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Compliance Corner Archive

Read the notable cases, tax tips and news from 2018 through 2020. We cover a wide-range of topics and provide you with important information throughout the year. Recent topics can be found on our Compliance Corner page.

2020

 

Tips & News: 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.


Tips & News: 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

Tips & News: 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.


Notable Cases: 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.

Please note:

  • 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:

 


Tips & News: 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.


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:


Tips & News: 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.

Tips & News: 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. 


Notable Cases: 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.


Tips & News: Use Tax Due if VT 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 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.


Tips & News: 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.


Tips & News: 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 over paying your Health Care Contribution.


Tips & News: 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.

Tips & News: 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.

Tips & News: 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.


 

Tips & News: 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.


Tips & News: 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.

2019

Notable Cases: 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.


Tips & News: 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.


Notable Cases: 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.


Tips & News: 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.


Notable Cases: 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.


Tips & News: 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:

2018

Notable Case: Proper classification of purchases in POS systems | November 15, 2018

We identified a business that was incorrectly exempting all purchases made by a customer who had previous purchases involving an exemption certificate.

The incorrect exempting of all purchases occurred because of the way the POS system was set up. The POS system identified exempted sales based on who the customer was, rather than considering if the purchase itself was exempt. This customer-based classification in the POS system caused 100% of all purchases made by certain customers to be exempted from tax. The audit found that while many purchased items were properly exempted from tax, there were purchased items that should not have been exempted. At the conclusion of the audit the entity was billed for sales tax that was not collected at the time of purchase.

Sales that qualify for no sales tax to be collected by the seller need an exemption certificate, which exemption is either entity-based or use based. 

Entity-based exemptions: An example of an entity-based exemption would include 501c3s, Vermont towns and schools, etc.  These entities may purchase all items exempt from Sales Tax.

Use-based exemptions: Example of use-based exemption would include retailers, contractors, and farmers.  While a retailer purchases items for resale using a resale exemption certificate, or a contractor may purchase items exempt for an exempt real estate construction job using a contractor’s exemption certificate, or a farmer may purchase items used in the production of agricultural commodities using the agricultural exemption certificate, purchases like these, made with exemption certificates, are use-based purchases and would not be subject to sales tax. However, these customers would pay sales tax on other items that they themselves use or items that do not qualify for the claimed exemption. 

When accepting exemption certificates, it is important to set up your POS system to be able to distinguish between a taxable sale and an exempted sale made by the same customer. The Department has many resources to help you understand exemptions and exemption certificates.


Past Work: Personal Income Tax Discrepancy |July 1, 2018

Our office audit staff is currently working on the personal income tax "Discrepancy” program for tax year 2015. This program involves matching data items on the Vermont IN-111 and related schedules with information from the IRS and other state agencies. If information is inconsistent or not reported, we will contact the taxpayer with a proposed correction. As of June 30, 2018, we have contacted over 1,600 people with a "Preliminary Notice of Audit Findings" that total about $2.9 million in tax. We have created a Discrepancy Reference Guide to help explain the letters we are issuing for this program. As 2018 progresses, we’ll move on to personal income tax non-filers for 2014 and 2015. These are folks who have filed a return with the IRS and/or received income and have a Vermont address, but did not file a Vermont personal income tax return at all.


Notable Case:  Multiple Home Businesses | July 1, 2018

We matched information and data to try to identify taxpayers who were misreporting expenses on Schedule C. In one case, we found that not only were deductions for one business being overstated, but that the individual was conducting multiple other lines of business but not reporting any of that activity on tax returns. Audit staff identified almost $50,000 of unpaid sales, use, and income tax across several years.


Tips & News: November 2, 2018

The South Dakota V. Wayfair Supreme Court decision now requires certain out-of-state vendors to register with the State of Vermont and collect/remit Sales Tax beginning July 1, 2018. We have received several inquiries about the Voluntary Disclosure Program (VDP) whereby the applicant is hoping to postpone the implementation date of this required registration, collection, and remission. The VDP is a program that allows qualifying taxpayers to voluntarily come forward to file and pay required taxes.  VDP is not a program that can waive or delay the collection and reporting mandated by legislation. Therefore, it should be expected that any qualifying taxpayer accepted into the VDP, in connection to this court decision, will need to file and pay returns starting with July 1, 2018 and forward.


Tips & News: November 2, 2018

Did you know you can save yourself money by being proactive in amending your Vermont State Income Tax return? Periodically we receive information from the Internal Revenue Service that reports changes made to a Federal Income Tax return. In many situations we find taxpayers did not amend their Vermont State Income Tax return, when required, which results in additional tax, interest, and penalties being imposed.


Past Work: Larger Businesses | July 5, 2018

The Department has recently invested some resources in examining some of our large corporate taxpayers. Due to confidentiality restrictions of IRS Publication 1075 and the relatively small pool of companies affected, we cannot disclose detailed information.

Broadly speaking, we were able to use information that a certain industry sector is required to file with another state agency.  We compared that information with tax department filing records for those companies to identify a number of companies that were either not reporting all of their activity to for tax purposes or were not filing tax returns with us at all.

Collections to date on that program are over $2.6 million, and we expect additional revenue from future anticipated voluntary compliance from these companies. We also identified some opportunities where we can provide better information to companies in that industry to help them determine their correct tax base and tax.


Tips & News: July 1, 2018

Fact Sheets: Your Guide to Taxation in Vermont: The Department has been working hard in recent years to provide detailed information about a variety of tax types and topics. Check out our library of fact sheets and publications to learn more about the topics we cover.


Tips & News: July 1, 2018

We are currently in the third run of our Personal Income Tax Discrepancy Program in our new tax system. This program uses federal data to identify taxpayers who have underpaid Vermont tax. Over those three runs we have improved the program and decreased the rate of improperly identified taxpayers by almost 60%. Thank you to all who have provided feedback that helped us improve selection parameters.