In 1789, Benjamin Franklin said in a letter that there are only two things you can be certain of death and taxes.
He was certainly right about the taxes. Especially sales tax. We are hearing from clients and accountant colleagues about the increase in sales tax audits. These are turning out not to be friendly, let’s talk audits but somewhat nasty, prove you’re innocent audits where the assumption is that your business is not paying what it should.
The real issue is not whether you’re paying but whether you’re collecting, then paying. Since that’s what you are really doing. You’re the Sheriff of Nottingham and Prince John wants his due.
We are recommending to our clients that they actually pick up the phone and talk to someone at the Texas Comptroller’s Office. Their mission, should they accept it, is to validate what products and services they offer that are taxable. And, collect and pay the taxes of course.
This is not something you do once and forget. State legislatures in tough times move the goal posts to find “lost” revenue and a smart business owner is right there, ready to go. It’s very likely that what you thought was not taxable is now or at least part of it is. Their position, quoting the Texas Comptroller is “State Sales and Use Tax is imposed on all retail sales, leases and rentals of most goods, as well as taxable services”.
The second guilt for a business is payroll taxes. You are guilty of having employees and needing to pay taxes on them unless you can prove otherwise.
Even though people and bookkeeping software refer to “Contract Labor”, there’s no such thing. There are only employees and contractors.
As I heard every time attorney Tommy Simmons from Texas Workforce Commission spoke at my Street MBA and Owners MBA programs, no one can “sign away” their rights to be classified as an employee. So, don’t think you can ask someone to sign a paper that says they’re not an employee.
Everyone is an employee unless you can prove otherwise and that’s tough. There are 20+ ways to recognize you’ve got employees that are spelled out in a grey way by the IRS and Workforce. They look to see how many of those apply. If enough do, that person is an employee. In general terms, the IRS says what matters is if the employer has the legal right to control the details of how the work/services are performed.
There is some information on employee vs contractor at the IRS site. We refer owners to Especially for Texas Employers that has a great section on the issue by Simmons who has been a business owner himself. Pay special attention to Appendix D & E which have a test that the IRS and Workforce apply.
So, be wary and prepared.
Have a happy Sales Tax Holiday, August 19-21 when you get a break as a consumer or business from state and local sales taxes on purchases of clothing, footwear, backpacks and school supplies priced at less than $100.
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