A colleague of mine and I were recently discussing that there are some common sales tax questions we receive just about every day. We’ve outlined some of them below:
Does an internet e-tailer need to collect sales tax?
Yes, provided the e-tailer has sales tax nexus in the destination state where the product is being shipped.
What creates sales tax nexus for an e-tailer?
Besides the traditional office and employees, many e-tailers have inventory in warehouses in various states. Owning inventory is a sales tax nexus creating activity. Also, some e-tailers have affiliate programs where a business will refer a potential buyer to an e-tailer via a link. The e-tailer then pays a commission to the business if the buyer makes a purchase. This is common with bloggers that review a product and then provide a link to the e-tailer’s site. Multiple state have passed “Amazon Laws” directed at this type of activity which can be a nexus creating activity in some states.
Do I need to register with the Secretary of State in addition to the Department of Revenue?
The requirement to register with the Secretary of State (SOS) should be determined by a company’s legal staff, outside counsel, or a firm specializing in Secretary of State compliance. TaxConnex frequently manages the sales tax registration process with the Departments of Revenue (DOR). Historically, when the sales tax application was paper based, very seldom was a SOS registration required to successfully complete the sales tax registration. (There could have still been the need to register with the SOS – it just wasn’t a requirement to receive a sales tax ID via the DOR.) More recently, with the proliferation of e-file sites, most states require a SOS registration before they will process a sales tax registration.
If I provide telecommunications services, where should I collect the applicable taxes?
The telecommunications industry is one of the most highly taxed industries. The question is generally coming from someone who is new to the industry and is offering a VoIP service. There are a couple of items to highlight to address this question:
(1) First, nexus should be determined. Interestingly, within the telecommunications industry, nexus for transactions tax purposes (sales tax, communications services tax, etc.) is applied based on where the service provider has customers. This is different than traditional sales tax nexus. The overall concept is that the telecommunications service provider is taking advantage of infrastructure within the state – switches, routers, towers, etc. Notwithstanding the fact that the provider doesn’t own the infrastructure it is still critical in helping the provider establish and serve a market. As a result, telecommunications service providers will have nexus wherever they have customers.
(2) The second part of the question is focused on where tax should be applied (technically referred to as the point of situs). The easy answer related to the collection of taxes on telecommunications services is that tax should be charged based on the “benefit of service” which is where the user is located – not necessarily where the bill-to is. The concept is easy but the execution can be challenging as a provider could have the same customer with users in many different states – and thus taxes due in many different states. Sometimes, a provider will not know where every user is located and the bill-to is used as a default.
Stay tuned for additional Q+A in the future. And check out Ask a Sales Tax Pro on our website for more.