You Have to be Careful About Tax Reduction Strategies

When the media reports on strategies companies use and have used over the years to minimize their tax burden, their lack of tax expertise and hunger for scandal makes them predisposed to report it like a heinous crime. Look at this article. When you are a prominent retailer, the media can make something look like a scandal and if the result is a backlash by the consumer, the tax savings can be dwarfed by decreases in sales.

No Industry Wants Sales Tax to Apply to Their Services

The investment advice community does not want its services to be taxed in MI. That's certainly predictable. But this article highlights the industry's novel reasoning in why it shouldn't be taxed.

"In a letter to Michigan State Senator Nancy Cassis and Steve Bieda, Chairman of the Michigan House Tax Policy Committee, the Washington-based ICI said that imposing the tax would harm Michigan residents by discouraging them "from seeking financial advice to ensure their retirement security."

Halt the obscene sales tax giveways

This is not my headline; it's the headline in a California newspaper and it shows the degree of dislike people have for certain tax incentives. Getting cities to rebate some of the sales tax collected by retailers continues to be controversial. As more of the general public hears about these types of incentives, the more controversial it will become. At some point, you can probably expect a backlash from consumers and the tax rebates will be insignificant compared to the loss of business. This editorial is evidence of the bad feelings this type of incentive creates.

Maryland's Tax Burden Close to the Worst

According to a speech given by Curtis Dubay who is a staff economist at the Tax Foundation (in Maryland), Maryland's tax burden as compared to the rest of the region, is worsening.

"Maryland's Tax Burden

Marylanders currently pay 10.8 percent of their income in state and local taxes. This is right near the national average of 11.0 percent and ranks Maryland 23rd overall nationally.

If Governor O'Malley's plan had been in effect for 2007, however, Marylanders would have paid 11.5 percent of their income in state and local taxes, ranking 11th highest nationally.


Maryland would have jumped over West Virginia and competed with New Jersey for the highest-taxed state in the region. In fact, Maryland would only be a few hundredths of a percentage point behind New Jersey, meaning it would be knocking on the door of the top ten."

Chrysler Looking at a $46M Tax Credit

Times are tough in Detroit. According to this article in the Detroit News, the state of Michigan and the city of Detroit are teaming up to keep a Chrysler plant open in that city. The state is offering a tax credit valued at more than $6 million over seven years. The city of Detroit is also considering a12-year abatement worth an estimated $40.2 million.

Ohio is Trying to Enact a Sales Tax Holiday

It seems like every state is jumping on the bandwagon to help the "hard-working" folks and "the children". Ohio is considering getting in on it. In my experience, anytime a politician mentions "hard workers" and "the children", you better grab your wallet. These sales tax holidays mean some headaches for retailer tax departments.

Texans Trying to Make Sales Tax Deduction Permanent

Texas has no personal income tax, so it makes sense that Texans should be able to deduct sales tax on the federal income tax return. At least that makes sense to Texans. Senators Cornyn and Hutchison are working on that. Click here to view the article on this. They don't want "hard-working Texans" to pay too much federal tax. Well, maybe there needs to be some consideration of repealing the federal income tax for Texans (at least for the hard working ones).

Double Taxation On Drop Ships

So You Don’t Drop-Ship Items To Your Customers? You Still May Be A Victim Of Double Taxation.
In our last newsletter we discussed the sales tax implications for manufacturers and/or distributors who drop ship items to customers. We also offered a state-by-state chart showing how each state handles tax on drop-shipped items. This week we’re going to explore the other side of the issue.

Almost All Companies Purchase Drop-Shipped Items
It’s more common for companies to purchase items and have it delivered rather than going going to retail locations. Many of these purchases are drop-shipped items. For example, your company may buy supplies from the catalog of a local supplier. But in fact, that supplier might be just a catalog company and the product is drop-shipped to you, their customer. They might never even touch the product.


States Commonly Collect Tax Twice On Drop-Shipped Items
As we discussed last time, some states require the distributor to pay tax on the transaction at the time the product is drop-shipped, however, most companies accrue tax on these items to satisfy their use tax obligation. If you haven’t picked up on it already, when the distributor pays tax on a shipment and the user pays tax on the same order, then the state is collecting the tax twice.Double taxation is not legal in any state.

Here’s An Example:
In California, if a manufacturer is registered in the state but a distributor is not, the manufacturer is required to collect sales tax on the sale to the distributor. In fact, they collect tax on the sale after an additional 10% markup.

Let's say Your Company purchases computer equipment from Distributor located in Washington. Distributor arranges for Manufacturer to ship the product on their behalf to you. Manufacturer is registered in every state. Distributor is not registered in California. Manufacturer is required to collect the California tax after adding an additional 10% markup to the price charged from Distributor. Distributor does not show the tax to you. Your Company is registered in California and accrues tax on the purchase to satisfy your use tax obligation. Your Company and Distributor both paid tax on the sale to California. Double taxation is alive and well!State Laws Vary Widely On Drop-ShipsLike anything else in state and local tax, these laws vary from state to state. The scenario above is not the same in every state. A thorough review of state laws will help in determining the possibility of credits available.

Review For Credits Or Refunds
A quick review by a state and local tax firm like Peisner Johnson & Company is the most effective way of conducting this type of review. We often conduct these type of reviews on a performance basis. Please contact us if you would like more information, or to be contacted regarding our FREE Refund Review.

Click here if you would like a copy of our Drop Ship Chart.