It’s that time the year, when most of the United States starts to think about personal taxes. However, those operating a business know that dealing with corporate taxes is actually a year round responsibility. Tax compliance challenges, both large and small, can quickly spiral into serious and expensive problems if you’re not careful. If sales tax compliance isn’t a priority for your company in 2016, you could face risks that jeopardize the growth and future of your business.
In conjunction with our partner, Avalara, we bring you 5 ways to avoid sales tax issues with these 2016 eCommerce Tax Tips.
[EDITORS NOTE: For Amazon FBA merchants, we also invite you to check out the joint Avalara, Monsoon Commerce webinar recap about the tax implications of Amazon FBA fulfillment.]
In 2015 new measures were introduced to expand the government’s ability to impose tax collection duties on remote out-of-state businesses. If any of the following measures are passed this year, online sellers will follow a different set of rules — and many states could minimize their budget shortfalls as fast as you can say Amazon. Proponents of these bills also claim they would finally level the playing field between brick-and-mortar and ecommerce.
Here is what’s making it’s way through Congress in 2016:
Marketplace Fairness Act of 2015 (MFA)
Earlier this year, several members of the Senate introduced a newly revised Marketplace Fairness Act bill, legislation similar to the 2013 MFA proposal. Essentially, this legislation grants states authority (should they meet certain criteria) to require non-exempt remote sellers to collect sales tax. If passed, the MFA would broaden state authority to require remote sellers to collect sales tax regardless of whether that business has a physical presence within those states. How soon will the MFA go into effect? That’s the million dollar question. Even if this bill is signed into law, it may still be challenged on grounds of constitutionality. Legal challenges would likely delay enactment.
Remote Transactions Parity Act of 2015 (RTPA)
The Remote Transactions Parity Act (RTPA) of 2015 is similar to the MFA in that it would allow states to apply sales tax to remote sales. As with MFA, the 23 member states of the Streamlined Sales Tax (SST) initiative would be authorized to require remote sellers to collect and remit sales tax soon after legislation is passed. Non SST member states would have to adopt and implement certain minimum simplification requirements.In addition, the RTPA would give catalog-only sellers a break, allowing them exemption from the law. The RTPA, like MFA, would have no effect on nexus; sales made to states with no sales tax would not be subject to tax. In addition, it would create no new taxes and have no effect on intrastate sales or the Mobile Telecommunications Sourcing Act.
Online Sales Simplification Act (OSSA)
OSSA is quite different from the MFA 2015 and the RTPA. Most notable, perhaps, is that it does not provide for a small seller exception and it would allow states to require in-state sellers to collect sales tax on all interstate sales.The OSSA adds layers of complexity to remote sales tax collection. Under it, “the lowest combined rate within any of the contiguous 48 States that do impose a sales tax” would be determined and remote sellers located in states without sales tax would be required to collect that “flat tax” on all remote sales. Also, origin-sourcing makes it so a Washington state resident who purchases an item online from a Florida-based seller would pay the Florida sales tax rate instead of the Washington rate (eventually, Washington state would receive that revenue). States that opt to not participate in this method would be prohibited from imposing sales tax on remote sales.
As a merchant, here is what you can do today to prevent any nasty tax related surprises.
1. Watch out for broader definitions of nexus.
Every time your company introduces a new product or service, sells into a new market location, or online into a state, remote seller nexus may apply. In 2016 these rules are a moving target. Due to state and federal court inaction, states have assumed a presumptive authority to broaden definitions of nexus, obligating more out-of-state sellers to collect sales tax.
Affiliate relationships are not only considered taxable when they occur among online sellers. Drop shipping is a complex element of sales tax management. In some cases, the use of a drop shipper, or a contract with a distributor that functions as a drop shipper, is considered a taxable nexus-creating activity.
Alabama: Enacted a law January 1st, 2016 that broadly expands nexus to include all businesses with a “substantial economic presence,” rather than only those with some physical presence in the state. This law is likely to be challenged on constitutional grounds, but if it survives, other states may soon follow suit.
Michigan: Passed “click-through” nexus laws last year that require sales tax remittance from businesses generating click-through sales through affiliate links.
2. Track your product taxability exposure.
In many states, product taxability and the sales tax rate depend on the type of product, sometimes its ingredients, the date it was sold, how it will be used, and the location in which it was purchased. To make matters worse, the traditional definition of what makes something a product (i.e., tangible personal property) is changing. Nowhere is this more obvious than in the treatment of developing technologies. With the rise of digital downloads, including music and movies, some states are broadening taxable product definitions to include virtual products.
Nebraska:Legislators are currently considering a bill, backed by many large companies in the state, that would exempt custom software from sales tax. Under the proposed law, mass-produced software would still be considered taxable.
3. Pay attention to what services are taxable in what state.
States approach service taxability in various ways. Whether or not the service you provide is taxable depends on many factors including the customer’s location, the location of your service, and whether or not the service fits into the broad service categories used by a particular state. Services that are typically considered taxable range from personal services to fabrication, repair, and installation.
Services provided under the “professional service category” can be confusing given that the modes of service delivery are increasingly moving online. So-called cloud services, such as IT support offered remotely, can be considered taxable in some states.
Ohio: In December 2015, the Ohio Department of Taxation defined online advertising services, online lead generation, and online chat feature services as subject to sales tax. This contrasts with traditional advertising services — for instance, print advertising — which is still considered exempt from sales tax in the state.
4. Keep accurate records of exempt transactions.
Sales tax exemption certificates enable a purchaser to make tax-free purchases that would otherwise be subject to sales tax. Resale certificates are provided to suppliers to substantiate that the items purchased are intended for resale only and therefore are exempt from sales tax. Sales can be exempt for many reasons including:
- The nature of the use—how or where the goods will be used by the buyer (i.e., resale).
- The nature of the goods or services sold—some states do not tax services
and labor, others do.
- The nature of the buyer—some states exempt nonprofits and government agencies from collecting sales tax. Others do not.
Collecting and filing these certificates can be a burdensome administrative chore, especially given the conflicting requirements of individual states. This is one of the most error-prone aspects of the sales tax management process that can leave a company at considerable risk in an audit due to expired or invalid certificates. In fact, disallowed exempt sales are a leading cause of audit fines, penalties, and interest.
Alabama: As of January 1, 2016, all businesses that are exempt from paying sales or use tax under Alabama law are required to obtain a certificate of exemption annually from the Alabama Department of Revenue. Annual reporting requirements also apply. Failure to file annual reports or obtain a certificate of exemption annually will result in businesses being unable to make tax-free purchases.
5. Create a 2016 Action Plan.
Any sales tax compliance action plan for 2016 should include looking for more efficient, accurate, and cost-effective ways to manage the challenging sales tax environment. Companies striving to accurately collect, file, and report sales and use taxes face an uphill battle in 2016. Avoid practices that put you at risk for audit, such as using out-of-date rates and rules, failing to recognize new rules that create remote seller nexus, or using error-prone manual processes to manage unwieldy sales and use tax laws and rates.
Managing sales tax compliance through technology automates the calculation, reporting, and remitting of use tax. Minimized human intervention reduces the risk of over or underpayment. Most software solutions also feature dynamic, on-demand tools that deliver reports quickly and easily, improving accuracy and discouraging audits. Companies also enjoy rapid ROI from technology solutions due to improved compliance and redeploying staff time to revenue-generating activities.
Avalara makes sales tax compliance simple and automatic for thousands of customers every day. Its SaaS-based, sales tax and compliance automation software solutions span the compliance spectrum; each year these solutions deliver billions of tax decisions, manage millions of exemption certificates, file hundreds of thousands of sales tax returns, and remit billions of tax dollars to states nationwide.