at risk of labor-related tax errors. A contractor’s gross receipts from the installation or repair of personal property are subject to sales tax on the total sale price (labor and material), unless an exemption applies. For example, the installation or repair of cabinets or counters used to carry on a trade or business (such as in a restaurant, bank, hotel, movie theater or medical office) is subject to Wisconsin sales or use tax.
Even if you’re not in the construction industry, it’s important for your business to know these rules. If you remodel or make repairs to your facility and are audited, you could be liable for any taxes that were not collected and remitted by the contractor (including penalties and interest). Because of the complexity of these rules, it’s a good idea to have a professional knowledgeable in sales and use tax review all invoices to ensure you haven’t over- or underpaid your tax liability.
- Not charging sales tax when selling business assets. Even though it’s not a typical sale, most ongoing businesses selling equipment used in their trade or business need to collect sales tax on that transaction and provide a receipt to the purchaser. Examples could include a landscaper selling a used lawn mower, or a transportation company selling a truck.
In certain situations, such as a manufacturer selling production equipment to another manufacturer, exemptions exist. In those cases, make sure you obtain a sales tax exemption certificate from the buyer.
- Not registering for sales and use tax. Voluntarily registering for sales and use tax will save your business interest and penalties in the long run. If your business comes under audit by the Wisconsin Department of Revenue, and your business is registered with the WDOR when you receive the audit notice, (1) the audit itself will be limited to four years, and (2) assessment interest will be assessed at a rate of 12%.
However, if your business is unregistered when you receive the audit notice, there is no limit to how far back in years that the Wisconsin Department of Revenue can go. Typically, the WDOR will only audit the last six years if you are not registered, but they may go all the way back to the period in which the business originated. In case of an assessment, delinquent interest of 18% is statutory for a non-filer.
Penalties can be significant, so take the time to evaluate your practices relating to sales and use tax to ensure that you are in compliance. For all the above, an experienced sales and use tax professional can help you to assess the unique aspects of your business and where exceptions may apply, and provide direction to ensure you are in compliance.
For more about sales and use tax rules and issues that may impact your organization, join us for our 2012 Sales & Use Tax Update workshops to be held throughout January and February. Join us to learn:
- How to limit your sales and use tax liability exposure
- When to charge your customers sales tax and when to self-assess use tax
- Best practices in structuring transactions to reduce tax obligations
- How to handle overpayments and refund opportunities
We’ll begin by covering general sales and use tax issues affecting most businesses. The second hour of this two-hour workshop will address specific issues impacting the construction, health care and manufacturing industries.
To learn more, or to discuss the rules that impact your business, contact your account director or any member of our State and Local Tax Team at 800-236-2246.
Julie Woelfel, CPA, is the manager of Schenck’s State and Local Tax team. Julie has more than twenty years of experience with specialized expertise in sales and use tax issues, multi-state income tax, as well as state, corporate and individual income tax.
Shea Reese, sales and use tax supervisor, researches and solves sales and use tax compliance issues across all industry types. He provides audit assistance through comprehensive knowledge of sales and use tax laws as they apply to many businesses.
Crystal Krenke, senior accountant, helps businesses ensure their sales and use tax practices are in compliance with state regulations by reducing their exposure and identifying potential liabilities. She has experience with the State of Wisconsin’s recent acceptance into the Streamlined Sales & Use Tax Agreement (SSUTA) and the legislative changes to Wisconsin’s statutes.
Prior to joining Schenck, Julie, Shea and Crystal served as Revenue Field Auditors for the Wisconsin Department of Revenue.