Editor’s Note: This guest blog post comes courtesy of Gail Cole with Avalara.
How often do you think about sales tax?
Although not the most scintillating topic, sales tax should be a priority for any company that sells taxable goods or services. For starters, there’s a lot more to sales tax than rates. In addition, many businesses don’t realize that they can have sales tax obligations in more than one state, or that complying with a state’s sales and use tax may require something other than collecting tax or filing returns.
Below are three basic facts about sales tax compliance — a Sales Tax 101 of sorts — to help put it into perspective.
There’s More to Sales Tax than Rates
One of the first things many people think about when they hear “sales tax” is rates, and getting the rate right is certainly essential. It’s also not always easy. While some states only impose a state sales tax, others allow localities to levy local taxes. In some jurisdictions, the total sales tax rate is comprised of a state tax, a county tax, a city tax, and one or more special taxes (e.g., an economic development tax or a transportation tax).
But there’s a lot more to sales tax than rates. Different rules apply to different transactions, and they can be surprisingly complex. For example, many states tax to-go food differently than food consumed on premises, or candy containing flour differently than candy without it. Getting rates and product taxability rules correct in all jurisdictions can take a considerable amount of time and research. And since they’re always subject to change, the research needs to be ongoing.
It’s Not All About the Home State
Since ecommerce has made it easy for retailers in one state to sell to consumers in other states, many states have upped their efforts to tax online sales.
To do so, some are expanding the definition of nexus, the connection between a state and a business that allows the state to tax the business. Relationships with in-state affiliates and referrals from in-state websites can now trigger a tax obligation in some states; placing software and web-cookies on in-state devices or storing goods in a marketplace facilitator’s warehouse can trigger it in others; and in some states, economic activity alone can be enough to trigger a tax obligation in the state’s eye.
Some of these laws are being challenged because the Supreme Court held in 1992 (Quill Corp. v. North Dakota) that a state cannot impose a tax obligation on a business that doesn’t have a physical presence in the state. Yet states are pushing back against that limitation. Recently, South Dakota successfully petitioned the Supreme Court to revisit the physical presence limitation in South Dakota v. Wayfair, Inc. A decision is expected soon.
Sales Tax Compliance Can Include Not Filing Returns
Instead of requiring remote sellers to collect and remit tax, some states have imposed use tax notice and reporting requirements on non-collecting sellers: e.g., sending annual purchase reports to consumers and consumer purchase reports to state departments of revenue.
Rather than comply with these onerous requirements, which have been upheld by the Supreme Court of the United States, some out-of-state sellers are opting to collect and remit tax. With use tax reporting for non-collecting sellers seeming to increase remote sales and use tax compliance, more states are looking to adopt it.
Unlike many business practices, which often become easier over time, sales tax compliance tends to become more challenging as a business grows. To learn more about it, download the Wakefield Research report.
Avalara helps businesses of all sizes achieve compliance with transactional taxes, including sales and use, VAT, excise, communications, and other tax types. The company delivers comprehensive, automated, cloud-based solutions that are designed to be fast, accurate, and easy to use.