Overlooked Aspects of Your Compliance Process
When you think about tax compliance, of any kind, the first thing that comes to mind is filing, or...
This may be true but physical presence isn’t defined only by office location. You can also create physical nexus through employees living in a state, contractors or representatives visiting a state to perform services or make sales, warehouses or inventory sitting in a 3rd party warehouse, and more.
Additionally, as of 2018, physical nexus is no longer the only way to create sales tax nexus. The Wayfair decision in 2018 created economic nexus as an additional way a business could create an obligation to collect sales & use tax. Economic nexus affects all businesses that previously didn’t have nexus outside of their home state. It states that if a business’s sales revenue and/or number of sales transactions exceeds a certain threshold over a one-year period of time, then the state will assert sales tax nexus and require the business to collect the applicable sales tax. 43 of the 45 states that have sales tax have since enacted economic nexus rules which vary state to state.
Check out the latest information in our economic nexus guide.
Identifying your nexus footprint should not be a one and done project. Many businesses need to look at this on a yearly, quarterly or even monthly basis. You can establish nexus in a new state or jurisdiction through hiring new employees, attending tradeshows and having sales growth in new areas. It is important to set aside time to re-examine your nexus footprint, so you ensure you remain compliant.
No – economic thresholds are additive to physical presence standards. This is an “either/or” review. You can have either a physical presence or an economic presence – either of which will create sales tax nexus.
Yes. There could be a variety of reasons that would allow a state to require a company to register for, collect, and remit sales tax in a particular state. In most cases, the reasons for a state being able to exert this type of requirement may have nothing to do with nexus. For example, several states require companies who desire to obtain a contract with the state government that all related entities must register with the state and agree to collect and remit sales tax on sales made in that state.
Another way states require non-resident companies to become compliant with the state's sales tax laws is in the area of drop-shipments. A standard drop shipment involves the retailer's supplier shipping materials directly to the customer of the retailer. If this shipment takes place in a state where neither the supplier nor the retailer have nexus, the customer may be the only party the destination state could hold liable for the tax. If, however, the supplier has nexus in the destination state, the supplier will be required to charge the retailer sales tax on the sale unless the retailer can present the suppler a "resale exemption certificate" for the sale. In most cases, the retailer does not want to pay the supplier tax since the tax charged would be on the wholesale price and would increase its cost of sales.
To avoid being charged the tax, the retailer will likely be required to provide the supplier a resale certificate with a registration number issued from the state where the shipment is destined. To obtain such a number, the retailer will need to register with the state. Once registered, you will be required to collect the tax on its taxable sales to the customer. Therefore, even though the retailer does not have nexus, for it to avoid being taxed on its wholesale price of the goods delivered, it is likely that the state will require it to register and collect the tax.
Eventually, yes. Once nexus is established, states usually require that the registered company collect and remit the sales tax for at least 1 year. Most of these decisions have been informally developed and are not found in statute. Requiring a company to collect sales tax and file returns after nexus is terminated is recognition by the states that the market development activities created in the states when nexus existed has a residual affect that will last for some period of time. From personal experience, it can be somewhat difficult to cancel a registration with a state once a company is registered. In most cases, once nexus is established and a business is established in a particular state, there is a greater chance that business will expand in that state and not decrease.
Most states have both a "sales" and a "use" tax. When states refer to a "sales tax", they usually mean the tax charged to the customer by an in-state retailer at the time a taxable transaction occurs. Sales taxes can either be a "privilege tax" or an "excise tax." As a privilege tax, the tax is imposed on retailer for the privilege of doing business in the state. In these situations, if the retailer does not charge the sales tax, the retailer is usually the only party who can be held liable for failure to charge the tax (see Missouri sales tax law). As an excise tax, the tax is imposed on the property being sold. If the retailer does not charge the tax, the states can usually pursue either the purchaser or the retailer for the unpaid tax. (See Georgia sales tax law). In both situations, the retailer has the ability to collect the tax from the customer to cover their liability.
"Use tax" is a complementary tax to sales tax and is due whenever a taxable transaction takes place, but the retailer failed to charge the sales tax. In most situations, we speak of use tax being due on purchases made from out-of-state vendors when they have failed to charge the tax on the sale. Use tax may be accrued and paid by the purchaser or it can be collected by the vendor. Many states consider the tax that is collected by a non-resident retailer to be "vendor use tax" rather than sales tax because the retailer does not have a regular place of business in the state. Other states consider use tax to be only the tax that is paid directly by the purchaser when the retailer does not charge the tax.
Use tax is one of the most misunderstood areas of multistate taxation and one area where state tax auditors generally make significant collections each year from unsuspecting taxpayers. In most cases, the rates of tax for sales and use tax are the same. In some states, the use tax may not include certain local taxes. In no situation, though, may the "use" tax rate of tax exceed the "sales" tax rate of tax.
In many cases, the answer to this question is "yes". If a business does not have sufficient physical presence in a particular state that would require them to collect and remit the tax, then the customer has the obligation to accrue and pay the use tax in the state where the property is used. If the property being sold is for resale to other customers, then the business should obtain and retain valid resale exemption certificates from their customers.
If, on the other hand, a business has sales tax nexus (either a physical presence or economic presence) then that state can legally require the business to collect and remit the sales or use tax due on the transaction.
Vendors are required to assume that all sales are taxable until the customer provides a valid exemption certificate. The only way to have the vendor stop charging tax is to provide them a valid exemption certificate for the state in which the items are shipped to.
In most cases, exemption certificates do not expire. Other states, (i.e. Florida) require that exemption certificates be updated annually. In addition to retaining the new certificate, you should also retain the certificate that is being replaced. If you have the space, you may want to keep certificates to cover 10 years worth of sales transactions. In most cases, this period is beyond the period that most states would audit. In some cases, the use of a exemption certificate software or services may be a cost beneficial alternative to managing the certificates manually.
In most states, the performance of personal and professional services is not a taxable event. New Mexico, Hawaii, and South Dakota tax a variety of services. If the service you perform includes data processing, information analysis, communications, or the interstate movement of data you may be performing a service that is taxable in a number of states.
If your service involves the construction of real property or the installation of property, there are a variety of issues you must concern yourself with. Contractors owe tax on all the items of material they purchase. They are generally not permitted to purchase materials for resale. As with all rules, there some very limited exceptions to this rule.
Providers of non-taxable services have the obligation to pay tax on all the property they purchase to perform the service. For example, a contractor must pay the tax on all the construction materials they purchase. As a service provider, it is very important that the invoice submitted to your customer indicate what service is provided and that there is no segregation of property and labor on the invoice. Anytime items of property and service are separated on the invoice it could appear that the property was resold and that tax should have been collected.
Companies that sell and install software and provide other computer related services have a variety of issues they should be concerned with. First, many of these companies have nexus in many states and do not realize the significance of this connection with the state.
Further, almost all states tax computer software licenses when the software is delivered in a tangible fashion. In addition, more states are taxing software when it is downloaded electronically and even Software-as-a-Service.
In addition to states taxing downloaded software, a few states now tax custom software and many of the consulting services that are used to implement the software when sold.
It would be difficult to provide an exhaustive list of the services that are taxable. Some of the uncommon services taxed by several states include:
Detective and investigatory services
Credit reporting and bad check lists
Pre-employment background checks and resume verification
Car storage charges
Armored car services
Criminal background checks
Even though most states don't tax services, it is still a prudent effort to verify that your service is not taxable before you start offering it.
For companies that provide data processing, there are two separate issues to be concerned with. First, the company must still have nexus with the state where the customer is located before they would have an obligation to collect any taxes that may be due. Second, an analysis should be completed to determine if the service is taxable. There is not an established definition of what constitutes "data processing." States may consider these services to also be "information services" or "computer services".
There are less than 15 states that tax data processing, information processing and computer services. There may also be special tax rates for these services or special limited exemptions for these services.
Yes. The confusion lies with the sometimes controversial Internet Tax Freedom Act (ITFA), passed in 1998. ITFA does prohibit federal, state and local governments from taxing internet access and from imposing discriminatory internet-only taxes. There were a few states that were “grandfathered” and were allowed to charge tax on internet access; these grandfathered rules have been revoked as of July 1, 2020.
ITFA has no application to the taxability of telecommunications services. Understanding that VoIP is not tax-free, each state (and in some situations, each local jurisdiction) is able to decide whether VoIP is taxable or not. For example, California at the state level does not tax VoIP, but various cities in California apply a local utility users tax to VoIP..
This comment often comes from someone experienced in the standard world of sales tax. Generally, as related to sales tax, nexus needs to be established before a company is obligated to adhere to the jurisdiction’s sales tax rules. Nexus has historically been thought of as a physical presence, but within the last two years (ever since the Supreme Court’s now-famous Wayfair decision), it has been expanded to include the idea of economic presence. If you are providing a telecom service, you could easily look to a customer in another state and conclude that you don’t have nexus in that other state and therefore are not responsible for collecting and remitting the taxes.
As a telecom service provider, however, you are using infrastructure within a state to deliver your service. This infrastructure includes cell towers, fiber, switches and so on. You may not own this infrastructure, but if it were not present, you could not deliver your service. States have concluded that the use of this infrastructure creates attributional nexus and therefore gives you the responsibility to collect the applicable taxes. Wherever you have customers, you must collect the taxes.
ot exactly. The main factor to consider is that by providing VoIP service, you are now considered a telecom service provider. And as a service provider, 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.
Even if you are paying taxes to your carrier, these taxes are on the wholesale amount, not the retail amount. At the least, you are exposed to taxes on the markup. At the worst, an auditor could assess you the full tax amount, and you would have to work with your carrier for a refund. Where this assumption is correct is related to your Federal USF (FUSF) in certain situations. Specifically, if are you considered a de minimis filer, then it is correct for your carrier to pass-through the FUSF charges to you, and you pay your carrier, while you are not required to pay (or pass through) the FUSF to your customer. Even this situation, however, does not relieve you of the responsibility of registering and filing a $0 due report with USAC.
One of the principle tenants of multistate sales tax is that all sales of tangible personal property are presumed to be taxable unless a specific exemption or exclusion from the sales tax exists in law. To further compound the issue, even though exemptions may exist, the burden to claim the exemption rests with the customer.
A sales tax "exemption" is a provision of law that specifically states that an otherwise taxable transaction is "not taxable" if certain conditions are met and if the vendor receives the appropriate exemption certificate from the purchaser. The most common exemption is the "resale" exemption that allows items of resale inventory to be purchased without tax. Without providing the vendor with a valid resale exemption certificate, though, the vendor is obligated to charge the customer sales tax.
Exemptions can exist at both the product level and the entity level. The resale exemption is an example of a "product" exemption. "Entity level" exemptions may include sales to the federal government, certain charitable organizations, and state government agencies.
A sales tax "exclusion" is a transaction that has never been subject to tax. For example, many states exclude Software-as-a-Service from taxation. In most states, sales of services are excluded from tax unless specifically listed as taxable in the law.
Most states do not require that certificates be exchanged by the parties when a transaction that is "excluded" by law is entered into. In most cases, these transactions are generally recognized as being non-taxable by operation of law and do not require an affirmative claim by the purchaser.
If a transaction is not excluded by law, it is deemed to be taxable. As a taxable transaction, the only way a purchaser can obtain relief from either the sales or use tax that will be due is to provide the retailer with a valid exemption certificate that is specific to that transaction. In most cases, absent a valid exemption certificate, sales tax will be charged by vendors even though they may know the item is not taxable. Because the tax burden is on the retailer if they fail to collect the tax, their only obligation is to collect that tax or collect the exemption certificate.
This is a very common question and it also reflects an attitude that has cost businesses millions of dollars in taxes over the years. As stated earlier, all sales of property are deemed to be taxable unless valid exemption certificates have been received. If a resale certificate is issued to the seller and the purchaser uses the materials in ways that are inconsistent with the resale certificate, then only the purchaser has a liability for the use tax due when the inventory was converted to a taxable use.
If no exemption certificate is issued to the seller, and an audit is conducted on the seller, the sale will be deemed to be taxable until a valid resale certificate has been received. In most states, it is permissible for retailers to obtain certificates for historical sales. Other states, though, only allow certificates to be valid from the date of issue forward. If a retailer fails to obtain a resale certificate and the customer to whom the property was sold is unable or unwilling to provide a resale certificate to the retailer after the sale, the retailer can (and will) be assessed sales or use tax on the transaction. In addition to the tax, interest and penalties will likely be assessed.
Assessments like this happen with great regularity. Many wholesalers have been assessed tax on transactions that everyone agreed were "resale" transactions, but since the wholesaler could not get a resale certificate from their customer, they were assessed the tax, interest, and penalties as if the transaction had not been for resale. This problem occurs most when customers go out of business after the sale or stop using the supplier. As mentioned earlier, the presumption of state sales tax is that every sale is taxable until a valid exemption certificate is issued.
Even if you only sell property in "resale" transactions, you should still implement a strict policy of obtaining and retaining resale exemption certificates from your customers. Collecting exemption certificates is vital for limiting liability even if you do not file returns in the state where the sale is made.
The first step in analyzing this situation is to carefully evaluate whether nexus existed between the retailer and the state where the sale took place. If nexus did exist, carefully examine the transaction to determine what is, in fact, taxable. If you have concluded that nexus exists and that the transaction is taxable, the next step may be to contact major customers to determine if they paid use tax on those transactions. In most interstate transactions, the purchaser and the retailer have an equal responsibility for the payment of tax on the transaction.
If customers have not accrued the tax, you may consider billing your customer for the tax that was not charged. This strategy is almost never used for taxes more than a few months delinquent since the loss of a customer of such an issue could be far more damaging to the business than the payment of tax directly by the company.
Under audit, non-registered businesses can be assessed tax for many years of the past due taxes. A few states limit the look-back to seven years, but other states will go back much further if they suspect fraud or some willful negligence. In addition to the tax, states will impose interest which averages 12% a year and penalties which can be 25% of the tax due. To avoid such and economic hit, many states allow unregistered taxpayers to come forward under a "voluntary disclosure program" that will limit the look-back period to three or four years and usually has a provision to abate the penalty. These are best done through an intermediary such as a CPA who can approach the states anonymously.
Most states have statutes that hold corporate officers or other "responsible parties" personally liable for the sales or use tax that was not collected. In some cases, states impose severe criminal penalties for officers who collect tax but do not remit the tax collected.
This liability attaches to the officer and the liability can be enforced through the lien, levy, and sale of property to satisfy the debt.
Acquiring either the assets of stock (equity) of a company that may have a liability for past due taxes creates what is commonly known as "successor liability". That is, the acquiring company takes on the same risk and liability that the target company had. Acquiring the assets of an entity does not prevent this liability from attaching unless specific statutory procedures are followed. In many states, notices of bulk sales must be filed before a business can be sold. Further, purchasers may be required to withhold certain amounts of the purchase price until an audit has been done of the target company.
It should be noted, that provisions in purchase contracts that attempt to limit the liability of the purchaser for unpaid tax are ineffective and not binding on the state. Any time a business is acquired, careful diligence should be conducted to identify and quantify the sales and use tax risks of the company.
The risks and penalties that your business could be subjected to start with an analysis of whether your company has nexus with a particular state. If nexus did not exist, then the state has no jurisdiction over your business and has no ability to compel you to pay any type of tax.
On the other hand, if your business had/has nexus with the other state, then that state can use any means at its disposal to enforce the tax liability against you. This can include assessments against your business, the levy of any property in the destination state, filing collection suits in court, using collection agents to collect the debt, or using the courts in the home state to enforce a valid legal judgment from the courts in the destination state.
If your business is ever contacted by another state, be responsive and pay attention to all the dates and deadlines in the notices. If your business has nexus in the destination state, that sate has the same authority to enforce assessments and judgments against your business as the home state does.
A voluntary disclosure agreement (VDA) is a legal means for taxpayers to self-report back taxes owed for income, sales, property, and other taxes.
In exchange for voluntarily reporting the tax due, states generally grant a waiver of penalty and a limited look back (generally 3-4 years) potentially reducing the tax due significantly as compared to an audit. If a business is not registered for sales tax and is audited, the state can assess tax due, penalties and interest from the time from which taxable sales first occurred. This could be 5 years, 10 years, or more. Thus the benefit of the limited look back period of 3-4 years allows a business to eliminate the risk associated with the older periods.
*If you had previously collected sales tax but failed to remit, you must pay all that has been collected (even beyond the look back period) but the penalty would still be waived. And in extreme cases, the penalty could be in excess of 50% of the tax amount… and could be considered a criminal offense!
here are three common situations in which a VDA is most beneficial:
There are two main qualifications for your business to be accepted into a VDA program. You cannot have already registered in the state and you cannot have already been contacted by the state for an audit or for questions about your sales/use tax exposure.
If a VDA is such a great money saver then why are states for it?
Simply put, a state cannot find and audit every business that is not in compliance. States would prefer for businesses to voluntarily comply. A VDA allows the state to welcome in new taxpayers, and get cash up-front for the previous 36-48 months of non-compliance. That taxpayer is now registered to continue collecting/remitting prospectively. The waiver of penalty and the limited look back is fair and equitable for both parties in a VDA.
A marketplace facilitator is a business or organization that contracts with third party businesses to sell goods and services on its platform and facilitates retail sales. Marketplace facilitators enable these sales by listing the products, taking the payments, collecting receipts, and in some cases assisting in shipment. Well-known examples include Amazon, eBay, and Etsy.
Marketplace facilitator laws mean that your facilitator will handle collecting and remitting sales taxes on behalf of your sales in states where your marketplace is compliant. In most situations, if you are only selling through a marketplace facilitator, they will manage sales tax for you in the states with these laws. Simple right? Well not so much if you are selling on your own as well.
A new term in this industry is “marketplace facilitator,” a business or organization that contracts with third parties to sell goods and services on its platform. (Your company would be the third party.) Marketplace facilitators – think Amazon and eBay – enable these sales by listing the products, taking the payments, collecting receipts, and shipment. In most cases, they now also collect and remit sales tax for you.
Laws governing marketplace facilitators popped up when states saw that platforms were charging sales tax on the sale of their own or certain third-party sales but not on all sales. This produced a gap in tax collection that revenue-hungry states quickly looked to close (and will probably be hungrier to close in the future as pandemic lockdowns continue to wreck tax revenues).
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 can vary greatly.
Many states have added these laws, most recently Hawaii, Texas, Wisconsin, Illinois, Michigan, Iowa, North Carolina and Louisiana. (More to come.)
Laws governing marketplace facilitators popped up when states saw that platforms were charging sales tax on the sale of their own or certain third party sales but not on all sales. This produced a gap in tax collection that revenue-hungry states quickly looked to close (and will probably be hungrier to close in the future as pandemic lock downs continue to wreck tax revenues).
Marketplace facilitator laws grew from the idea that a state could collect all of the required sales tax from one entity rather than from thousands of smaller companies – with the added expense and time of pursuing those smaller companies for non-compliance.
Ironically, such uniformity is the last thing you’ll encounter in tax regulations as you sell nationwide. States’ precise definitions of a marketplace facilitator vary almost as much as the galaxy of sales tax laws, though most do face economic nexus laws similar to those on sellers.
The majority of states with economic nexus laws, also employ marketplace facilitator laws but it is best to consult with a sales tax expert or CPA to find the most updated laws. This year alone Hawaii, Texas, Wisconsin, Illinois, Michigan, Iowa, and North Carolina added laws, Louisiana added the laws as recently as July 1, 2020.
If you are also selling products or services off of your own site as well as through a marketplace facilitator you may have nexus in more states than you realize. You may need to consider the total sales through both the marketplace facilitator and your own site, to determine if you have crossed any economic nexus thresholds. If you have crossed the economic nexus thresholds, then you will establish sales tax nexus and will need to collect and remit sales tax on your own sales.This only becomes important when a state has both marketplace facilitator laws and economic nexus laws (which is of course now most states).
Remember, a facilitator will only handle the sales tax on transactions sold through its platform. If Amazon is collecting sales tax on your behalf in Washington but you’re in Washington and you sell items through your business website too, you still need to collect, remit and file in the state on your own. And in many states, if you don’t do any sales outside of those with the facilitator, you may not need to collect or file any sales tax. But there are instances in which you may be required to file a “zero return” or register for non-reporting sales tax status.
Don’t forget about warehouses (Amazon, to name one facilitator, famously has many throughout the country). Marketplace facilitator laws may relieve some marketplace sellers from certain sales tax collection obligations, but as a marketplace seller you can have a physical presence and an obligation to collect and remit sales or use tax in states where your inventory is stored for sale.