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Compliance Corner

The Compliance Division’s work contributes to the mission of the Department of Taxes by informing and educating taxpayers about complex tax laws, selecting and conducting audits, and collecting unpaid taxes. We have 55 auditors, collectors, technical, and support staff working on behalf of all Vermonters to ensure taxpayers are paying the right amount of tax.

One of our primary goals is to encourage “voluntary compliance” – that is, to enable Vermont taxpayers to accurately determine what taxes they are liable for and pay the correct amount on their own. Another goal is to provide a level playing field for Vermont taxpayers by making sure that everyone is paying their fair share, in accordance with current law.

Tax laws are complex, which can lead to honest mistakes and there are people and businesses who under report taxes or do not file tax returns at all. We work diligently to identify people and businesses who are not reporting and paying the correct amount of tax and help bring them in to compliance. This is achieved through educational outreach, fact sheets, regulations, and audits conducted from our office in Montpelier and field staff located around the state.

We are continually looking for ways to improve service to Vermont taxpayers, and we welcome your feedback. You can contact the Compliance Division by phone at (802) 828-2514 or send an e-mail.


TIPS & NEWS

Tip | September 2, 2020

Service oriented businesses, manufacturing or distribution businesses, farm, non-profit or other businesses are required to report and remit sales and use tax if they make purchases which are not taxed properly at the time of sale, are not eligible for exemption, or they make purchases from on-line or out-of-state vendors.

  • Businesses who do not have taxable tangible personal property sales are encouraged to register and obtain an account with the Vermont Department of Taxes for the filing their use tax.
  • Businesses that have infrequent purchases subject to use tax or are expected to have a small amount of use tax due have the option to report and pay their use tax on their Vermont Business or Corporate Income Tax Return, or may use Form SUT-452.
  • Schedule C businesses must report use tax on Form SUT-451, Sales and Use Tax Return, or on Form SU-452, Use Tax Return.

Tip | August 14, 2020

Did you know contributions made to a political candidate, a PAC (political action committee) or a campaign aren’t tax deductible?

If you haven’t already, you may soon be receiving solicitations for donations to your favorite political candidate’s run for office.  These contributions are not tax deductible as charitable donations.  For details on what types of donations are tax deductible, see IRS Publication 526. 

Tip | June 15, 2020

While it is well known that use tax  is due on items purchased from out of state and shipped or brought into Vermont, did you know that you also owe "use" tax on the purchase of items from Vermont vendors if that vendor failed to collect the tax from you? This law is covered under T 32 § 9705, Payment and Return by Purchaser:

(a) Where any purchaser has failed to pay a tax imposed by this chapter to the person required to collect the same, then in addition to all other rights, obligations and remedies provided, the tax shall be payable by the purchaser directly to the Commissioner and it shall be the duty of the purchaser to file a return with the Commissioner and to pay the tax to him or her within 20 days of the date the tax was required to be paid.

Report all purchases from VT vendors where no sales tax was collected on your Use Tax line of the sales and use tax filing.

Tip| May 13, 2020

Did you know that shipping/delivery charges billed to your customer which are associated with the delivery of taxable tangible personal property are subject to sales tax? Be sure that your systems are set up to include the shipping charge as part of the taxable sale.

Tip | April 17, 2020

No one wants to pay more than they owe! Remember to contact your payroll company when an employee becomes covered by your health care plan to be sure you are not over paying your Health Care Contribution.

Agricultural Supplies Exemption | March 30, 2020

Agricultural Supplies Exemption (use Form S-3A)
See Reg. 1.9741(3)-1. The agricultural supplies exemption is generally product-based, and the supplies identified in the first clause of the exemption statute – Agriculture feeds, seed, plants, baler twine, silage bags, agricultural wrap, sheets of plastic for bunker covers, liming materials, breeding and other livestock, semen breeding fees, baby chicks, turkey pullets, agriculture chemicals other than pesticides, and bedding; and fertilizers and pesticides for use and consumption directly in the production for sale of tangible personal property on farms, including stock, dairy, poultry, fruit and truck farms, orchards, nurseries, or in greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities for sale.

For most of these items, when packaged and typically used in agriculture the seller is not required to obtain an exemption certificate from the purchaser.

Tips:

  • The items listed in Reg. § 1.9741(3)-1 Agricultural Supplies Exemption ARE THE ONLY PRODUCT BASED EXEMPTED ITEMS for agriculture. All other supplies used in agriculture are subject to tax.

  • The exemption for fertilizers and pesticides require the purchaser to provide an exemption certificate.

  • The sale of bedding material packaged and marketed as bedding for pets, other animals, or other uses is taxable without an exemption certificate. 

  • The sale of grass seed and wild bird seed are generally taxable.  An exemption certificate must be presented if the buyer is claiming an exemption. 

  • Landscaping plants are taxable.

Agricultural Fuel Exemption | March 18, 2020

Agricultural Fuel Exemption (use Form S-3F)
See Reg. § 1.9741(27)-1. Sales of fuel used directly and exclusively for farming purposes shall be exempt from sales tax. "Fuels" shall include electricity, oil, kerosene, natural gas, propane, wood, coal, and any similar product.

Tips:

  • Generally, if the purchaser is not registered to do business in VT and doesn’t meet the Farm definition, the exemption does not apply and the purchase is taxable. “Farm" means an enterprise using land and improvements for agricultural and horticultural production for the sale of tangible personal property.

  • Includes operation of exempt equipment, lighting and heating of farm buildings and farm stands.

  • An exemption certificate is required.

  • If there are both exempt and nonexempt purposes and the fuel is not separately metered or measured, use any reasonable method to estimate the exempt portion.

Agricultural | February 14, 2020

Agricultural Machinery and Equipment Exemption (use Form S-3A)
See Reg. § 1.9741(25)-1. Sales of agricultural machinery and equipment for use and consumption predominantly (75% or more) in the production for sale of tangible personal property on farms (including stock, dairy, poultry, fruit, and truck farms), orchards, nurseries, or in greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities for sale are exempt from the sales and use tax.

Tips:

  • Generally, if the purchaser is not registered to do business in VT and doesn’t meet the Farm definition, the exemption does not apply and the purchase is taxable.  “Farm" means an enterprise using land and improvements for agricultural and horticultural production for the sale of tangible personal property.

  • Agriculture does not include lumbering or the growing of trees for logging purposes. The cutting of trees, except for cutting of Christmas trees, is not considered agriculture.

  • Farms do not include cooperatives and similar organizations that engage in marketing and related activities, commercial operations such as processing food or dairy products, cheese making, logging and lumbering, the operation of a stockyard or slaughter house, enterprises for the breeding or raising of dogs, cats and other pets, and birds, fish or any other animals that are intended for use in sporting or recreational activities such as hunting and fishing.

  • Materials used to construct barns, sheds, silos and permanent fences are not exempt as they are building materials, not machinery or equipment. Movable equipment is exempt if the item is not incorporated into real property and it is used for farm production.

  • Machinery and equipment used to maintain or improve real estate, landscaping and snow removal are not exempt.

1099R | February 3, 2020

Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.  If you receive a distribution from these types of accounts or similar plans, it is important for you to know if the amounts received should be reported as income on your Federal Income Tax return. If the distribution is reportable income, you also need to consider the income when filing your Vermont State Tax return. Any time a taxable distribution is made, a 1099-R form is issued with data populated in Box 2a or 2b. Please review any 1099-R forms received carefully and refer to information provided by the IRS to determine if you should include this as income on your Federal return. The distribution code plays a large part in how or if it is reported as income.  Please be sure to enter the correct distribution code when filing your 1099R. We have had several e-filed 1099R’s filed with distribution code 7 (Normal Distribution) when in fact it was a distribution code 1 (Early Distribution, No Known Exception).  Another area where common mistakes are made are with distribution code 3 (Disability Pensions).  If you retired on disability, you must report your taxable disability payments as wages on line 1 of Form 1040 until you reach minimum retirement age. Entering the correct distribution code and reporting it correctly can avoid an audit in the future.

Business Deductions Related To Reimbursements | January 2, 2020

Businesses must follow IRS Publication 535 guidelines related to (employee and/or owner) reimbursements such as per diems and allowances, mileage reimbursements, and other types of arrangements for meals, vehicles, etc. In an audit, reimbursements which do not follow an accountable plan, as outlined in IRS publication 535, may be denied as a deduction and/or treated as income for the individuals. Contact a qualified CPA to find out more about accountable plans.

Tipped Wages | September 20, 2019

During audits, the Vermont Department of Tax routinely reviews records to ensure proper reporting of tipped wages. It is important to ensure that you properly report tips on your employees' W-2’s and the company W-3. Tips that are not included in your quarterly withholding could show as cash variances resulting in assessment of gross receipts tax under meals and rooms or an assessment of the withholding liability.

Tax-Exempt Nonprofit Organizations | June 11, 2019

During some recent audits, it was discovered that some nonprofits are incorrectly claiming exemption from Vermont Sales and Use tax.

Many nonprofit organizations that qualify for an exemption from federal income tax are also exempt from Vermont income tax. However, nonprofits are generally not exempt from paying other state taxes, such as Vermont Sales and Use Tax. Taxes are due on most purchases and sales made by your nonprofit.

Only federally designated 501(c)(3) tax-exempt nonprofit organizations are normally exempt from Vermont Sales Tax when making purchases of items that are taxable in Vermont, subject to certain requirements and limitations.

A tax-exempt nonprofit organization that is not a 501(c)(3) is not exempt from Vermont Sales and Use Tax. Organizations with tax exempt status under subsections 501(c)(4)-(13) and (19), and political organizations under 26 U.S.C. § 527(e), are subject to sales and use tax unless specifically exempted.

Exempting Meals | March 8, 2019

An audit of a business revealed sales of meals that were filed as exempt where the records to support the meal exemptions were not maintained. When exempting sales to schools, qualifying government entities or municipalities or other qualifying exempt organizations you must maintain records to document the entity that paid for the purchase. The Law requires that businesses maintain records for three years.

When exempting meals, you must maintain documentation that shows the entity itself paid for the meal. Individuals representing themselves as members, employees or representatives of exempt entities, such as schools, qualifying government entities or municipalities, are not eligible for the exemption when they purchase meals. A payment from the entity itself is good documentation that the entity paid for the meal.

For more information see:

See more tips & news

NOTABLE CASES

Shareholder Loan Transactions | September 15, 2020

The Vermont Department of Tax recently disallowed what an S-Corporation had reported as loans to its shareholders. The substance of the loan transactions did not meet the IRS qualifications for loans. The loans were determined to not be ‘bona fide’ and were reclassified to be considered as distributions of income to the shareholders, creating taxable income. This determination was based on the lack of loan documentation, lack of interest being accrued or paid, and minimal, irregular repayment of principal. The taxpayer did not dispute the Department’s findings, and the audit resulted in nearly $100,000 in tax, interest, and penalty.

Note: Businesses making loans to shareholders need to ensure the loans meet the criteria of the Federal “Bona Fide Indebtedness Factors”.  These criteria have been established through case law and include (but are not limited to) written loan documents, an established and appropriate interest rate, maturity date, payment schedule, and legal enforceability. 

Further guidance on S-Corporation shareholder loans and federal interest rates can be found at:

Taxable Fees | July 20, 2020

During a recent audit we found a taxpayer that did not recognize that certain fees are taxable when those fees are required to complete a sale. This law is explained in our sales and use tax regulations:

…“sales price” for purposes of calculating tax means the total amount of consideration, including cash, credit, property, and services for which personal property or services are sold, leased or rented….

Even where stated as a charge separate from the charge for the property or service, the sales price includes charges for labor to create the product sold, charges for services necessary to complete the sale, and delivery charges.

Examples include:

  • Fee charged for “damage” or “insurance” when renting a piece of equipment
  • Fee charged to pick up (or deliver) or empty rented port-o-lets
  • Fee charged to pick up (or deliver) set up rented tents, tables and chairs
  • Fee charged to pick up (or deliver) set up rented equipment
  • Fee charged to “set-up” a print job prior to printing tangible personal property
  • Cleaning charges on rented tangible personal property
  • Additional “optional” fee for fitness or pool access when renting a room
    • If the amenity fee is itemized, and charged to guest whether or not the guest choose to use the amenity, this fee is subject to rooms tax.
    • If the amenity fee is itemized, and charged to guest only when the guest elects to take advantage of the amenity, this fee is subject to sales tax.

Additional fee for fitness or pool access when renting a room (subject to rooms tax when non-itemized, subject to sales tax when itemized)

  • Fuel surcharges associated with sales or rentals of tangible personal property or amusement
  • Web fees associated with sales of amusement tickets or tangible personal property
     

This is not an all-inclusive list, so we encourage you to reach out to the tax department for advice on fees you may be charging which are associated with amusement sales or the sale or rental of tangible personal property.

Sales & Use Tax | June 1, 2019

In a recent audit of a contractor, it was observed that the contractor had extended government or non-profit exemptions to the rental of equipment which he used to provide his services. When contractors purchase, rent, or lease tools or equipment and use it in Vermont, it is always subject to Vermont Sales Tax. Tax applies even when contractors use equipment on exempt projects. If the contractor does not pay 6% sales tax at the time of purchase/rental/lease, the contractor must pay Vermont Use Tax. 

Fraudulent Failure to Pay | December 12, 2019

During a recent tax audit, it was found that the owner of a business collected 36% more tax than was remitted to the department. Trust taxes are collected from customers on behalf of the state and are to be remitted to the tax department appropriately. During this audit it was further found that the under-reporting of taxes was fraudulent. Under statute 32 V.S.A. §3202(b)(5), the department is exercising its authority to pursue fraud penalties for these types of situations. Fraud penalties are equivalent to 100% of the tax due.

Short-Term Rental | July 1, 2019

Recent tax audits identified unreported income tax as well as unreported meals and rooms tax from individuals that provide short-term rentals. A short-term rental is a property that you own or control that you rent out for short periods of time. Income earned from the rent is subject to income tax and the rent charged to the lodger is subject to the Vermont meals and rooms tax.

Income Tax

Vermont tax law requires that individuals report the income earned from the short-term rentals. When you file your Vermont Income Tax Return, you will need to ensure the following entries include the income you earned from the short-term rental:

  • adjusted gross income and

  • taxable income (inclusive of the rental income) from your federal income tax return, found on Form 1040, Schedule E.

Meals and Room Tax

Sleeping accommodations offered to the public for a consideration on premises operated by a private person, entity, institution, or organization are subject to the Vermont Meals and Rooms Tax if those rentals total fifteen (15) or more days in any one calendar year.

The following are a few examples of the types of lodging rented or owned by the host which fall under the provisions of the law:

  • A house or room(s) in a house

  • Cabin, cottage, condominium, ski lodge

  • Barn, bunkhouse, tree house, camper, tent

You are personally responsible for registering for a Meals and Rooms tax account with the Vermont Department of taxes and charging your guests the 9% Vermont meals and rooms tax for the rent accommodation. Learn more about how to register for an account. In addition, if you are providing meals to your guests and billing them separately, those meals are also subject to the tax.

Please note: If you rent your room or other type of lodging to the same person for thirty (30) or more consecutive days, the person is then considered to be a permanent resident, and different rules apply. In addition to the state taxes, you may also be required to collect and remit a local option tax imposed by some Vermont municipalities. Please check with your town/municipality. 

See more Notable Cases

CURRENT WORK

Business Income Tax (BIT) Non-Filers and the Voluntary Disclosure Program (VDP)

The Department has had success using data matching to identify businesses and individuals who are conducting business in Vermont, but not filing Business Income Tax returns.  The identified non-filers are contacted to confirm business activity. The Department uses available information from state, federal, and public resources to estimate and assess tax liability. In recent months, several cases have been closed resulting in the filing of many returns and payment of significant delinquent taxes. The Department intends to continue to use this information to ensure everyone with an obligation to file and pay income taxes is doing so, and to provide a level playing field for those conducting business in Vermont.

In some cases, people have acknowledged that they have fallen behind, and are working cooperatively with our audit staff.  If this is the case for you or one of your clients, know that you can reach out through the Department’s Voluntary Disclosure Program (VDP) to get into compliance. To be considered for the Voluntary Disclosure Program, the disclosure applicant must not have been contacted by the Department prior to initiating the disclosure process. Coming forward before the Department contacts you could have financial benefits in the form of penalty relief. Find more information about the Voluntary Disclosure Program.

Ideally a Voluntary Disclosure request contains the following information:

  • The type of entity (corporation, partnership, etc.)
  • A brief description of the company's business including its specific activities in the state Vermont
  • Date the company began business and date the company began business activities in Vermont
  • Disclosure of the tax type (Sales and Use Tax, Meals and Rooms Tax, Corporate Income Tax, Withholding Tax, etc.) for which an Agreement is requested
  • Specifying tax types the entity is already registered for in Vermont
  • Whether the company has been contacted by the Vermont Department of Taxes
  • Whether the company has collected, but not remitted, Vermont Tax
  • An estimate of the amount of taxes due
  • Any additional information or extenuating circumstances to support the request

Real Estate

The Compliance Division has recently invested resources in reviewing capital gains on real estate transactions. We are using information from multiple state and federal data sources to ensure that sales are reported correctly and that the proper amount of tax is paid to Vermont.

Taxpayers and preparers should note that almost all real estate sales, including many primary residence sales, are subject to reporting for capital gain.  Most primary residence sales will not have a capital gain tax liability due to IRS exclusion amounts. However, if you receive a 1099-S for any sale, you must account for the transaction on your income tax return and schedules. Primary home sales will generally be reported directly on federal Schedule D – “Capital Gains and Losses,” while investment property sales should flow through federal Form 4797 – “Sale of Business Property.” Review the resources listed below or consult with your tax professional for further information.

Properly completing all required forms and schedules will dramatically reduce the possibility of the Department contacting you to confirm or clarify transactions. Taxpayers should keep records about all their properties (including primary home) for 3 years after the sale of that property.

1099K Data

Businesses should be aware that the Vermont Department of Tax receives Federal 1099K merchant information. This information allows the department to run discovery programs to ensure that businesses are remitting the proper amount of tax. The discovery program compares your credit card sales (adjusting for taxes and tips) to your filed meals and rooms tax (MRT) and/or sales tax (SUT) returns. Businesses who fail to report their sales, based on our analysis of this data, may be flagged for audit. To avoid this, always ensure that you have reported all of your sales and that you have remitted all of the taxes you have collected.

Corporate/Business Income Non-Filers

In general, any business that operates or has any presence in Vermont is required to file an Income Tax return with the state, or report on 1040 Schedule C if it is a sole proprietor or single member LLC. Our Office Audit and Discovery teams have been working on ways to identify companies that are operating in Vermont, but not filing the required returns for Corporate or Business Income tax.

We have identified dozens of businesses that fall into this category. Recently, we have been using various information sources that indicate companies that have employees working in Vermont, or own or rent property in Vermont, to conduct business. Going forward, we have more data stores and avenues to uncover other companies similarly operating, but without filing or paying Income Tax.

We want to share this information for two reasons. First, to let businesses and preparers know that if they are conducting business in Vermont, to be aware that there is generally an entity-level Income Tax filing requirement, and that the Department is actively working to find companies that are not meeting this responsibility. Second, and equally importantly, we want to assure all taxpayers – Vermont businesses and beyond – who voluntarily report and pay the correct tax, that we are diligently working to ensure your colleagues and competitors in the business community are doing the same. We want all businesses to be on a level playing field and be paying the correct amount of tax.

For more information review our Corporate and Business income tax web page, as well as Technical Bulletin 70 on this topic.

DISCOVERIES

Personal Income Tax Discoveries

The Vermont Department of Tax regularly conducts the following four Personal Income Tax (PIT) discoveries:

  • CP2000 Discovery: A notice containing preliminary findings is mailed to a taxpayer based on information the Internal Revenue Service (IRS) has identified as being under reported, which information appears to not be considered on the Vermont tax return filed.
  • IRMF Non-Filer Discovery: A notice is mailed to the taxpayer when the Department has information that indicates a strong possibility a Vermont Personal Income Tax return should have been filed. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department. The preliminary notice indicates the taxpayer needs to file a return or let us know why they believe they do not have a filing requirement in Vermont.
  • IMF Non-Filer Discovery: This discovery covers situations where the taxpayer has filed a Federal return but did not file a Vermont Income Tax. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department. The preliminary notice indicates the taxpayer needs to file a return or let us know why they believe they do not have a filing requirement in Vermont.
  • Discrepancy Discovery: This discovery covers situations where the taxpayer has filed a Federal return and a Vermont Return, and it’s believed there is under reported financial income. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department.  The preliminary notice indicates the taxpayer needs to file an amended return or let us know why they believe they do not have to amend.

Over the course of 2020, we plan to release the following PIT discoveries:

Program tax year Expect Release 
Time Frame
CP2000 2016 January 2020
Discrepancy 2016 April 2020
CP2000 2017 April 2020
IRMF 2017 May 2020
IRM/IRTF 2017 June 2020
Discrepancy 2017 July 2020
CP2000 2018 August 2020
IRMF 2018 August 2020
IRM/IRTF 2018 2018 September 2020
Discrepancy 2018 October 2020