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Don't shoot the sales tax collector; it could be you


Generally sales taxes apply on the sale of just about anything to just about anyone.

Those taxes collected on the sales of many goods and products and paid by even more veterinarians are increasing in both amount and complexity.

Cash-strapped state and local governments are raising sales tax rates and stepping up enforcement of their collection rules. In fact, in their efforts to increase revenue from sales taxes, many states are broadening the definition of gross taxable receipts to include services.

Many states now levy a sales tax on services and still others are considering sales taxes on a variety of services as well as many goods and products previously exempt from sales tax levies such as prescriptions, medical equipment and the like. This, of course, increases the burden on the veterinary practice, whether collecting those sales taxes or required to pay sales-and-use taxes.

Unfortunately, sales taxes appear to be a growth industry for many of the 7,500 taxing jurisdictions in the U.S. What's worse, many of those taxing jurisdictions and systems vary widely.

Common definitions can differ greatly. Orange juice, for example, is defined as a fruit in one state and taxed. As a beverage in a neighboring state, however, that same orange juice may not be taxed at all.

Generally sales taxes apply on the sale of just about anything to just about anyone. In most states, as well as in many cities, a veterinarian must collect sales tax on all applicable sales of veterinary products. In addition to adding to the burdens borne by every veterinary practice, whether collecting those sales taxes or required to pay them, mistakes can abound.

Mistakes can be expensive

On one hand, a veterinary practice caught not collecting sales taxes must pay those amounts from its pockets. Another veterinarian, unfamiliar with the rules, may pay over to the government tax authorities sales taxes, whether collected or not, on sales where no tax was imposed. Or, even worse, the practice may pay over sales taxes based on the operation's gross sales.

And, then there are those mistakes, errors and omissions that result as an increasing number of states rush to tax the selling price of many services. In addition to imposing sales tax on routine sales of goods and products, there are an increasing number of jurisdictions that are already taxing many types of professional services (doctors, dentists, accountants, attorneys, consultants and, yes, in some cases, veterinary services).

Other types of services that falling under these increasingly more comprehensive sales tax requirements are:

  • Personal services. Services provided on a personal, but not professional, basis. Examples might include haircuts, manicures, home-cleaning, landscape maintenance, laundry or dry cleaning services, etc.

  • Repair services. These services do not create new property, but merely render operable property usable at the site of the user. The fine distinction between assembly and installation is important because states generally tax assembly, but may not tax installation.

  • Business services. The services in this category result in the movement of services or something. The things moved could include freight (freight services), financial instruments or money (banks), persons (transportation companies), electrical or telephone services (utilities), risk (insurance companies), ownership of real property (real estate companies), etc.

Remember, however, individual sales and use tax systems may differ in defining any or all of these categories or may ignore them altogether.

Exception to the rule

Obviously, sales tax collection would be far easier if the tax were based on total sales without exceptions, exclusions or exemptions. In addition to taxing or not taxing specific goods, products or services, exceptions to the general rules include sales to resellers, either wholesalers or retailers, which have valid state resale certificates.

Another exception to the general sales tax rules involves sales made to tax-exempt institutions, such as public schools and libraries. No sales taxes need be collected on sales to tax-exempt or other exempted organizations. Further complicating matters, in some states, sales taxes apply only to products, while in other states, sales taxes apply to services as well.

Naturally, every veterinary practice should have a resale certificate of license. Without such certification, every seller is legally obligated to collect sales taxes on many of the practice's purchases.

The importance of records

The complexity of the sales tax rules and the need for keeping good records is illustrated by one passage taken from California's sales tax regulations:

"Every seller, retailer and person storing, using or otherwise consuming in this state tangible personal property purchased from a retailer, and every lessor and lessee of tangible personal property for use in this state, shall keep adequate and complete records showing:

  • Gross receipts from sales or rental payments from leases of tangible personal property (including services that are part of the sale or lease) made within California irrespective of whether the seller or lessor regards the receipts as taxable or nontaxable.

  • All deductions allowed by law and claimed in filing returns.

  • Total purchase price of all taxable personal property purchased for sale or consumption or lease in California."

Obviously, this is a tall order for any veterinarian. Fortunately, there is a so-called "loophole" that permits the veterinary practice to keep only those records that are "ordinarily maintained ... by the average prudent businessman."

California's complex sales tax rules also illustrate why records are so important. Often misunderstood is the amount of taxes that must be included in the veterinary practice's total receipts. A practice can wind up paying sales tax on the sales tax and income tax on the sales tax -if adequate records are not maintained.

This frequently results because the "gross receipts" figure demanded by California and many other states means the total of all monies coming into the practice, including sales tax collections. Obviously, careful recordkeeping is needed in order to "blackout" the sales tax from the veterinary practice's gross sales.

The bad debt write - off

Although it is relatively easy to recognize when a sale has occurred, it requires good bookkeeping or tracking to note the point of time when a sale is actually written-off as not collectable. Bad debts can be a simple failure of someone to pay a bill, a check with insufficient funds or a rejected credit card transaction.

Bad debt can usually be excluded from gross receipts with a reduction in the period that it is actually written-off. Naturally, if that bad debt is eventually recovered or collected, the amount must be re-included in gross receipts at that time.

Obviously, bad debts are a federal tax write-off. They should not, however, be ignored for sales tax purposes. The importance of writing-off bad debts for sales tax purposes against the sales tax liability results in a return of 100 percent of the originally reported tax. Sales taxes written-off against federal income tax liability only results in the savings of the income tax on the sales tax.

In the beginning

Before any practice or business opens its doors, registration with the sales tax authorities should be undertaken for each place of business. A license or permit is important because in some states it is a criminal offense to undertake sales without one. Any veterinarian who fails to collect sales tax may, of course, be held liable for the uncollected amount.

And don't forget that all-important resale certificate. Without it, a practice may be paying sales tax on supplies, goods and products that are resold to customers. The government may not care that two sales taxes are being paid on the same item. It is the sale to the ultimate consumer of goods, products or services that is taxed. All intermediate sales are usually exempt from sales tax payments if the buyer has a resale tax license that will allow it to collect sales taxes, both the amount unpaid when purchased and on the amount added before sale to the ultimate consumer.

When it comes to "discounts," it is all in the timing. That so-called "prompt payment" discount offered by so many practices is considered taken after the sale act in many states and is often included in gross receipts. In other words, the seller reports the gross receipts without reflecting the amount the customer may deduct due to a prompt payment. In a number of other states, the seller can adjust the gross receipts after the fact reflecting the discounted amount of the computation received on a prompt payment discounted sale.

In many states the reduction in selling price resulting from a trade or quantity discounts shown on the face of the invoice reduces the taxable gross receipts as well.

By now it should be obvious that sales taxes are a major headache for many veterinarians. However, they don't have to become a financial burden for any veterinarian who understands what goods or services are taxed and which are not. Remitting or paying over only the tax due on taxable sales is as equally important as collecting sales taxes in the first place. And remember, the only common denominator among state sales tax systems is that they are all subject to change.

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