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Cradle to Grave: the Taxman Cometh
Posted Jul 1, 2011 Print Version     Page 1of 1

Last fall, I received a phone call that informed me my business had been chosen for an audit by the Minnesota Department of Revenue. I somewhat expected this call because I knew that several of my fellow videographer and photographer friends had been audited and, in some cases, had received severe penalties for incorrect reporting. One friend actually closed down three of his locations and had to let 10 employees go because he faced such a severe penalty for not collecting enough sales tax. Another friend had to dip into his retirement account to pay a $10,000 fine for inaccurate reporting.

With those and other tax horror stories in mind, I was not looking forward to meeting the auditors assigned to my business. However, after thinking it through, I realized that since I had always tried to comply with state guidelines, I had nothing to fear and, if anything, this could turn out to be a positive learning experience. When the day of our appointment arrived, I opened the door to find two young men who appeared to be very friendly. Before setting them up in our business office, I took them on a tour of my studio and explained the nature of my business. I then gave them the records they requested and turned them loose on the business computer. I was told that they would be with me for a whole week, so I was surprised when they announced after 3 hours that because of our detailed record keeping, they were done with their on-site investigation. Their only request was that they take a copy of our files back to their office so they could finalize their report.

The one observation they made before leaving was that we should have been charging sales tax on shipping and handling-including postage. I mentioned that a class I took several years ago from the Minnesota Department of Revenue made it clear that we shouldn't charge tax on shipping and handling. They informed me that this rule had been changed because some people were charging high shipping and handling charges on eBay sales to keep the cost of their product (and therefore taxes) low. Even though I had not been informed about those changes, they said I was still liable because "the law is the law." Fortunately, we were talking about just a few hundred dollars.

Imagine my surprise when I received the final report and was told I owed more than $2,000. I was immediately motivated to do some research. The first thing I found out was that a video company was a new enough type of business in Minnesota that the state had yet to set specific guidelines to follow in assessing taxable purchases. For example, the auditors said that I should have paid taxes on all of my purchases from Digital Juice because "business software" is considered taxable. I responded that the purchases they were trying to collect taxes on were used in my business to create a taxable product. I pointed out that my editing computers were different from my business computer because they were used solely to produce a product that would also be taxed.

At first I was told I was mistaken, but I insisted that my arguments be taken to their superiors, who eventually agreed with me. To make a long story short, instead of paying more than $2,000 to the State of Minnesota, I received a check from the state for almost $1,700. I learned that it pays not to accept everything auditors say simply because they are the authority. They're also human and can make mistakes. It's important, however, to not respond in a confrontational manner but in a spirit of honest inquiry.

This is yet another example of why we must treat our business as a business. That means we should keep accurate records and be accountable to the state in which we live for following appropriate business practices. I encourage you to find a business program, such as QuickBooks Pro, and learn how to use it. The time spent learning it will be more than reimbursed when it comes to filing your taxes.

Also, make sure you have a computer dedicated to business transactions. With the price of hard drives plummeting, you should have a backup system for all of your computers—especially the one that has all of your business records. The proper use of a business computer will free you to grow your business and not be bogged down in details.

You should also make use of your state finance department as a valuable resource for learning how to efficiently run your business. My auditors and I have had several conversations to help clarify business procedures. In fact, one of the auditors I dealt with has become a good friend.

Instead of spending valuable time trying to become an expert in accounting, find a good accountant who understands the unique nature of the video business. It is important for us to understand the basic principles, but we don't need to get bogged down in details. A good accountant is a great investment that can ultimately save you money.

If there are publications put out by your state that pertain to your specific type of business, make sure that your accountant is familiar with them. In our situation, video was tacked on to the bulletin dealing with photography almost as an afterthought. As a result, much of the bulletin didn't apply to the business of video. It was helpful to have an accountant who understood the principles of taxation that could be applied to our situation.

Someone once said, "Death and taxes may be certain, but we don't have to die every year!" That may be true. But it's also true that we need to be wise in how we run our businesses, or our businesses may be run into the ground. And that wisdom starts when we educate ourselves so that we can pay what we owe in taxes and not a penny more. As Benjamin Franklin once said, "A penny saved is a penny earned."

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