Accounting Services for Small
Businesses
- Due to the confusion surrounding retailers' state tax
collection and reporting responsibilities, it is important that businesses
understand the laws in states in which they sell their products or services.
States
continue to pass legislation to force out-of-state retailers to register,
collect, and remit sales tax on taxable sales made to in-state residents.
Several states have passed laws that require out-of-state retailers to collect
sales tax despite not having any in-state physical presence, which appears to
violate the Supreme Court's decision in Quill Corporation v. North Dakota.
If a
business has sales to customers in states in which it does not currently
collect sales tax, the business may need to take some, or all, of the following
steps in order to avoid potentially significant tax and penalties:
•
Register to collect sales tax in new states.
•
Add "use tax" notification language on its sales
invoices.
•
Add language to its website for online orders.
•
Set up new procedures to track the names, addresses, and sales
made to each customer in each state per year.
•
Set up new procedures to mail information reports to customers
and certain state tax departments.
Nexus - Since Quill, a business has needed more than a "de
minimis" physical presence in a state (i.e., in-state property, employees,
contractors, sales representatives) before the state could require the company
to collect and remit sales tax (i.e., nexus). Unfortunately, in deciding Quill,
the Court did not define what constitutes a "more than de minimis"
amount. Not surprisingly, most states have taken an aggressive approach in
interpreting this terminology, which has led to both confusion and
inconsistency as to the degree of physical presence required to establish nexus
for sales/use taxes.
Several states, including Alabama, Minnesota, Vermont, South
Dakota, Tennessee, and Wyoming, have pushed the proverbial sales tax nexus
envelope over the edge by taking the position that "economic nexus"
is the standard for sales tax nexus. This position appears to be in direct
conflict with Quill, as shown in the following examples.
Minnesota - Minnesota adopted an "economic nexus" standard that
requires out-of-state retailers to collect sales tax on sales made to Minnesota
customers if the seller engages in certain activities in the state and either:
(1) makes 100 or more retail sales into the state during 12 consecutive months,
or (2) makes ten or more retail sales totaling more than $100,000 during 12
consecutive months.
South Dakota - South Dakota passed a
law that imposes collection and remittance duties on certain remote sellers
that sell tangible personal property, products transferred electronically, or
services for delivery into the state that meet one of two economic thresholds
in either the previous or current calendar year: (1) The seller's gross revenue
from South Dakota sales exceeds $100,000, or (2) The seller had more than 200
separate sales into South Dakota.
Enforcement of the South Dakota law has been suspended due to an
injunction, since the State brought a declaratory judgment action against 200+
retailers. A South Dakota trial court recently ruled that the law is
unconstitutional, but the state is expected to appeal the case to the South
Dakota Supreme Court.
Use tax reporting/notification
Use tax is imposed on the buyer of taxable goods when sales tax
was not collected by the seller. This situation typically applies when the
seller does not have nexus in the state where the purchaser is located. The
problem many states face is that most buyers (particularly individuals) do not
comply with their use tax obligations. This lack of compliance has led some
states to pass legislation that requires out-of-state sellers to report certain
in-state sales information to a state's department of revenue/taxation and/or
buyers.
Conclusion
States continue to try and expand their ability to require
out-of-state businesses to register, collect, and remit sales tax on taxable
sales to in-state residents. While the change in policies and laws in these
states may or may not be constitutional, one thing is certain-there is
significant confusion among retailers on their tax collection and reporting
requirements. Given this confusion, it is more important than ever for a
business to evaluate its nexus footprint and understand the laws in each state
where it sells products and services.
ABA Tax
Accounting offers tax help on various topics. Also, if you'd like to learn more
about our CFO Services please feel free to contact me.
Amare Berhie, Senior
Accountant
(651)
300-4777
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