TaxConnex Sales Tax Blog

Sales Tax Nexus and Drop Shipments

Posted by Brian Greer on Thu, Jan 12, 2017 @ 10:31 AM

TaxConnex held a webinar yesterday regarding sales tax nexus and drop shipments.   The webinar was organized into three topics:

  • sales tax nexus
  • new developments related to sales tax nexus – for example economic nexus and notification requirements,
  • and finally drop shipments

The discussion of drop shipments sometimes seems out of place with a nexus discussion; however, it’s critical to understand the role of sales tax nexus in determining how to manage drop shipment transactions.  Interestingly, most of the questions from the audience were related to drop shipment rules and how to exempt certain transactions from sales tax.

The real key piece to understand with drop shipments is that there are two distinct transactions involved.  drop shipment 3.jpg

Generally, there’s a sale between a manufacturer and a distributor where the manufacturer ships product to the distributor’s customer and invoices the distributor for the sale.  Sales tax applies based on the destination of where the product is shipped and if the manufacturer has sales tax nexus in that state then the manufacturer charges sales tax.

Separately, the distributor is making a sale to their customer.  Sales tax is applied based on where the product is being shipped and if the distributor has sales tax nexus in that state, then they charge sales tax to their customer.

For the distributor, a problem exists when the manufacturer has sales tax nexus in the destination state and thus charges sales tax; but the distributor does not have sales tax nexus in the destination state and therefore does not charge sales tax to their customer.  The distributor wants to exempt this transaction from sales tax by providing a resale exemption certificate to the manufacturer.  This resale exemption certification needs to be valid for the destination state.  This is where we take a turn…..

Some states, Georgia is one, will allow an out of state distributor to exempt the sale in Georgia with their home state resale exemption certificate or their home state sales tax id number on the Georgia resale exemption certificate.  California is not so friendly.  California requires a sales tax registration and a California sales tax id on the California resale exemption certificate.

For the distributor, and the manufacturer, it’s critical to know which states are like Georgia and which states are like California.  IPT publishes a bi-annual (every other year) guide that can help.  You can purchase this survey through IPT for $275 (https://www.ipt.org/IPT/Publications/Books_and_Surveys/IPT/Publications/Books%20and%20Surveys.aspx)  Sometimes the states are not entirely clear on the responses they provide to IPT and IPT does not attempt to interpret the responses from the various states.  For more thorough assistance, you might need the help of a sales tax firm like TaxConnex to understand exactly how to exempt various drop shipment transactions.

 

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Topics: sales tax nexus, drop shipments

Sales Tax Outsourcing vs. Return Prep Outsourcing

Posted by Brian Greer on Thu, Dec 15, 2016 @ 10:30 AM

As sales tax outsourcing has grown in popularity, I sometimes see situations where the “service provider” (I use that term loosely as these are generally software firms that try to provide service) is misaligned with the requirements of the client. 

In the early days of sales tax outsourcing, it was all about return prep. 

Vendors focused on the large end of the market – Fortune 1000 businesses, who possessed significant in-house sales tax expertise.  These large businesses needed access to efficient return preparation, not sales tax expertise.  Many vendors thrived in this environment, building more and more efficient return preparation shops and reducing the overall cost per-return.  These vendors were successful at creating a commodity driven marketplace.

However, the large end of the market ultimately became saturated and vendors started moving downstream to the small and mid-size businesses.  These small and mid-size businesses often lack the internal sales tax department that their Fortune 1000 brethren possess. 

The wise vendors realized along the way that small and mid-size businesses need more than just return prep, they need guidance, advice, and access to people to address day-to-day sales tax questions. 

The return prep providers failed in this market and continue to fail today.

dinosaur.jpg

Unfortunately for some businesses, these return prep dinosaurs continue to push their return prep service to a market that requires something more. 

If your business does not have a dedicated sales tax resource, be wary of these return prep providers.  You will leave a large gap in your sales tax compliance process which ultimately translates into risk for the business. 

Look for services providers that can help with the day-to-day sales tax questions and issues:

  • I have nexus? 
  • Should I register? 
  • What should I do with this nexus questionnaire? 
  • How risky is it to take this position? 
  • What should I do about this audit notification? 

Return prep providers will not know how, or be able to address these questions for you.

 

The TaxConnex Difference

Topics: sales tax outsourcing

Sales Tax Compliance Outsourcing

Posted by Brian Greer on Thu, Dec 08, 2016 @ 10:20 AM

 

year end.jpgAs year-end approaches, it may be the perfect time to switch sales tax compliance outsourcing service providers.  (I use the term “service provider” loosely as many of the companies that provide sales tax compliance outsourcing are really software companies that aren’t good at providing service.)

Occasionally, businesses find themselves in a situation where their current sales tax provider is not meeting expectations.  Perhaps there’s an inability to reach someone on the phone or there are too many notices. 

Whatever the situation, year-end is a good time to make a change and allow the new service provider to begin the new tax year – which for sales tax means the January returns filed in February.

Something I’ve noticed through the years is that the transition from one provider to another provider is generally not as difficult as the initial outsourcing.  This is because during the initial transition, the business was required to document their filing calendar – tax id’s, filing frequency, e-file credential, etc. – and establish data feeds or Excel spreadsheets that represent their tax liability.  Once the process has been set-up and outsourced to a provider, it can more easily be “lifted” and moved to another provider.

If you’re in an untenable relationship, don’t let the fear of a difficult transition immobilize you.

This guide will provide you some key indicators that it’s time to make a change and also step-by-step instructions on how to make the transition simple.

  Thinking of Making a Switch?  Download Our Step By Step Guide

 

Topics: sales tax compliance, sales tax, sales tax outsourcing

Sales Tax Compliance - The Importance of Good Old Fashion Service

Posted by Robert Dumas on Tue, Dec 06, 2016 @ 10:57 AM

old fashion service-623920-edited.jpg

I heard a story about Chick-Fil-A on the radio this weekend that has reminded me about the importance of service.

My apologies in advance to Chick-Fil-A and the characters in the story to the extent I get the details wrong, but I believe I am getting the moral of the story right.  Here we go…at a strategy meeting of Chick-Fil-A executives, they were discussing the need for faster growth to fend off another competitor that seemed to be growing faster at the time.  After listening intently to the discussion, Truett Cathy – the much revered and respected founder of Chick-Fil-A – stopped the conversation and stated that he did not want to hear anything else about fast growth.  He wanted to discuss how Chick-Fil-A could get better.  He said if Chick-Fil-A gets better, the market will demand they get bigger.  Based on the results, I think Truett Cathy has proven he was right!

As the founder and leader of TaxConnex, I am always trying to push for faster growth.  I measure part of our success on year over year revenue growth because businesses with fast growing revenue are deemed more valuable and exciting. 

There is definitely truth in this, but fast growth does not mean the business is getting better at what they do. 

We see this in the sales tax compliance industry, which is dominated by fast growing technology companies.  These businesses have created and built software applications using the latest technologies – e.g., “the cloud” – and developed a very appealing message of push button simplicity.  There are definitely aspects of sales tax compliance that demand and require the latest and greatest software technologies, but there is a significant aspect of sales tax compliance that also requires good old fashion service.  

It is critically important for businesses in sales tax compliance to strive to get better whether we provide technology or service.

TaxConnex is a premier service provider that uses proprietary and licensed software solutions to manage the financial risk of all or part of a business’s sales tax compliance responsibilities.  I am reminded by Chick-Fil-A that my goal for fast growth will only be achieved if we constantly get better at what we do.  

 

The TaxConnex Difference

Topics: sales tax, sales tax service

3 Components of Sales Tax Compliance You Haven't Considered

Posted by Robert Dumas on Tue, Nov 29, 2016 @ 02:19 PM

I get the opportunity to talk to many businesses and CPA firms about our sales tax outsourcing services at TaxConnex.  When most of the people we talk to refer to sales tax compliance, they are thinking about tax return preparation only.   They never consider the other components of compliance. 

 

This blog is going to highlight three of these ancillary components of sales tax compliance:

FilingMailingRemittance.png

 

1. Filing, Mailing & Remittance    

Once a sales tax return is prepared, it must get filed and paid.  Filing can include mailing or electronic filing.   If you mail a return, it must be signed, copied or imaged for future reference, stuffed in an enveloped, metered and delivered to the post office for certification of mailing.  If you electronically file a return, it must be entered manually or uploaded into a unique jurisdiction web-site.  Regardless of the filing method, a payment is generally required and can be a check, an ACH debit or an ACH credit.  All of these remittance, mailing and filing activities require human action, processes, controls and related costs.

 

2. Jurisdiction Correspondence    

Once a business is registered with a state and local jurisdiction, it can expect multiple pieces of recurring mail from each jurisdiction.  This correspondence includes notifications of law and tax rate changes, blank tax forms, account changes and notices regarding previous filed tax returns.  Though 90% or more of this correspondence is not relevant, there is a small percentage of this mail that requires action. 

Many times, the action required is time critical so any delay in responding creates risk with the jurisdiction.  Unfortunately, a person with some level of knowledge (as opposed to a technology), must review each article of mail as quickly as possible to separate the irrelevant from the time critical and to get the mail into the proper hands.  This too requires human action, processes, controls and related costs. 

 

3. Audit Workpapers   

Once a tax return is filed, there must be some form of documentation to support the reported tax liabilities in case the tax return is audited in the future.  Ideally, this documentation provides an easy trail from the core business transactions – for example, customer invoices or vendor invoices - to the lines on the tax returns.   The documentation should also include proof of exemptions, if applicable, and support for bad debt write-offs and other adjustments.   The cost of accumulating this information can be extensive if it is gathered after the original tax return preparers are gone and the data is stored in archives.

 

Just last week I ran into a situation where a company was using another firm to prepare paper based returns.  The company then had to login to the e-file site to file and pay and/or cut checks and send the return and check to the jurisdiction.  It’s not an efficient process to have multiple parties involved in the preparation, filing, and payment of the sales tax returns. 

Be sure to factor in all of the relevant processes, costs, and risks when evaluating whether to outsource and to whom.

 

In case you missed it!  Great read; originally run October 2016. Click here to catch up on more blogs. 

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Topics: sales tax compliance, sales tax, sales tax outsourcing

A Happy New Year for California!

Posted by Noelle Ard on Tue, Nov 22, 2016 @ 10:00 AM

happy new year ca.jpg

In recent news, the California State Board of Equalization (CA BOE) announced a statewide sales and use tax rate decrease of 0.25% from 7.50% to 7.25% on January 1, 2017.

Although the decrease is effective for all cities and counties in California, the actual sales and use tax rate in many jurisdictions in California may still be higher than the statewide rate due to the addition of district taxes.

Decreasing sales tax rates have you wondering what’s up? 

The Schools and Local Public Safety Protection Act of 2012  which raised the sales and use tax by .25% expires December 31, 2016!. Cha Ching!

Other notable changes to California’s tax system voted on by residents;

  • The addition of a $2.00 per pack sales tax on cigarettes, as well as other smoking products (e-cigarettes, tobacco, etc); bringing the total to $2.87 per pack.
  • California voters legalized marijuana to be used recreationally with a sales tax of 15% on the retail sale plus additional fees effective January 1, 2018. 

Additional information can be found by logging onto the CA BOE website at http://www.boe.ca.gov/sutax/prop30.htm 

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Topics: sales tax, California

EYE ON Minnesota Sales Taxes

Posted by Jeff Meigs on Thu, Nov 17, 2016 @ 11:12 AM

eye on minnesota.png

 

The Minnesota sales and use tax is imposed on taxable retail sales of tangible personal property and certain services. 

The statewide general tax rate is 6.875% - and if you happen to be around on July 1, 2034, the rate is scheduled to go down to 6.5%. 

So just hold off a bit longer on that expensive purchase.   

 

A political subdivision can impose a general sales tax under:

(1) the metropolitan transportation area sales tax,

(2) the greater Minnesota transportation sales and use tax, (3) if permitted by special law, or

(4) if the political subdivision enacted and imposed the tax before the effective date of Minn. Stat.  §477A.016 (enacted in 1981) or its predecessor.


The 10 biggest cities in Minnesota, according to the 2010 census, are: Minneapolis; St. Paul; Rochester; Duluth; Bloomington; Brooklyn Park; Plymouth; St. Cloud; Eagan; and Woodbury.

Of these 10 big cities, only the following impose state-administered sales taxes: Duluth, Minneapolis, Rochester, and St. Paul. The rest of the top 10 cities do not impose sales taxes.

Clothing is generally exempt from the Minnesota state and local sales and use tax.  We say “generally exempt” as there are certain items that do not qualify as clothing, such as:

  • Belt buckles sold separately.
  • Costume masks sold separately.
  • Patches and emblems sold separately.
  • Sewing equipment and supplies, including but not limited to, knitting needles, patterns, pins, scissors, sewing machines, sewing needles, tape measures, and thimbles (but see special exemption explained herein).
  • Sewing materials that become part of clothing, including but not limited to, buttons, fabric, lace, thread, yarn, and zippers.
  • Clothing accessories or equipment. “Clothing accessories or equipment” means incidental items worn on the person or in conjunction with clothing. Clothing accessories and equipment include, but are not limited to, briefcases; cosmetics; hair notions, including barrettes, hair bows, and hairnets; handbags; handkerchiefs; jewelry; nonprescription sunglasses; umbrellas; wallets; watches; and wigs and hairpieces.
  • Sports or recreational equipment. “Sports or recreational equipment” means items designed for human use and worn in conjunction with an athletic or recreational activity that are not suitable for general use. Sports and recreational equipment includes, but is not limited to, ballet and tap shoes; cleated or spiked athletic shoes; gloves, including but not limited to, baseball, bowling, boxing, hockey, and golf gloves; goggles; hand and elbow guards; life preservers and vests; mouth guards; roller and ice skates; shin guards; shoulder pads; ski boots; waders; and wetsuits and fins.
  • Protective equipment. “Protective equipment” means items for human wear and designed as protection of the wearer against injury or disease or as protection against damage or injury of other persons or property but not suitable for general use. Protective equipment includes, but is not limited to, breathing masks; clean room apparel and equipment; ear and hearing protectors; face shields; finger guards; hard hats; helmets; paint or dust respirators; protective gloves; safety glasses and goggles; safety belts; tool belts; and welder’s gloves and masks.


And just when you thought it was straight forward to comply with Minnesota sales and use taxes:

Vendors with liability of $250,000 or more for a fiscal year ending June 30 must make an accelerated payment for the June liability for the next year as follows: 81.4% of the estimated June liability is due two business days before June 30, and the remaining amount of the June liability is due on August 20.

 

Stay tuned for more of Jeff's EYE ON series as he blogs aboout sales and use tax State by State

Need Help with  Sales Tax Registrations?

 

 

Topics: sales tax, Minnesota

Service Vs. Technology

Posted by Brian Greer on Tue, Nov 15, 2016 @ 10:15 AM

Be afraid of a sales tax compliance solution that promises “easy” and “push button simplicity”.  Because of the complexities surrounding sales tax compliance, business owners and finance leaders want to hear there’s an easy answer to automate their sales tax compliance.  These business owners and finance leaders talk with different companies involved in the sales tax compliance industry and often times buy from whomever promises what they want – ease and simplicity.  However, it’s not always that simple.

I believe that technology can play a vital role in sales tax compliance. 

I divide sales tax compliance into two distinct functions – (1) Calculating the applicable sales tax and adding the sales tax to an invoice; and (2) Making sales tax decisions including nexus decisions, where and when and how to file sales tax returns, and managing day-to-day sales tax questions.  Technology is most valuable in calculating the applicable sales tax.  But be wary of a technology-first solution where decision making is required. 

A service-first approach is best in the decision making area.

The infographic below shows the difference between the service-first approach and the technology-first approach as it relates to sales tax compliance outsourcing. 

Who do you want to speak with when you have a question – a person or a computer?

service vs tech image.png

Topics: sales tax outsourcing, sales tax service, sales tax technology

TaxConnex's Robert Dumas in Accounting Today

Posted by Kate Bennett on Thu, Nov 10, 2016 @ 10:15 AM

Like self-driving cars, some things are best not 100% automated - sales and use tax is one of those things.  As seen in the latest supplement from Accounting Today, TaxConnex’s Managing Partner, Robert Dumas explains the importance of working with an experienced Sales Tax Outsourcing Service Provider, with a breadth of knowledge of sales and use tax accounting, and not solely a sales tax technology solution.

Robert Dumas AT.png

At TaxConnex we focus on providing service. Whether that be through our sales tax outsourcing practice or our consulting practice where we assist with sales tax nexus reviews, audits, VDA’s, and taxability reviews. Service is key – understanding clients’ issues, developing solutions, following through on our commitments, being responsive to questions and requests – all are critical. Technology complements the great service, but never replaces it.

 

Click below to read entire article in Accounting Today  

OPPORTUNITY IN COMPLEXITY

THE RAPIDLY CHANGING LANDSCAPE OF SALES & USE TAX


 

Topics: sales tax outsourcing

Top 3 Differences in Income and Sales Taxes Management

Posted by Robert Dumas on Thu, Nov 03, 2016 @ 02:10 PM

taxes.jpg

Would you manage your sales tax process the same way you manage your income tax process? 

Of course not. 

Why?  Because they are two different types of tax with differing risks, complexities, and timing.  As you develop an effective sales tax process, it’s important to understand how these tax types are different and therefore how you manage them should also be different. 

I’ve noted a few of the differences below:

1. Income tax is imposed on the business or person that generates the income.  Sales tax is imposed on the person (i.e., individual or business customer) that consumes the taxable property and services sold by the business. 

The income tax paid by a business is their liability and their expense, whereas the sales tax liability of a business is generally the tax liability of someone else and not a business expense – sales tax is considered a pass through tax.  With sales tax, a business is a sales tax collection agent for the government and the government says if you don’t collect and remit this tax correctly, it becomes your liability.   (NOTE:  This does not mean a business does not have a sales tax liability for property and service it consumes.  However, the reporting and remittance of these sales taxes are generally handled by the business’s vendors.)

2. Income tax is reported and paid annually with quarterly estimated payments and an extension opportunity.  Sales tax is reported and paid much more frequently but usually monthly with a recurring monthly due date of the 7th, 10th, 15th, 20th, 25th or 30th depending on the jurisdiction. 

The income tax reporting is extraordinarily complex with multiple forms and schedules at the federal, state and local levels.  The sales tax reporting is much less complex overall with no federal reporting but extensive local reporting in certain states.  Additionally, depending on the state, there is a huge disparity in reporting detail for sales tax as there are certain returns that are very complex while others are quite simple.

3. Data for reporting income tax generally starts with the annual trial balance, which is a compilation of transactions, but sales tax generally starts with the monthly transactions. 

This can result in massive and complex amounts of sales tax data each month due to the extensive and detailed reporting requirement in certain states.  Additionally, the data must be available quickly in order to meet the monthly due dates – which as previously noted can be very early in the month.

 

Creating an effective sales tax process must account for the unique characteristics of sales tax.  Namely the voluminous amounts of data and extremely small windows of time to process the data and returns each month.  If not managed properly, what is otherwise a pass through tax will become the tax liability for your business.

 

TaxConnex acts as Your Outsourced Sales Tax Department.  To learn more about sales tax outsourcing click below.

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Topics: sales tax compliance, income tax