Certified public accountant Inez Mello is a principal in the tax services department at CCR, an accounting and business advisory firm with offices in Providence, Boston, Westborough, Mass., and Glastonbury, Conn. Mello joined the firm in 2007 and works out of the Providence office, but she has been specializing in state and local taxes for nearly two decades at other firms.
Mello answered five questions about recent state threats to close businesses that had passed their sales tax collections to the state.
PBN: Last month, the state issued final sales tax notices to more than 1,000 businesses, saying either pay up or shut down. Is the state acting within its rights?
MELLO: Unfortunately, the state is acting within its rights. Sales tax is considered to be a fiduciary, or trust, relationship. It is a “flow-through” tax, which means that when the collections process is handled correctly, the only financial burden on the business is the time spent preparing the returns. The business collects sales tax from a customer, holds the money for a short period of time, and then remits it to the state. However, there are two types of businesses registered for sales tax that seem to be involved in this closure. A business that operates on a cash basis and a business that operates on an accrual basis. A cash-basis business collects the sales tax at the point of sale. An accrual basis business offers credit and in today’s economic environment most likely is not being paid prior to the due date of their sales tax return.
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PBN: The Carcieri administration has said it has sent out similar notices in years past, but have you seen that states are getting more aggressive in their tax collections during these tough fiscal times?
MELLO: I am celebrating my 20th year of being a national state and local tax practitioner. More than 40 states are facing dire fiscal situations. Not only have all of the states increased their enforcement efforts, many states plan to raise money for their state budgets from an increase in performing state audits. And not just for sales tax. Many states are actively auditing companies that do business in their state to determine whether the company has a taxable presence in the state (nexus) for a filing requirement for both corporate state tax returns and sales tax returns.
PBN: Is there sales tax training available for new small-business owners when they become licensed, either through the state or through private means?
MELLO: The R.I. Division of Taxation does not offer any sales tax training. However, it is my understanding that the division is currently looking into establishing a formal sales tax training course. However, organizations such as the Small Business Administration (SBA), the Small Business Development Center (SBDC) and the Center for Women & Enterprise (CWE) all offer a business planning series that devote a small portion of the training to “General Business Responsibility.” And, of course, small-business owners should really consult with their attorney or CPA for guidance.
PBN: When it is done properly by a retailer, how should the sales tax process work for a business? What’s your advice to clients on how to handle it?
MELLO: I have my cash-basis clients reconcile their sales tax collections either daily or weekly (depending on their volume of business) and deposit the sales tax they have collected into a separate business bank account just for sales tax. I know this strategy can be a nuisance, but for the undisciplined business owner, this strategy works.
Again, sales tax is a flow-through tax, which means that when the collections process is handled correctly the only financial burden on the business is the time spent preparing the returns. Unfortunately, for those businesses that offer credit, accounts are often paid after the due date of the sales tax returns, especially for a monthly sales tax filer. In a perfect world, if their sales are flat (basically the same dollar amount each month), the business should only have to float the first month. The only advice I can offer them is to closely monitor their accounts.
PBN: What would be your recommendation for clients who receive these types of delinquent tax notices from state agencies?
MELLO: Immediately call your attorney or CPA firm for advice. Do not attempt to address these delinquent notices without an adviser who has had experience dealing with state agencies.
Make sure your records are in impeccable order. Although you are legally responsible for remitting any sales tax charged on your invoices, if you truly have not collected sales tax because your accounts are late paying you, have a copy of your accounts receivable aging report ready to show the state agency. This will help you in working out a payment plan with the state agency.
