The everchanging world of multi-state taxation and what businesses should watch out for
Sales and use tax collection; Are you ok?
Two years ago, many businesses could have answered that question yes with little doubt. Today it’s a little harder. In June of 2018, the Supreme court overruled a long-standing court case paving the way for states to require collection of sales and use tax even if your company never physically sets foot in the state. This was the Wayfair case and you can read our previous article here. Sales tax and use tax are technically different, but for the purposes of this article we are going to use the term sales tax to refer to either.
What started with South Dakota has expanded rapidly. We are now up to at least 43 states that have enacted some sort of remote seller requirement. The number keeps growing. If a state has a sales tax, it most likely will eventually have a remote seller collection requirement. Should you look at your sales to see if you have any issues? An answer of yes to any of the questions below is a sign you might have an issue.
- If you make sales of tangible property:
- Do you make sales of over $100,000 whose destination are in any other state?
- Are any of those sales retail (and not wholesale)?
- If you sell purely services:
- If you haven’t already confirmed your services aren’t taxable (in each state, not just in your home state), did you make sales of over $100,000 to customers in any other state?
Understanding the requirements themselves isn’t difficult. Usually, there is a dollar threshold and sometimes a transaction threshold. For example, South Dakota says you must collect use tax if you have gross sales into the state exceeding $100,000 or 200 or more transactions in the year. Both of those are easy to measure. What gets hard is the variability between states. Some states measure gross sales (regardless of whether the items sold are taxable) and some measure only taxable sales. There are a wide range of effective dates too. For example, Texas has an effective date of October 1, 2019, while Vermont’s date was July 1, 2018. The Streamlined Sales Tax Governing Board website has some easy to use resources if you want to read more. Each state also has different rules about which products and services are taxable and how you should report and remit the tax.
If you are properly collecting the sales tax, it is a cost to your customer, not you. However, if you aren’t reporting, you can be held liable for the tax you didn’t collect so it is very important to get up to speed on your collection requirements or noncompliance can get very expensive.
If you discover you should have been collecting and remitting sales tax to another state and haven’t there are a couple different options. If you haven’t passed the state’s effective date by much you can start collecting and get caught up as quickly as possible. If you have, you may want to consider a voluntary disclosure program if a state offers one. These programs allow you to self-report your noncompliance and you often get out of some of the penalties related to late filing as a result.
It isn’t just sales tax
What if you don’t make sales that are subject to sales tax? You aren’t necessarily free from worry. Unlike sales tax, there was no physical presence requirement for income taxes. There are Federal law protections for some sellers of tangible personal property, but those don’t exist for service providers. Some states impose bright line sales thresholds somewhat like the sales tax thresholds. For example, if you have over $500,000 of sales, $50,000 of property, or $50,000 of payroll in Alabama, you are subject to their income tax without physically going there. Some states impose a tax based on sales instead of net income. These are often labeled as Franchise taxes, but sometimes have other names like the Ohio Commercial Activity Tax or the Washington Business & Occupation tax. These states have been using defined sales thresholds for a while to impose nexus and there are no protections for sellers of tangible property since these aren’t income taxes. About a dozen states have these types of rules that could impact you.
The moral of the story is it is always a good idea to discuss your multistate activity with your WK advisor
since the laws are always changing and there is a good chance you might have new issues you aren’t aware of. A listing of sales by state and awareness of what type of activity you might have in other states (such as employees, warehouses, or equipment on site) will be what your accountant needs to help you make sure you don’t have any issues.
If you have any questions, we are here to help. Please contact your WK advisor
at (573) 442–6171 in Columbia or (573) 635-6196 in Jefferson City.