Sales Tax

Just when you thought the chaos created by the Streamlined Sales Tax (SST) agreement could not get any more comical, they recently decided to clarify when flavored water becomes a soft drink. I’ve long been critical about how this group can micro-manage the sales tax rules of the member states and this is just another example of the hoops companies must jump through to understand the taxability of the products they sell.  On the flip side, this also shows how little control the states have over their own tax rules once they become a member of the SST. I know that this is an important issue for the retailers, but the problem was created by the SST project when it forced states to comply with these definitions.

The new ruling clarifies that flavors and essences added to water do not constitute “soft drinks” as long as there is no sweetener added.  Once sweetener is added, the drink become a soft drink and may become taxable as food.

Ned Lenhart, CPA
President

www.salestaxstrategies.com

So the Senate just passed S 743 the Marketplace Fairness Act of 2013.  That’s no surprise.  For the most part, the goal of this legislation is to get non-resident vendors to collect tax from customers in the destination state.  This bill applies only to companies with remote sales of over $1 million.  There are a lot of e-commerce companies with sales less than $1 million who will not be impacted by this Act.    https://www.salestaxstrategies.com/index.html

Because this Act is enforced separately by each state based upon the rules of their state, you may end up with a wide range of enforcement rules and different outcomes.  I am also concerned that wholesalers may be swept up in this issue and have to take on a much larger effort at compliance.  I am especially concerned with the impact on 3rd party drop-shipment transactions.

A lot of wholesalers don’t have nexus outside of just few states but they may have sales being shipped to a large number of states.  Because these companies don’t have nexus in the destination state, they may not have valid resale exemption certificates from customers who are located in that state.  Because of the way the term “remote sale” is defined in the law, it sounds like even wholesalers who are only selling to other retailers may now need to increase their collection of resale certificates in each of the states where they have customers.  The failure to have this certificate could create a taxable transaction during an audit by any state that has adopted this new provision.

This could become even more significant when dealing with 3rd party drop-shipments.  In these cases, a vendor requests that his supplier ship products directly to one of the vendor’s customers.  Historically, if neither the vendor nor the supplier had nexus in the state where the customer was located, then no tax was charged and the customer had the obligation of paying use tax if the product was taxable.  Now, however, it may be necessary for both the vendor and the supplier to be registered in any number of states so that resale certificates can be issued to support exempt sales.  This could create a real nightmare for wholesalers and companies that don’t make taxable sales.

I don’t want to be too suspicious of the motivation of some of the states that will adopt this Act, but my experience tells me that most of them will attempt to enforce this as aggressively as possible.  If you are a wholesaler don’t just assume that this Act does not impact your business, I think it does.

Ned Lenhart, CPA
President
Interstate Tax Strategies, P.C.

U.S. Senate Bill 743 (Marketplace Fairness Act of 2013) will impact many more businesses than you may think. The Bill allows states to demand that sales tax be collected on “remote sales” made by “remote sellers”.  The press is focusing on e-commerce companies such as Amazon and Overstock, but the Bill will also significantly impact companies that don’t make Internet sales.  https://www.salestaxstrategies.com/index.html

The Bill defines “Remote sale” to mean: a sale into a State in which the seller would not legally be required to pay, collect, or remit State or local sales an use taxes unless provided by this Act”.

Nowhere in this definition is the word “Internet” used and nowhere is the term “e-commerce” used.  This Bill will impact every company that makes a sale to a customer outside of its border regardless of how the sale was made.  No longer is is necessary for a company to have “nexus” in the state before it is required to collect the tax.  There is no de minimis level of sales in a state that would not require the company to collect the tax.

Any business with more than a total of  $1 million in “remote sales” is impacted by this Bill.  Given the huge disparity in state laws compliance with these rules could be crippling for small businesses.

Even if your business does not make Internet sales, you are likely to be impacted by this Act.  Stay alert to its progress through Congress.
Ned Lenhart, CPA
Interstate Tax Strategies

The US Senate recently re-introduced the Marketplace Fairness Act.  This is the latest version of the federal legislation necessary to allow states to force out-of-state vendors to collect sales tax on remote sales of property and services.  This bill addresses sales by retailers with over $1 million in sales.  While the intention of this bill may be to capture the sales of books, electronics, and other consumer items, the reach could be far more intrusive to businesses.   http://www.enzi.senate.gov/public/index.cfm/news-releases?ContentRecord_id=27ed84d0-5ab2-4054-afdc-423a8bd36699

In a nutshell, here are some of the highlights if the bill is passed:

1. Allow states to require and enforce collection of sales tax on any remote sale delivered to state even if the seller does not have nexus with the state.
2. Requires state to have singe return for remote sellers to use
3. Fosters a market for Certified Software Providers to serve as the primary sales tax collection agency for the state under the mechanism
4. Uses the Streamlined Sales Tax Project (SSTP) as the structure for the Act.
5. Does not “deem” companies to have nexus in the state where the sale is made.  Just allows states to enforce the sales tax collection absent commerce clause nexus.

From reading all the press on this issue, the intended focus seems to be collecting sales tax from individuals who purchase items from EBay, Amazon, Overstock, and the thousands of other sites that sell books, electronics, clothing, and household goods.  But as the bill is written, I believe the law could reach thousands of other businesses who may not realize it applies to them.  As written, this law gives a state the power to force collection of sales tax by any out-of-state business who delivers a product or service to a customer in their state.  Here are a few scenarios that might catch some businesses off guard:

Mailing houses/printers: When a printer produces and mails advertising and other direct mail they normally only need to collect sales tax on the cost of the items delivered to the state where they have nexus or production facilities.  Under the Marketplace Fairness Act these companies could end up collecting sales tax on the cost of mailings delivered to every state where they are directed.  Given the variability in tax bases that apply to this industry, this could be a nightmare.

Software sales: the sales and delivery of most computer software can now be done efficiently through electronic download.   About 1/2 of the states tax software delivered electronically and the maintenance agreements that go along with these licenses.  Most of the retailers can operate nicely without traveling to other states or creating nexus.  Under the Marketplace Fairness Act, their sales of downloaded software would now be sales on which they would need to collect tax when delivered to states that tax this product.   Maintenance agreements would also be taxable.  This may not happen immediately, but as more states adopt the SSTP provisions, this might become a reality over time.

Software as a Service: Many states tax SaaS, data processing, and information services.  Many times these services can be sold without creating nexus in the destination state.  Under the Marketplace Fairness Act, companies that provide these services would be subject to tax collection obligations when these services are delivered to states that tax the service.  This can be a very challenging taxation exercise because the seller may not always know where the services is being consumed and the service location is often different than the “bill to” location.  Again, this will depend on the states involved.  Over time, there could be a great expansion of the states that tax these services as a way to capture revenue from out-of-state businesses.

As this bill moves through Congress, it may change or get stalled.  As written, the Bill has a far reaching impact which can create a lot of work and expense for retailers of all sizes and types.  For companies that fail to recognize their responsibility, the audit efforts by the states will likely increase in intensity.

This Bill, or one like it, may actually pass this year.  If that happens, watch out!!

https://www.salestaxstrategies.com/

Ned Lenhart, CPA
President

During the process of closing a registration for a client in the state of Washington I found the attached document dor.wa.gov/Docs/Pubs/SpecialNotices/2010/SN_10_TrailingNexus.pdf that outlines the states view on companies that wish to close their account.

This is one of the few published policies on the “trailing nexus” theory that I’ve mentioned before.  Under this policy, the state of Washington requires out of state retailers who stop having nexus with the state must continue to file returns for 4 years under this trailing nexus theory.  This theory holds that the nexus created by your business has a lingering affect in terms of generating sales and creating revenue for your company.  As such, the state of Washington wants sales tax to be collected on any taxable transaction even though you don’t have direct nexus.

Many states take this position but this is one of the few I have seen that actually has a published policy on the matter.

Ned Lenhart
President

On December 28, 2012 the Tennessee DOR issued Ruling 12-110 attempting to clarify its rule on the taxation of gold and silver bullion.  I’m not sure that it hit the mark, though.

TN, like most states, does not tax currency transactions when they are completed based on the explicit value of the coin or currency.  When the exchange or the price is based on the intrinsic value of the item then it is a taxable sales of personal property.  The most compelling evidence that an item is being sold based on “intrinsic” value is when the price varies according to weight and not its value established by the government.  As I read this opinion, then, a $20 gold coin sold for $1800 because of its weight would be considered a taxable transaction subject to 9.25% TN Sales tax.  http://www.tn.gov/attorneygeneral/op/2012/op12-110.pdf

Other states, like Georgia, address this in a rule that excludes gold and silver transactions unless they are in the form of jewelry or art or other “objects”.  However, given this ruling it may open the door for other states to reexamine their historical practices on the taxation of these types of transactions.  I think most of these rules were written when the price of gold and silver was much lower and maybe closer in price to the face value of the coin being exchanged.

https://www.salestaxstrategies.com/firm-overview.html

Last week it was reported that the Governors of Nebraska and Louisiana would start movements to eliminate their state’s individual and corporate income taxes and adopted a broader based sales tax.  I’ve been writing about this for the past several years.  These states would join other Southern states such as TN, FL, and TX that rely heavily on sales tax as their primary source of revenue.  TN, FL, and TX do have corporate level income taxes but no individual income tax.

Making such a transition could be tough to achieve given the tax credits and other incentives that are built into the income tax codes.  Both Governors talked about eliminating sales tax exemptions as a way to broaden the base to make up for the lost income tax revenue.  There are certainly some exemptions that could be eliminated, but others serve a very real economic development purposes and would likely be retained.

I suspect that these two states will not be the first during 2013 to make these types of announcements.  When states do this, it puts a lot more pressure on the sales tax collections of these states.  That means more audits and tougher enforcement rules.  https://www.salestaxstrategies.com/white-papers/whitepaper-Effective-State-Sales-Tax-System.pdf

Ned Lenhart, CPA

The Georgia Department of Revenue has published revisions to Rule 560-12-2-.64 to explain interpretation of the new statute that exempts energy used by manufacturers.

In this rule, the DOR explains that the energy exemption applies energy use “for any purpose at a manufacturing plant” including:

1. machinery operations
2. create conditions necessary for the manufacture of property
3. Perform an actual part of the manufacture for personal property
4. administrative or other ancillary activities that are located at the manufacturing plant
5. Is related to operations that convey, transport, handle or store raw materials or finished goods
6. for heating, cooling, ventilation, illumination, fire safety, and other comfort and convenience purposes.

This includes electricity, water, natural gas, propane, heating oil, wood, and others forms of fuel

This exemption is phased in over a 4 year period of time beginning January 1, 2013.

https://www.salestaxstrategies.com/index.html

Ned Lenhart,CPA
President

On August 28th, the PA Department of Revenue ruled that the presence of an instate affiliates will not create nexus for the out-of-state seller unless there is a commission paid by the out-of-state seller for the services performed by the in-state affiliate.  This is especially true where the commission is based as a percentage of sales.   While the state is trying to tie this “commission based” nexus rule to the recently passed Amazon laws in other states, the truth of the matter is that any commission based agent will create nexus for the out of state principal.  

There may be a lot of internet sellers who are only monitoring the development of the “Amazon” legislation and are not really paying attention to the traditional nexus rules.  These would include the presence of property in a state.  In many situations, the out-of-state e-tailers use Amazon and other “fulfillment” centers for delivery of goods that are ordered.  In these cases, the e-tailer may actually ship property to the fulfillment center and then pay a fee for fulfillment.  The presence of this property in the state will, in most cases, create nexus in most state and create a sales tax collection responsibility for all the sales shipped to that state by the e-tailer regardless where they were shipped from.

Ned Lenhart, CPA
President

In the September edition of the Journal of Accountancy, the section entitled “From the Tax Adviser” ventures into the world of sales tax and the concept of successor liability for income and franchise tax.  I’ll confess that this was new to me.

In his article, the Editor notes that Illinois and Pennsylvania have provisions that the buyer of assets can succeed to the income tax liabilities of the seller when a “major part” of the business is purchased.  To avoid this liability, the buyer must notify the state that the bulk-sale is occurring. 

These provisions sound similar to the sales tax bulk-sale notifications which are mostly ignored in every M&A deal I’ve ever been involved with.  Rather than go through the pain of getting tax clearances from the states, most sellers and buyers just work out a hold-back or escrow of the taxes due.  Speaking of sales tax, the purchase of assets will make the buyer the successor to the seller’s known and unknown sales tax liability.  If due diligence is not conducted, these issues can be significant.

Ned Lenhart, CPA
President