Sales Tax Scaries (Part 1)

Could Your Sales Tax Become a Horror Story?

This part of the year is filled with horror stories. Could your sales tax become one of them? 

Danger certainly lurks, and in the first of our “sales tax scaries” series we examine a trio of terrors for your sales tax: 

• Selling into multiple channels and not knowing how to manage your different revenue channels;
• Neglecting the physical presence potentially create by utilizing a marketplace facilitator;
• The endless sales tax traps for wholesalers and contractors. 

Channel Chills: The Fright of Multi-Channel Selling

Businesses have new ways to sell today, as marketplaces such as Amazon, TikTok and the business’s own website have joined established channels like direct retail sales and wholesale sales. Some of these channels are much less of a horror show than others. 

Sales tax obligations start with nexus, the concept that enables state and local governments to require businesses to collect and remit sales tax on the products and services they sell. This generally takes the form of economic nexus based on dollar amount or number of transactions or physical presence (more on this later) in the state to collect sales tax. Nexus casts a broad net nowadays. 

One way to get around this is a sales tax exemption. The most common type of exemption is a resale exemption, in which the buyer intends to resell the item to another entity or end-user. The buyer wants to make the original purchase exempt from sales tax, and they expect to then charge sales tax when they sell the item. The buyer will present a resale exemption certificate to their vendor, who is relieved of the burden of charging and collecting the sales tax.  

New venues often engage in drop shipment transactions, where the retailer acts as an intermediary between the end consumer and the supplier or distributor. 

These transactions have unique sales tax rules that can be confusing. For instance, many companies now have an online presence for taking orders and making retail sales without maintaining any inventory. Instead, they leverage other suppliers/distributors who “drop ship” directly to the customer.  
  
Let’s say a supplier/distributor in Arkansas sells to a retailer in South Carolina and drop ships to the retailer’s customer in Illinois. The Arkansas supplier/distributor has nexus in Illinois and is registered for sales and use tax purposes in Illinois. As a result, the Arkansas supplier/distributor is required to charge Illinois sales tax unless an applicable resale exemption certificate is provided. The South Carolina retailer does not have nexus in Illinois and is not registered for Illinois sales and use tax purposes. 

Sales tax regulations can wind like haunted old vines around your sales plans.

Frightful Shock: Marketplace Facilitators and Sales Tax

Ecommerce has introduced yet another factor scary to the sales tax process: the marketplace facilitator. These are platforms where third-party sellers of any size and geographic area can facilitate retail sales, including the collection/processing of payments, in exchange for compensation. Today some of the household names are Amazon, eBay, TikTok and Etsy.  
  
The marketplace facilitator is responsible for collecting and remitting the applicable sales tax, but sellers do need to monitor these sales if they also sell through avenues outside a marketplace, such as their own website, via resale and so on. Even though the marketplace is collecting and remitting that tax, those sales need to be accounted for to determine whether a company has reached economic nexus thresholds and may need to collect and remit sales tax on their own website. 

What defines a physical presence? Is it only your physical office location – or can it include inventory or parts are stored in a warehouse? (This can include consigned inventory in 3rd-party logistics warehouses, including Amazon.) Marketplace facilitators can maintain inventory for a seller in many different states, creating potential physical nexus and sales tax obligations – sometimes completely unknown to the online seller.

(Check out our webinar: Multi-Channel Selling & Your Sales Tax Obligations) 

Believe in Spooks: Wholesaler and Contractor Tax Nightmares

Many manufacturers, wholesalers, and distributors believe they have minimal sales tax obligations due to the likelihood of sales tax-exempt transactions. That’s not always true. 

Businesses don’t always fit into a box as being only a manufacturer or only a distributor; many times, they’re both. The key consideration is whether the sales by these types of businesses are exempt or not from sales tax collection.  

The most common type of exemption is a resale exemption and is applicable to wholesale transactions. In a wholesale transaction, the buyer intends to resell the item to another entity or end-user. In this situation, the buyer wants to make the original purchase exempt from sales tax, and they expect to then charge sales tax when they sell the item. In this situation, the buyer will present a resale exemption certificate, and the wholesaler/distributor is allowed to not charge the sales tax.  

The wholesaler must maintain resale exemption certificates for their buyers for protection against audit, when a state is likely to ask for copies of these certificates and deem taxable any transaction without one. Wholesalers selling on their websites may also inadvertently ignite sales tax obligations. 

A contractor is generally defined as someone who provides improvements to real property on a lump sum contract basis. At first glance, the sales and use tax requirements for a contractor seem quite simple. Contractors are typically considered the end-user/consumer of all tangible personal property purchased and used by them in conjunction with the performance of a contract to improve real property. As such, all purchases by a contractor are usually subject to sales and use tax. Since contractors are considered service providers, charges by them for real property improvement services are typically exempt from sales and use tax. 

Sounds simple but it isn’t always. Many contractors are also involved in the sale and installation of tangible personal property, for instance. One of the difficulties faced by many contractors is determining when tangible personal property becomes real property vs. retaining its character as tangible personal property. This is a critical distinction for sales and use tax purposes: The sale of tangible personal property is subject to sales and use tax, and the sale of real property is generally not.  

Beware the Next Sales Tax Scare

Scary stuff, for sure. Next, we’ll look at what can be frightening about sales tax troubles wrecking an M&A. 

If you need help understanding your sales tax obligations, taxability or how to manage exemption certificates, get in touch. TaxConnex has experts to help answer these questions and to help you remain compliant with the frequently changing rules of sales and use tax.