FAQs & Tax Tips

Frequently Asked Maryland Sales Tax Questions

What is the statute of limitations for a Maryland sales tax audit? Four years unless fraud is found. Fraud is usually when the taxpayer did not remit sales tax that was collected. The Comptroller will extend the audit period back to whatever period it determines that tax was being collected and not remitted.

What is the penalty percentage for a sales tax audit?
Ten percent (10%).

What is the interest rate for a sales tax audit?
Annual rate of thirteen percent (13%). If an audit takes six months to complete, then the interest rate would be around thirty percent (30%).

What is the tax rate for alcoholic beverage sales?
Nine percent (9%). This tax is reported on Line 6 of the monthly MD Sales Tax Return.

What will The State look for in a sales tax audit?
The State audits three areas – assets, sales and expenses. All equipment capitalized on the federal income tax returns will be reviewed to determine if sales tax was properly paid. A business will need a copy of every invoice to prove that tax was paid. For sales and expenses, The State will select a sample period. For sales, the State for look at every invoice for the sample period. For expenses, the state will select certain account numbers and will spot check each vendor to determine sales tax is being paid. The sales and expenses will be projected over the audit period.

What is the error factor in the sales and expense projections?
Error factor is the percentage the State found that tax was not properly collected (sales) or paid on expenses. If the sales workpapers add up to $2,000 in sales and the total sales for the sample period is $20,000, then your error factor is 10% ($2,000/$20,000). The State will then take the error factor and apply it to the total sales for the audit period to get the basis that tax was not collected. Then the State will multiple that taxable basis times the tax rate of 6% to calculate your tax due.

How long does a sales tax audit take?
It depends on the volume of records, complexity of the tax issues involved, how quick the taxpayer can get the needed documentation together for the auditor and how often the auditor comes to review the information. Six months to a year would be in the average range.

When do I need a sales tax license to collect tax?
If you sell any tangible personal property to a third party. Some services became taxable in 1992, like armored car, commercial building cleaning services like janitorial and window, detective, and security guard.

Is shipping & handling taxable?
Yes. Shipping, freight or delivery separately stated on the invoice by itself is not taxable. Handling is considered part of price and if shipping & handling is lumped together on the invoice it makes the entire charge taxable.

Are caterers required to collect tax?
Yes. The caterer should collect tax on all sales of food, rentals charged the customer and all charges for personnel used for the event.

Are rents taxable?
Yes. All bare rentals are taxable. If an operator is supplied with the equipment, then all operator charges are taxable. Examples include waiting time, overtime, guaranteed time, travel time and holiday pay.

Is installation labor taxable?
No, but the installation charge must be separately stated on the invoice. If the installation charge is combined with the product charge, then the entire amount is taxable.

What is the difference between repair and fabrication labor.
Repair labor is restoring used property to its original condition, which is not taxable. An example of this is when we get our car fixed. The labor, if separately stated is repair labor and not taxable. Fabrication labor is when a new or different item is created or assembled, which is considered part of the price of the new or different item. Examples include labor to install new phone systems, new computer workstations and new modular office furniture.

Should cabinet makers and countertop installers collect tax?
Yes. The furnishing and installation of cabinets and countertops for residential housing is considered real property and tax is not to be collected. However, sales tax should be collected on cabinets and countertop that are installed in commercial spaces, unless the cabinets and countertops are in a bathroom or kitchen.

Tax Tips – DC

Washington DC Resale Certificate alert
Did you know… Washington DC requires all taxpayers who have a resale certificate to go online and renew their resale certificate annually (effective November 1, 2017)

• If a taxpayer does not have this new certificate on Washington DC letterhead, then the Taxpayer cannot purchase tangible personal property for resale.
• Refunds for resale will be denied without a new resale certificate.

Tax Tips – MD

Sales Tax Collecting Alert
Is your computer software properly collecting the 6% tax? Try this $10 test:

• Put a sale into the system at $9.95 and $10.03.
• If the result is not $.60 and $.61, then your system is not properly collecting tax.

This error could cost a taxpayer thousands of dollars per location in a three or four-year audit. This type of error can add up quickly. I know of a food-based taxpayer that had 40+ locations and the assessment was in the six figure area. With this one simple test, the software error could have been detected earlier and corrected. Again, this taxpayer paid an assessment on tax that was owed by their customers, not them because the taxpayer did not properly collect the tax.

Tax Tips – VA

Virginia Sales Tax Licensing alert

• If a taxpayer is doing business in Virginia, then the taxpayer needs to register for one of three sales and use tax licenses. The in-state license is for the collection of sales tax and the payment of use tax for taxpayers with a VA location and there is one out-of-state license for the collection of tax only and the other for the payment of use tax only for out-of-state taxpayers.
• What happens if a taxpayer does not have the proper license when the tax collector calls? The audit will be SIX years instead of the normal period of three years. See Virginia Tax Code 58.1-634 – Period of Limitations.

Contact Information

If you should have any questions or desire a free consultation, then please contact Ken Dickard at 410-598-0955 or ken.dickard@comcast.net. If you are being audited or about to be audited, then I would be happy to sit down with you and discuss where you are in the audit process, what needs to be done and what is going to happen through the rest of the process.