Businesses that provide services generally know whether or not they are required to collect sales tax. But sometimes there are cases where the law is unclear whether or not sales tax must be collected. Often, in fact, the Department of Revenue may treat taxpayers within the same industry differently, ruling in some cases that a business must collect sales tax, but ruling in other instances that another business (selling the same service) need not collect sales tax. For example, it had been unclear until recently whether restaurants and similar establishments which have a cover charge to use a dance floor must charge sales tax on the charge. When business owners were surprised by Revenue audits assessing substantial amounts of back taxes the story was taken public, and the matter was quickly remedied by legislation enacted this year which exempted the cover charges from sales tax – at least until July 1, 2017.
In other cases the matter is not so easily, or clearly, resolved. In some cases the Department of Revenue has shown awareness that it is bad public policy to assess businesses with big bills for sales tax which the business has not collected if it was unclear that they had to collect sales tax in the first place. For example, it was unclear for several years whether yoga instruction was subject to sales tax, and Department auditors and employees providing advice to the public were giving inconsistent instructions. Because of the increasing number of yoga instruction providers, the Department recognized the problem and met with industry members in a so-called “stakeholder meeting.” The result of the meeting was to provide both some tax relief to businesses that had not collected sales tax, and to provide clarification for the future as to when yoga instruction is, and when it is not, subject to retail sales tax. While the guidelines for future reporting were less than fully clear, the fact is that there was relief for taxpayers that had not been collecting sales tax, and at least some new guidelines for the future.
We have been contacted in a number of cases where taxpayers have not collected sales tax because they believed in good faith that they were not required to. This has been true, for example, in the skydiving and physical training industry. In some cases taxpayers have been audited and received large bills. In other cases, taxpayers have received written advice that they need not collect sales tax. The fact patterns differ from case to case and they are too numerous to explain at one time, but following are a few possible approaches for a business which finds itself in this kind of confusing situation.
If a taxpayer has already been through an audit and received an assessment for sales tax, an appeal is probably a good idea. For one thing, collection is normally suspended during the period of the appeal, and where the law is in flux a taxpayer may benefit from delaying the finality of a big bill because of the possibility that the uncertainty will be resolved on an industry wide basis in time to be applied in the taxpayer’s appeal. If a matter is not resolved before the deadline for a hearing on the appeal, settlement is always a possibility, especially where the law is unsettled. But the tradeoff to a settlement is that the taxpayer probably loses the right to undo the settlement if there is later a favorable industry wide resolution. A taxpayer who receives a negative appeals determination may pursue the matter by appeal to the Board of Tax Appeals. While the Department of Revenue can pursue collection even though the matter is before the Board, a taxpayer will have its usual options regarding postponing payment or working out an installment arrangement.
If the Department acknowledges the uncertainty in its guidelines, and if there is enough interest among members within the industry, a group can approach the Department to seek clarification for future reporting, and possible relief from taxes allegedly owed. In the case of yoga instruction, for example, the businesses were relieved of past liabilities if they had not been collecting sales tax, and all taxpayers were required to collect sales tax from the date set forth in the memorandum of the meeting, unless the type of instruction qualifies as not subject to sales tax under the new guidelines.
Finally, if a business finds itself with genuine doubts as to whether its activity is subject to sales tax it may submit a request to the Department for a written ruling as to future reporting obligations. If the ruling is not favorable, it is appealable. Outside of these or similar approaches, businesses are well advised to collect sales if they think it may be legally required so that if the business is selected for audit it is not faced with the possibility of a large assessment.
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