Doing business with USA member states

Hey everyone, we’re currently undergoing an audit for the 2013 fiscal year. Basically, we have to reconcile everything, submit documentation, and explain any discrepancies or inconsistencies found in our sales tax filings—whether we over-reported or if our suppliers from within the USA reported less than we did, or didn't report anything at all. So, I'm sitting here scanning these invoices and a question popped into my head: when you're purchasing goods from a US supplier under a reverse charge setup, is it possible to categorize that small shipping fee (say, $50) as a service acquisition rather than part of the goods acquisition? In the past, I’ve always just lumped the entire total into the cost of goods. Any thoughts?

We just realized there's a mistake in our July FBI filing. A specific amount from one of our invoices—the part that qualifies as a tax liability transfer under Section 17(1)—was completely left out. It didn't make it into the FBI form when it absolutely should have.
I’m thinking—though I can't say for certain yet—that we probably need to file an amended FBI form for July, and presumably, that would mean an amended Sales Tax form for July needs to go right along with it, correct?
Now, here is the dilemma regarding how to actually execute this properly within our accounting software:

- Should we leave the original July FBI and Sales Tax forms we filed back on August 10th untouched in the system, and then just generate entirely new versions starting on the next available line item dated October 28th? That would mean having two separate FBI forms and two Sales Tax forms sitting in the database for the month of July.

- Or, is it better to just wipe the original July FBI and Sales Tax forms from the database entirely since they were sent on August 10th, and replace them with the corrected versions to send to the IRS? In that scenario, the final July totals in our database would only reflect the single, corrected set of FBI and Sales Tax forms.

Nicole Wells38 said:Hey everyone, we’re currently undergoing an audit for the 2013 fiscal year. Basically, we have to reconcile everything, submit documentation, and explain any discrepancies or inconsistencies found in our sales tax filings—whether we over-reported or if our suppliers from within the USA reported less than we did, or didn't report anything at all. So, I'm sitting here scanning these invoices and a question popped into my head: when you're purchasing goods from a US supplier under a reverse charge setup, is it possible to categorize that small shipping fee (say, $50) as a service acquisition rather than part of the goods acquisition? In the past, I’ve always just lumped the entire total into the cost of goods. Any thoughts?

Don't sweat it.
I totally pulled this one back in August 2013. I logged an entire service invoice as a purchase of goods. I didn't even realize my mistake until they came knocking, asking for scanned copies of specific periods 😁 and honestly? No big deal. The auditor just told me to file a corrected sales tax form and we were done. (It was just some tiny amount, maybe around $67).

The real headache for them isn't even the math; it's that we're being such perfectionists about reporting every single acquisition while the other side is barely keeping track.😁

ruggedmaker2 said:Don't sweat it.
I totally pulled this one back in August 2013. I logged an entire service invoice as a purchase of goods. I didn't even realize my mistake until they came knocking, asking for scanned copies of specific periods 😁 and honestly? No big deal. The auditor just told me to file a corrected sales tax form and we were done. (It was just some tiny amount, maybe around $67).

The real headache for them isn't even the math; it's that we're being such perfectionists about reporting every single acquisition while the other side is barely keeping track.😁

That comment about our obsessive rule-following is the best thing I've heard lately... 👏
The only thing "THEY" actually know how to say is, "Sorry, you made a mistake... the system can't process this form."

It’s never our fault. Right.

The lady handling my paperwork told me they pretty much have a handle on the situation already. Apparently, they’ve already figured out which specific countries are causing the most headaches. 😁
Honestly, I caught on to the same pattern just by looking at the documents she had me scan. 😁
We don't deal with this stuff very often, and it's not even a monthly thing, so... you don't exactly need a PhD to see what's going on.
She gave me a call a few days later to let me know everything was cleared and good to go, so I didn't bother following up.

ruggedmaker2 said:Don't sweat it.
I totally pulled this one back in August 2013. I logged an entire service invoice as a purchase of goods. I didn't even realize my mistake until they came knocking, asking for scanned copies of specific periods 😁 and honestly? No big deal. The auditor just told me to file a corrected sales tax form and we were done. (It was just some tiny amount, maybe around $67).

The real headache for them isn't even the math; it's that we're being such perfectionists about reporting every single acquisition while the other side is barely keeping track.😁

Ugh, tell me about it... I'm not worried, but I’ve noticed that with every single problematic invoice she's asked me to scan, the discrepancy between our books and theirs always seems to stem from shipping costs. Dealing with those guys is the absolute worst; one of them didn't report anything at all. We'll see what happens once the lady from the IRS gets back to me. Thanks!

I mean, what can I even say... I've got this situation where Google hasn't reported a single account to the IRS, even though every single invoice clearly states that the recipient handles the sales tax, 😁

Oh, please, Google... haha. Honestly, we’ve been dealing with some nightmare invoicing issues with them this year too. It’s probably for the best that they’re citing that specific Council regulation—at least there’s a paper trail if things get confusing. It's such a headache; we're currently stuck in a standoff with partners in Italy, the Czech Republic, and the Netherlands. I'm waiting on a response today after I scanned everything and sent it over to her. The real kicker? Half these people don't even realize we're part of the USA, let alone how integrated our systems are. Some of them act like we're still living in the dark ages.

I need some clarity here.
A sole proprietor working in construction—let's say a painter—is invoicing a VAT-registered corporation for both labor and materials. Under Section 75 regarding the domestic transfer of tax liability, the rules are straightforward.
Case two: what happens if that same service is invoiced to, say, a local municipality, a city government, or a non-profit organization? Does the tax still apply if they are invoicing an individual, perhaps adding a note that the tax is only due upon receipt of payment?
Thanks in advance.

Ethan Bailey18 said:I need some clarity here.
A sole proprietor working in construction—let's say a painter—is invoicing a VAT-registered corporation for both labor and materials. Under Section 75 regarding the domestic transfer of tax liability, the rules are straightforward.
Case two: what happens if that same service is invoiced to, say, a local municipality, a city government, or a non-profit organization? Does the tax still apply if they are invoicing an individual, perhaps adding a note that the tax is only due upon receipt of payment?
Thanks in advance.

Every city was supposed to be part of the sales tax system by Jan 1st, but if you want to be absolutely sure, just check this link to see which taxpayers are actually registered for sales tax. You can print out the verification and staple it to the invoice.

http://irs.gov/sales-tax-registry/search

So, if you find your city, the county, or that non-profit in the registered database, then you use the reverse charge.
If they aren't registered, you charge the sales tax normally, use the R2 code, or whatever the standard designation is for paying once the payment is collected.

Andrew Fowler5 said:I'm actually looking for some similar advice here—I run my own small business under a flat-rate tax scheme, but I'm planning to export my services to clients both within the USA and internationally. Do I actually need to include my tax ID or VAT number on my invoices, or can I skip that part? Thanks! 🙂

To figure out if you actually have to collect sales tax, it’d help to know exactly what kind of services we're talking about... assuming they aren't special exemptions (like real estate or vehicle rentals, etc.) and who you're selling to—businesses or individuals. Let's just assume you're dealing with businesses here.

You need to fill out this form and get it over to the Democrat office at least 15 days before you start providing those services:

Once that's done, you'll get your tax ID. On your invoices, you'll always cite Section 17, Subsection 1 of the Tax Code—which covers the transfer of tax liability (doesn't matter if you're servicing clients in the USA or abroad)...

During the months you're actually performing these services, you'll have to file your sales tax forms and regular returns. If there's no activity, you don't have to bother sending in empty ones.

Jessica Anderson59 said:A small business owner operating under the flat-tax system is providing services to a taxpayer located in Canada.
How should I go about issuing an invoice, and which specific tax code should I cite? Is there a requirement for me to register for sales tax purposes? Furthermore, will I be obligated to file a monthly sales tax return in this particular scenario?😵

First thing you gotta do is get proof from them that they’re actually a registered business over there—like a federal tax ID or whatever their local authorities issue.

Just cite Section 17, Paragraph 1 of the tax liability transfer law.

On your sales tax return, you just list it under section I.5., and you don't have to file any extra supplemental forms.

You don't need to go through the whole hassle of registering for sales tax in this case, but you definitely still have to submit your regular monthly sales tax report. Though, honestly, I'm not even sure how the IRS handles the paperwork side of things for international clients... you don't have to register, but you still gotta file the return... hmmm...

Ethan Bailey18 said:I could use some help here,
I have a question... when I donate my own product, do I calculate sales tax based on the initial price and then write it off from my finished goods inventory?
The cost to me is the price including sales tax.
Do I also need to account for sales tax on products removed from inventory via a commission report and booked as a warranty claim expense??? (non-deductible)
In my view, I shouldn't have to pay sales tax on something that isn't even tax-deductible... right??
Or am I wrong??
ruggedmaker2??😵

Look, if you're actually donating it, you calculate the sales tax based on the product's acquisition cost. You'll book it to a tax-deductible donation account up to 2% of revenue (if they qualify as deductible) along with the sales tax, and then just clear it out of your inventory. Just make sure whoever picks up the goods signs a delivery receipt.

Or are you maybe just giving it away to customers?

Regarding your second question, I'm assuming we're talking about defective products being returned by customers. Don't just write them off immediately and dump them into expenses. At the end of the day, an accountant doesn't have the authority to decide what happens to those items. Even if they aren't up to standard, they still have some market value. If you just write them off and book the loss directly, the IRS would probably flag that as personal use extraction.

My advice? Move the returned goods to a separate area and set up a specific sub-account, like "Non-current Inventory" or something similar.

When annual inventory comes around soon, a formal report will be drafted. Based on the audit committee's suggestion regarding quantity and condition, a decision will be made to scrap the items. That’s when you handle the sales tax and it becomes tax-deductible.

If I totally misunderstood the situation, just ignore this nonsense I'm rambling about... 😉

Jeremy Anderson63 said:Look, if you're actually donating it, you calculate the sales tax based on the product's acquisition cost. You'll book it to a tax-deductible donation account up to 2% of revenue (if they qualify as deductible) along with the sales tax, and then just clear it out of your inventory. Just make sure whoever picks up the goods signs a delivery receipt.

Or are you maybe just giving it away to customers?

Regarding your second question, I'm assuming we're talking about defective products being returned by customers. Don't just write them off immediately and dump them into expenses. At the end of the day, an accountant doesn't have the authority to decide what happens to those items. Even if they aren't up to standard, they still have some market value. If you just write them off and book the loss directly, the IRS would probably flag that as personal use extraction.

My advice? Move the returned goods to a separate area and set up a specific sub-account, like "Non-current Inventory" or something similar.

When annual inventory comes around soon, a formal report will be drafted. Based on the audit committee's suggestion regarding quantity and condition, a decision will be made to scrap the items. That’s when you handle the sales tax and it becomes tax-deductible.

If I totally misunderstood the situation, just ignore this nonsense I'm rambling about... 😉

You've got it right. As for the donation, I have both the signed delivery receipt and the internal authorization memo.
The suggestion for the returns is solid... except for one thing. We sent a replacement to our customer so they could swap it out for their own client on-site, but the old, defective unit hasn't physically arrived back at our warehouse yet. How am I supposed to write off the new product from inventory without the old one being back in hand?🙂

Jeremy Anderson63 said:Every city was supposed to be part of the sales tax system by Jan 1st, but if you want to be absolutely sure, just check this link to see which taxpayers are actually registered for sales tax. You can print out the verification and staple it to the invoice.

http://irs.gov/sales-tax-registry/search

So, if you find your city, the county, or that non-profit in the registered database, then you use the reverse charge.
If they aren't registered, you charge the sales tax normally, use the R2 code, or whatever the standard designation is for paying once the payment is collected.

🙂thanks so much

Ethan Bailey18 said:You've got it right. As for the donation, I have both the signed delivery receipt and the internal authorization memo.
The suggestion for the returns is solid... except for one thing. We sent a replacement to our customer so they could swap it out for their own client on-site, but the old, defective unit hasn't physically arrived back at our warehouse yet. How am I supposed to write off the new product from inventory without the old one being back in hand?🙂

Aha, so you need to get that product back and handle it exactly like I suggested. A warranty shipment should at least roughly match what was sitting in the warehouse that had the quality issues.

The second part is the warranty delivery based on the inspection report. You're basically guaranteeing the person holding the goods in commission that you'll either fix the defects or swap it for an identical item.

That report is your basis for the accounting entry:

7144 - Debit (depending on which US GAAP chart of accounts you're using - Warranty Replacement Costs)
6xxxx - Credit (remove from inventory) - at cost

Don't charge sales tax per the relevant IRS guidelines; it’s better to just note the exemption on the invoice or delivery note.
(If a supplier replaces a delivered good within the warranty period with an identical item of similar quality and value, that shipment isn't taxable))

Also, watch out, this isn't taxable, which means it doesn't hit the tax records or the sales tax filings.

🙂🙂🙂

Jeremy Anderson63 said:Aha, so you need to get that product back and handle it exactly like I suggested. A warranty shipment should at least roughly match what was sitting in the warehouse that had the quality issues.

The second part is the warranty delivery based on the inspection report. You're basically guaranteeing the person holding the goods in commission that you'll either fix the defects or swap it for an identical item.

That report is your basis for the accounting entry:

7144 - Debit (depending on which US GAAP chart of accounts you're using - Warranty Replacement Costs)
6xxxx - Credit (remove from inventory) - at cost

Don't charge sales tax per the relevant IRS guidelines; it’s better to just note the exemption on the invoice or delivery note.
(If a supplier replaces a delivered good within the warranty period with an identical item of similar quality and value, that shipment isn't taxable))

Also, watch out, this isn't taxable, which means it doesn't hit the tax records or the sales tax filings.

Jeremy Anderson63 said:First thing you gotta do is get proof from them that they’re actually a registered business over there—like a federal tax ID or whatever their local authorities issue.

Just cite Section 17, Paragraph 1 of the tax liability transfer law.

On your sales tax return, you just list it under section I.5., and you don't have to file any extra supplemental forms.

You don't need to go through the whole hassle of registering for sales tax in this case, but you definitely still have to submit your regular monthly sales tax report. Though, honestly, I'm not even sure how the IRS handles the paperwork side of things for international clients... you don't have to register, but you still gotta file the return... hmmm...

Well, it is certainly a good thing this question was brought up. Now I am actually feeling a bit stuck.

Back in July, I issued two invoices for vehicle towing services; one went to Mexico and the other to Switzerland—so in both cases, we are dealing with a non-EU country.
The invoices were issued with the sales tax transferred per Art. 17, Section 1, because we are dealing with branches of a major European insurance company located in Switzerland and Mexico.
I don't have confirmation from their local tax authorities that they are registered tax entities in their respective countries, nor do I have certification from a competent tax body proving the client is engaged in business activities (which is what we were told at the rif seminar back in April 2014). Honestly, I don't even have a tax ID for the Swiss insurance company; the request came through a regional dispatch center, and even if I managed to get them on the phone, I wouldn't have any clue how to explain exactly what documentation I need. So, I just relied on the fact that based on their name and their website, it is clearly an insurance firm—specifically a branch of one. I assumed they were a business user and weren't using the towing service for private reasons (the invoice shows the service was used by Ivo Ivić, but the bill is addressed to the insurance company, which is Ivo Ivić's insurer and the party settling the cost).

Furthermore, we received payment guarantees/instructions via email showing that the insurance company is both the client and the payer. Their details were provided for invoicing, along with a note stating that sales tax should not be applied. We managed to reach someone at the regional center and asked them to have the client provide that famous certification from the tax authorities proving they are a business entity, but the response we got was simply that the purchase order already listed the client's VAT number, so that should be sufficient evidence, and we should send the invoice without tax. That is exactly what we did.

Now, four months later, those two invoices are being sent back to us. They have handwritten notes on them saying, "Switzerland and Mexico are not in the EU; sales tax must be applied." This implies they are rejecting it because it's a third country, rather than questioning whether they are legal entities, since I lack that official tax certification.

So, tell me, who is the crazy one here?! I called the consultants at Ripup, and they say it doesn't matter that it's a third country; the transfer under Art. 17 applies, but I absolutely must have proof that they are a taxable entity in that country. Meanwhile, rif claims I need proof not just that they are a taxpayer, but that they conduct business activities in their own country—essentially, proof that they are a commercial entity and not just a private citizen. For the Swiss side, I don't have that, though the insurance name matches the one in Germany, which I can verify via ViES, and it is indeed in ViES (all branches share the same name, with just the specific country added to the title). As for the Mexican side, I managed to find some info online in Cyrillic to print out showing they are taxpayers, but it doesn't explicitly state they are registered for sales tax in Mexico.

What on earth am I supposed to do now? How should I handle this?

Nicole Lee6—wait, I’m still a bit lost on that part—who actually sent you those bills back after four months?

As far as I can tell, it's crystal clear—it just falls under the tax liability transfer law, Article 17, Section 1...

Carol Price4 said:Nicole Lee6—wait, I’m still a bit lost on that part—who actually sent you those bills back after four months?

As far as I can tell, it's crystal clear—it just falls under the tax liability transfer law, Article 17, Section 1...

So, these are invoices from Switzerland and Mexico. It looks like someone at the regional center just left them sitting in a desk drawer for four months, and now they're suddenly being handed back to me. Apparently, these bills never even made it to Mexico or Switzerland in the first place...
along with them, they also returned three invoices from June 2014 that were headed to Canada (European Union). These were all properly reported to ZP because they were invoiced to the wrong subsidiary, even though we billed based on the purchase order we received... honestly, I have no clue what my next move should be.

And what am I supposed to do about that unfortunate missing certification from the authorities? I went ahead and issued the invoice with the transfer anyway. Did I mess this up, or is my reasoning sound—that based on the partner's name, their website, and the actual nature of the business, it's perfectly logical to conclude they are a legal entity (and not just a tax debtor)?