New Jersey Tax Court: Don’t “Discount” the Importance of Sales Tax Remittance Obligations

In a New Jersey decision, the Tax Court reaffirmed the universal concept that registered sellers must remit any and all sales tax collected as shown on an invoice, even if in error.

By Jess Johannesen, SALT manager

Sales tax rules with respect to discounts and rebates can be a source of confusion, particularly when trying to figure out whether or not sales tax should be collected on the discounted or undiscounted price. Regardless, one universal concept is that all sales tax collected as shown on an invoice, even if in error, must be remitted to the taxing authorities. On May 5, 2016, the Tax Court of New Jersey issued a decision addressing this issue. [1]

The taxpayer, a car dealership, had a service department that performed repair and maintenance services. Customers would bring their cars to the taxpayer for service and parts, but before the service began, the customer was provided with a cost estimate of the total charges. This estimate included the amount of sales tax that would be associated with the work. Upon completion of the job, the customer received an invoice with total charges, sales tax on the total charges and a discount. This discount was recorded as a single line item on the invoice provided to the customer, but the taxpayer internally allocated the discount between (1) a parts and service discount and (2) a sales tax discount. This allocation was calculated before presenting the customer with the printed invoice, and the two-part discount was actually coded onto the printed invoice. However, the coded discount was not comprehensible to the customer since he or she was not familiar with the taxpayer’s accounting system.

For example, assume that the invoice listed total charges for parts and labor of $100.00. Assuming that the entire charge is subject to sales tax at a 10 percent sales tax rate, the invoice would reflect sales tax of $10.00 associated with the total charges. A discount of $22.00 is reflected on the invoice, so the total payment due would be $88.00. A portion of the $22.00 discount applied to the $100.00 parts and service charge, while the remainder of the discount applied to the $10.00 of sales tax. Continuing with the previous example, the internal code on the invoice reveals that $20.00 of the discount relates to the parts and services while $2.00 relates to the sales tax. Even though the printed invoice states $10.00 of sales tax, the taxpayer reported and remitted to the state the $8.00 of sales tax net of the sales tax discount.

The Tax Court held that the taxpayer was required to remit to the state all amounts which it informed the customer that it had collected for sales tax purposes. [2] The taxpayer unsuccessfully argued that it did not collect the full tax indicated on the invoice since it provided a discount that included a reduction in sales tax. The Tax Court noted that under New Jersey law, every seller required to file sales tax returns shall, at the time of filing such return, pay to the state the taxes due as well as all monies collected by the seller acting or purporting to act under the provision of the sales tax laws. [3] In other words, whether correctly or incorrectly, intentionally or negligently, all sales tax monies collected from the customer as reflected on the invoice must be remitted to the state. The Court continued to state that if the taxpayer felt it had overcollected sales tax, the laws provide that any tax “erroneously, illegally or unconstitutionally collected” can be refunded by the state to the customer who actually paid the tax. [4]

The Court explained that this rule satisfies important policy considerations. First, the rule removes any incentive to overcollect sales tax. Second, the public must have confidence in the sales tax system, which relies on private third parties to act as collection agents. Thus, when an invoice reflects sales tax amounts, the purchaser must have faith that those monies are being remitted to the government. Finally, including a sales tax discount with the parts and services discount inflates the actual discount being provided to the consumer and can provide a seller with an improper competitive advantage due to incorrect reporting. [5]

While different states may codify this concept in a variety of ways, the universal rule is that all sales tax collected (or purported to be collected) must be remitted to the state. Some states require the ultimate customer to request a refund of any erroneously collected sales tax, and other states provide mechanisms for either the customer or the seller to request the refund. It is an important reminder that in any case, however, it is the registered seller’s obligation to remit any and all sales taxes collected. Aprio has experience assisting companies in determining their state and local sales tax obligations, as well as assisting companies in obtaining sales tax refunds at the state and local level. If your company has questions regarding sales tax collection and remittance policies, please contact the SALT group.

Contact Jess Johannesen, SALT manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the June 2016 SALT Newsletter. To view the newsletter, click here.

[1] Dick Greenfield Dodge, Inc. v. Director, 2016 WL 2639210 (N.J. Tax Ct., 04/28/2016).

[2] The court case arose from a sales tax audit of the taxpayer. By sampling one month of the audit period, the New Jersey auditor determined that the taxpayer was required to report and remit the amount of sales tax printed on the invoice (in the example illustrated above, this is the $10.00 as opposed to the net $8.00). While this resulted in a small discrepancy per invoice for the taxpayer, the number of errors in the sample month were extrapolated across the audit period to yield an assessment of $46,517.28.

[3] N.J. Rev. Stat. §54:32B-18 (emphasis added).

[4] N.J. Rev. Stat. §54:32B-20(a).

[5] Using the example above, the correct reflection of the sales tax and the discount would be as follows: (1) Parts and Labor = $100.00, (2) Discount = $20.00, (3) Sales Tax = $8.00, (4) Total Amount Due = $88.00.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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