For years the physical presence standard enacted by the 1992 Supreme Court Case Quill v. North Dakota was the primary determinate whether states were justified in requiring out of state business to collect and remit sales tax.
That all changed on June 21st when the U.S. Supreme Court overturned the Quill decision by siding with the states in South Dakota v. Wayfair, Inc. The Court concluded that states like South Dakota were unjustly missing out on billions of dollars in revenue by not imposing sales tax collection and remittance by online retailers who lack a physical presence in their states.
South Dakota now follows an economic presence standard in creating sales tax nexus, in which retailers making sales exceeding $100,000, or having 200 or more transactions into the state, in the current or previous year have a requirement to collect sales tax, regardless of physical presence.
Background on Collecting Sales Taxes as a Remote Seller
In 1992, North Dakota attempted to levy sales tax on Quill Corporation for doing business in the state. Quill, however, successfully argued that because they were merely doing business through out-of-state mail orders and phone calls, they did not have an obligation to pay taxes in a state in which they had no physical presence. Thus, the physical presence standard was created, and since that decision, countless sellers have depended upon this standard in business and tax planning strategies.
The case was revitalized in early 2016 when Supreme Court Justice Anthony Kennedy noted that the Quill decision had become dated. In the early nineties, it was impossible to anticipate the prevalence of the internet and e-commerce, which composed a fraction of interstate sales at that time in contrast to the $450 billion industry it is today.
Several states decided to challenge the Quill decision in light of Justice Kennedy’s willingness to revisit the case. South Dakota, who does not impose an income tax and relies heavily on sales tax revenue, passed remote seller legislation, imposing tax on out-of-state retailers selling into the state. Following the legislation, the state sued Wayfair, Inc. among other online retailers, for compliance. The case would eventually reach the Supreme Court, and in a 5-4 ruling they overturned Quill’s physical presence standard.
South Dakota v. Wayfair Implications: State Reaction
Many states are expected to change their nexus laws/regulations following the Supreme Court’s decision, and several have already enacted economic presence standards that are currently in effect or become effective within the next year.
States including Alabama, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Vermont, Washington and Wyoming, have proposed or enacted economic sales tax nexus thresholds prior to the Wayfair decision. Going forward, these states are now expected to take action to enforce these requirements.
North Dakota’s economic presence provision became effective immediately following the overturn of Quill, and Louisiana and Vermont are expected to join the Dakotas soon.
The question remains as to whether the economic thresholds now in place by these states are discriminatory against interstate commerce. For example, a company that sells low dollar value items may easily surpass a 200 transaction per year threshold but yet be nowhere near the gross sales threshold. This could significantly impact such a company’s ability to continue to sell into the state because of the additional administrative costs it would take to comply with sales tax filing requirements.
It’s likely that most states will enact standards similar to South Dakota’s as these were reviewed by the Court when Wayfair was decided. However, without any guidance or legislation from Congress, each state is now steering their own course and the destination is unknown.
The SALT team at Freed Maxick CPAs, P.C. is monitoring the fallout of the Court’s South Dakota v. Wayfair decision closely and is ready to discuss how your business may be impacted.
Connect with us to schedule a Tax Situation Review so we can provide guidance on anticipated operational, administrative and technical requirements that will be necessary for compliance with the myriad of State requirements that are around the corner.
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Aside from the sales incentives, other charges and fees such as transportation costs and returns and allowances and bad debt can be easily overlooked by companies computing the taxable base of a transaction. And as with discounts (discussed in part 1), when dealing with multiple jurisdictions, the rules are not uniform.
The majority of states tax transportation charges to the purchaser. Transportation charges can be defined differently state to state and could include in the definition: handling, packing, mailing/delivery, shipping, and postage costs. If an exclusion is allowed for transportation charges, the invoice must separately state the charges or it will default as being taxable.
Among the states, New York and Nebraska state that delivery charges are taxable when (1) the transaction with the retailer is taxable, and (2) the purchaser pays the delivery charge to the retailer. Note that the delivery charges in addition to the sale of the product are part of the retailer’s taxable sales base. If the transaction is nontaxable, any charge to the customer for shipping or delivery would not be subject to tax. Colorado and Illinois generally will not tax transportation costs if the amounts are agreed by the buyer and seller to be separately stated on the invoice.
As part of the normal process of doing business, companies often incur bad debt. Businesses may or may not know that sales tax reductions are generally allowed for taxes that have been paid to a jurisdiction on accounts deemed to be worthless. A state will normally allow the deduction for sales tax if the account is taken as a bad debt deduction for income tax purposes. If a recovery of bad debt occurs after the deduction was taken, the amount is subject to sales tax. Pursuant to the uniform provisions under the Streamlined Sales & Use Tax Agreement, bad debt does not include finance charges, interest and expenses incurred in the collection activity.
Most states allow a taxpayer to take a deduction against the current period’s tax base. Returns and allowances and defective products are treated similarly in that vendors are generally allowed a credit for the tax paid and remitted on taxable goods returned to the vendor.
Note that for defective merchandise, the deduction is limited to the sales price less the allowance. If the purchaser exchanges a defective product for a new one at equal value, no deduction is allowed by the vendor and no sales tax charged on the exchange.
Interest and Borrowing Fees
Most states do not tax finance charges or interest and carrying charges to sales made on credit as long as the amounts are separately stated.
Understanding and applying sales and use tax rules can be quite cumbersome for many business operating in multiple states. Determining the correct taxable base and deductions for sales and use tax reporting could be highly material to your business if done incorrectly. Are you confident in the accuracy of your sales and use tax compliance?
Contact our State and Local Tax team by clicking here or calling 716-847-2651 to get in touch with a member of the Freed Maxick SALT Team for a no cost consultation.View full article
Many business practices can contribute to determining a company’s base for sales tax. For instance, companies will often utilize incentives to sell their product to customers by offering discounts, rebates, loyalty programs, gift certificates and so on. Changes to the ultimate sale price may or may not influence the tax base subject to sales tax.
Discounts can occur in many forms. Vendors may offer a discount on a sale if a specified quantity is purchased. Some may offer an incentive discount for customers to prepay. In other cases, a vendor may offer a retroactive discount.
When dealing with multiple jurisdictions, the rules are not uniform. Some states have guidance on whether the discounted sales price is the taxable base to charge sales tax. The general concept with discounts in sales and use tax is whether the discount is applied in the present or future.
Colorado, for example, states that discounts not determined by future events are taxable at the discounted amount but a cash discount that is contingent on a date that a future payment is made does not reduce the selling price because the discount is contingent upon a future event. Also, a quantity discount or discount card that reduces the selling price which is not contingent on any other event would be taxed at the discounted price. Regarding discounts offered after the sale, a New York case ruled that retroactively granted discounts based on volume were not exempt from tax, likely because there was a contingency on the discount being honored at the time of the transaction.
It’s important, therefore, to be aware of how the discount is being applied to the customer and how the jurisdiction treats such discount.
Coupons are generally structured in two different forms: (1) as a manufacturer coupon for which the retailer is reimbursed on the sale, or (2) a retailer coupon for which the retailer incurs the cost of the discount on the sale. Generally, the taxable base of a sale with the use of a retailer coupon would be at the discounted sale price. Manufacturer coupons, however, are generally excluded from the taxable base because the retailer is being compensated by the manufacturer for the sale.
Stored value cards or Groupons are becoming increasingly popular and few states have provided guidance on the tax base. For New York, the amount subject to sale depends if the voucher is for a “specific product or service” or a “stated face value voucher.” If it’s for a specific product or service, the taxable base is the price the customer paid for the voucher. For a stated face value voucher, tax is calculated on the selling price of the items before the value of the voucher – that is, the full value of the voucher is subject to sales tax, not just the amount paid by the customer.
Understanding and applying sales and use tax rules can be quite cumbersome for many business operating in multiple states. Determining the correct taxable base and deductions for sales and use tax reporting could be highly material to your business if done incorrectly.
(In part 2 we’ll discuss how transportation charges and bad debts affect calculating a company’s sale tax base.)
Are you confident in the accuracy of your sales and use tax compliance? Contact our State and Local Tax team by clicking here or calling 716-847-2651 to get in touch with a member of the Freed Maxick SALT Team for a no cost consultation on your sales and use tax accounting issues.View full article
In today’s technological society, every business is purchasing or licensing some type of software. However, vendors are not always charging sales tax on these purchases, or in some instances, sales tax is being charged incorrectly.
Are you paying the correct sales tax on your software purchases/licenses and/or your software maintenance agreements?
Rules for Taxability of Software and Maintenance Agreements Vary
The type of software, where it is being used, how it is billed on the invoice, and the items included in the charge determines its taxability. The rules vary from state to state.
In general, “canned software” is subject to sales tax in most states. “Canned software” is prewritten software not designed or developed to the specification of a specific buyer. It is software you can buy off the shelf. Some states have an exemption for software which is electronically delivered. However, reasonable and separately stated modifications and custom software are generally exempt from sales tax. Most states also exempt maintenance agreements for software, training and installation of software if separately stated on the invoice. Whereas, maintenance agreements that cover hardware or agreements that contain upgrades to software are subject to sales tax. In most states, exempt items need to be reasonable and separately stated from the taxable items on the invoice, in order for them to be exempt from sales tax.
It is also important to check any invoices and review software contracts and maintenance agreements for any software you purchase. This is important because usually these contracts or agreements detail out what is being included in the sales price. (For example, does your maintenance agreement include software upgrades?) Computer expenses (software, maintenance agreements, etc.) seem to be a common area reviewed during sales tax audits and seem to be a high exposure area.
When the Software Purchaser is Responsible
In some instances your software vendor may not be registered in the state you are using the software and therefore is unable to charge you the proper state sales tax. This does not make the transaction exempt. The responsibility then shifts to you, as the purchaser, and it is your responsibility to self-assess use tax on the taxable piece of the invoice. Complexity becomes an issue when the invoice is issued as a simple lump sum. It might be hard to tell what is actually included in the sales price. This is when careful review of the agreements needs to be done to determine what is included and its taxability. Determining what is subject to state sales tax can also be complex.
We Can Help with the Complexities of Software Sales Tax
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Related companies often use intercompany master service agreements in order to allocate common costs of doing business among the related entities. Depending on the size and nature of the business conducted, these service agreements can be extensive and include several services that are used throughout the related companies.
Something that business owners may not consider when drafting these agreements is the possibility that sales tax may need to be collected on the services provided. To complicate matters, each state has different laws that dictate whether services provided are subject to sales tax. Therefore each state that the related companies are located in should be considered in any sales tax analysis of intercompany service fees.
Sales Tax in New York
In New York State, sales of services are generally exempt from sales tax. However, services related to tangible personal property, software, and real property can be subject to sales tax and should be reviewed carefully if such services are included in an intercompany services agreement.
For example, if a service agreement includes repair and maintenance or installation services to computers, equipment, vehicles, or other tangible property, those services are subject to sales tax. License fees for access to software applications, unless specifically customized for the purchaser, are also subject to sales tax in New York State.
Avoid Costly Errors in Classification
If services related to real and tangible personal property are included in a service agreement, it is crucial to segregate these services on the invoice to the purchaser. It’s very likely that the majority of the services performed under an agreement are nontaxable due to the fact that in general most administrative services are exempt from sales tax. However, in most states, bundling both taxable and nontaxable services under a general label of “management fee” will make the entire transaction subject to sales tax. Consequently, for companies with large management fee income, an error in classification could be very costly.
If your business utilizes intercompany service agreements and has not performed a sales tax analysis, you should discuss the possible audit risks that you may face and steps to ensure proper tax filing compliance with a professional.
Freed Maxick's SALT team can assist with analysis of your service agreement to determine taxable versus nontaxable sales and review invoices for proper segregation of services to make certain that nontaxable sales do not become subject to sales tax. Contact us to get started.View full article
By: Amanda Roth, Senior Tax Manager
Halloween is a signifier of many things. It brings to mind the fall season, children running around in costumes, carving pumpkins, baking apple pies, and eating candy. Few look at the picture at right and think about paying sales tax. But sales tax applies to many things- including Halloween items. Here are a few sales tax facts to consider this Halloween.
In New York State, sales of pie pumpkins, gourds, and other items sold in supermarkets that are used by a purchaser in cooking pies, cakes, breads, cookies, etc., are exempt from New York sales tax because they constitute food sold for human consumption. However, decorative and carving pumpkins (including decoration gourds) are not being marketed or sold in their normal or intended use for human consumption. Thus, decorative pumpkins and gourds, and carving pumpkins, whether sold in supermarkets, farm stands, nurseries, or other businesses, are not sold as “food” and constitute tangible personal property subject to sales tax. So if you are buying a pumpkin which you will use to bake a pie then it is exempt from New York sales tax. However, if you are buying a carving pumpkin to carve a jack-o-lantern, that pumpkin is subject to New York sales tax.
In addition, generally, food, food products, beverages, dietary foods and health supplements sold for human consumption are not subject to New York sales tax. However, the exemption does not apply to candy and confectionery. Therefore, Halloween candy is subject to New York sales tax.
Also, beginning April 1, 2012, there is an exemption from New York state sales and use tax for clothing, footwear, and items used to make or repair clothing, costing less than $110 per item or pair. This exemption does not apply to locally imposed sales and use taxes unless the county or city imposing those taxes elected the exemption. For purposes of the exemption, the term "clothing and footwear" is defined to mean: clothing and footwear to be worn by human beings. This does not include costumes or rented formal wear; fabric, thread, yarn, buttons, snaps, hooks, zippers and like items that are used or consumed to make or repair such clothing (other than costumes or rented formal wear) and become a physical component part of the clothing. Therefore, the pants you buy to take you child “trick or treating” are exempt from New York sales tax but your child’s Halloween costume is subject to New York sales tax.
New York state sales tax is complicated and most areas are not straight forward. Sometimes the use of an item dictates whether and item is subject to sales tax. If sales tax is this complex for Halloween items, imagine how complicated they can be when considering whether your business needs to collect sales tax.
For information about how Freed Maxick can help guide and manage your individual or business tax strategies, contact us to learn more.
Author: Amanda Roth, CPA
What does this image make you think of? It makes me think of all the recent sales tax audits I have been involved in. The most dreaded letter to get in the mail is the one that reads “We’ve scheduled an audit of your New York State sales and use tax records”. Even if all your records are in order and all your sales tax has been paid, the process can be overwhelming and you may not know what to expect. If you feel anxious, terrified, or even a little nauseous at the prospect of an audit, you are not alone, many feel as you do. It can be a daunting task to get organized for an audit. But don’t panic, these tips may help your audit go more smoothly.
Surviving a Sales Tax Audit
- Locate all your records – Make sure you can find all the records the auditor is asking for, if not try to obtain them from other sources (tax returns from your CPA, bank statements from online or from your local branch, etc.)
- Get Organized – Organize all your records according to the request list and present them in an organized manner (i.e.: by year or alphabetically). As a CPA I recommend setting up a binder, printing the request list and setting up tabs that correspond to each item requested. Some items, such as invoices, are too large to put in the binder. For these types of documents, a box will suffice, and then reference their location in the binder. Purchase invoices should be grouped together per vendor and listed in date order. This is usually done to make it easier to pull out the applicable invoices if a test period is chosen, or to search a particular vendor file quickly if the auditor wants to view certain expenses.
- Be prepared - Always make sure you have what the auditor has requested before scheduling an appointment. No one likes wasting time and it will make the audit move along more quickly.
- Put your best foot forward – Always look at everything you provide an auditor and ensure all work papers tie out to reports and/or returns provided. Present and retain records as organized as possible and ensure the records you print agree to reports or returns. Sometimes if you rush and just gather the information, errors can occur.
- Make sure you have your “A Team” - Decide if you will be representing yourself or if you will be getting your CPA involved to help in the process. Most businesses feel they can handle an audit on their own to save on costs. However, there are times where having a representative saves money in the long run. A representative allows your employees to focus their time on what they are best at (usually the operations of the company). Some considerations in deciding whether to go it alone or get your CPA involved are as follows: cost, resources, capacity, technical knowledge, business needs, condition of record or lack thereof, and knowledge of audit procedures.
These five basic tips will help make any audit go more smoothly. I always recommend getting your CPA firm involved; they are accustomed to the many obstacles of audits and might be able to help clear a path to a smoother audit; alleviating that anxious and overwhelming feeling that many get.
Contact Our Sales Tax Professionals
If you are not sure what steps to take next, contact Freed Maxick. We can help you navigate through a sales tax audit, and help get you organized. Please contact us for more information.
Senate Approves Internet Sales Tax: Measure Headed to House
The U.S. Senate has overwhelmingly, and with strong bipartisan support, passed the Marketplace Fairness Act of 2013 (the Act) by a vote of 69-27. The bill would allow a state to require certain remote sellers to collect sales and use tax on sales made to customers in the state. States that are members of the Streamlined Sales and Use Tax Agreement (SST) would automatically be granted this authority. States that are not SST members would be required to implement simplification requirements. The bill provides an exception for businesses with annual remote sales of $1 million or less.
Highlights of the report available below include:
Authorization of Tax
Collection on Remote Sales
Small Seller Exception
Relief from Liability
To check out a detailed summary on the Marketplace Fairness Act, click HERE for the full report.
When it comes to taxes, Freed Maxick CPAs is different than most accounting firms in Western New York. To us, tax time is all the time. We’re sticklers about deadlines and compliance, but our larger goal is tax management. So we keep a year-round eye on federal, state and local tax laws, including those pending. We alert you to any changes that may affect you and help you respond in a timely way.
We have the experience and resources necessary to resolve all your tax issues no matter what the complexity, including:
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Personal Tax Services
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Tax Planning and Consulting
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