Adding a new product is great, new revenue streams are wonderful. Just don’t let sales tax turn the situation into a nightmare.
Think “nightmare” is too strong? Consider:
Your new product is not taxed but should have been. In the first year, your sales total is $100,000 (the economic nexus threshold in many states) and grows 20% annually over the next three years, for a total of $364,000 in sales. At an average sales tax rate of 8%, that’s more than $29,000 in uncollected sales tax in just one jurisdiction. Additional penalties and interest could take the total exposure to close to $40,000.
(Taxability of products and services was once again a top worry in our latest sales tax survey of financial professionals.)
Scary. And even if your company has a solid handle on the taxability of its current products, new ones can ignite sales tax obligations you might not learn about until it’s too late.
Sales tax regulations can seem like one of those black-and-white checkered rooms in your local haunted house attraction.
Even if you simply add tangible personal property to your product line (or TPP, which is generally taxable), you have to research a number of factors to determine how much sales tax to collect and remit.
- Jurisdictions tweak economic nexus requirements all the time (check some of our recent sales tax news updates). Extra fees for retail delivery – they amount to an extra sales tax, say merchants – are already in Colorado and might soon crop up in other states. Even a “NOMAD” state like Alaska continues its ever-evolving march toward a statewide sales tax.
- Not only might you be selling into many of the country’s thousands of sales tax jurisdictions, you might also be selling TPP in a given transaction that does or doesn’t qualify for a sales tax exemption (such as for resale). This is another area that jurisdictions frequently tweak.
- Sales tax holidays, though reasonably stable certain times of the year on such items as emergency-preparedness gear or back-to-school supplies, can come and go. Remember: You don’t want to collect too much sales tax on your new products, either.
- Are you selling your new products through a marketplace facilitator like Amazon? That may count toward your economic nexus in some states, not in others. A facilitator warehousing your new products in certain states could produce physical nexus, too, though this notion was recently shot down in Pennsylvania.
What you sell matters, too
Suppose your new product isn’t flat-out TPP but some mutant (at least in the many eyes of the many tax jurisdictions you sell into)?
Taxability becomes confusing, for instance, with software, which tends to have varying tax rules state-to-state. Is it Software-as-a-Service (SaaS)? How is it delivered? Are there maintenance or support services included with the software? Is the maintenance or support optional or mandatory? These questions matter when determining whether sales tax applies. Similarly, taxability is confusing for telecommunications services, which can be subject to sales tax and communications taxes.
In fact, if you’ve brought a new service to market, you’re in a segment ripe for a sales tax upheaval: More and more states’ lawmakers see taxing remotely delivered services as a potential big new source of revenue.
Generally, digital products are “intangible” and sent to your customers electronically. These products include digital books, music, internet TV and streaming media, webinars, subscriptions and apps, among many other products. So intangible and so not taxable, right? Not always the case.
This is just a sample of the dangers, but clearly failing to keep up on the latest developments can land you and your new product in a sales tax version of “The Pit and the Pendulum.”
Understanding the taxability of your company’s products or services old or new is one of the key steps to complying with sales and use tax laws nationwide. To learn how TaxConnex helps their clients remove the burden of sales tax – get in touch!