Warning – Sales and Use Tax Compliance

May 8, 2009 | Subscribe to our RSS Feed

The State of Maryland is looking for revenue. They are aggressively performing more and more sales tax audits to increase their coffer. This year in particular, they expect a reduction in income tax revenues due to the downturn in the economy. The State has caught businesses off guard with huge assessments for this unrealized tax.

The Comptroller’s office looks at three areas to identify unpaid sales and use tax. These areas are:

1. Fixed Assets
2. Operating Expenses
3. Sales

Fixed Assets

All fixed assets that are used in the state of Maryland should have a sales tax charged on them. Sometimes businesses purchase assets from out of state vendors that do not charge a sales tax. If this happens, the business is required to remit a “use tax” for the purchased fixed assets. The use tax is the same rate as the sales tax. This tax is charged on all personal property. It is not charged on real property (property permanently affixed to the building). There are tricky areas where there are labor costs associated with fixed assets. They must be reviewed in a case by case basis to determine if sales/use tax is warranted. The service will look back and assess a tax on all untaxed assets placed in service during the past four years. There may be exclusions from tax if you are in manufacturing and/or sale to others who resell your product.

Operating Expenses

The state auditors pick a test period of three or six months and review invoices to determine whether all sales tax is paid. Generally, they review purchases from out of state vendors and large purchases. Sales tax should be charged on tangible products. In addition, there are several services that are subject to sales tax by statute. One of the most common one is commercial office cleaning. Once the audit determines the extent of the error during his test period, it is projected for a four year period. This can create a huge liability.

Sales

Sales of personal property to customers in Maryland are subject to sales tax. There are exceptions when the product is going to be resold by your customer. You must get a resale certificate to support not charging a tax. Also some sales to non-profit organizations are not subject to tax. You need to get support of their non-profit status from them. Generally, labor is not taxable if it is separately stated. The State of Maryland reviews the invoice to determine if the tax applies. The wording on the invoice may determine the taxability. The reality of what is being paid for may not control. The State is extremely literal with the wording (form) rather than the substance of the transaction.