Advisors need to beware that line of calculated local taxes on invoices—on both ones they receive from vendors and ones they themselves issue to clients.
“That [sales and use tax] returns are fairly simple compared to income tax returns often misleads taxpayers and their consultants to believe that the underlying tax itself is easy,” said Gary Bingel, a state and local tax specialist at EisnerAmper in Iselin, N.J. “There are also several layers of complexity—nexus, sourcing, taxability.”
State and local sales tax is imposed on the sale, transfer or exchange of a taxable item or service and applies on the sale to the end user; use tax is offered by certain states to vendors who meet certain requirements. Nexus determines a company’s requirement to collect sales/use tax and remit it to a tax jurisdiction.
Any problems advisors have calculating sales tax come on the heels of a recent Securities and Exchange Commission warning that advisors may be violating their fiduciary duties and securities laws because of errors in fee calculations.
“I would not like to consider [sales tax miscalculation] fraud,” Armstrong said, “but rather a recognition of how difficult it is to track sales into 50 states.”
These taxes become especially tricky when clients get involved, either as recipients of invoices or seekers of advice.
“On the business side, you should know how your state sales tax regulations work and whether your purchase is subject to a sales tax or use tax. On the flip side, you should know if your services make you responsible to collect a sales tax and if so, file and remit,” said Morris Armstrong, an RIA and enrolled agent at Armstrong Financial Strategies in Cheshire, Conn.
Armstrong said he recently received a monthly bill for digital services with sales tax calculated at 6.35%, Connecticut’s sales tax rate for physical services. “My state, as do others, have a lower digital rate of 1%,” he pointed out, adding that he’s caught other vendors using incorrect billing.
Yet “applying proper state and local tax rate on invoices can be fairly difficult,” said Geoff Christian, managing director of national, state and local taxes at CBIZ MHM in Greenville, S.C.
“It’s important to remember [that] sales tax was initially intended to apply to tangible personal property—that is, physical goods—and not services,” Christian said. “In many instances it’s difficult to apply to services sales tax rules that were largely adopted or intended for physical goods.”