Law Firm Tax Alert

As states are forced to confront continuing budget shortfalls, they are looking for ways to increase revenue.  One of the easiest revenue sources is enforcement of existing tax laws, generally through audit of taxpayers.  Although the Technical Bulletin discussed here applies only to New Jersey taxpayers, we are seeing increasing audit activity in many states.

On January 15, 2013 the New Jersey Division of Taxation issued a Technical Bulletin (TB-69) on taxability of purchases made by lawyers and law firms. The fact that New Jersey issued this bulletin may be an indication that law firms will be the subject of increased audit activity.  Although lawyers practicing in New Jersey are not liable for collecting sales tax on charges for professional services, law firms located in New Jersey are required to pay sales or use tax on all purchases of taxable tangible property, specified digital products, and certain services used by the firm, unless otherwise exempt by law.

We have recently observed increasing New Jersey tax audit activity.  In a typical audit, little time is spent on income tax issues; the main focus of the audit is sales and use tax.  In such an audit, the auditor selects a single year, obtains and reviews copies of your business depreciation and cash disbursement schedules, and requires proof that sales or use tax was paid on each item on the depreciation schedule and selected items on the cash disbursement schedule.  Use tax, penalties, and interest are assessed for all taxable items where tax was not paid.  Based on the single year findings, sales and use tax liability is estimated and assessed for all other open years.   When penalties and interest are added on, the liability can be substantial.

The fact that a provider of a product or service does not collect New Jersey Sales Tax does not relieve the purchaser of the obligation to pay.  Examples of taxable products and services typically purchased by law firms include janitorial services, computer equipment, office furniture, office supplies, pre-written computer software, computer maintenance and service contracts, and detective and private investigation services for discovery purposes.  The bulletin and a full listing of taxable and tax-exempt products and services may be found at http://www.state.nj.us/treasury/taxation/pdf/pubs/tb/tb69.pdf