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
Estimated Tax Payments/Return Filing Requirement | December 5, 2022
Remitting an estimated tax payment does not exempt you from the legal requirement to file your tax return. Even if an estimated payment is made, filing your return late without an extension will result in a late filing fee.
International Purchases | November 28, 2022
Order something from overseas that went through US Customs? Remember to report the use tax due on your income tax or sales and use returns.
Local Option Tax (LOT) | October 3, 2022
Local option tax is a way for municipalities in Vermont to raise additional revenue. A municipality may vote to levy a 1% local option tax in addition to collecting state business taxes. A transaction is subject to local option tax if it is subject to the Vermont sales, meals, rooms, or alcoholic beverage tax. Local option tax is “destination-based.” In other words, the tax is collected based on the location where the buyer takes possession of the item or where the item is delivered. Remember to collect the LOT when shipping or delivering taxable items to local option towns.
Aircraft Sales and Purchases | September 16, 2022
Aircraft sales and purchases are subject to Sales & Use Tax if the following criteria are met:
- Aircraft is sold in Vermont and possession is taken in Vermont. Sales tax due.
- Aircraft is sold out of state and possession is taken in Vermont. Sales tax due.
- Aircraft is purchased out of state and brought into Vermont. Use tax is due. See Form SU-452.
- Aircraft, purchased for commercial use can be purchased tax-free.
- Parts, machinery, and equipment purchased to be installed on all aircraft, including those for personal use, excluding drones, are not subject to Vermont's sales and use tax. See 32 V.S.A.9741 (29).
Non-Employee Compensation (1099-NEC) | August 5, 2022
Reminder to businesses: If you made payments totaling $600 or more to a nonemployee during the year you must provide federal Form 1099-NEC. Nonemployees include independent contractors, freelancers, and self-employed individuals. Starting with tax year 2020 this form has replaced federal Form 1099-MISC for reporting nonemployee compensation. For more information, please visit Instructions for Forms 1099-MISC and 1099-NEC.
Cancellation of Debt | June 1, 2022
A Cancellation of Debt (COD) is the result of a creditor discharging or forgiving debt for less than the full amount owed. The amount the debtor is no longer required to pay is considered “canceled” in the eyes of the law, but that does not necessarily mean the once-owed money simply disappears from the record for taxation purposes. If you have benefitted from canceled, forgiven, or discharged debt, the amount of the canceled debt must be reported as taxable income and included in your gross income unless you qualify for a special exception. In general, if you receive a 1099-C from a creditor it is recommended that you review Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) for further guidance.
Taxability of Flowering Plants and Shrubs | May 2, 2022
The sale of flowering plants or shrubs for use in flower gardens and landscaping is taxable. Fruit trees and vegetable plants are considered agricultural supplies and are exempt, even when not purchased for commercial use, see §9741(3)-(2)(4).
Establishing Domicile | May 2, 2022
Domicile is a legal concept that has implications for Vermont income tax, the statewide education tax and property tax adjustments. An individual may have several places of abode in a year, but at no time can he or she have more than one domicile. Domicile means the place where an individual has a true, fixed permanent home, and to which place, whenever the person is absent, he or she has the intention of returning. Domicile is not limited to a specific structure but refers rather to a place or an area to which the individual expects to return. To better understand tax implications as it relates to domicile, please see Reg. § 1.5811(11), § 1.5401(7), (14) § 1.6066(c) DOMICILE.
Capital Gains | April 29, 2022
A Capital Gain is profit derived from the sale of any capital asset. Capital assets include stocks, bonds, precious metals, jewelry, real estate, goodwill, patents, and trademarks. For Vermont purposes, your federal taxable income can be decreased by the Vermont Capital Gains Exclusion as follows:
- File Vermont Schedule IN-153
- The first $5,000 of adjusted net capital gain income or
- 40 percent of adjusted net capital gain income from the sale of assets held by the taxpayer for more than 3 years except from the sale of the following:
- Any real estate or portion of real estate used by the taxpayer as a primary or non-primary residence
- Depreciable personal property other than farm property and standing timber
- Stocks or bonds publicly traded or traded on an exchange or any other financial instruments.
The amount of decrease in taxable income due to the exclusion of capital gain subject to the 40 percent preferential rate cannot exceed $350,000. The total amount of decrease due to the capital gain exclusion cannot exceed 40 percent of federal taxable income. Qualified dividends are not eligible for capital gains treatment for Vermont tax purposes. For more details, see Technical Bulletin 60.
Business Use of Vehicle | November 22, 2021
If your vehicle is not company owned, adequate evidence of business use of vehicle must be provided for vehicle expenses to be allowed as a tax-deductible expense. Adequate evidence should consist of entries in an account book, log, or diary, stating the date, destination, business purpose, and miles traveled. Documentary evidence of your expenses should be kept with your travel log, such as receipts. Calculate the business use of the vehicle as a percentage, based on your log. For further clarification, see IRS Publication 946, page 65, What Records Must Be Kept.
Caterers and Event Rental Companies | September 20, 2021
When you rent a tent, tables and chairs, etc., the charges for labor to set the items up are subject to sales tax, because they are considered necessary to complete the sale. 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 are taxable. In other words, all the charges are taxable, even when stated separately 9741(4).1
Tags: Accommodations and Food Service, Other Services
Event Organizers and Vendors | August 20, 2021
Are you a food vendor, selling your yummy eats at an event? Or a crafty vendor selling the wonderful items you have created? You need a business tax account and a license to sell taxable items in Vermont. Learn more about how to register for a business tax account.
Organizers with over 25 vendors at the event must provide to the Commissioner of the Vermont Department of Taxes a list of vendors who are authorized by the promoter to sell taxable property at the event. The list must also include the vendors' current sales and/or meals tax license numbers. This list must be submitted to the Department no later than one day prior to the event. The promoter must notify the Department in writing of any changes to the list of participating vendors and their relevant tax license numbers no later than one week after the event.
How to Correct a mistake or Add Information to a Vermont Income Tax Return | July 1, 2021
You are required to file an amended Vermont return within 60 days of the following:
- you become aware of a change to your Vermont income;
- you file an amended return with the IRS; or
- you receive a notice of change from the IRS.
To file an amended return, use Form IN-111 for the applicable tax year, check the “AMENDED” box in the header section, and complete the form and submit it to the Tax Department.
Please include the following documents with your amended return:
- A copy of federal Form 1040X, Amended U.S. Individual Income Tax Return
- Your amended federal Form 1040, U.S. Individual Income Tax Return, with all schedules
- Your amended Vermont Form IN-111 with all schedules even if there are no changes on the schedules
Note: If you filed a Property Tax Credit Claim or Renter Rebate Claim, you must also amend your income on Schedule HI-144, Household Income.
Personal Exemptions | June 30, 2021
According to Federal statute 26 U.S.C. 152, a dependent is defined as a qualified child or a qualifying relative.
For parents claiming any qualifying child and who do not file a joint Vermont Income Tax return together, the child would qualify only for the parent who had the child reside with them for most of the year. If the child spends an equal amount of time with each parent during the year, then the qualifying parent is the parent with the highest Adjusted Gross Income.
Note: If the IRS denies Earned Income Tax Credits for a federal return, you must amend the corresponding Vermont Income Tax Return.
Items Removed from Inventory and Used | April 28, 2021
Items purchased exempt for resale and later removed from inventory for your own use become subject to use tax. This could include cleaning and disinfectant supplies, paper products, inventory for promotional use, inventory for window displays, or items to be used personally. Regulation §1.9707-2(B) states: Taxpayers who make recurring purchases of tangible personal property or withdraw tangible personal property from inventory for taxable uses upon which no sales tax was paid shall register and report use tax liabilities on returns in accordance with the filing requirements of 32 V.S.A. § 9775.
Household Members Income - Homestead | March 22, 2021
Do you have household members with income? Remember that the first $6,500 of income earned by a full-time student who qualifies as your dependent is not considered to be part of your household income. Learn more about how to determine your household income.
Keeping Proper Records | February 11, 2021
Some recent tax audits have shown insufficient retention of records. 32 V.S.A. §§9702(3) & 9709 require detailed records to be kept and furnished to the Commissioner upon request. This shows the Department that the correct amount of sales tax has been collected and remitted. 32 V.S.A. §3201(4) allows for the request of "any books, papers, records, or memoranda" related to the Department's ability to determine the proper amount of tax due and collected be provided upon request. To ensure the best possible outcome in the event of a tax audit or tax examination, please keep accurate records to demonstrate that the correct amount of tax has been collected and remitted.
Use of Salt and Sand in Snow Plowing Services | January 28, 2021
'Tis the season! For businesses engaged in providing snow plowing services, you must pay sales tax when you purchase the items used to provide your services, namely salt, sand and similar products.
Bag Fee | December 30, 2020
Starting July 1, 2020 single-use plastic carryout bags are no longer allowed in Vermont (10 V.S.A. § 6691). Stores may provide a recyclable paper bag for a fee. Sales tax is not charged on the fee (usually 10 cents) for recyclable paper carryout bags. The past treatment of the packaging remains the same; tax should be paid by the retailer when they purchase the bags. See 32 V.S.A §9741(54) for additional information.
Self-Employed | November 16, 2020
If you’re a self-employed person, the Vermont Department of taxes may ask you to produce records to verify the amount of income and expenses claimed on your income tax return. For this reason, it’s important that you keep good records. Examples of supporting documentation often include:
- 1099 Forms you have received (including 1099-MISC)
- Detailed documentation that supports your business income and expenses, such as: sales slips, invoices, purchase receipts, canceled checks and bank statements
- When claiming business use of your home - Form 8829, and documentation that supports the basis for your calculations
- Summary documents that you used to calculate the income and expenses you reported on your tax return: general ledgers, spreadsheets, income and expense journals, travel log or mileage statement etc. For further tips see IRS Publication 463
Notice to File - Provide Records | November 2, 2020
If you received a Notice from the Vermont Department of Taxes informing you about the need to file your Vermont Personal Income Tax return, please remember to provide a copy of the corresponding Federal Income Tax Return, schedules, W-2s and 1099-Rs associated with this filing.
Business and Hobby Income | October 1, 2020
Did you know? The difference between Business and a Hobby income comes down to how expenses/losses are treated? Business losses are fully deductible, while the expenses related to a Hobby are only deductible up to the amount of any income earned from the Hobby.
Hobby income is usually claimed on, Line 21, “Other Income" of the Federal 1040 form (from 2017 and prior) and Hobby expenses are typically filed on the Federal Schedule A, Itemized deductions (subject to 2% of your adjusted gross income). As of 2018, the IRS no longer allows any deduction of Hobby expenses, and all Hobby income must be claimed (1040 Schedule 1, Line 21).
Based on IRS Publication 535, Business Expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit.
In determining if you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive.
- You carry on the activity in a businesslike manner,
- The time and effort you put into the activity indicate you intend to make it profitable,
- You depend on the income for your livelihood,
- Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
- You change your methods of operation in an attempt to improve profitability,
- You (or your advisors) have the knowledge needed to carry on the activity as a successful business,
- You were successful in making a profit in similar activities in the past,
- The activity makes a profit in some years, and
- You can expect to make a future profit from the appreciation of the assets used in the activity.
A presumption of profit is when an activity produces a profit in at least 3 out of 5 tax years, including the current year. However, if the activity consists of breeding, training, showing, or racing horses than the presumption of profit would be at least 2 out of the last 7 tax years, including the current year.
Profit is established when the gross income from the Business activity exceeds the deductions. See IRS Publication 535, Business Expenses for a further guidance on Business expenses.
Untaxed Business Purchases | 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.
Political Contributions | 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.
Use Tax Due if Vermont Vendor did not Collect Sales Tax | 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 32 V.S.A. § 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 Vermont vendors where no sales tax was collected on your Use Tax line of the sales and use tax filing.
Shipping/Delivery Charges| 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.
Heath Care Contributions | 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 overpaying 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.
- 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.
- Generally, if the purchaser is not registered to do business in Vermont 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.
Generally, if the purchaser is not registered to do business in Vermont 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.
Long-Time Business Not Paying Income Tax | July 19, 2022
A recent audit identified a business that had been active and profitable for many years, paying withholding and other trust taxes, but whose owners had not been filing income tax returns. When contacted by our auditor, the taxpayer engaged a tax preparer. The Department and preparer worked together to prepare accurate income tax returns using the best information available from Department data sources and taxpayer records.
The audit identified almost $60,000 in income tax that had not been reported, in addition to associated interest and penalties. Taxpayers should note that if you are conducting business, the revenue received must be reported on the appropriate return form (personal, corporate, or business income) depending on how the business is structured.
Unreported and Misreported Capital Gains | June 1, 2022
Taxpayers must calculate and report the correct amount of capital gains when they sell real property. In a recent case, the Vermont Department of Taxes identified an individual with substantial proceeds from sales of real property which were not reported on income tax returns. An audit of the taxpayer further revealed additional real estate transactions, rental activity, and disposal of property that was either not reported at all or not documented properly. These circumstances led to a substantial adjustment to income tax due, including interest and penalty. Taxpayers are reminded to maintain accurate records for real estate transactions in order to properly determine and report basis and gain or loss.
Hobby vs For Profit Activity | April 29, 2022
The Department recently identified multiple taxpayers who deducted losses from “business” operations to offset income from other sources such as wages, capital gains, interest, and dividends. However, audits which applied IRS guidelines revealed that the taxpayers were not conducting business with the intent of earning a profit. That is, the taxpayers were deducting business losses every year, but the activity fit the criteria of a hobby, not a for profit business.
When business activity is not engaged in for profit, taxpayers may deduct related expenses to offset the revenue generated but not beyond that to reduce taxable income from other sources. Reference the IRS guidance below to assist with determining when an activity is deemed to be engaged in for profit, as opposed to hobby activity.
NOL and Expense Deductions | February 1, 2022
In a recent Personal Income Tax (PIT) audit, multiple years of federal and Vermont income tax returns were reviewed. The review coupled with engagement with the taxpayer revealed that net operating loss (NOL) deductions taken were not substantiated. Moreover, several items of expense were double-deducted – i.e. included in two different deduction lines on the tax return - further reducing taxable income incorrectly. The outcome resulted in income tax and homestead adjustments to this taxpayer with applicable interest, and penalty. Please be sure claimed NOLs can be substantiated and deductions are properly accounted for when filing. To learn more about this topic, please read our Personal Income Tax: Net Operating Losses guide.
Bundled Transactions & Sales Tax | May 26, 2021
During a recent audit we found that a taxpayer did not collect sales tax on a bundled transaction. A bundled transaction is the retail sale of two or more products for one non-itemized price. Sales tax must be collected on the selling price of a bundled transaction if any product would be taxable if sold separately. For example, a raincoat has a retail price of $100 and umbrella a retail price of $20. A seller offers the two items to its customers for the single price of $120. Pursuant to subsection (C)(3), the entire charge is taxable – notwithstanding that clothing is exempt from the tax – because the products are sold for a single charge and the value of the umbrella is not de minimis because it exceeds ten percent of the total purchase price. Further information can be found in Reg. §1.9701(4)-3.
Misreported Deductions | October 15, 2020
The Vermont Department of Tax recently assessed personal income tax due as a result of misreported deductions from income on the Federal 1040.
- Noncash charitable contributions on Schedule A, “Itemized Deductions” were reported but the taxpayer was unable to provide records, documentation, or explanation of what the contributions were.
- Deductions reported on Form 2106 – “Employee Business Expenses”, were also disallowed. Expenses on this form are only allowed in limited circumstances. In this case, deductions were taken for vehicle and travel expenses (which are not allowed for the cost of commuting to work), a home office (not used for the generation of income), and travel and meals expenses – in all circumstances the taxpayer was not able to provide an explanation or records to support the noted deductions.
These adjustments resulted in assessment of over $5,000 in unpaid tax over 2 tax years. As a result, the Vermont Department of Tax has undertaken some systemic data analysis to identify individuals that may be incorrectly using the charitable contributions lines to reduce their taxable income.
- Detailed records must be kept for all charitable contributions. Taxpayers should note that donations of volunteer services and time are not allowed to be deducted from income.
- Effective 2018, the Federal Form 2106 has been discontinued as part of the Tax Cuts and Jobs Act. The Vermont Department of Taxes will be analyzing return information to identify misreporting of these types of expenses as part of our ongoing work.
Further guidance on these deductions can be found at:
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:
- IRS Publication: LB&I Concept Unit Knowledge Base – S Corporations
- IRS List: Index of Applicable Federal Rates (AFR) Rulings
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.
- 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.
Business Outreach Program
The Vermont Department of Taxes will be launching a Business Outreach Program in February 2021. The program is designed to help newly established businesses better understand tax collection and filing obligations that may apply to their business. A representative from the Department’s Compliance Division will be reaching out to selected businesses that have recently registered with the Department of Taxes to provide the optional educational assistance. If you are interested in being considered for this outreach program, please contact us via email sent to firstname.lastname@example.org or by calling (802) 828-2514.
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
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.
- Publication 523 – Selling Your Home
- Form 1099-S – Proceeds from Real Estate Transactions
- Schedule D – Capital Gains and Losses
- Form 4797 – Sales of Business Property
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.
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.
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 the year, the Department plans to release various mailings involving these programs.