Monthly Archives

December 2014

Dec 10
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Dropshippers Need to Know Supplier’s Nexus Footprint

By | Retail

3rd party drop shipments are becoming the life-blood of most e-commerce companies.  More and more e-commerce companies don’t directly own any inventory. Rather, they have a vast network of suppliers that drop-ship products to the e-commerce company’s customers as needed.  In a drop-shipment transaction, there are two sales that happen simultaneously at the point of destination.  The first “sale” is between the supplier and the e-commerce company. https://www.salestaxstrategies.com/index.html   This would generally be treated as a wholesale or sale for resale transaction.  The second sale is between the e-commerce company and their customer.  Depending on the products and customer, this second sale could be taxable or nontaxable.  In working with most e-commerce companies on multistate sales tax issues, they want to focus on the second transaction because that’s the one where they may have a collection and remittance obligation.  However, depending on where their supplier has nexus, many e-commerce companies should be more concerned with the first sale.  If their supplier has nexus in the state where the shipment is made then the sale between the supplier and the e-commerce company is presumed to be taxable unless a proper exemption certificate is provided.

Many e-commerce companies don’t grasp the consequences of this issue until they get their first invoice from their supplier and it includes sales tax being charged in one or more states.  Taking 6% to 9% tax out of an already slim gross profit margin may turn a profitable sale into a big loser!

If you are an e-commerce retailer that relies on drop-shipments to fulfill your orders, then you need to be asking your suppliers questions about where they have nexus and where they will be charging you sales tax unless you provide them with a valid resale certificate.  In some states, avoiding the tax charged by suppliers can be easy.  In other states, not so much!.  Knowing the rules and planning your transactions accordingly is the key to maximizing profits and minimizing risks.

If you have any questions about this or any other multistate sales tax issue, please call me for a no obligation 30 minute consultation.

Ned Lenhart, CPA
President

 

 

 

Dec 08
0

Texas Comptroller Takes Dramatic Move in Nexus Ruling-This Could Spread!

By | Sales Tax, Uncategorized

On September 19, 2014, the Texas Comptroller issued its decision 106,632.  On the surface, the issues seemed fairly routine.   A Utah taxpayer was audited and assessed tax on sales of downloaded software.  The decision outlines many procedural issues but the most startling point of the ruling is the conclusion reached by the Hearing Officer that the Utah vendor had nexus with the state of Texas by virtue of the presence in Texas of software that had been downloaded onto servers located in the state. https://www.salestaxstrategies.com/sales-tax-audit-defense.html

The company did not send salesmen into the state to solicit sales and it did not conduct other types of training or support services in the state.  The decision states: “The substantial physical presence requirement is determined by the character of the rights and interest Petitioner retained in the software and digital images download by users located in Texas.”  Because Texas deems downloaded software to be tangible personal property and because the taxpayer (Petitioner) only grants a limited set of rights to the user and retains other rights for itself, that the Petitioner is deemed to own personal property in the state of Texas.  That’s right, the state of Texas has now concluded that software residing on the servers of another to which the licensing company has retained some intellectual property rights thereto, is deemed to be the ‘ownership’ of property in the state of Texas and creates nexus for the company.

The decision went on to say that based on the volume of business the company had in the state that there was “substantial physical presence”-not just a minimal physical presence in the state.  Granted, the taxpayer did not object to the assertion that the downloaded software was tangible personal property, so part of their problem may be a self-inflicted by not vigorously objecting to the characterization of their intangible property as being tangible.

Regardless of the taxpayer’s error, this is a very frightening outcome and a dramatic advancement of the theory of nexus for sales tax purposes.  For remote sellers of software they would be forced to abandon their intellectual property rights of the software sold or be forced into a sales tax compliance position that, heretofore, has not be promoted by any other state.  Just because downloaded software is taxed as “tangible personal property” does not make it “tangible personal property”.  There is nothing physical about software that is received electronically and exists only in an electronic state on a computer.  If more states pursue this dramatic and unprecedented advancement of nexus, software vendors across the country should be in fear of audits and assessments.

Ned Lenhart, CPA