Today’s bookkeeping challenge is to double check that all your customers are properly licensed where they do business. This can be more difficult that it appears.
First: Determine their nexus or where they do business. Nexus is the concept that they are connected to a particular state or city enough so that they need to be licensed or pay taxes in that locality. For instance, Washington state is a location based business. If I physically go to Bellingham, Washington to deliver the products, it’s construed if I did the business in Bellingham. This is even if I conducted all the business in Seattle, the fact that I went to Bellingham means the sale transacted in Bellingham.
Washington State taxes are somewhat difficult for landscapers, each sale may be in a different local. That difference might result in vastly different sales tax and income tax structures.
Second: track down the business licenses they currently hold. Are they up to date? Is there one they forgot to file? City business licenses seem to be the most problematic for small businesses. Large businesses forget to refile their business license each year.
Let’s talk about the different types:
Secretary of State: This certification for corporations, LLC’s, and partnerships that needs to be filed in each state. It can either be a domestic or foreign certification. Foreign means that the company is incorporated or formed in a different state. Domestic means that it’s formed within that state. The name of the certificate may vary.
Revenue Certificate. This is often a state requirement to do business. They maybe also required to file a sales tax certificate, permission to do business or register for taxes in that state. This is usually administered by the Revenue department and revolves around their taxable status.
Employment Security or Unemployment tax department. There is usually a state department that regulates unemployment. Often there will be a separate tax return for this as well.
Labor & Industries or LNI in Washington state. It’s often a state department that regulates employee safety. Tax or insurance payments might be made to fulfill this requirement.
City or County Business License. This might be rolled into the state licensing know the rules!
Professional Registration. Some professions, like CPA’s have professional registration requirements. Know the rules for that business.
IRS: EIN or Employment Identification Number. Required at the federal level.
Make sure are on your toes with every customer. Here are some common mistakes.
- Different legal entities at the state and federal level. For instance, on the federal level they are a sole prop, but the state thinks they are a corporation.
- Not filing state tax returns. The IRS and the States share information on a regular basis. I wouldn’t be shocked if you had an audit if this was the problem.
- Not licensed in the city you are based in. Cities often have state tax auditors who drive down the street and look at the business signs. Sounds like a joke, but seriously, that is how a lot of violators are found.
- Not licensed for their specialty. If they are massage therapists, doctors, or any of thousand other regulated industries, make sure their professional certification is also up to date.
How bad can it get?
In Seattle, we have tons of medical marijuana shops. Tons. The federal and the state have had disagreements about this for about 10 years. Combined legality issues at the federal level, IRS rules and attorneys suggesting that medical marijuana shops don’t get licensed, it’s been a mess from an accounting point of view.
What do you do when it’s an all cash business, the attorneys suggest no paper work is kept or maintained for legal reasons? Despite the recent rules and regulations that have gone into effect, it will be a long time before all these items are sorted out. I know those out of town might think I’m exaggerating the no licensing advice, but remember this was an illegal activity that is coming clean with tax authorities in Washington State.