New chart: Sales Tax VDAs by State

Voluntary disclosure agreements are a useful way to mitigate past liabilities while becoming compliant for sales tax purposes. Nearly every state offers a VDA program for sales tax, and if you qualify and take advantage, it could save quite the headache. One of the challenges is that VDA programs vary widely by state, and keeping up with the changes and variations between the states is a handful.

In the state of Texas for example, a VDA will waive all penalties and interest associated with any back taxes you may owe, and they will limit themselves to a four-year look-back period. Hawaii, however, will waive penalties but will require a 10-year look-back period and no interest waiver.

Oklahoma offers a VDA program with a three-year look-back, and the department will also grant a full penalty waiver and will reduce the interest by half. Compare that with the state of Iowa, whose look-back period is dependent on the amount of time your business has been operating in the state and can be up to five years, while offering a penalty waiver with no interest waiver.

In addition to what they offer, states vary in their requirements to qualify for a VDA. The state of California for example, will only enter into a VDA with a taxpayer if they have not been contacted by the state or any of its offices, and the taxpayer cannot be under audit.

Contrast this position with Maine’s VDA, where taxpayers who have been contacted by the state are not automatically disqualified from the program unless they are under a criminal investigation.

Because of the variations between states, tracking down this information would be incredibly time consuming. To save you from the hassle we have composed a chart detailing the differences between the state VDA programs. This is not meant to be exhaustive, but it can give you some helpful information on how best to proceed in your situation. If you would like a copy of the chart, just click here and let us know.

Peisner Johnson & Company Turns 20

Twenty years ago today, Jerry Peisner and Andy Johnson formed Peisner Johnson & Company with a clear mission: Solve clients’ state tax problems. 

As the newest member of the PJCo team, I’d like to wish Jerry, Andy, and the rest of the team a happy 20th anniversary! Congratulations, Team, and here’s to many more years of continued excellence!

Certificates of Authority to Transact Business: Do I Really Need to Ask for “Permission” To Do Business?

By Michael J. Fleming

A number of states ask about Certificates of Authority on their sales and use tax registration forms and/or during their voluntary disclosure agreement (VDA) programs. While the potential need for a Certificate of Authority is certainly not new, it appears that some states have taken a more aggressive stance in ascertaining who should be registered and then holding firm on compliance in their efforts to identify additional revenues. As a result, we are seeing an increased number of questions about the topic. A frequent question that arises in one form or another is, “Do I really need to ask for ‘permission’ to do business?” The short answer, at least according to the states, is yes. However, the short answer may not be the right answer for you. Before addressing how you get to the “right” answer, let’s review some of the basic concepts underlying a Certificate of Authority. What is it? What is the process to procure it? What is the basic theory behind it? What are the potential ramifications of electing not to secure it? And, what are the costs associated with obtaining and maintaining a certificate? Then, with a better understanding of certificates, we’ll return to our central question. 

What is a Certificate of Authority?
A Certificate of Authority to Transact Business is the proof that a state has granted you the authority to transact business within its borders. The process of asking for permission is usually called “foreign corporation qualification” or “foreign corporation registration.” It is called foreign corporation qualification because you are considered a domestic corporation in the state in which you are incorporated, and a foreign corporation everywhere else. Contrary to the somewhat common misconception, it has nothing to do with being from another country. The governmental agency that regulates the process is usually the Secretary of State. It is important to note that while we are mainly addressing corporations in this article, most states have the same requirements for the other types of business entities as well.

The process to obtain a certificate.
The process to obtain a Certificate of Authority is slightly different in every state. The majority of states require that you get a Certificate of Good Standing (COGS) or its equivalent from your state of incorporation. The certificates may or may not have to be certified depending on the state. Some states require certified copies of the Articles of Incorporation instead of the COGS.

Another requirement is checking for name availability. In other words, you need to find out if the name of your corporation as registered in your home state is available in the target state. If your name is not available, you will have to use an assumed name that is available. You will also need to find a registered agent. Each state has different rules on the guidelines for registered agents. A registered agent is your official representative in a state for purposes of receiving service of process and any official Secretary of State correspondence.

Once you have designated a registered agent, you will need to fill out your application and submit it to the state with the COGS and the application fee. State fees vary, but usually average around $100. There are companies that can assist with this process including Peisner Johnson & Company.

The theory behind Certificates of Authority.
The rationale the states have put forth for the requirement to obtain authority to do business is the need to protect domestic organizations from unfair competition. They also want to place domestic and foreign organizations on equal footing. The states’ ability to do so is apparently well settled and dates back to the 1869 U.S. Supreme Court Case of Paul v. Virginia, 75 U.S. 7 Wall. 168. In this case, the court found that “corporations are not citizens ... They are creatures of local law, and have not even an absolute right of recognition in other States, but depend for that and for the enforcement of their contracts upon the assent of those States, which may be given accordingly on such terms as they please.” It is specifically important to take notice of the language of the statement that refers to the enforcement of contracts.

The potential ramifications of electing not to obtain the Certificate of Authority.
The potential ramifications of electing not to obtain the Certificate of Authority vary by state, and each state usually has multiple ramifications. Perhaps the most serious ramification relates to a company’s ability to use the courts in that state to enforce their contracts, and the other ramification relates to potential assessments of fines and penalties. Many states will say that without their particular Certificate of Authority, you are prohibited from using the state court system. Some states go a step further and say that contracts you have entered into are invalid and unenforceable. Most states also have civil fines and or penalties, and a few have criminal fines and penalties. Some states cap the dollar amounts of these, but a large number do not. We have seen some fines and penalties add up to the $50,000 - $75,000 range. This can be a serious issue.

The downside of obtaining a Certificate of Authority.
After hearing the negatives of not getting a certificate, you may ask if there are any downsides of compliance, and the answer is yes. The most obvious downside of obtaining certificates is the costs associated with doing so and their maintenance. Once you have your Certificate of Authority, you will need to renew it annually in most cases. The renewal process usually consists of filing an annual report and paying a fee.

Also, the holding of a certificate in and of itself could be a nexus creating event in some states and could subject you to other taxes; most notably income and franchise taxes.

Do I really need to ask for “permission” to do business?
Again, the short answer to the permission to do business question, at least according to the states, is yes. The long answer, however, takes into consideration that each state defines “doing business” -- or as some call it, “transacting business” -- differently. The problem is that those definitions sound more like, “I’ll know it when I see it,” rather than a true definition. To the best of my knowledge, no state publishes a list of activities that are considered doing business for purposes of requiring a Certificate of Authority. Some states have a very limited list of activities that are not considered doing business. Most often, the only guidance that most states will give you is that you should consult with your attorney about your activities and whether they constitute doing business in the state.

In summation, the answer to the question is: it depends. If a state determines that your activities fit their interpretation of doing business, then their answer would be yes. We do not intend to take on the role of your attorney, nor can we state whether or not your activities definitely cross the threshold. But we do believe, given the downsides of failing to obtain a Certificate of Authority when when one was required, that a conservative approach may be desirable. Many clients of ours after considering the possible downsides, decided to err on the side of caution and tend to get registered in their larger states. But, by all means, do feel free to check with your attorney.

Peisner Johnson, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax issues. Peisner Johnson is comprised of former state auditors and other professionals with years of state and local tax experience. Peisner Johnson has worked with clients of all sizes, in all industries and currently works in all 50 states, U.S. territories and Canadian Provinces. We work with many CPAs who find us to be a perfect complement to their business since we limit our practice to state and local taxes. We do nothing else. If you would like information on any of our free webinars, free chart services or would like to learn how we may be able to help, you may email Michael Fleming or call him at 972-277-4820.

Think the “Haunted House of Horrors” on Halloween is Scary? Try Appealing Your Audit Assessment in Texas!

As a CPA firm focusing on state and local taxes, we speak with many taxpayers going through audits. A recurring theme that we often hear is that the auditor, audit supervisor or even the entire state audit division are being totally unreasonable or unfair. They can’t wait to appeal their audit, because once they get in front of an “impartial third party”, they feel that they will be treated more justly and receive a different outcome. While these taxpayers are often correct that they are being treated unreasonably, they are far from correct in their belief they will receive a different outcome in appealing their audit; especially in the state of Texas.

Should You Appeal Your Assessment in Texas?

Probably, especially if you disagree with it, but before you do, understand the odds are stacked against you. In addition you should know the audit process and try to resolve any issues at the appropriate levels during the process. Do not give up in trying to work with the auditor. If need be bring in someone to work on your behalf. Here are some reasons why.

Big Changes with Texas Certificates

Are You A Rancher/Farmer in Texas or Do You Have A Rancher/Farmer Customer?  If so, the Texas Sales Tax Law Has Changed for You.

Do you sell to farmers or ranchers in Texas? Then a new law in Texas applies to you. Starting in January, 2012, you’ll have to collect a new certificate from them with their new Comptroller-issued exemption number.

The Comptroller is currently working on the application for a registration number. A farmer/rancher in Texas enjoys a very broad-ranging exemption and until now, there was no need to register. You just buy an exempt item at Home Depot or Lowes or Tractor Supply and sign a statement that you're a rancher and no tax is charged. Now, any store who sells to a rancher will need to collect and manage a new certificate.

Certificate Management Just Got Harder

Many of our clients are experiencing increased sales tax audit liabilities because of missing resale and other exemption certificates. This is an area that states are targeting with laser-like focus. Exemption certificates have always been a problem in most sales tax audits, but as long as you had something on file that you “accepted in good faith”, or if you came up with the missing certificate, the auditors would usually give you a pass. If the item was clearly exempt, they were pretty lenient about the certificates. But states are getting very aggressive; focusing on the technicalities to the extreme. The item may clearly be for resale or exempt like these agricultural items, but it you don’t have the right form completely filled out and signed with a valid id number and the right date, they will tax you all day long til the cows come home. It’s easy, low-hanging fruit.

Is an iTune Taxable in California?

How About in Other States?

Back in 2008, we wrote that the CA legislature was contemplating a change to its sales tax statutes to tax downloaded software. As it turned out, they didn’t change the law after all and electronically downloaded music and other digital goods in CA remained exempt from sales/use taxation. Meanwhile, a song purchased on a CD has always been taxable in CA. That may seem a bit unfair. If you buy a song on iTunes and download it to your iPod, you owe no tax in CA, but that same song on a CD is taxable in CA.

This may seem arbitrary and capricious, but there is a reasonable explanation for the different tax treatment.

OH SALT Update

Commercial Activities Tax (CAT), Sales & Use Tax, VDAs & Amnesty

By Michael J. Fleming

The State of Ohio and its state and local tax (SALT) policies are currently generating a variety of questions from our clients as well as with others we are speaking with. Since OH is generating so much attention we thought it might be beneficial to share with our readers the subjects that are most frequently arising and provide you with some information as well as our thoughts.

These subjects include OH’s requirement that companies register, file and remit use tax, and the State’s push to go after the 380,000 business who don’t have use tax accounts. We will also take a look at the OH sales tax amnesty that forgives not only all principle and interest but all back sales taxes as well. Finally, we will take a look at the CAT and how you can have nexus without a physical presence.