Can your customer purchase this poster tax-free? Are you sure?

Can your customer purchase this poster tax-free? Are you sure?

A small business in Springfield, Illinois, was audited recently and the owners were distressed by what they learned. Five years ago, when they were last audited, they were told they were doing things right. This time, the auditor spent ten days looking through three months of receipts and told them they were doing things wrong.

The auditor found $800 in owed sales tax. The owners could have dealt with $800 plus penalties and interest, though they noted wryly that the Illinois Department of Revenue spent more on the audit than they would generate from it. But when they learned that $800 could turn into $8,000, they were stunned. $8,000 is more than 2 years of the store’s profits. Said the owners:

“We were told the state would plug the findings of the audit into some sort of formula and come up with a tax bill for the past three years. We’re guessing that will be about $8,000.”

Using a formula to calculate taxes owed is standard procedure for many state departments of revenue.

“Uncle”

Susan Clause and her husband Stephen Brigss have owned and operated Ergadoo for sixteen years. They kept the teacher supply store open while they both battled serious health problems: Susan’s leukemia and Stephen’s prostate cancer. They don’t consider themselves quitters.

According to Susan, they dutifully keep track of exemption certificates and exempt sales—many of their customers, being in the education field, enjoy a nonprofit status that allows them to purchase supplies tax-free. They collect exemption certificates from customers who claim they’re allowed the exemption, and they don’t charge those folks sales tax.

Nonprofit businesses may only make exempt purchases when the organization itself pays for it. For example, a teacher buying paper for the classroom could purchase it tax-free if he or she uses the school’s credit card or a check from a school account. That same teacher buying the same paper with his or her own money would have to pay sales tax–even if the purchase will be reimbursed by the school.

During Ergadoo’s most recent audit, they were told it’s their responsibility “to determine where the customer’s money comes from.” Easy when a credit card or check is used. Not easy when the transaction is cash.

“How am I supposed to prove if someone comes in with a $20 bill and a tax-exempt letter whether that money is from a school’s petty cash fund or someplace else? I can’t. No one can,” said Susan.

The tax law is written that way so employees won’t take advantage of their company’s tax exemption when buying items for personal use. To ensure that doesn’t happen, a seller would have to refuse cash for exempt transactions. All exempt transactions would have to be paid by (business) check, credit or debit card.

Susan continues:

“We operated under the assumption we were doing things right—the last auditor told us we were. Now we’re being told differently and have to pay back taxes. Sure, we could appeal this or go to court, but we don’t want to hire a lawyer–that would cost us more than they say we owe. So we are shutting down.”

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photo credit: Enokson via photopin cc