Sales tax is full of complexities. There are myriad complications that require much consideration and careful examination. Some items to consider are how, where and why you would pay sales tax. These may seem like simple questions, but the answers can be very complex and complicated.
In this article, we will examine some of the circumstances where sales tax becomes tricky. As always, we recommend that your best bet is to contract with a Certified Service Provider to assist you in the setup, collection, remittance and maintenance of sales tax liability.
Sales tax is complicated enough at the state level, but when you add local jurisdictions, also known as ‘home rule’ jurisdictions, you have entered a new level of complexity. Some states allow for home rule in which localities pass laws for self-governance. Often these laws include setting sales tax. Home rule has been around forever, but the Wayfair decision set in motion the ability for home rule jurisdictions to collect sales tax from remote sellers that have established economic nexus in the state. We will delve into this topic in more detail in another posting.
Origin vs Destination
Questions can arise when a business needs to determine where and to whom they owe sales tax. This is answered with sourcing as a determinant. Retailers know that most states follow sourcing rules based on the destination of a sale. They must pay the sales tax that is owed at the final destination of the product when shipping into a state. But there are a few origin-based states; Texas, Ohio and Pennsylvania are the major ones. California is a hybrid origin state where some transactions are origin-based, but others are destination-based.
Voluntary Disclosure Agreements (VDA)
A VDA can help shield a company from sales tax obligations/exposure. Most states have some sort of VDA, which provides businesses with a way to voluntarily report that they have past sales tax obligations/exposure in exchange for avoiding penalties typically associated with a failure to properly remit these taxes. Generally, a VDA also includes a limited look-back period, often enabling companies to significantly reduce their tax burden. To use a VDA, businesses may not already be registered with the state and they cannot have been contacted about an audit of their sales tax payment.
Resale Certificates are typically exemption certificates obtained by businesses that buy products for resale to another business or to consumers. For example, when you go to an electronics store to purchase a television, you pay sales tax at the point of sale. The electronics store retailer will have obtained a resale certificate allowing them to purchase inventory from the manufacturer without paying sales tax. Another example would be when accountants or bookkeepers sell software to their clients. A resale certificate will allow the accounting professional to pass the sales tax on to their clients that buy the software.
Bear in mind that when someone buys from you and claims that it is for resale, you must exercise good faith. This includes obtaining and reviewing the certificate for information such as a sales tax ID number, date, signature and reason for claiming the exemption. Should a business ever be audited, these will be part of the audit request and failure to provide proper documentation can result in interest and penalties, on top of any tax owed.
In years past, software was sold on disks and the programs were loaded on your local computer. Fast forward a few years and software no longer came on a disk, but as a download from a website. Many businesses buy software in this manner, having a license to download and use the product that they bought for as long as they like.
A more recent development is the entry of Software-as-a-Service (SaaS) into the marketplace. In this sales model, consumers of software are given access to an application that is owned, operated and maintained by the SaaS provider. Typically, this is done through a subscription model, where the end-user pays a monthly or annual fee to maintain access to said software. So, how is sales tax paid on SaaS? Put simply, some states continue to collect sales tax on SaaS in the same manner as software purchased and downloaded online. Others see it as a service and tax it according to rules laid out for services, as opposed to products.
Sales Tax Statute of Limitations
Businesses that have not been remitting sales tax properly will often find themselves in hot water when an audit comes around. At that point, the question changes. How long can you be held liable for back taxes? The amount of time varies from state to state, but if you are being audited by a state with a 3-year statute of limitations, then generally the auditor can look back a maximum of 3 years. So am I in the clear if my tax liability goes back more than 3 years? Maybe. Some states allow for an increased number years in the look-back period if the business’ tax base is misrepresented. If tax evasion, fraud, or gross negligence is found, then the statute will generally not be in effect and the state may look back for more years.
Sales taxes at the state and local levels are often cumbersome and complex. Given the level of complexity of collecting and remitting sales tax, it is recommended that both retail and service businesses subject to state sales tax employ a Certified Service Provider to verify that state and local sales taxes, where applicable, are collected and remitted properly.
As always, tax compliance can be done right, if you know the facts. And remember, you can be proud to pay taxes in these great states but you can be just as proud for half the amount.