If you are a CFO at a business that provides SaaS to clients in multiple states, new state sales tax rules will have an impact on your tax reporting and compliance obligations
A recent Supreme Court case and related law changes in many states have resulted in significant new state sales tax obligations on many SaaS providers. It’s important to understand that these changes could result in new tax collection responsibilities on your business even in states where you have operated without them in the past.
Executives need to act quickly to make sure that their existing operations are in compliance with the new rules and that their systems can adapt as sales growth and law changes trigger additional obligations.
Two Sales Tax Changes That SaaS Providers Need to Consider
Historically, most states have not imposed their sales tax on payments for services. As a result, SaaS providers were not required to collect and remit sales taxes on transactions in those states. In the 16 states that did impose sales tax requirements on cloud-based services, many SaaS providers were still exempt from the obligations because they did not have a physical connection to the jurisdiction, like an office or a server farm. “Physical presence” was the standard used by the Supreme Court to determine if a business established “nexus” in a state. (Nexus is the level of presence that allows a state to tax an out-of-state entity without violating the Constitution’s Commerce Clause.)
These circumstances started to change on June 21, 2018 when the Supreme Court ruled in South Dakota v. Wayfair, Inc. (Wayfair) that economic activity within a state could also establish nexus.
The ruling determined that a sales tax obligation could be established in some circumstances solely through virtual contacts with a state. Most states have since established some variation of an economic nexus standard. The most common variation requires a company to collect and remit sales tax if it has more than $100,000 in sales to the state, or 200 or more transactions delivered into the state during the preceding or current calendar year.
What Wayfair Means for SaaS Providers Now
If your business crosses the economic nexus threshold in a state that imposes sales tax on services, you will need to bill your clients for those amounts and remit them to the state. In fact, you’ll need to start tracking your transactions in the state from the outset in order to know when you cross a threshold that triggers a sales tax obligation. Subscriptions models increase the likelihood that you could become liable, as a monthly billing cycle would generate twelve transactions per year for each client.
What SaaS Providers Can Expect In the Near Future
We noted above that several states already tax the sale of digital products delivered electronically to their residents. As states evaluate their sales tax laws considering this latest change, it seems likely that many more states will introduce legislation extending their laws into the digital goods sector.
For example, sales of digital products were exempt from sales tax in Iowa until January 1, 2019. Now Iowa taxes electronically transferred digital products such as digital books and audio-visual works. Also, the District of Columbia has recently passed emergency legislation to amend the sales and use tax treatment of digital goods sold or used in the District. Effective January 1, 2019, the definition of “retail sale” in the D.C. Code has been expanded to include charges for or the sale of digital goods, such as digital audio-visual works, digital audio works, digital books, digital codes, digital applications and games, and other taxable tangible personal property delivered electronically.
In addition to digital goods, more states are likely to start taxing SaaS and similar cloud-computing services. For example, effective October 1, 2018, Rhode Island made the sale, storage, and use of vendor-hosted prewritten computer software subject to sales tax, and as of January 1, 2019, SaaS is subject to sales tax in Iowa, but an exemption applies for the sales price of SaaS provided to a business for its exclusive use.
Sales Tax Compliance Strategy for SaaS Providers
Given the Supreme Court’s expansion of nexus to include economic activity, any of the states that expand their sales tax rules to include digital goods and SaaS will easily be able to apply the new requirements to out-of-state businesses. SaaS providers need a sales tax compliance strategy that analyzes where they currently have collection obligations as well as where they are likely to incur them as business grows and laws change.
SaaS and digital goods providers should be working closely with knowledgeable state and local tax advisors to track the obligations created by electronic sales and law changes and ensure proper sales tax collection and compliance.
To learn more about how the SALT experts at Freed Maxick can help your SaaS business manage sales tax obligations across multiple states during this period of significant change, please contact connect with us by clicking on the button or call us at 716-847-2651 to discuss how we can help guide your business through the aftermaths of the Wayfair sales tax case decision.View full article
Under a new provision that was recently added to the New York State Tax Law, a marketplace seller is relieved from liability for the collection of New York State sales tax when it receives Form ST-150, Marketplace Provider Certificate of Collection, from a marketplace provider. This new form certifies that the marketplace provider is registered with New York State and will collect New York State sales tax on sales it facilitates for marketplace sellers.
A marketplace seller is also relieved from liability when the marketplace provider has a publicly available agreement which includes the following (or similar) statement:
[Marketplace provider name] is a registered New York State sales tax vendor and will collect sales tax on all taxable sales of tangible personal property that it facilitates for delivery to a New York State address.
New York State Economic Nexus Laws
Following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., states have enacted new economic nexus laws or have begun enforcing their existing laws. For example, New York State’s pre-existing economic nexus law is now being enforced.
Many states followed South Dakota’s law by enacting a $100,000 sales or 200 transaction threshold. States are now changing to a sales-only economic nexus threshold.
A remote seller with no physical presence in New York State must register and collect New York State sales tax when they have more than $300,000 in sales of tangible personal property delivered in New York, and makes more than 100 sales of tangible personal property delivered in New York during the previous four sales tax quarters. The sales tax quarters in New York are: March 1 through May 31, June 1 through August 31, September 1 through November 30, and December 1 through February 28/29.
Additional information on the economic nexus provisions is available on the Department of Taxation and Finance’s website.
New York State Marketplace Facilitator Laws
To facilitate the collection of sales tax from out-of-state sellers with no in-state physical presence, states are enacting “marketplace facilitator” laws. A marketplace facilitator is a company such as Amazon, which provides a “marketplace,” such as a web site, catalog, shop, store, etc., where goods are offered for sale, and the marketplace facilitator collects payment from customers. It is easier for states to enforce their sales tax laws on a few marketplace facilitators like Amazon than from the customers they serve.
Marketplace facilitators may be required to register themselves and their customers with the state. For example, Kentucky requires marketplace providers to register their customers. As a result, remote sellers may be contacted by the state once they have been identified. States often issue nexus questionnaires to determine exposure to state income, franchise, and sales tax for prior years.
New York State’s Marketplace Provider Law
New York State’s marketplace provider law is effective for sales of tangible personal property made on or after June 1, 2019. Under this law, a marketplace provider is required to collect and remit New York State sales tax on all taxable sales of tangible personal property that it facilitates for its customers when the marketplace provider agrees to collect payment from in-state customers.
Highlights of New York State’s marketplace provider law are as follows:
- A marketplace provider must issue Form ST-150 to its marketplace sellers for sales of tangible personal property it facilitates for such sellers. Alternatively, this form is not required when the marketplace provider has a publicly-available agreement that includes the statement discussed above.
- A marketplace provider is relieved of liability for failure to collect the correct amount of tax to the extent the marketplace provider can show that the error was due to incorrect or insufficient information given to the marketplace provider by the marketplace seller.
- A marketplace provider is not required to collect and remit New York State sales tax on services, restaurant food, hotel occupancy, or admissions to a place of amusement. The marketplace seller is responsible to collect and remit sales tax.
In addition, a marketplace seller is relieved from liability for sales tax collection on sales of tangible personal property and should not include such receipts in taxable receipts. However, a marketplace seller is not relieved of liability for sales of services and sales not made through a marketplace provider.
New York State Technical Memorandum TSB-M-19(2)S (May 31, 2019) provides further information regarding New York State sales tax collection requirements for marketplace providers.
State Sales Tax Nexus Reviews More Important Than Ever
Marketplace sellers should continue to assess their sales tax nexus footprint in each state through state sales tax nexus reviews. Sales made through marketplace providers are generally included in determining whether in-state sales exceed economic nexus thresholds, which may require sellers to register with the state. The seller is then responsible for sales tax collection for sales of services and tangible personal property not made through marketplace providers, or to collect exemption forms from customers for exempt sales. Nexus reviews are equally important for income, franchise and other state and local tax purposes.
For more information on New York State and other states marketplace seller laws, or to talk with a member of our state and local tax team about a nexus study, please contact Freed Maxick.View full article
Vendors with no physical presence in the state may be required to collect and remit New York State and local sales tax…are you?
After almost seven months of silence following the Supreme Court’s decision in South Dakota v. Wayfair Inc., taxpayers were finally given an answer to the question of how the state of New York would respond. On January 15, 2019, the New York State Department of Taxation and Finance announced that effective immediately, vendors with no physical presence in the state are required to collect and remit New York State and local sales tax if the specified economic thresholds are met.
How Does New York State Define a Vendor?
For New York State sales tax purposes, a vendor is defined as a person who regularly or systematically solicits business in the state, and as a result, makes taxable sales of tangible personal property or services into New York. One is deemed to be regularly or systematically soliciting business in New York if, for the four most recent sales tax quarters, gross receipts from the sale of property delivered into the state exceed $300,000 and more than 100 sales of tangible personal property were made into the state.
Therefore, a business with no physical presence in New York is now required to register with the state for sales tax purposes if they are making taxable sales into the state and meet both the sales and transaction thresholds.
New York State’s Economic Nexus Thresholds
Each state has its own rules on what sales are included, as well as what look-back period should be used when tracking your in-state sales and transactions for their economic nexus thresholds. For New York, all sales of tangible personal property delivered in the state, including both taxable and non-taxable sales, are counted towards the $300,000 and 100 transaction thresholds. For the look-back period, New York will be using the preceding four sales tax quarters. The New York sales tax quarters are March 1st through May 31st, June 1st through August 31st, September 1st through November 30th, and December 1st through February 28th or 29th. This means that for the purpose of tracking sales and transactions to see if the economic nexus thresholds are met, businesses will need to reevaluate their sales tax nexus in New York State on a quarterly basis. Once the thresholds are met, the business is required to register with the state as a vendor and begin collecting and remitting sales tax.
An important distinction regarding New York’s economic nexus thresholds is the fact that both thresholds must be met in order for a remote seller to be deemed to have sales tax nexus in the state. This differs from the majority of other states, who generally consider an out of state seller to have sales tax nexus if just one of their economic nexus thresholds are met. There is also the issue of what is or is not taxable when looking at local sales tax in New York State.
For example, New York State offers an exemption from sales tax on the sale of clothing or footwear sold for less than $110 per item. This exemption, however, is optional at the locality level, with only ten localities following the state and exempting these items. The remaining localities require the collection of sales tax on these items, each at its own specified tax rate.
If a business only sells clothing that falls under this exemption, they could potentially have no taxable sales into New York State, and therefore, not be required to collect and remit New York State sales tax.
But what if those sales are into localities that do not provide the exemption? Does the business still have an obligation to collect and remit to those localities? Are they exempt from collecting and remitting sales tax to the localities if they do not have a New York State collection and remittance requirement? New York is yet to address complexities such as this, leaving some businesses unsure of their sales tax obligations in the state for the time being.
Tax Director Don Warrant discusses Wayfair as a major tax compliance issue for certain businesses. Listen here.
Assistance for the Daunting Task of Multi-State Sales Tax Compliance
Following New York’s announcement, there are now only eight states that have not enacted economic nexus thresholds in light of the Wayfair decision. Under these economic nexus rules, remote sellers of tangible personal property and taxable services now have the potential to be subject to sales tax collection and reporting requirements in dozens of states that they were previously exempt from due to a lack of physical presence.
Understanding the rules and requirements of each state without professional guidance can be a daunting task for a business, however, the importance of compliance cannot be overlooked as there can be harsh penalties for noncompliance.
Connect with us by clicking on the button or call the SALT team at Freed Maxick CPAs, P.C. at 716-847-2651 to discuss how we can help guide your business through all these sales tax changes following the Wayfair sales tax case decision.View full article
9 steps to figuring out what you have to collect and who you have to pay
The Supreme Court’s decision in South Dakota v. Wayfair (Wayfair) expanded the ability of states to require out-of-state retailers to collect and remit sales taxes on transactions in jurisdictions where the seller has no physical presence. In short, the court held that a state law requiring out-of-state sellers to collect and remit taxes based on an “economic nexus” with the state did not automatically violate the U.S. Constitution’s Commerce Clause.
The opinion remanded the case for further action without specifically ruling on the constitutionality of the South Dakota law. However, the justices highlighted several features of the law that they felt would keep it from imposing an undue burden on interstate commerce, including:
- A safe harbor threshold that limited the application of the law to sellers with more than just “limited business” in the state. In South Dakota’s case, the law does not require the seller to collect and remit taxes if it has less than $100,000 or 200 transactions in the state during the previous or current calendar year.
- A prohibition against retroactive enforcement.
- One state-level administration of all sales taxes within the state, and
- Access to sales tax administration software provided by the state.
Many states already had economic nexus statutes on the books before the Wayfair decision, and a host of others have worked to enact similar laws since the Supreme Court’s ruling. The terms of these laws can vary significantly from South Dakota’s. Because the factors listed by the court are only guidelines on what the justices believe would pass Constitutional muster, there is still considerable uncertainty over what requirements might be found unconstitutional if challenged.
A Nine Step Action Plan for Remote Sellers
With so many details still up in the air on this topic, many businesses are struggling to figure out how to comply with current requirements and adapt quickly to new rules as they are enacted. The following nine steps can help any business that sells products or services into multiple states meet current state tax obligations and manage changes effectively.
- Determine where, what, and to whom you sell.
- The reason for the “where” determination is fairly obvious, but keep in mind you should be tracking not just the destination state, but also local jurisdictions that may have additional sales tax requirements.
- Your system needs to know “what” you are selling in each jurisdiction because sales tax rates can vary from product to product, or may not be subject to tax at all.
- You need to track your customer information in order to know if a buyer qualifies for a sales tax exemption.
- Determine your activities that create physical and economic nexus. Remember, the Wayfair decision didn’t do away with previous sales tax laws based on physical nexus. Your system needs to allow for the possibility that either standard could trigger a collection requirement in a jurisdiction.
- Review the most recent 12-month period and prior year sales in each state. The first item in this list is designed to give you a current snapshot of your activities that may trigger economic nexus. A look back at recent periods is also required to make sure that you haven’t missed an obligation based on previous transactions.
- Determine the taxability of your products and services in each state. Once you know what you sell and where you sell it, you need to understand how each jurisdiction taxes your product.
- Monitor economic nexus. You need some type of system in place to track both the dollar volume of sales and number of transactions in each state where you sell. Even though sales tax collection obligations may not attach until you cross a threshold, you need to monitor the data from the start in order to know when your activity triggers economic nexus.
- Monitor changes in state sales and use tax laws. Many states are scrambling to enact or modify laws to align themselves with South Dakota’s requirements. Work closely with your tax advisor and any sales tax software provider to make sure you are aware of any changes in requirements that affect your obligations.
- Determine whether reporting requirements apply. Penalties for failure to comply with sales tax collection requirements can be significant. You need to know what rules apply before you bill your customer because the state will look to collect the amount from you even if you failed to collect it from the buyer.
- Review your marketing, selling, billing, and tax collection and payment practices. You need to look at the whole process from soup to nuts in order to confirm that you’re giving your buyers the correct information about what taxes apply and that you’re collecting and remitting them to the proper authorities.
- Evaluate your sales tax exemption certification process. Your business may not have paid close attention to exemptions in the past when you had no physical nexus in a jurisdiction. With more states looking to collect taxes based on economic nexus, you will need to be more vigilant in monitoring customers that claim an exemption. That includes tracking when exemption certificates you have on file may expire.
Talk to the Freed Maxick SALT Team
It may seem like a daunting challenge at the start, but careful planning and implementation of a Wayfair-compliant sales tax system can give your business the ability to monitor and adapt to changes more effectively for years to come.
Our state and local tax services team can help you with a review of your situation and a discussion of how best to comply with each state’s requirements. Call us at 716.847.2651 to discuss your situation or request a situation review here.
After the Wayfair Sales Tax Case:
- What Remote Sellers Need to Know About Use Tax Notice and Reporting Requirements
Uncertainty still exists about what businesses should expect after the Wayfair decision
The recent Wayfair decision has sent states and businesses alike scrambling to make sense of what taxes are owed in which jurisdictions. Many business owners and officers may be tempted to backburner the issue. After all, you have enough other fires to put out. You’ll get to sales tax compliance when you get to it.
Not so fast. Remember that sales tax, much like employment tax, is considered a “trust fund” transaction. Sales tax isn’t additional revenue that is billed to your customer. Rather, it’s money that you are deemed to hold as a trustee of the state. You are responsible for collecting and remitting the appropriate sales tax. If you fail to do either, it’s not just the company’s assets on the line. “Responsible Persons” can be held personally liable for any unpaid liability.
Who is Responsible for Charging and Collecting Sales Tax?
Most businesses don’t run into problems by failing to remit the sales tax they collected. The greatest risk arises from failing to charge and collect sales tax on taxable transactions. In the event of a sales tax audit, the company could be assessed the amount of sales tax that it should have collected and remitted, plus penalties and interest. But because of the trustee relationship, that liability could extend to responsible persons. Who are they?
In New York, owners, corporate officers, LLC members, general partners, and any limited partners who actively run the business or who have at least 20% ownership are automatically responsible persons. In addition, the list of responsible persons generally includes anyone who:
- Is actively involved in operating the business on a daily basis,
- Decides which bills are paid,
- Has hiring and firing authority, or
- Has check signing authority.
If the business has the money to settle the sales tax liability, the responsible persons can breathe a sigh of relief. If the business is unable or unwilling to pay, the responsible persons can be held liable. Generally, your directors and officer’s policy will not protect you against this type of omission, so don’t think of that as your fail safe.
Long Term Effects and Impacts of Wayfair
There is still a lot of uncertainty about the long-term effects of Wayfair. Will there be a uniform minimum threshold on either dollar volume or transaction volume? Will there be small business exceptions?
As we wait to see how questions like these are resolved, we recommend starting at the basics: what states are you currently registered in? Are you selling into any states where you are unregistered? What products or services are you selling? Do you have employees or contractors in states other than your home state? Taking stock of your current selling practices is the best first step.
Talk to a Freed Maxick Sales Tax Expert
The sales tax experts at Freed Maxick work with hundreds of US and Canadian companies to help them understand and comply with state and local sales tax requirements. All our experts agree that after the Wayfair decision, sales taxation will become an increasingly complex endeavor.
If you need help understanding how the Wayfair decision affects the sales tax compliance of your business, please contact us here or call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation.View full article
Before June 2018, Canadian companies could avoid having to comply with U.S. sales tax laws by not establishing a physical presence in any state or municipality within the U.S. However, that changed on June 21, 2018 when the U.S. Supreme Court in South Dakota v. Wayfair, eliminated the “physical presence” barrier that prevented states from enforcing their sales tax laws on remote sellers. As a result, states can now require remote sellers to comply with their state and local sales tax laws based on economic presence. Therefore, Canadian companies are no longer shielded from complying with sales tax laws by avoiding establishing a physical presence within any state. Instead, Canadian companies now need to determine if they have established an economic presence in any state and if so, may need to comply with the sales tax laws in those states.
A series of U.S. Supreme Court cases (most notably Quill Corp. v. North Dakota) established that a remote seller must establish a physical presence within a state before the state and local governments can impose its sales tax laws on the remote seller. Physical presence is generally established by having in-state employees or agents, or owning or leasing property within the state. All states with sales tax laws continue to require compliance with their sales tax laws when physical presence exists.
South Dakota (SD) passed legislation in April of 2016 requiring remote sellers to collect SD sales tax when annual gross revenue from SD customers exceeded $100,000 or when remote sellers completed more than 200 transactions with SD customers. Wayfair challenged the law and since the law’s requirements weren’t based on physical presence, SD lost at each level of appeals. Ultimately, the U.S. Supreme Court determined that physical presence was no longer a requirement to establish nexus (i.e., minimum connection with a state) for sales tax purposes. Instead, nexus can be established based on gross sales to in-state customers or the number of transaction with in-state customers. In addition, the U.S. Supreme Court determined that SD’s sales tax laws did not impose undue burden on interstate commerce.
We covered the Wayfair decision in more detail in our blog post, State Sales Tax Nexus Without Quill.
States Reaction to Wayfair
Many states have adopted, or are in the process of adopting sales tax laws that are similar to SD thinking that the U.S. Supreme Court approved SD’s sales tax laws. However, there are other features to SD’s sales tax laws that are unique and may not be present in the laws of other states. Therefore, it is uncertain whether the sales tax laws being adopted by other states in reaction to Wayfair will place an undue burden on interstate commerce or whether such laws will create substantial nexus allowing the state to impose its sales tax laws on remote sellers.
States are not bound by tax treaties and such treaties do not apply to non-income based taxes such as sales tax, gross receipts tax, and net worth or capital based taxes. Therefore, the U.S. Supreme Court decision in Wayfair extends beyond sales tax, potentially exposing Canadian companies to other state taxes as well.
Congress may finally need to act to alleviate the burden being placed on remote sellers who must now comply with numerous state and local taxing jurisdictions and state-by-state determination of how goods and services are taxed.
Sales Tax Analysis
Canadian companies should maintain a sales tax matrix of every product or service they sell, where the product or service is received by the customer, and whether the product or service is subject to state or local sales tax. The matrix should include both the gross sales and number of transactions in each state and local taxing jurisdiction to determine whether economic nexus is present or could occur in the future. This analysis will help to plan on a state-by-state basis to minimize the burden of sales tax compliance. Sales tax compliance software may be needed to alleviate this burden.
Since all states with sales tax laws continue to require compliance with their sales tax laws when physical presence exists, Canadian companies should determine whether they currently have established physical presence in any state and if so, the amount of their sales tax liability for prior years. State voluntary disclosure programs may prove beneficial and should be considered when sales tax liability exists for prior years.
If sales are exempt, then it may be necessary to begin collecting exemption forms from customers. For example, sales to tax exempt organizations, governmental entities, and sales for resale are generally treated as exempt sales. In advance of collecting exemption forms, states may require registration with the taxing jurisdiction.
Talk to a Freed Maxick Tax Expert
With our proximity to Canada, we have worked with hundreds of Canadian companies facing a myriad of U.S. tax issues including state and local tax planning and compliance.View full article