Wednesday, July 20, 2011

When The Taxman Cometh

There’s an interesting conversation going on today over at the Association of Professional Genealogists (APG) member listserv about the need for professional genealogists to collect (and remit) sales taxes on professional genealogical “services.”  Last year, New York State, and specifically the Department of Tax and Finance, made it almost clear that “genealogical services” were sales-taxable.  There are still some shaded areas to be worked out, but that'll take time.

In other words, if you run a business in the State of New York, and that business does genealogical research for paying clients, then that business is in the “information services” business.  That means, plain and simple, that the bills that get sent to clients for research need to have NYS sales tax added to them (both state and local.)

But... but... should a state like New York be forcing “mom and pop” genealogy businesses to collect sales tax from their research clients?  After all, it’s a professional service.

Turns out, that’s the wrong question, because it doesn’t matter.

It’s just like selling books.  Whenever we send a book to a New York State address, the law requires us to collect the appropriate state and local sales tax, not only on the price of the book itself, but also on the shipping costs. 

That’s the law in New York State.

Of course, we also have to file periodically – usually quarterly - with a bunch of other states where we are required by law to have sales tax permits. It’s one of those costs of doing business that nobody ever thinks about when they hang out their “open for business” shingle.

Of course, nothing is ever simple.  You can’t just start a business doing research for clients, add the appropriate sales tax to your client’s bill, collect it from your client and then send it the State of New York.  Before you can do any of that, you need to register with the State Department of Tax and Finance as a business, get a “tax number” (also known as a “Certificate of Authority”), and only then can you collect and remit the tax to the state.

(Personal aside: a few years ago, New York State wanted all those of us with “old” Certificates of Authority to get “new” Certificates of Authority.  There was a $50 fee for that…)

Note that State tax people tend not to kid around.  The NYS Department of Tax and Finance makes it crystal-clear on its official website what’s likely to happen if you fail to register:

If you are required to register for sales tax purposes but fail to do so and you operate a business without a valid Certificate of Authority, you will be subject to a penalty. The maximum penalty for operating a business without a valid Certificate of Authority is $10,000, imposed at the rate of up to $500 for the first day business is conducted without a valid Certificate of Authority, plus up to $200 per day for each day after.

Of course, they wouldn’t do that to little ol’ you, right?

Welcome to the “Cautionary Tale About Sales Tax Collection”:

More than 30 years ago, I sub-leased about 200 square feet of not-so-great retail space from a friend who had just started a retail business and was selling all kinds of interesting jewelry, clothing and other objets d’art made in Asia.  I used the space to install about 15 six-foot bookcases, stocked with interesting and unusual (non-genealogical, non-historical) books. Art, science, medical history, that sort of thing.  The arrangement was simple:  I paid her for the space (and a bit extra) and she agreed to handle the sales of the occasional book, using my receipts, etc., just so it was clear that it was two separate businesses.

This all lasted for about six or so months.

Then came The Day.  The day that I found out that my friend was collecting sales tax from HER customers for HER stuff, but not sending any of it on to the State of New York.  (Because we used separate receipts, my stuff was properly accounted for and I paid the state directly.)

However, that didn’t stop the NYS sales tax agents from visiting the shop one morning, padlocking the doors and plastering huge bright orange stickers with the words "SEIZED BY THE STATE OF NEW YORK FOR TAX VIOLATION" all over the display windows. 

It took lots of calls, document production, and smooth talking to convince the tax folks that there was no problem with the thousands of out-of-print books in the bookcases and storage boxes (mine) in the two hundred square feet in the back.  My book business was current with sales tax filings. Finally, an agent allowed me inside to retrieve my stock and my bookcases.

My friend’s merchandise, however, ended up being sold at a tax auction for pennies on the dollar.

The moral here is simple:  no matter what your personal beliefs about government or taxes, if you run a business, it’s your responsibility to know what’s required in your state and then, to do what’s required.

Sure, it may not seem logical or fair.  Doesn't matter.  No question, it complicates your life.  Doesn’t matter.  If you mess with the tax folks, there’s a very high likelihood you will lose - big time.

These days, states are broke and looking for revenue sources. “Information services” businesses are easy targets when states are looking for new taxable services.  Genealogists research and sell information to clients.  Ergo . . .

If you do this sort of thing, it’s a good idea to find out if the service you provide for a fee is taxable in your state.  Here’s an interesting “advisory opinion” from the State of New York tax people about the tax-ability of “information services.”  (Not “genealogical – but close enough for government work…)

When it comes to collecting sales tax, you need to be on top of stuff like this if you run a business, not only because it is the law and you’re responsible for knowing what it is, but most of all, because –

Bright orange “tax violation” stickers on your place of business 
are not good advertising for your business skills!

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