Pronto Guest Blog Post by: J. Michael Pusey, CPA
In 2018, the Supreme Court opened the door for the states to rewrite their sales tax laws to reach sellers who don’t have a physical presence in the state. South Dakota v. Wayfair Inc., 138 S. Ct. 2080 (2018).
Many states have been busy writing and rewriting their rules ever since. The new rules generally look for out-of-state sellers to collect the sales tax if they ship goods into the state and meet certain sales thresholds.
Our focus here is the much more important sales tax. In a company review, also keep in mind the use tax, which can apply when buying goods out-of-state and shipping into the state.
While many income tax preparers avoid sales tax work like the plague (“no money in it” and so forth), the new rules under Wayfair do in fact open up new avenues for helping clients and earning more revenue (increasing billable hours, new service packages, etc…)
However, moving effectively into this service area is far from simple. The tax professional will often need to learn more of the operational details of the business itself while researching the sales tax rules. The subject will often surface tax research questions.
Let’s take a closer look at sales tax changes and how these changes may create new opportunities for you as a tax professional.
A physical presence or direct remote sales into the state are generally sufficient to find nexus after the Supreme Court’s decision.
The taxing authorities need to find some connection with the state to impose the collection responsibility. Wayfair didn’t eliminate the general rule of nexus arising when there is a physical presence in the state.
As with tax issues generally, nexus has issues in the debate stage. An example is whether an employee working at home in a state may create nexus.
States generally look to the destination state. Electronically selling into a state doesn’t preclude finding sales tax responsibility. Electronic commerce can have its own issues that may involve tax differences depending on whether there is found to be a product or service. Virtual events may run into unique classification under a state’s law
One of the sales tax complexities is the combined rate considering all the jurisdictions below the state level.
An oddity with Alaska, for example, is that the state has no sales tax, yet there are taxing jurisdictions below the state level.
Delaware, Montana, New Hampshire, and Oregon are without sales tax, but the great majority of states impose a sales tax.
There may be issues of taxation without the name “sales tax.” For example, New Hampshire has no sales tax but it has a hotel room tax labeled an excise tax.
“Hold out” states enacting new sales tax provisions in 2021 include Florida, Kansas and Missouri.
While there are general principles, the detailed rules are state-by-state, and subdivisions (taxing authorities) within the state.
Sales tax obligations usually reach the retailer but they may also reach the marketplace provider or marketplace facilitator who may list, store, collect, etc. One of the complexities of our topic is that the sales tax rules generally may reach the retailer and/or the marketplace provider. The adviser or corporate executive needs to understand the details of how goods get to the customer.
In general, sales tax exemptions are available, if substantiated, when supported by reseller exemptions. Our sales tax rules generally reach the final sale in the chain.
The absence of state income tax reporting requirements isn’t conclusive of a lack of sales tax nexus.
After identifying nexus and tax reporting obligations, identify nontaxable sales for products. For example, sales of food are often tax free if purchased in a supermarket but taxable if purchased in a restaurant.
The adviser’s focus is not only on taxable (and exempt) categories but any rate differences, applicability dates as well as due dates, and exemptions.
Services are often free of sales tax. It is not uncommon, then, for the rules to distinguish between sales and service.
For example, in Texas, parts in car repairs would be taxable but the charge for the service person installing the part would be exempt as service. “Motor Vehicle Repairs, Remodels and Maintenance,” Publication 94-113.
It is not uncommon to find full value subject to tax when services are combined with product sales.
Part of the tax adviser’s work includes looking at the reasonableness of pricing allocations if the categories involve special rules or exemptions, such as exceptions for service.
A common threshold for required reporting is sales of $100,000 or a multiple thereof, or 200 or more transactions.
A state may periodically change its threshold. For example, in 2019, California raised its threshold to $500,000 while removing the number of transactions from the threshold. See “Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision,” California Department of Tax and Fee Administration.
Exempt sales may or may not be counted in a particular state’s rules for nexus threshold.
Amnesty programs are often a topic of research for the tax professional working in this area. Amnesty programs, if available, vary state by state.
Most amnesty programs would require payment of the tax with possible relief for penalties and/or interest. See “Sales Tax Amnesty, Sales Tax Amnesty Programs by State,” salestaxinstitute.com, 11/1/21.
General research sources on our topic include the state’s explanations on the internet.
See for example California’s “Sales & Use Tax in California,” and “California City & County Sales & Use Tax Rates,” California Department of Tax and Fee Administration, cdtfa.gov.
Or see New York’s discussion of what is included in the sales tax base. “Taxable Receipt – How Discounts, Trade-Ins, and Additional Charges Affect Sales Tax,” Department of Taxation and Finance, New York State.
Other useful research sources include:
- Streamlined Sales Tax Governing Board, Inc.; streamlinedsalestax.org; see ”contacts” link which includes various state websites;
- Multistate Tax Commission, mtc.gov
- Taxjar.com/sales-tax, and taxjar.com/resources/sales-tax/states
- Council on State Taxation, COST Studies, Articles and Reports; cost.org.
Getting and Staying Compliant
The sales tax has taken on new importance in so far as compliance and planning. The topic is filled with relatively new developments, collection and reporting requirements.
The practicalities of our 2022 sales tax environment are that taxing authorities have often had time to “gear up” by increased staffing, despite the difficult pandemic environment.
If you position yourself to provide a high level of expertise on this crucial and rapidly-changing environment, your value to business clients who have compliance obligations will go up substantially and continually, as states begin to enforce their various rules and greater numbers of clients seek professional help.
J. Michael Pusey is a practicing CPA and accomplished writer on tax topics. He has more than 40 years worth of real-life tax experience, and regularly shares his knowledge with other tax professionals via books, magazine articles, blog posts, and consulting. In addition to his work with Pronto Tax School, Mr. Pusey has written for the AICPA, Kaplan Financial, Andersen, and Accounting Web.