State & Local Tax Blog

Sales Tax Rates Isn’t Rocket Science, It’s Harder

For some businesses, sales tax collection is not a big deal. If your business operates out of a single physical storefront and you don’t ship or deliver the items you sell, and if you sell straightforward stuff (not food, candy or mixed goods and services) then sales tax is not complicated. It may be a pain and involve another form and process each month, but it’s relatively easy. You simply charge the state and local tax applicable to the location where your storefront is located.

On the other hand, if you don’t fall into that narrow classification, sales tax can be a complicated nightmare. Setting aside for the moment having to figure out whether the different items you sell are even taxable and assuming you have that down, just knowing what rate(s) to charge can be the biggest problems companies face.

Suppose for example, you deliver items you sell yourself, or you sell your products online.

Sales tax is usually based on the destination of the item sold. In some states, however, some of the local taxes are based on where the item was shipped from and others are based on where the item is shipped to. Once you start selling at multiple locations, you’ve moved into a completely new level of required sales tax sophistication. What tax do you charge now? Does it mean you charge them the same sales taxes as those coming into your store? The answer to that is: it depends.

Nexus – It’s not Shampoo

If your business has a physical presence in a state, such as a store, office or warehouse, you must collect applicable state and local sales tax from your customers. If you do not have a presence in a particular state, you are not required to collect sales taxes. In legal terms, this physical presence is known as a “nexus.” Each state defines nexus differently, but all agree that if you have a store or office of some sort, a nexus exists. If you are uncertain, whether or not your business qualifies as a physical presence, contact Peisner Johnson and Company, we can help. 

It is generally true that if you do not have a physical presence in a state, you are not required to collect sales taxes from customers in that state but states are becoming pretty aggressive in asserting nexus. For example, New York has taken the position that Amazon.com has nexus in NY. NY concedes that Amazon.com has no employees or physical property in the state, but asserts that by virtue of links to Amazon’s website on unrelated individuals’ computers in the state, Amazon.com has nexus in NY. So if NY is successful in nailing Amazon.com with nexus simply because an unrelated blogger sells a book through a link to Amazon.com, then its Katie bar the doors. Every other state will see that as a huge opportunity. There won’t be any need for the Streamlined Sales Tax Project then, and simplification as a goal will be out. Needless to say all sales tax eyes are on this Amazon.com situation.

7,500 Taxing Jurisdictions

This physical presence rule is based on a 1992 Supreme Court ruling (Quill v. North Dakota, 504 U.S. 298, (1992)) in which the justices ruled that states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state. The Court reasoned that forcing sellers to comply with over 7,500 tax jurisdictions was too complex for sellers to manage, and would put a strain on interstate commerce. Of course the states argue that with the advances in technology, there is no unconstitutional burden on interstate commerce. Taxpayers might have to fall back to an argument of no “due process”, but that argument is not such a powerful one anymore given recent court rulings. So, that’s about where we stand these days when it comes to having to charge sales tax. In a state of flux. One thing is certain though, if you have physical presence in a jurisdiction, you have a tax collection responsibility.

How Do We Stay on Top of All These Rates?

Many of our clients find themselves in a position where they sell in many jurisdictions where they are registered to collect tax. They want to collect the right amount of tax but keeping up to date on those rates has proven to be very time consuming and expensive. If you can justify the cost, you can subscribe to a number of services that will tie into your financial software and always have the right rate at your fingertips. Such a system costs about $15K to $20K per year for the license plus 5 to 10 times that amount sometimes to get it setup in the first place. So you could spend $150K in the first year just to get the right rates. In some cases, that cost is justified. If all you need is a rate table that you would refer to and maybe just upload the table to your billing software and the billing software can accept such a table, you could get by with a much cheaper solution. Just a rate table that is updated each month, will run you about $5,000 per year. There are other solutions that fall somewhere in the middle of these two that might work for you depending on your particular facts and circumstances.

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