States aren’t the only ones who can complicate your life with sales tax: Local governments want to play their part, too. Cities, counties and towns nationwide – which have almost all seen an increase in their sales tax revenues in recent years – constantly tinker with their own sales taxes. The states and local jurisdictions have been the beneficiary of economic nexus over the past four years.
Economic nexus is the threshold at which a seller incurs sales tax obligations. All states with a sales tax have set an economic nexus threshold since the Supreme Court’s Wayfair decision. Your localized tax obligations usually begin with states’ economic nexus thresholds. In California, for instance, if you have sales tax nexus and your products or services are subject to sales tax, you charge the state and local level taxes together, usually as an overall combined tax rate. This tax is then reported on a single California return including all state and local taxes. California is then responsible to see that the local taxes are distributed to the appropriate local jurisdictions.
Other states allow local jurisdictions to administer their own taxes. This is prevalent in Alabama, Colorado, and Louisiana. In these states, nexus is still a determining factor, but the rules can become complicated. Generally speaking, if you have exceeded the economic nexus thresholds in these states, then you are required to collect the applicable state and local sales tax. In Alabama, if you only have nexus related to economic nexus thresholds, then you are allowed to apply a single tax rate across the state and report all tax on a Remote Seller Return. Louisiana is similar to Alabama, however, in Louisiana there are different tax rates that apply at the local level rather than the single rate in Alabama. Louisiana also offers a single Remote Seller Return.
Colorado is working toward a consolidated return for Remote Sellers, but not all local jurisdictions currently participate. Requiring the taxpayer to file a consolidated return for the participating local jurisdictions and file directly with the non-participating jurisdictions.
To add another layer to this, if you have a physical presence in any of these states, then you are not allowed to file the Remote Seller return. In the case of a physical presence, you may need to make the nexus determination at the local level before determining whether you have the obligation to collect the local sales tax or not. In the case of a physical presence, these local taxes that are collected will need to be filed on directly with the local jurisdictions on their own sales tax return.
Local sales taxes remain front and center election after election, as voters nationwide wrestle with funding for public services and infrastructure – and sometimes whether to reduce local sale taxes to relieve citizens who are slammed by inflation.
Recently in Missouri (where statewide economic nexus kicked in this year), voters in several of the state’s cities are trying to decide whether to institute use taxes that would allow each of those cities to collect its sales tax for online purchases. Similar proposals have cropped up in Tucson, Ariz., and around the Twin Cities of Minnesota, to cite two of many communities.
Communities are often closely divided when it comes to raising or lowering sales tax. In some communities, votes on the mandates have been so close that it’s taken a month or more to decide the outcome. Some measures passed; some didn’t.
Sales taxes might be a toss-up with the populace, but there’s no longer any doubt that local governments love them. Local sales taxes may change – but they’re not going away any time soon.
Let TaxConnex manage the burden of keeping up with the changes and challenges of sales tax obligations. Contact us to learn what it means when your sales tax compliance is all on us.