Category

Retail

Feb 03
0

Hybrid-Origin Based Sourcing! What is Rep. Goodlatte thinking?

By | Legislative, Retail

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.

Dec 10
0

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

 

 

 

Nov 17
0

MFA Fate Uncertain in Lame Duck Session!

By | Legislative, Retail

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

Apr 01
0

States Expect 4.5% More Sales Tax Revenue in 2014!

By | Legislative, Retail, Tax Audit

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

 

 

Mar 21
0

Ignorance is not Bliss (when it comes to sales tax!)

By | Contractor/Repair Services, Retail

This has been a week of delivering bad news to companies who contacted me only after being notified by a state taxing jurisdiction that they were not in compliance.  As predicted, their first words were “Why didn’t someone tell me _________”?   It’s really hard to know how much of this whining to believe. Over the years I’ve found business of all sizes to fit into one of three categories when it comes to sales tax (and probably other taxes):

1. Those that don’t want any information or advice unless they initiate the dialog.
2. Those that solicit information and promptly ignore or don’t believe the advice they get.
3. Those that welcome and follow the advice from trusted advisors and implement their suggestions as appropriate

When I get calls from companies who find themselves in trouble, it’s hard for me to figure out which category they fall into.  Almost all of them have an outside CPA so I know that they are having some interaction with a tax professional at some point in the year.  Whether their advisor knows anything about sales tax is a different story (and different blog entry).

Regardless of the type or quality of advice these businesses may have received, it is still startling that the owners have taken no initiative to find out what their obligations were as a multistate business.  How, in once case, could a contractor doing business in 10 states not wonder if they had any type of multistate sales tax or income tax problem?  Did they just think that they could wonder from state to state doing construction projects without having any type of state tax issues? (Apparently the answer was “yes”).

This type of ignorance is dangerous to the business and the business owner.  With more states enforcing their officer liability rules, the owners and officers of the companies are now personally liable for the ignorance (or lack or curiosity) of their business managers when it comes to multistate tax.  In the short term, ignorance may be bliss, but in the long term, ignorance is dangerous and could be catastrophic for the business and its owners.

Because most CPAs only have a rudimentary working knowledge of multistate sales tax, don’t expect them to be the only resource available to you for quality advice.  If you have any questions please contact me for a free 30 minute discussion. https://www.salestaxstrategies.com/index.html
Ned Lenhart, CPA
President

 

 

Mar 13
0

Leave it to Congress to Makes Sales Tax More Complicated

By | Legislative, Retail

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

 

 

Nov 19
0

California SBE makes finding sales tax rate a sinch!

By | Retail, Technology

Finding accurate sales tax rates has always been a challenge especially when you have a mixture of county, city, and district taxes.  The California SBE has just launched a great map-driven way to find the correct sales tax rate for a specific address.  Here is the link to this very creative tool.  I’m hoping more states will follow the lead and start using this type of technology to allow taxpayers to get the most accurate tax rate information.

https://maps.gis.ca.gov/boe/TaxRates/

Ned Lenhart, CPA
President

Interstate Tax Strategies

 

Apr 09
0

More Evidence that Congress Does not Understand Sales Tax!!

By | Legislative, Retail, Technology

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

 

Feb 05
0

Want Amazon to collect sales tax? Be nice to them!!

By | Retail

Just saw that Connecticut has reached an agreement with Amazon for the e-tailer to start charging sales tax on sales made to that state.  This will begin November 1, 2013.  A couple of years ago the state had passed the “Amazon Nexus” legislation with high hopes that the retailer would start collecting tax.   Just the opposite occurred.  Amazon cancelled the agency agreements that were supposed to be creating nexus for them and $0.00 sales tax was collected.

Since then, Amazon has invested $50 million in distribution facilities and will hire several hundred Connecticut workers.  As such, the state is more than happy to forgive and forget all those nasty things they said about Amazon a couple of years ago.   This seems to be a trend. Texas has also stretched out its welcome mat to Amazon after assessing them $300 million in sales tax just a few years ago.

So, if a state want’s to get Amazon to start collecting sales tax, be nice to them.  You never know what might happen.   https://www.salestaxstrategies.com

Ned Lenhart

 

Jan 16
0

Alabama Local Tax Nexus-Another Confusing Case!!

By | Retail, Tax Audit

On January 3, 2013 Judge Bill Thomson issued yet another ruling on the nexus rules for Alabama local sales tax.  I’ve lost count of how many rulings he has issued.  In this case, as with most of the others, the Judge held that the retailer did not have nexus in the city where the services were performed becuase they did not have “significant physical presence” in the city where the sales occured.  His decsions are always tied to the Yelverton decision issued by the Alabama Court of Appeals in 1997.  He hates this decision and takes every opportunity to comment about how out of date their ruling is and how the Alabama Department of Revenue has not updated it’s regulation on local tax nexus since the Yelverton decision was issued.

Under the Yelerton rule, a retailer has sales tax nexus with a home-rule city only when it has property located in the city or when the sales activity occurs in the city.  That’s it.  You can perform services in the city and not create nexus, you can delivery property on your own truck and not create nexus, and you can meet with cusotmers on technical issues and not create nexus.  In the January case, the company was headquartered in Montgomery, Alabama and made sales calls over the phone for team photography.  The photographer would then go the the towns and take the phototos and then sell packages to the team and families.  Only on 4 occassions did the company go to a town for a “sales presentation”.

Based on the Yelverton rule, the company did not have nexus in the cities where the sales call was made over the phone.  Even though the photography service was performed in the city, the nexus is determined by the sales activity.  In the 4 cases where an “inperson” sales visit was made, the Judge held that even thought they were in the city, he did not believe that 1 sales visit was sufficient to create nexus.  Great, well what about 2 visits, or 3 visits or more.  How many visits are sufficient to create nexus in a home-rule city for sales tax?   Is this also the rule for state sales tax?  https://www.salestaxstrategies.com/tax-consulting-services.html#salesTaxNexu

Each year Judge Thompson issues at least one ruling on this topic.  I fully expect to see more during 2013.  Despite these rulings, the auditors hired by the home-rule cities to audit taxpayers seem to assert that everyone has nexus and that local tax is due on every transaction.  Be alert to this labarinth of rules related to local tax jurisdiction.

See Paris John Van Horn (Sport Shot Photography) vs State of Alabama Department of Revenue Docket 12-863

Ned Lenhart, CPA