Tennessee legislation (SB 603 and HB 644) would make some dramatic changes to the income and sales tax nexus definitions used for Tennessee tax purposes. Tennessee, like most states, is finding it more challenging to collect the revenue it needs to fund the state programs. Without a state personal income tax, Tennessee relies on a 9 to 10 percent sales tax and its corporate income tax to generate the needed revenue. Neighboring states, like Georgia, get 50% of their state revenue from individual income tax.
SB 603 and HB 644, outline the “bright-line presence test” as the new method for determining both income tax and sales tax nexus in Tennessee. Any company meeting any one of the three parts of this “bright-line” test is deemed to have nexus in the state. Parts “ii” of this test states that a company with average property in Tennessee of $50,000 will have nexus and part “iii” of the test says that a company with $50,000 of compensation will have nexus in Tennessee. There is nothing new here. The presence of property and payroll in Tennessee has always created nexus so I’m not sure why this needed to be added. However, Part “i” of the bright-line test deems nexus to be created if the company has the lesser of $500,000 in revenue or 25% of its revenue sourced to Tennessee. My guess is that a company that has 25% of its revenue in Tennessee or has $500,000 of sales in Tennessee may already have nexus in the state, so I’m not really sure why this specific provision is necessary for income tax purposes.
In addition, Tennessee is also adopting language that mirrors the “Amazon nexus” language in New York and in other states. Under this language if a remote seller located outside of the state of Tennessee had commissioned sales arrangements with agents inside of Tennessee and the remote seller has $10,000 or more of sales in Tennessee the previous year, then the remote seller is deemed to have nexus in Tennessee for sales tax purposes. This is also called “click through” nexus. If passed, Tennessee would joint about 20 other states that have similar provisions. The effectiveness of these statutes is questionable since many remote sellers just cancel their agreements with the instate sellers so that they can avoid the requirement. Also, Amazon is already registered in Tennessee for sales tax.
Lots of states are passing bills similar to what Tennessee is doing. Even thought they may pass and be signed into law, they must still pass Constitutional muster.
Ned Lenhart CPA
Interstate Tax Strategies, P.C.
Virginia Representative Goodlatte is circulating a “discussion” draft of a Bill intended to plug the “loop hole” related to uncollected sales tax on remote sales. If adopted as drafted, this measure would transform the entire multistate sales tax collection and remittance mechanism, trash the notion of state sovereignty, and create a tax bureaucracy that will rival the IRS. In my humble opinion, Goodlatte’s Bill does to sales tax what the Affordable Care Act did to healthcare.
Is the multistate sales tax system we have perfect? Absolutely not. Are their problems? Yes! Are states losing revenue? Yes. Do we need an entirely new system to deal with the problem? NO! From what I can gather, Congress is laboring under the notion that states are losing over $20 billion of sales tax revenue a year. At a 7% sales tax rate this translates into over $285,000,000,000 of untaxed Internet/Remote sales. That is absurd! With Amazon as the largest Internet retailer now collecting tax in 23 states, with all of the “big box” retailers collecting tax, and with companies putting use tax systems into place, the amount of lost revenue is a fraction of this total; I’ve heard as low as $5 to 6 billion. That’s still a lot of revenue, but not so much that it justifies a complete change in the state sales tax collection mechanism.
Per Goodlatte’s bill, when remote sales are made the sales tax is collected based on the rates and the rules of the “origin state”. The tax that is collected is then sent to a clearing house agency where it is distributed to the states based upon a formula agreed to by member states. Gee, what could possibly go wrong with this plan? The origin state is not the state where the shipment originated, rather, the “origin state” is the state where the seller has most of their employees! Under this rule, all of Amazon’s sales would be taxed in Washington state since that is where Amazon has the most employees. If you’re going to have an “origin” based tax, at least make it the state where the goods where shipped from.
Under this rule, consumers in Montana, Alaska, New Hampshire, Oregon, and Delaware would be charged tax based on the location of the shipper. I’m still wondering how exemptions will work for items that are not taxable in the destination state but are taxable in the origin state; or vice-versa. Adopting a new system at this point in time would create significant confusion and would probably end up costing states more money than they are losing now. Under Goodlatte’s draft, there does not seem to be an option for retailers that are currently collecting and remitting tax to opt-out. They would have to stop what they are doing and change to this new system.
I’m not sure what the solution is to this problem, but I know what is NOT the solution. What is not the solution is Rep. Goodlatte’s origin based approach. I can hear it now, ” if you like your sales tax system, you can keep your sales tax system (period)!”
Ned Lenhart, CPA
President Interstate Tax Strategies.
Sponsors of the Marketplace Fairness Act “MFA” are worried and frustrated about the lack of House action on the MFA. No action is scheduled for the next few weeks. Speaker Boehner has indicated that the House would not act on the MFA this year. The main sponsor, Rep. Steve Womack (R-Ark) indicated that he was uncertain what the outcome would be this year. If the MFA fails to get approval in the House this year, the entire process will need to start again when the 115th Congress convenes next year.
To complicate matters, Rep. Goodlatte (R-VA) is threatening to introduce a bill that would assign the tax liability to the “ship from” state rather than the “ship to” state. What a mess that would create. If the local retailers are yelling now about the online purchasers not paying tax, this will certainly get them going. Image every online retailer setting up a facility in MT, OR, NH, DE, or even AK just so they would not have to charge sales tax! Further, there is no assurance that any state would be required to give credit for the tax paid to another state. Goodlatte’s bill is not the solution to the internet tax fairness that everyone wants.
Stay tuned!
Ned Lenhart, CPA
I just finished reviewing the 2013 National Association of State Budget Officers 2013 Budget Survey. Even though some elements of this may be estimates, I still believe that the information is directionally accurate in showcasing where the revenue will be coming from. https://www.salestaxstrategies.com/sales-tax-issues.html
For 2013, the report shows total estimated revenue of $572.882 Billion. Of this amount, $219.340 billion is from sales tax, $307.768 is from personal income tax, and $45.774 billion is from corporate income tax. As percentages, this is 38.29%, 53.72%, and 7.99% respectively. For 2014, the reports shows a 4.5% increase in sales tax revenue ($9.886 billion) and a decrease in personal income tax of about $1 billion. Corporate income tax is expected to grow by about 3% or $1.43 billion.
The state leading the pack for expected increases in sales tax are California, Florida, New Jersey, Ohio, and Texas. Unlike the personal income tax projection, no state showed any decline in sales tax collections.
The growing reliance on sales tax as the primary source of new revenue for 2014 likely comes from a combination of the following events:
1. Increases in tax rates
2. Increases in tax base (expansion of tax to services, removal of exemptions, expansion of tax base to digital products)
3. Expectation of increases tax collection and remittance from remote sellers
4. Increased enforcement from auditors and delinquent tax collection people
5. Increased awareness and voluntary compliance by multistate businesses
As I’ve reported for the past several years on this site, sales tax is quickly becoming the revenue of choice by states as they continue to seek revenue to cover the expansion of state services required by new state programs and the imposition of rules by the federal government. In most cases this burden will fall on your business, either as the consumer of taxable items or as the seller of taxable items and services. Either way, the cost of non-compliance can be significant and catastrophic to your business if you are not fully aware of your responsibility.
Please contact me if you have any questions.
Ned Lenhart, CPA
President
I’m reading with amazement the various testimony offered to Congress on March 12, 2014 concerning the initiative to allow states to require remote sellers to collect sales tax on all remote sales. I’m comforted by the recognition that the cost of compliance for any business is not insignificant and that there are serious integration issues associated with the “free” sales tax software offered by the states. What is most concerning are some of the options that special interest groups are offering. https://www.salestaxstrategies.com/sales-tax-issues.html
One group is suggesting that sales tax be based on the “ship from” location and not the “ship to” location. This is certainly an option which will be great for customers buying products from Delaware, New Hampshire, Alaska, Montana, and Oregon which don’t have sales tax. I fail to see, though, how this strategy bridges the tax revenue gap in the states where the customer is located-which has been the primary argument of the retail community. Further, how would this provide and incentive to purchase items from the brick-and-mortar stores in your home state?
One group is also suggesting that Congress implement a law similar to the “Webb-Kenyon” act which prohibits the shipment of property from one state to another state if the sale is not legal in destination state. Under this approach, the Federal government wants to use the taxing power of the state to dictate what retailers can send property into a state. As I follow their arguments, any retailer who is not registered for sales tax in the destination state would be deemed to be shipping property that is not lawful to be sold in the destination state. Wow!
The best comment from the day was that if something were to pass the House this year, it would be during the “lame duck” session after the mid-term elections. That is not very encouraging. “We have to pass it so we will know what’s in it”!!
Even with the passage of some type of tax act, many savvy shoppers will still continue to shop primarily from web-stores (even if they do charge tax) because of the dramatic price difference of the products and offers of free shipping. I’d hate to see what type of solution Congress has for that problem
Ned Lenhart, CPA
President
Just saw that Senator Max Baucus of Montana added a provision to the Marketplace Fairness Act of 2013 that allows states to exempt “remote sales of business inputs from sales and use tax”. What the heck is that all about?
The Senator must believe, or has been advised by his staff, that the state sales tax is like the value added tax which does allow for exemptions for business inputs because the total amount of the business revenue is subjected to VAT when sold. No state that I am aware of has any broad sales tax exemption for “business inputs”, however there are countless examples of specific product level exemptions that will survive despite the passage of the Marketplace Fairness Act of 2013.
As a reminder, the vote the Senate took on the Act was not binding and really did nothing to impact that progress of the bill. However, this addition to the bill shows how little the U.S. Congress knows about state sales tax and why they really have no business tying to micromanage what the states may or may not do. In Sen. Baucus’ addition, there is no definition of what a “business input” is and it does not require state to actually provide an exemption for business inputs. As I have written about before, though, the passage of this kind of bill would potentially allow Congress to set state sales tax policy or allow the Streamlined Sales Tax Project to dictate to states what is taxable and what is not taxable. Based on the trajectory of these types of non-governmental groups, the states are slowly losing their ability to legislate tax policies that are specific to their states.
Ned Lenhart, CPA
President Interstate Tax Strategies
https://www.salestaxstrategies.com/index.html
On June 28th, 2011, California Governor Jerry Brown signed into law a budget bill that expands the state’s nexus creating activities to out-of-state retailers based on the presence of in-state Internet affiliates and (in some situations) certain commonly owned companies. There is no surprise that this bill was aimed squarely at Amazon.com. The state is not subtle at all in its attempt to force Amazon to collect California sales tax on shipments made to California residence. Under this bill, the goal is to create an agency relationship between the California based retail associates and Amazon.
The Bill adds a provision that changes the definition of the term “retailer” to include anyone who pays a commission to a California based “person” for any-type of referral of potential purchasers through the use of an Internet Link or an Internet Web site. There are some de minimis provisions that would exclude small out-of-state businesses. However, unlike some other states, the new nexus standard does not apply unless (1) the fee for the advertising is a commission or otherwise based on sales and (2) the in-state person also “directly or indirectly solicits potential customers in Californai through use of flyers, newsletters, telephone calls, e-mail, blogs, microblogs, etc.” As such, in Internet affiliate in California that merely advertising for an out-of-state retailer does not create nexus, even if the payment for the advertising is commission based.
Given this unique 2 prong test, I wonder how much additional revenue California expects to get from Amazon (or anyone else). From my understanding, all of the advertising between the out-of-state retailers and the in-state is done via the Internet and does not involve any of the other types of promotional efforts outlined in the Bill.
Ned Lenhart
President
Interstate Tax Strategies
California nexus standards
On August 1, 2011, Sen. Dick Durbin of Illinois introduced Senate Bill 1452 “Main Street Fairness Act”. This Bill is identical to a Bill introduced in the previous Congress that essentially adopts the Streamlined Sales Tax Program (“SSTP”) and allows states that are Members of this association to require out-of-state remote sellers to collect sales tax on sales made to customers in their state even if they do not have nexus. The SSTP has been floating around for over a decade with about 20 states signing up. For the most part, this movement has been primarily involved with establishing uniform definitions and processes and has not done much about determining the actual uniform taxation of goods and services. SB 1452 does have an exemption for “small sellers” but the criteria for this have not been set.
This Bill is simply the latest in a long line of legislation that has been introduced for over 20 years in an attempt to allow states to force companies that do not have nexus to collect sales tax. There is no dispute that uncollected use tax is a serious issue for the states to deal with. Use tax continues to be one of the most widely assessed tax on audits. In the past these Bills have died in committee. The Direct Marketing Association (DMA) is a powerful lobby and has been successful in arguing defending or modifying this legislation. In the past, however, the state revenue situation has not been as bleak as it is now and a Bill like this might just pass this time.
In addition, I would not be surprised to see some type of attempt to impose a small federal sales tax on remote commerce as way to increase federal tax revenue. Who knows how creative these folks may get?
Ned Lenhart, CPA
President
Interstate Tax Strategies
Taxation of Internet Sales
If the states thought they were facing difficult revenue and budget issues in 2010, they may not have seen anything yet. Based on a report issued by the National Association of State Budget Offices (NASBO), the 2011 fiscal condition for many states may be much worse than the 2010 position. This revenue shortfall has direct implications for tax policy and tax enforcement, including changes to sales tax collections and audits.
According to NASBO, the slow organic revenue growth combined with decreased funding from the 2009 “Stimulus” program combined with increased Medicare payments will lead to a dramatic need for budget cuts and increased revenue. 11 states are reporting budget gaps of nearly $10 billion which must be closed through revenue and budget cuts. Because so many of the new governors were elected on an anti-tax campaign, it is unlikely that taxes will be changed much and that most of the shortfall will be made up by budget cuts. The full report can be found at http://www.nasbo.org/LinkClick.aspx?fileticket=C6q1M3kxaEY%3d&tabid=38
Finally, with the revenue shortfall comes greater enforcement. States have already ramped up enforcement but I suspect more is to come in 2011. For businesses that have not carefully assessed their multistate obligations, now is the time to do so. Each week I talk with companies that are getting notices for audits, nexus questionnaires, and sales tax complaints from customers. These are strong signals that there is a problem and a possible sales tax exposure.
Failing to act does not make the problem go away.
Ned Lenhart
President
2011 state revenue outlook
The New York Department of Finance has issued a notice indicating that the state tax exemption for clothing items costing more than $110 will be suspended from October 1, 2010 until March 31,2011. As such, state tax and MCTD tax (where applicable) will be due on all sales of clothing items. If a local exemption for clothing exists, it will remain in force unless the local government also suspends their exemption.
New York is one of just a few states that has an exemption for clothing items.
Ned Lenhart
President
New York Clothing Exemption
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