Did you know sales tax audits are providing a good source of income for states during these difficult economic times? Unfortunately it is no longer a matter of if a business will be faced with a sales tax audit, but when it will happen. As an accounting professional (or business owner) are you aware of the latest sales tax laws and implications for your business or your clients? Are you providing your clients with the information and advice they need to ensure compliance with the latest sales tax laws?
The following post / article is written by Shane Ratigan, an attorney with Avalara specializing in sales tax law and compliance. It provides a lot of useful, relevant and timely information. Plus, I invite you to join me, Shane Ratigan and Ian Clyde from Avalara for a free webinar with more information, a demo of AvaTax’s integration with QuickBooks and questions (info and registration link at the end of the post).
Why Sales Tax and Nexus Matter to Accountants
What do you need to know about sales tax? Plenty!
In the early days of sales tax collection it was easy enough for a state to identify the types of transactions on which it could demand payment. Typical transactions were localized and minimal. Now, fast forward to today’s business landscape where many commercial channels exist and cross-border transactions are the norm. Vendors of all sorts and sizes are likely to engage in business transactions with others across the United States, and quite possibly the world.
A diverse marketplace makes collecting on sales tax, filing the proper returns and complying with sales tax laws a challenge. Accounting professionals and business owners alike may overlook this pass-through tax compared to federal and state income tax, but failure to comply with sales tax laws should not be underestimated. To minimize risks and avoid the sales tax audit, you have to fully educate yourself on sales tax and help your clients understand the implications for their business.
Sales Tax 101
Sales taxes play a dynamic role in economic development and are an increasingly important source of revenue for states seeking to make up for revenue shortfalls. Sales taxes typically represent more than one third of a state’s revenue; in many states, the percentage is much higher. In Michigan, for example, 28.3 percent of state revenue was derived from sales tax in fiscal year 2010, while in Nevada, a whopping 43.9 percent of state revenue was derived from sales tax for the same year.
In the arena of sales tax collection, the elimination of borders to trade presents several concepts that you should fully understand:
- Nexus: This refers to the connection a company has with a state. Nexus is the legal connection that empowers a state to demand collection and remittance of a business sales tax. If your clients have business, service personnel or even contractors in more than one state, nexus laws affect them.
- Destination-based local tax versus an origin-based local tax. If a sale is taxable, you must determine which jurisdiction is imposing the tax so you can apply the correct rate, which means you must understand the distinction between origin- and destination-based sourcing rules. In origin-based states, any transactions originating and terminating within the state are sourced to the origin jurisdiction, so the sale is subject to the local tax rate imposed by the jurisdiction where the sale originated — either a retail or ship-from location. Transactions crossing state boundaries are usually sourced to the “destination” regardless of the state’s sourcing rule.
- Streamlined Sales and Use Tax Agreement (SSUTA). The Agreement minimizes costs and administrative burdens on retailers that collect sales tax, particularly those operating in multiple states. The SSUTA encourages “remote sellers” selling over the Internet and by mail order to collect tax on sales to customers living in the streamlined states, and levels the playing field so that local “brick-and-mortar” stores and remote sellers operate under the same rules. To date, 24 states conform to the SSUTA.
Recently, states have developed and tested legal theories in order to push the boundaries of nexus and compel sales tax collection and remittance. Some have met with success and some have not.
Nexus and Your Client’s Business
If you have clients who sell over the Internet, then you will want to know about the “Amazon Law,” an affiliate nexus concept currently being pushed by several states. The Amazon Law opens the door for states to require sales tax collection in situations where a company has only limited commercial activities within a state.
As Internet marketing becomes more complex and intertwined, there will only be more opportunities for otherwise remote activities to trigger sales tax nexus in a given state. Keep in mind these laws are directed at Internet-based vendors that use affiliate advertisements. The courts ruled in the case of Amazon that if an ad appears on web pages based on servers in New York State, Amazon’s lack of control over the web page owners does not prevent the state from enforcing collection on the Internet vendor.
Other nexus concepts are also worth understanding.
In-State Representatives: It makes sense that paid representatives in a state will trigger nexus, but what about the use of independent contractors and sales representatives? An independent representative need not even be paid in some states in order to trigger nexus. Make sure you know the sales tax laws governing this for your state.
Occasional or Minimum Presence: In general, permanence is not a required element for nexus. Many courts find nexus either through existence of property or agents of the company. In some states, even the slightest presence — deliveries, installations or occasional service calls — can trigger nexus.
Transactional Nexus: Any office in a state can trigger nexus. Even sales entirely unrelated to the in-state presence of your client’s employees are subject to sales tax collection. For example, a mail order company with an advertising office in-state that’s entirely unrelated to the mail order business itself is still required to collect on mail order sales.
Armed with the latest information about sales tax and nexus in your state, you will be in a good position to reduce the risk of penalty and audit to your clients’ businesses and your firm, and improve your accounting practices for the long haul. It’s better to be aware than to be caught off guard.
Shane Ratigan, a licensed attorney in Oregon and Washington, works in sales tax law and sales tax compliance with Avalara, a Software-as-a-Service, end-to-end sales tax solution for businesses of all sizes. Contact him at firstname.lastname@example.org.
Free Webinar: A Sales Tax Primer to Help Your Clients & Boost Your Business
Your clients are facing a diverse marketplace that makes collecting, returns filing and complying with sales tax laws a challenge. You can guide your clients in the right direction by learning a few critical sales tax basics, tapping into up-to-date educational tools and resources – and having the newfound ability to explain the implications for their business. You’ll leave this webinar with a clear understanding of:
- The definition of all-important “Nexus”
- Which activities create Nexus in a state
- Destination vs. Origin-based sales tax
I hope you will join me for this free webinar to learn more, see how AvaTax integrates with QuickBooks and ask questions during the live webinar.
When: Wednesday, August 22 at 1:00 pm ET (10:00 am PT) for 1 hour
Register here: https://www1.gotomeeting.com/register/480819376