There can be a lot of questions when it comes to understanding and managing sales and use tax for your business. It’s easy to become overwhelmed and frustrated when it comes to warranties, sales tax exemptions and compliance. So, let the professionals at BRP help you sort it all out and free up your time. We will provide the commitment and expertise to keep your business on track.
The following is Part 3 of a 4-Part Series that will help answer some basic questions.
Warranties, Exemptions, Registration and Compliance and Audits
Warranties are agreements to repair or replace tangible personal property, generally without substantial additional charges to the consumer, for a given period of time following a sale. They are often viewed as a form of insurance due to the uncertainty of the need for repair or replacement.
Warranties differ from service contracts or maintenance agreements, which presume maintenance or repairs will be performed. Many states treat optional service contracts and maintenance agreements as pre-buying of repairs, and will tax or exempt the service contract or maintenance agreement according to the rules for repair services.
Warranties generally fall into two categories, Mandatory or Optional. Definitions, taxability, or non-taxability vary from state to state. Consult our BRP tax professional to help guide you through the details.
In general, an optional warranty is a warranty that a buyer chooses to purchase. In most instances the optional warranty is not sales taxable because it is considered a separate service contract. However, the parts used for repair under the optional warranty are subject to state sales and use tax paid and any applicable special district and local taxes by the warranty provider.
A mandatory warranty is a contract that comes with a product and is included in the total selling price. Under a mandatory warranty, your customer does not have the option to purchase the product without the warranty. Examples include standard manufacturers’ warranties that come with new vehicles, computers, etc. If your sale of the product is taxable, the mandatory warranty is also taxable.
Most states require retailers to register to conduct business within the state. The retailer collects, reports, and remits sales taxes on its qualifying sales of tangible personal property. Therefore, the merchandise purchased by the retailer that will then be sold to the consumer is usually exempt as ‘purchased for resale”.
If a wholesaler, manufacturer, distributor, etc. sells merchandise to a retailer, the sale usually qualifies as exempt. Most states require the wholesaler to verify the exemption by obtaining an exemption certificate. If the wholesaler receives and accepts a valid and appropriate exemption certificate in good faith, the wholesale is not liable for sales tax on the sale to the retailer.
What is valid and appropriate proof?
- A written exemption certificate (in Illinois this is Form CRT-61)
- To be valid, written certificates must conform to the states’ regulations
- Most states permit “blanket” or continuing certificates in specific situations
- Some states permit the use of “direct pay permits” by buyers (this allows a business to pay their own tax on purchases)
- Some states require a new exemption certificate at stated intervals as short as annually
- Some states accept the Multi Tax Commission’s Uniform Sales and Use Tax Exemption Certificate (https://www.streamlinedsalestax.org)
- Some states accept resale exemption certificates from other states for specific reasons, i.e., drop shipping
The obligation to prove the sale is not taxable usually falls on the seller. The seller must practice good faith in accepting exemption certificates. A buyer providing a resale exemption certificate is claiming the sale is not taxable. If the claim is found to be improper, the state will usually go after the buyer.
In addition to resellers, some frequently exempted buyers can be: federal government, state government, political subdivisions, public schools, religious organizations, charitable organizations, for-profit Hospitals, not-for-profit hospitals. Other than the federal government, exemption certificates are usually required. If there is an exemption available, it is for what the organization is exempt to do, not a blanket exemption for all purchases.
Registration and Compliance
- Most states require retailers to obtain a license before conducting business in the state (i.e., Illinois Form NUC-1)
- Some States may require a bond or other form of surety
- Frequency of filing sales tax returns is generally tied to size
- Returns must generally be filed by the due date, even if no tax is due. Late-filing penalties can usually be assessed if returns are filed late
- Late payment penalties vary from as little as one-half of 1 percent up to 25%
- Many states offer discounts for timely pay
- Additional penalties may be assessed for negligence, wilful negligence and fraud
- Failure to file can result in additional interest, penalties, revocation of license, creation of estimated returns by the taxing authority on your behalf based on history
- Most states require electronic filing and payment
Although some audits are random, many audits are triggered by something, such as leads generated from other audits, firm classification or state-to-state cooperation. Auditors will usually examine all open years (determined by the applicable statute of limitations) for sales, purchases, other records (including ledgers, journals and adjusting entries) reporting and remitting (including all filed returns), credits, claims for refunds, accounts payable, and other information.
In dealing with audits and auditors:
- Be prepared
- Treat the auditor as a professional and with the appropriate courtesy
- Keep the audit under control
- Be consistent in your answers
- Convince the auditor your doing it right
- Watch for overpayments
- Get help
- Climb the ladder
- Never lie
Portions of the information are from the Sales and Use Tax Workshop, and used with permission by Fred Pryor Seminars. All rights reserved.
Coming in the next and future Newsletters:
Part 4 – Streamlined Sales Tax Project
Look for this upcoming article and stay ahead of the curve! Contact a BRP professional to keep your business up to date and ready for success.
Disclaimer: The information contained in this Blog (the “Blog”) is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will BRP, or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Blog or for any consequential, special or similar damages, even if advised of the possibility of such damages.