Category Archives for Nexus, Registrations, Voluntary Disclosures

Voluntarily Disclosing Your Sales Tax: Is that a good idea?

Woman suffering from headache because of sales taxes

Voluntary disclosure agreements (VDAs) are a useful way to mitigate past liabilities while becoming compliant for sales tax purposes. Nearly every state offers a VDA program for sales tax, and if you qualify and take advantage, it could save quite the headache. One of the challenges is that VDA programs vary widely by state, and keeping up with the changes and variations between the states is a handful.

In the state of Texas for example, a VDA will waive all penalties and interest associated with any back taxes you may owe, and they will limit themselves to a four-year look-back period.  Hawaii, however, will waive penalties but will require a 10-year look-back period and no interest waiver.

Oklahoma offers a VDA program with a three-year look-back, and the department will also grant a full penalty waiver and will reduce the interest by half. Compare that with the state of Iowa, whose look-back period is dependent on the amount of time your business has been operating in the state and can be up to five years, while offering a penalty waiver with no interest waiver.

In addition to what they offer, states vary in their requirements to qualify for a VDA. The state of California for example, will only enter into a VDA with a taxpayer if they have not been contacted by the state or any of its offices, and the taxpayer cannot be under audit.

Contrast this position with Maine’s VDA, where taxpayers who have been contacted by the state are not automatically disqualified from the program unless they are under a criminal investigation.

Because of the variations between states, tracking down this information would be incredibly time consuming. To save you from the hassle we have composed a chart detailing the differences between the state VDA programs. This is not meant to be exhaustive, but it can give you some helpful information on how best to proceed in your situation. If you would like a copy of the chart, just let click here.

Is Your New Year’s Resolution to Collect Sales Taxes in 2019?

It’s 2019, and maybe it’s time to collect sales taxes?

Want to Start Collecting Sales Tax at the First of the Year? You Can Do It! Here are the 5 Steps You Need to Take Now.

Sales taxes can seem like an overwhelming and confusing task to take on yourself. At Peisner Johnson we’ve been doing this for the last 25 years and have seen first hand just how complicated it has become.  Now with the recent decision by the Supreme Court (Wayfair) it, it appears that many companies are deciding to just bite the bullet and start collecting taxes. And it seems like they all want to make it effective January 1, 2019. In our podcastthis week, we discussed what businesses should do right away if you want to start collecting taxes on January 1. You can check out the podcast here.

Here’s an executive summary of the 5 Steps along with a list of some of the questions we answered during the podcast:

Step #1: Start With Nexus And Taxability. Figure out where you have nexus first and consider if what you sell is even taxable.

  • How do I determine my nexus footprint?
  • Do I need to get registered everywhere?
  • At what point can states force you to register?
  • Can I register for sales tax myself?
  • What can give me nexus?
  • What if I have been doing business in a state for a long time without having a sales tax license?
  • How do I know if my product is taxable?
  • What should I do if I have significant sales tax exposure in a state?

Step #2: Evaluate Your Taxing System (POS, Website, Amazon, Walmart.com, etc)

  • What do I do to make sure my shopping cart software is set up for sales tax?
  • How to make sure my Amazon seller’s account is set up correctly for sales tax?
  • Do I need to get some developers involved at this stage?

Step #3: Get Registered. States require you to register and/or obtain a license from them before you can collect tax on their behalf.

Step #4: Turn On The Tax. You need to go into your settings in all of your sales channels and turn the tax collection function on to automatically start assessing tax on your sales invoices.

  • How do I start collecting the sales tax?
  • How do I avoid getting in trouble with sales tax in all the states?
  • Can I start collecting the sales tax even if I haven’t gotten my sales tax registration yet?

Step #5: File the Returns. Once you figured out where to collect the tax and you’ve collected the money, then the time will come when you actually fill out the returns and remit the funds. It may be annually, quarterly, or monthly.

  • How often do I need to file sales tax returns?
  • Can I file my own sales tax returns?

Will Amazon Collect Your State Taxes For You As An FBA Seller?

Maybe They Will… Someday. But Not Today, or Tomorrow, or Yesterday.

South Carolina has announced that they will pursue Amazon directly to force Amazon to collect sales taxes on behalf of Amazon sellers on sales to South Carolina customers. If all states adopted this policy and Amazon simply agreed with it today, it sure would make things easier for Amazon sellers. At least in theory that sounds pretty good. However, there are at least 2 major realities that FBA sellers must face here. First, so far only one or two states have indicated that they may take this approach. Second, and not surprisingly, Amazon has stated that the assessment is without merit and that they will defend themselves vigorously in this matter.

Should Amazon be required by the states to collect sales tax for their FBA sellers? That is an interesting question for theorists and advisors to debate. Nero fiddled while Rome burned. Theorists and pundits can spout their arguments and their theories, but what happens while FBA sellers are getting burned by state tax auditors?

Here’s what you need to know if you sell online through Amazon and utilize FBA:

  •  I feel your pain. I have been an Amazon seller for years and the thought of having to collect sales taxes in all of these different states is PAINFUL. We do understand the frustration. After all, why wont states just let you start sending them money? Why do they make it so difficult to send them money? Why do they make you pay taxes from the past? Or, better yet, why don’t they just have Amazon collect it for you? All of these questions and more have run through my head too. Maybe I should just wait until states agree to force Amazon to collect taxes for me? It’s tempting, I know. But I have to weigh that thought against the thought of paying a sales tax assessment in just one of these states, let alone 5 or 25. That’s not to mention the cost of hiring an attorney to fight the one or 25 states that audit me. So, I take a pragmatic and conservative approach to this situation.
  •  The sales tax auditors don’t care about the theories — they care about getting money from taxpayers. They really like getting money from out-of- state sellers, especially if it’s easy. Going after online sellers is easy.
  •  States do not act together in a block. Even if it could be successfully argued in one state’s courts that Amazon should be forced to collect the sales tax in that one state, there is nothing that requires another state to change the approach they use in their state. Unless Congress were to pass some kind of specific sales tax law forcing Amazon to collect the taxes, or the Supreme Court were to rule on this issue specifically, this is a battle that would have to be won, state-by- state. You might win in some, but lose in others. In the states where you win, is the decision applied retroactively? What do you do in the states where you lose? This seems like an approach where the only guaranteed winners are the attorneys.
  •  Nothing happens quickly when it comes to state governments and taxation. The same can be said for Congress passing a law like this or the Supreme Court taking a case like this. Again, the theory that Amazon should collect the taxes on behalf of FBA Sellers is nothing new, and it has merit, to be sure. We have always thought that states could take this approach. But unfortunately, that’s not how things are today. Maybe in the next 3 to 5 years, some states will adopt this approach and Amazon will stop fighting it and maybe sales taxes will be easier in some states. Maybe someday, but probably not. I hate to be the bearer of bad news on this, but I’d hate for you to be audited and get even worse news from an auditor.
  •  States have very little incentive to negotiate with online sellers. They really don’t care about individual business owners who have no voting power in their state. Sorry, but that’s how they are. They have the law of the land in their corner. The law of the land is that inventory and independent agents acting in your behalf create nexus. That’s really all they care about. If they find you, then they will audit you. I know that I get 1-3 contacts a day from people who have been found by either WA, CA, PA and now AZ. That’s what’s really happening today. They go back 7 years and assess you for the tax your customers should have paid, plus penalty and interest. The theory that Amazon should have collected this tax means nothing to them.
  •  The new amnesty program is NOT everything FBA sellers may have been hoping for, but it is actually better than we expected. I think it is a great tool in at least the 8 FBA states where no back tax is owed and in some instances perhaps an additional two FBA states that are requiring back taxes. (For the general FBA seller I would ignore the rest of the states participating in the MTC amnesty as they are either not FBA states or there is a better option available.) I never thought the program would come together and I certainly didn’t expect states like TX and FL offering total amnesty. However I am glad this program is available for those sellers that qualify.

Rather than collecting tax for you, we believe it more likely that Amazon will begin forcing sellers to prove they are registered to collect tax in either certain states or all states. This is the policy Amazon adopted when the United Kingdom passed laws stating that if the marketplace sellers do not collect taxes then the marketplace is responsible for collecting the taxes. So rather than begin collecting taxes on behalf of FBA sellers in the UK, Amazon sent a letter to all of it’s third- party sellers saying if they did not submit proof that they were registered to collect the UK value added tax (VAT) by October 27th 2017, then those sellers would be prohibited shipping inventory to the EU markets.

The states of MN and WA have passed recent legislation concerning marketplaces. Contrary to what is being said about these statutes, sellers are not relieved of their responsibility to collect and remit tax. MN actually says that the marketplace is responsible for collecting the tax, unless the retailer is registered, and that the marketplace can require the retailer to be registered as a condition of doing business. Rather than collecting the tax in MN we believe Amazon will require registration of their sellers as they have done in the UK.

In WA we see a different twist that allows Amazon not to collect the tax for FBA sellers. Amazon does not have to collect the tax for sellers who have a physical presence in WA. Since WA considers having inventory in an Amazon warehouse to be nexus creating, most FBA sellers will have a physical presence in WA and will therefore be required to collect the tax in WA.

Although we can’t predict the future, we expect to see more states follow the MN & WA model rather than taking the approach that SC has. It is the path of least resistance for the states and states are more likely to get the revenue they believe they are losing without having protracted legal battles.

As a firm, we have focused exclusively on state taxes, primarily sales tax since our founding 25 years ago. During that time, we have helped thousands of companies from all around the world with their US sales taxes. We learned long ago that the time to be aggressive is when you are being audited. The time to be conservative is when you are doing tax planning. The risk of taking a position contrary to the state’s position is much too expensive as many FBA sellers are currently finding out to their dismay. The amnesty is a tool for planning how to move forward.

We take a pragmatic view and try to limit our client’s exposure by using the tools at hand such as the amnesty. Like it or not states are finding sellers in ever growing numbers. Trying to change the system may be laudable, but it can be a very long and expensive process with only the attorneys, and not you, a guaranteed winner.

Theories and opinions will not protect you from these states, but the amnesty program, if used correctly can.


Statute of Limitations for Sales & Use Tax

Don’t miss the forest

Statutes of limitations are laws that restrict the maximum time after an event that legal proceedings may be initiated. Once the period of time specified in a statute of limitation passes, a claim can no longer be validly filed. State tax laws have statutes of limitations also. As time passes, earlier tax periods “expire” and companies cannot be audited for those past periods. Of course, neither can companies recover overpaid taxes in expired periods.

Most states’ laws provide for a limitations period for sales/use tax assessments and for income/franchise tax assessments. In some states, there are different limitations periods for different types of taxes in the same state. Also, in most states they have special provisions for companies who either materially misstate amounts on their returns, or who haven’t filed at all. In most cases, the limitations period is expanded, and in some cases there is no statute of limitations. We will focus on sale/use tax limitations in this article.

For sales/use tax purposes, most states’ limitations periods go back between 3 or 4 years. A number of states have a different limitations period for assessments vs. refunds. Perhaps not surprisingly, where there is a different period for refunds, it is usually less.

If you’d like to see the statute of limitations for sales/use tax assessments, you’ve come to right place. We have an [updated] chart for that.

When reviewing the chart, it is important to note that the three – four year assessment periods only apply to those companies who have registered and filed returns. If you have not registered and filed returns, these limitations do not apply and in theory the state can go back to the day you started doing business, although they generally only go back seven to ten years.

I hope this chart is helpful. We also can produce a chart of income/franchise tax and a chart for refunds, if you’d like. If you have any questions, please give us a call.

About Peisner Johnson and Company, LLP

We Have a Chart for That — You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.

What’s the Best Way to Get Answers to Your State Tax Questions?

CALL THE STATE? — This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it’s not that people at the state don’t know what they’re talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you’re protected in the event of a future audit.

But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a “form over substance” type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don’t get me wrong, I’m not saying there’s some sort of trick or code language that you must conform to or else, I’m just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.

Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.

GOOGLE IT? — With so much information available on the Internet these days, you can Google your question and chances are, you’ll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?

GET A RULING? — What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point — it’s just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you’re going to get in the ruling. It’s not always possible to do, but you don’t want bad precedent, if you can help it.

ASK THE EXPERTS? — Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do — We Solve State Tax Problems.

And, we don’t always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.

Sometimes we just flat know the answer to a question you have. We always tell our clients: “If you have a question, just call us or email us. If we can answer you off the top of our heads, we’re not going to charge you. If we need to do some research, we’ll tell you before we do the work and seek your approval before we do it.” You can expect no surprise invoices from us.

So What Questions Do You Have?

Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, “it depends!” And that may sound like a cop out, but it really does depend. The answer depends on which state we’re talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.

CAUTION ON CHARTS –-A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it’s still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state’s own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We’re here to help, give us a call.

Top 5 Questions From Online Sellers About Sales Tax

These are exciting times for online sellers. There is tons of opportunity everywhere, but with opportunities come challenges. In reality, online sellers face a very difficult environment. Competition is fierce and change is constant. Just staying on top of the ever changing technology and platforms is a challenge, not to mention keeping up with pricing pressure from competitors and marketing is a whole other can of worms. How do you drive customers to your website and keep them coming back?

And then on top of all that, there’s the issue of sales tax. It can be daunting and confusing. And it’s not like taxes help your business be successful. Quite the opposite, actually. If you fail to stay on top of the sales tax issues, it can cause your business to fail. You may do everything (all the hard things, like marketing, merchandising, fulfillment) just right, but if you mess up the sales tax thing, it could kill your business. But, have no fear, we are here to make sales tax the least of your concerns.

Here are the Top 5 questions we get from online sellers:

1. Do I Really Have Nexus??

First, what’s nexus and why do I care? A good definition of nexus is, the link or connection you must have, before a state can require you to collect or pay its taxes. For sales tax purposes this link must have a physical component. However, you may be surprised at what the states and in some cases the United States Supreme Court, consider to be physical presence.

What if you use Fulfillment by Amazon — Does a little inventory in another state really give you nexus?  The answer is yes. See below.

It is important to note that there is no national rule, but rather each state has statutes, rules, regulations or guidance as to what creates nexus in their state. There are many activities which the  states all agree create nexus and many where the states have differing opinions. For the purposes of this article, we can not possibly address all the activities in all of the states. However, we have a number of great webinars , white papers and charts that go into detail about nexus, important court cases involving nexus and numerous activities that states consider to be nexus creating. We have a list of the Top 10 nexus creating activities here.

For online sellers, and especially for Amazon FBA sellers, the activity that usually creates the most nexus problems is having inventory in a state. When you ship your inventory to Amazon, you may be shipping your product to Amazon in one state, but Amazon generally has a clause in their agreements where they can move your inventory to any of their warehouses. Since Amazon currently has warehouses in 16 states from where they ship, your inventory could actually be in 16 different states. This means you could actually have nexus in all 16 of those states. The good news is that two of those states, NH and DE do not have a sales tax, so we are actually looking at potentially 14 states for sales tax nexus.

One state that many FBA sellers forget about is their home state. You probably know already that that having employees in a state is a nexus creating activity. Well that includes you! So if you live in a state where there is not an Amazon warehouse currently, you could be looking at having nexus in potentially 15 states. If you need help figuring out where you have nexus we can help you work through it.

2. Ok, if I have nexus, As a practical matter, at what point do I start collecting tax?

Just because you have nexus in a state, doesn’t mean you should just panic. You should be concerned, but do some analysis of your situation to determine if and when you should start collecting the tax from your customer. Based mostly on the volume of sales you make in a given state, it may not be worth it to collect the minimal taxes in that state. This is entirely possible in some states where you sell. On the other hand, when you consider all the costs of not collecting the tax, you may find that it’s actually cheaper to start now.  Here are some items to consider:

  1. Materiality — Is the level of sales into that state enough to warrant a concern about sales tax? We have a good article that discusses materiality in more detail.
  2. Past Exposure — States can go back to when you first had nexus in that state and assess you the tax you should have collected from your customers. If you’ve been in a state for many years, this has to factor into your analysis.
  3. Penalties and Interest — Typically states will assess at least a 10% penalty on late payments. Interest varies all over the board, but it accrues from day one, so it’s not unusual for interest to become very significant.
  4. Cost of Compliance — In your analysis of when you should start collecting tax, factor in how much it will cost each month to calculate the tax due on your customer invoices and then how much to fill out the monthly/quarterly/annual forms and remit the tax. The cost of this “compliance” has come down tremendously over the years, but it’s still not free.
  5. Audit Exposure — If you sell to large businesses, chances are your invoices will be seen by some auditor somewhere. If you make small sales to only individuals, the chance you will be audited for sales tax go down significantly.
  6. Remember the Biggest Tragedy in Sales Tax Be conservative about sales tax collection. Don’t become a victim.

3. I Have Nexus. It’s Material. How Do I Get Registered?

Great question! It’s actually fairly easy to get registered to collect sales tax in a state. It’s just tedious and time consuming. You can use option one below if you have the time and patience to do it yourself, or option two if you want to hire someone like us to do it for you.

  1. You can go to each state’s Department of revenue or its equivalent to find out how to get registered. The easiest way to find correct information is to Google the state DOR with the words sales tax registration and you’ll get what you’re looking for. Some states have an online registration process and some do not. In some states you may want to choose a paper registration over the online registration, because the online registration may require additional potentially unnecessary registrations. An example of an additional registration that may not be needed is a Secretary of State registration.  
  2. You can hire someone, like PJCo to do the filings for you. Our process involves you telling us where you want to be registered, you providing us with some required information and us handling the rest. Our experience helps streamline the process and provides for a less stressful more efficient process.

4. Which Taxes do I Collect and at What Rate (just the State rate or do I need to collect the local taxes too)?

This is a common question. In many states, if you just Google “what is the sales tax rate for X state?” The answer you get sometimes is just the state portion of the total. For example the state rate in Texas is 6.25%. But if that’s all you charged in Texas, you’d be on the hook for up to 2% local tax on everything you sell. Other states just have one single rate in the whole state or at least most of the state. Some states administer both the local and state taxes at the state level. Other states allow local cities and/or counties to administer the local taxes. Generally speaking, if you charge any tax at all, and you are shipping to another state, you charge the full state and local tax rate based on the “ship-to” location. If you are shipping from a location inside a state to another location in that state, you may have an obligation to charge tax based on the “ship-from” location. Here’s a link to a great tool for determining the rate at a particular location.

5. How do I Get the Money to the State?

So many online sellers seem to get stuck here, or they’re making some invalid assumptions. It seems like many online sellers seem to think that somehow someone else is paying the tax over to the state governments. Amazon FBA is a really great service. Unfortunately, they end up creating nexus for online sellers who have inventory in all of the states, but once you configure the seller’s dashboard and indicate what states you want to collect tax in, then it’s pretty automatic. Amazon starts adding tax to all shipments to those states. Easy. But don’t assume that Amazon sends those taxes to the states. They don’t. They actually send it to you and it’s up to you to remit it.

You remit it by filling out the appropriate forms each month or each quarter or even annually, and then sending in the indicated tax on that form. Easy, in theory. As a practical matter it’s quite the bother. Still, if you have the time and inclination, it’s something you can do on your own. If not, we suggest you talk to us about how we can take over that process for you and shockingly low prices.

Summary

Those are the top 5 questions we seem to get from online sellers. The bottom line is that it’s much easier and ultimately much more cost-effective to get your systems set up to collect and remit the tax early on than it is to wait to be audited by a state. With the proper assistance, it can be relatively painless to take care of sales tax. Then it’s up to you to make all the other business aspects work. And we’re rooting for you!

Trailing Nexus — Check Out Anytime You Like, But You Can Never Leave

“Welcome to the Hotel California! Such a lovely place.” I never knew for sure what that song by the Eagles was really all about, but the line: “You can check out anytime you like, but you can never leave” is a classic. And it’s sounds a little like some state governments when it comes to getting out of a state where you’ve had nexus in the past. There’s a process for deregistering which varies by state, but deregistering may not mean you no longer have to collect sales/use tax in certain states. States just don’t want to let you go too easily.

Deregistering is a process for sure, but even once you are no longer registered in a state, you may still have a requirement to collect sales/use tax in certain states. This concept of having a continuing tax collection responsibility even after deregistration is sometimes referred to as “trailing nexus”. It’s kind of shocking that, even after a company cuts all “nexus” ties to a state, some states could still require the company to collect sales/use tax for some time after leaving the state. The whole idea seems like a government overreach. It has no basis in constitutional logic as far as I can determine. In fact, it seems to go contrary to Quill, in which the Supreme Court ruled that substantial nexus requires more than a slight physical presence. How about no physical presence at all? I do not see how “trailing nexus” is even permissible. However,  neither do I find that any state has been overruled on this issue by any state supreme court or by the US Supreme Court.

It may seem a lot like the Hotel California with the trailing nexus, but if you pay attention to the details, you can do more than just checkout of a state — you can stop collecting their taxes too.

Your question might be: What to do if I’ve had nexus in a state for sale/use tax purposes in the past and was collecting the taxes in that state, but because of changes in my business (I no longer have employees or offices or use third parties in that state) and wish to cease collecting sales/use tax in that state?

Well, to be conservative, you probably want to know which states assert this idea of “trailing nexus” and for what period of time do the states say you should continue collecting the tax.

You’ve come to right place. We have a chart for that.

Here is a chart for the states that claim a “trailing nexus” once you leave their state. Texas has circulated a draft rule change that would eliminate trailing nexus in Texas. See this post by our friend Allen Sherman for more information.

I hope this chart is helpful. If you have any questions, please give us a call.

About Peisner Johnson and Company, LLP

We Have a Chart for That You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.

What’s the Best Way to Get Answers to Your State Tax Questions?

CALL THE STATE? — This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it’s not that people at the state don’t know what they’re talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you’re protected in the event of a future audit.

But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a “form over substance” type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don’t get me wrong, I’m not saying there’s some sort of trick or code language that you must conform to or else, I’m just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.

Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.

GOOGLE IT? — With so much information available on the Internet these days, you can Google your question and chances are, you’ll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?

GET A RULING? — What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point — it’s just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you’re going to get in the ruling. It’s not always possible to do, but you don’t want bad precedent, if you can help it.

ASK THE EXPERTS? — Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do — We Solve State Tax Problems.

And, we don’t always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.

Sometimes we just flat know the answer to a question you have. We always tell our clients: “If you have a question, just call us or email us. If we can answer you off the top of our heads, we’re not going to charge you. If we need to do some research, we’ll tell you before we do the work and seek your approval before we do it.” You can expect no surprise invoices from us.

So What Questions Do You Have?

Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, “it depends!” And that may sound like a cop out, but it really does depend. The answer depends on which state we’re talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.

CAUTION ON CHARTS –A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it’s still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state’s own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We’re here to help, give us a call.

Pennsylvania Remote Seller Nexus

The Pennsylvania Department of Revenue (PA DOR) is reminding remote sellers that they should have registered as of September 1, 2012, if they have nexus as outlined in the PA DOR Sales and Use Tax Bulletin 2011-01. One of the nexus creating activities mentioned is commonly referred to as “click-through nexus.” Rather than pass a new “Amazon Law” as some of the other states have done, Pennsylvania opted to issue a bulletin outlining what the Tax Reform Code of 1971 (TRC) defines as “maintaining a place of business in this Commonwealth.” The DOR went on to give seven examples of what it considers are nexus creating activities under the TRC.
The seven examples in the bulletin cast a wide net on a number of activities in addition to click-through relationships. We have listed the seven examples below and suggest strongly that you review your activities in light of these examples. For those of you who drop ship into Pennsylvania from an in-state location, we suggest you look at example six. It looks as though the state is asserting that using a dropshipper located in Pennsylvania is a nexus-creating activity. While we believe the state is pushing the envelope of physical presence on a number of issues, until someone challenges them in court, you need to be aware of your exposure. As they have just reminded everyone of the September first deadline, it stands to reason that they will be stepping up enforcement.
    1. A remote seller storing its property or the property of a representative at a distribution or fulfillment center located within the Commonwealth, regardless if the center also stores property of third parties that is distributed from the same location.
    2. A remote seller who has a contractual relationship with an entity or individual physically located in Pennsylvania whose website has a link that encourages purchasers to place orders with the remote sellers. The in-state entity or individual receives consideration for the contractual relationship with the remote seller.
    3. A remote seller utilizing affiliates, agents and/or independent contractors located in Pennsylvania who will provide repair, delivery or other service relating to tangible personal property sold by the remote seller to Pennsylvania customers.
    4. A remote seller’s affiliates, agents and/or independent contractors provide service(s) within the Commonwealth (including, but not limited to storage, delivery, marketing or soliciting sales) that benefit, support and/or complement the remote seller’s business activity.
    5. A remote seller’s employee(s) regularly travel(s) to Pennsylvania for any purpose related to the remote seller’s business activity.
    6. A remote seller who accepts orders that are directly shipped to Pennsylvania customers from a Pennsylvania facility which is operated by a remote seller’s affiliate, agent or independent contractor.
    7. A remote seller who regularly solicits orders from Pennsylvania customers via the website of an entity or individual physically located in Pennsylvania, such as via click-through technology.

California “Click Through” Nexus

The California Affiliate Nexus statute will take effect on Saturday September 15, 2012. This statute was originally signed into law on July 1, 2011, however after a very short period it was postponed by AB 155 for just short of a year. The year is up, and internet retailers are scrambling to become compliant.
The statute affects internet retailers who have agreements with people in the state who have links steering people to the retailers for a fee and who meet two revenue thresholds. The first threshold is that all sales under “click through” arrangements must exceed $10,000. The second threshold is that the retailer’s total sales into the state must exceed $1,000,000. The second threshold has been increased since the original effective date from $500,000 to $1,000,000. This increased threshold is allowing many smaller retailers to forgo having to register and collect the use tax. These thresholds should be examined closely prior to assuming you have to register. The actual text relating to “click through” nexus is below.

Regulation 1684. Collection of Use Tax by Retailers.

(3) A retailer is engaged in business in this state as defined in section 6203 of the Revenue and Taxation Code if the retailer enters into an agreement or agreements under which a person or persons in this state, for a consideration that is based upon completed sales of tangible personal property, whether referred to as a commission, fee for advertising services, or otherwise, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet website, or otherwise, provided that:
(A) The total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described above, in the preceding 12 months, is in excess of ten thousand dollars ($10,000); and
(B) The retailer, within the preceding 12 months, has total cumulative sales of tangible personal property to purchasers in California in excess of one million dollars ($1,000,000).
The determination as to whether a retailer has made the requisite amount of sales to purchasers in California during the preceding 12-month period shall be made at the end of each calendar quarter. A retailer is not engaged in business in this state pursuant to this paragraph if the total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described above, in the preceding 12 months, is not in excess of ten thousand dollars ($10,000), or if the retailer’s total cumulative sales of tangible personal property to purchasers in California were not in excess of one million dollars ($1,000,000) in the preceding 12 months.

Top Ten Nexus Survival Tips

  1.  Do not underestimate nexus – Not knowing about nexus can have a devastating effect on you and your company. If a state determines you have nexus there is generally not a statute of limitations on how far back they can audit you. In theory, the state can go back to the date you started to do business in the state, although in reality, they usually stay in the seven to 10 year range. But seven to 10 years is still a long time.  Then, not only can you end up paying back taxes but they tack on penalty and interest as well. The dollars can start to add up quickly, especially if the states share information. In some extreme cases criminal penalties may also apply.
  2. Educate yourself – Learn about nexus and see how it applies to your company’s operations. Stay abreast of nexus changes as well as changes in your business. There are a number of resources that are available but free webinars are a good place to start. There are also a handful of firms that can help.
  3.  Do not assume you are OK – Just because you have not been contacted by a state yet doesn’t mean you are OK.  You may be OK or it may mean that the state just hasn’t found you yet. Some common ways states find you are through audits of your vendors or customers, disgruntled employees reporting you or your competitors turning you in. There are many other ways, but these are three of the big ones.
  4. Do not assume that your current CPAs fully understand nexus – CPAs are usually very good at what they do. The problem is that many of them don’t focus on state and local taxes and some of those that do only focus on a handful of states. You may be surprised to learn that their knowledge of multi-state nexus issues is no better than yours. Question your CPA about how much of this type of work do they do. How do they stay on top of the evolving issues in each of the states? You may have a great nexus resource in your CPA — then again you may not.
  5. Do not assume that your employees are keeping you compliant – Ask your employees how they stay abreast of nexus changes. Do they monitor operations and see how changes in the way you do business impacts nexus? How do they educate themselves? Who do they go to for answers or clarifications? Are you giving them the tools that they need?  If you have doubts, consider doing a nexus consultation and analysis; it can be done internally or by a third party.
  6. Do not assume that your competitors are approaching nexus correctly – This is a perfect example of something my father told me over and over, “Just because everyone else is doing it doesn’t make it right.” How true this is. Maybe your competitor has it right, but maybe not. Maybe they just haven’t been discovered yet. This may become a case of the blind leading the blind. How do you know that your competitors are not following you? Where are your competitors getting their information? Perhaps the best question to ask is, if the state finds you, will your competitor pay the money you owe? I would say no, therefore, educate yourself.
  7. Do not stick your head in the sand – If you have nexus do not wait for the state to find you. The longer you wait, the greater your liabilities grow as there is no statute of limitations. The second reason is that there is a program called a Voluntary Disclosure Agreement (VDA) that states offer to entice you to come forward. The VDA program usually limits the period a state will look back to three to four years as well as waiving penalties and/or all or part of the interest. The drawback is that if the state finds you before you come forward, then you are usually not eligible to participate in the program. 
  8. Do not answer a nexus questionnaire without fully understanding your exposure – When a state becomes aware of you, they will usually send out a questionnaire about your activities in the state. Before you answer the questionnaire you should not only understand what your exposure is but what options are available. Once you return that questionnaire, your options may be limited.
  9. Do not just get registered if you find out you have nexus – This may seem counter-intuitive, but remember that there is no statute of limitations if you have not filed the monthly returns. Once you come forward and get registered, you’ve lost the one small advantage and leverage you had. The state now knows who you are and the state can go back and audit you for all the past periods. You will definitely want to look at a VDA or amnesty program.
  10. Do not panic – If you think you might have nexus or have been contacted by a state, do not panic. There are programs you can take advantage of and a handful of firms that can help. You are not alone and are not unique. You can rest assured that many before you have had the same problems and have been helped. Just remember: Do NOT ignore this issue. Not only does it not go away, it gets worse with time.

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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