Many people think that states obtain their operating revenue from income taxes. However, most states obtain the volume of their revenue from sales taxes, not income taxes. As you might imagine, this makes them very jealous of sales tax revenue. Some states (such as Florida and Virginia) even tax services, not just tangible items.

While the concept of sales taxes seems simple – the ultimate flat tax – in reality sales taxes can be very complex. In some states, food or clothing is taxed at reduced or tax exempt rates. Certain types of transactions can qualify for reduced levels of taxes, such as sales to manufacturers, or if your shop is located in a special zone. A growing number of states have also enacted sales tax exemptions or reductions to spur business in impoverished areas, as well as instituting “tax holidays” such as the weekend before school starts each Fall. To make this more complicated, quite a number of states collect sales taxes for their counties as well. In some states the county rates can vary, so you must keep records of sales in each county as well as each state in which you do business.

A complex problem area is interstate purchases and sales. Some states such as California are extremely aggressive in attempting to collect taxes from businesses that don’t even have an office in the state. The ability to collect from out-of-state businesses depends on whether your business has “nexus.” Nexus is a legal term which means connection to the state. Different state and federal courts have inconsistent definitions of what it means to have sufficient connection to the state to be subject to tax. Internet commerce in particular is a highly volatile area of sales tax law that is temporarily on hold, but which is still undecided.Also, note that if you purchase items or equipment via interstate commerce you may still be subject to tax in your state. Almost every state has imposed a use tax on out-of-state purchases by their in-state businesses (and consumers too), equal to the sales tax that would have been paid. In a sales tax audit, you might be found liable for use tax on items you bought from out-of-state firms if you fall into this trap.

The most problematic area of sales tax audits and of sales tax audit defense is the definition of tangible items subject to sales tax. We run into this time and again.  For example, our client, a New York publisher, sells editorial time (billed by the page) to hone novels and articles until they are ready to be presented for publication.  The publisher also offers to publish the finished work itself, for a fee.  This portion of the business is known as vanity publishing, but the editorial services such as our client offered writers across the country are common.  Most people would say that it is common sense that the editorial charge would be an intangible that is tax exempt, while the books or articles are subject to sales tax. However, the state Department of Revenue ruled that all of the $10,000 editorial time was simply an enhancement of the $25 book, so the entire editorial time was subject to sales tax, even though intangible services are exempt from taxes in that state.  We of course won this bizarre case, but you can see from this example that even “cut and dried” flat tax issues like sales tax are subject to wild interpretations, so it pays to have our law firm build a strong argument for your interpretation as part of our sales tax audit defense approach.

When you receive the notice of audit or other state demand for money, your best course of action is to seek the help of an attorney who knows his or her way around sales tax issues.   John Ellsworth of ELLWORTH LAW GROUP, LLC is one such attorney, with more than 35 years of experience in representing taxed companies and individuals.  When we represent customers who are being approached by a state to pay up, we will always respond to any state notices of delinquency promptly. If there is a way to avoid the tax altogether (exemption, non-applicability of law) we will make every effort to find and enforce it.

Here are some ways our tax law firm can start helping your situation immediately:

• We use CPAs, accountants, and tax lawyers to defend your company.
• We will audit your records to determine where your state tax nexus and compliance is weak or strong.
• We begin to amass and digitize your data to limit your exposure and gather supporting documentation.
• We require that the audit be conducted off-site.  If necessary we will provide the office resources for the auditor to review the records we present in order to maintain the privacy and integrity of your own premises.
• If there is a nexus problem with the state’s case we will emphasize that and, if economically reasonable, we will litigate the issue
• We will supply you with the world’s largest database of tax precedent to analyze your case.
• We apply the U.S. legal industry’s most advanced legal research and technology to your tax audit defense, which serves to solidify your position, reduces sales tax audit defense expenditures and establishes legal precedent that is exactly on point and in your favor.
• We are tax lawyers, not CPAs or a “company.”  We can take your case as far as necessary to win.