Sales tax myths

It seems that most people would rather hear inaccurate advice that makes them feel good rather than accurate advice they don’t like. And that seems to hold regarding sales tax, a constantly changing yet critical business process.

We keep hearing so many stubborn misconceptions and myths about sales tax. Companies that believe those without doing their homework risk a hard path of non-compliance, back-tax payments, interests and penalties.

Here are some of the most common myths.

Economic nexus

Tax jurisdictions can determine that your company has sales tax obligations if you sell a certain amount of, generally, tangible personal property (TPP) into a jurisdiction (like a state) over a certain time (usually a year).

In the seven years since the Supreme Court’s landmark Wayfair case, almost all states have adopted some form of economic nexus that requires an out-of-state business to collect and remit sales tax. These economic nexus standards frequently change and can be a pain to keep up with – so naturally people keep embracing myths they hope will get them out of their Wayfair-related sales tax obligations.

Myth: The U.S. Constitution protects my company from nexus requirements. The Due Process Clause of the 14th Amendment mandates a link or minimal connection between a state and the entity it wants to tax; the Commerce Clause authorizes Congress to regulate commerce among the states and prohibits states from enacting laws that might unduly burden or inhibit the free flow of commerce between the states.

The Supreme Court has interpreted this to prohibit a state from taxing businesses unless there is a “minimal connection” between the business and the state in which it operates, yet the Court also has determined that either a physical or economic presence creates that connection between the state and your business.

Myth: I, the company’s owner, have no personal responsibility for sales tax non-compliance. Personal liability for sales tax can extend to owners, directors, shareholders, officers and employees. “Responsible parties” can even trickle down to the person in your company whose duties involve managing and paying taxes or any other person who has the authority or ability to control business payments and decisions.

For all responsible parties, this liability can extend to their personal assets.

Myth: I sell through Amazon and am off the hook for sales taxes. A “marketplace facilitator” is a business or organization that contracts with third parties (you) to sell goods and services on its platform. Marketplace facilitators such as Amazon and eBay enable these sales by listing your products, taking the payments, collecting receipts and handling shipment. In most cases, they now also collect sales tax from buyers and remit it to the appropriate jurisdiction for you.  

Selling through one of these sites may ease your sales tax obligations, but not if you sell on your own website in a state as well. States’ definitions of a marketplace facilitator also vary greatly as more states add facilitator laws.

Myth: Everything I sell is taxable. Many states exempt many categories of sales from tax, including items sold for resale and sold to certain buyers such as nonprofits, schools and governments, among others. Freeing yourself of sales tax obligations on these sales depends on obtaining and maintaining files of valid sales tax exemption certificates from your customers.

Physical nexus 

This kind of nexus existed before Wayfair and economic nexus and may seem more familiar: If you’ve got a store in a state or jurisdiction that sells enough, for instance, you likely have sales tax nexus. But physical nexus too is changing.

Myth: My business must be physically headquartered in a state to trigger obligations to collect sales tax. Not anymore. You might also trigger nexus with sales reps traveling into another state (where they aren’t based); technicians traveling into another state to perform service calls; an affiliate or agent; maintaining equipment or inventory in a state (maintained even by a marketplace facilitator, though this has been successfully contested in court); or, in some cases, remote workers (a potential trap here is distinguishing between nexus for purposes of sales tax and for purposes of state income tax). 

Tech

Myth: I don’t have nexus, so as a telecom provider I don’t need to collect and remit any taxes. Generally, nexus needs to be established before a company must adhere to a jurisdiction’s sales tax rules. As a telecom service provider, though, you use infrastructure in a state to deliver your service: cell towers, fiber, switches and so on. States have concluded that the use of this infrastructure creates attributional nexus and gives you the responsibility to collect the applicable taxes.

Myth: My service provider handles all my taxes for me. By providing Voice over Internet Protocol service, you’re considered a telecom service provider and as such you have direct responsibilities related to taxes and regulatory fees. Your upstream carrier may be charging you these various taxes and fees, but that does not relieve your responsibility.

Myth: Software as a Service (SaaS) products aren’t TPP and create no sales tax obligation. Many states tax SaaS or cloud-based solutions, and subscriptions and downloaded software can create obligations, though this can hinge on how your tech company just presents the charge on an invoice. Some states exempt SaaS from taxation, but this too varies widely – some states levy a sales tax on SaaS lower than the state’s regular sales tax rate. Some states tax SaaS only if it’s being sold to a business or exempt a portion of the cost.

Sales tax situs determines what state’s tax applies. Situs is the location in which a taxing event occurs; for many products of tangible personal property, this means either the billing or the ship-to address. For SaaS, situs can be where the “benefit of use” occurs. Also pertaining generally to tech, the location of the server can determine situs.

The moral: Never assume with sales tax that what you’ve heard is right just because it sounded good.

Sales tax non-compliance can add significant risk to your business. We can help you comply and stay on top of this ever-changing tax environment. Contact us to learn about the latest developments in sales-tax nexus and what they mean to you and your company.