Sales tax is a complex topic. You have heard and read about sales tax nexus and the basics of collecting and remitting sales tax. But even when you understand the complexity and nuances of those topics, you still need to have a deeper understanding of certain industries.
In these three industries, sales tax compliance is even more challenging and perplexing than usual sales tax topics.
Retailers can have it tough. First of all, they are always innovating, bringing new and differentiated products to market. Determining how these items might be taxed across the country without any established precedent in existing laws or regulations can be rough. For example, are aqua sport shoes considered clothing, sports and recreational equipment, or something else? While we are at it, what about wetsuits or waders?
In addition, many retailers are also opening and expanding ecommerce channels. While eCommerce can open up distant markets and bring in new customers, in a world where economic nexus standards prevail, it also exposes retail sellers to sales tax compliance obligations in an ever-growing number of states. Retailers also have to cope with sales tax holidays. In 2021, there were 30 separate holidays dispersed amongst 19 states, with no two holidays being the same.
Suppliers to retailers must confront the thorny issue of drop shipments. Most states hold that a third-party drop shipper won't be responsible to collect and remit sales tax when making a resale sale into a state where the retailer buyer has a customer but cannot, themselves, provide an in-state resale certificate. However, a solid handful of states hold that the wholesaler must collect tax. In California, the wholesaler either needs to collect tax on the final retail selling price (a transaction to which they are not a party) or collect tax on the wholesale price plus a deemed markup of 10%.
Direct selling, multi-level marketing
Direct sellers and multi-level marketing (MLM) companies can also find themselves in a precarious tax compliance spot. Organizations can adopt the classic “resale” model, where the parent direct-selling company sells inventory to their independent business owners. Or they may utilize the more modern “referral” model, where independent business owners direct customers to buy from the parent via a replicated website. Either way, the basic premise of their sales model means they all have massive physical nexus footprints, which in turn brings nationwide, if not worldwide, tax compliance responsibilities.
Similar to retail, the challenge of new and novel products exists here, too. Many direct selling companies offer health and wellness products that straddle the very confusing lines between food, drugs, candy, soft drinks and dietary supplements. Herbal tea bags, for example, are generally taxed as food but if the box carries a “supplement facts” label, then the item may be considered a dietary supplement.
If your client sells software or other digital goods, sales tax can also be quite tricky. As technology has evolved from premise software to electronic downloads to hosted/cloud/SaaS solutions, states have consistently been one step behind in keeping their sales tax statutes and regulations up to date. Even today, states like Louisiana have extremely challenging rules to decipher surrounding the tax treatment of SaaS software. In several states, premises, SaaS and downloaded software can all be taxed differently. While every state taxes “canned” software provided on tangible media, 11 states still don’t tax downloaded software and 24 don’t tax software in the cloud. Some states, like the Commonwealth of Massachusetts, have attempted to “future proof” their statues by taxing all prewritten computer software, “regardless of the method of delivery.”
The complexity deepens when considering the tax treatment of digital products such as movies, music, books and newspapers. The clear trend across the country is for states to tax digital property identically to their tangible equivalents, meaning if a paper book, magazine or newspaper is taxable, then the digital version should be taxed as well. However, this trend is by no means an absolute rule. For example, while every state with a sales tax will tax books (except for maybe certain required schoolbooks), 16 states still don't tax digital books. Maryland is an example of a state that didn’t tax digital property but recently changed its law to broadly tax both digital products and electronic/SaaS software.
Subscription streaming services add an even deeper level of complexity. While one might logically expect states to treat digital products (e.g., a downloaded movie) and streaming services identically, we know of two states (Kansas and West Virginia) that don't tax digital products, but claim to tax subscription streaming services.
Regardless of the industries in which your clients operate, it’s important to remain vigilant and current with the latest sales tax requirements. Working with the right software partner can help you account for all of these nuances and complexities.