Money Matters: The Ruling That Changed Sales Tax Collection


Ever since the Supreme Court ruled that physical presence in a state is no longer the sole requisite for sales tax collection (South Dakota v. Wayfair, Inc., June 21, 2018) questions about sales tax collection—and remitting—have multiplied. While most states provide an exception for small sellers, the problem with these exceptions is they vary widely. Nor, is it clear who must collect sales taxes on which sales or pay a “use” tax on their own purchases. Prior to the Supreme Court ruling, states would only tax sales of businesses with a physical presence in the state.

The Wayfair case changed that long-standing practice as the court found the respondents’ “economic and virtual contacts” with South Dakota to be a sufficient basis for a tax collection obligation (nexus).

For economic nexus, a promotional products business establishes an obligation to collect and remit sales and use tax by its economic activity in a state. Unfortunately, determining when economic nexus has been established in a state is, once again, complicated, because there is little uniformity between jurisdictions.

Collecting

The economic nexus laws continue to rely on the volume of sales, the number of transactions, or both. Approximately 20 states with economic nexus share South Dakota’s $100,000 in sales, 200 transactions threshold. Remote sellers that have less than $100,000 in sales or fewer than 200 transactions in the state usually don’t have to collect and remit sales or use tax in any of those 20 states.

While it might appear relatively easy for a distributor that sells only in its home state and South Dakota, distributors and manufacturers with customers in multiple economic nexus states face real challenges. Although most economic nexus states closely follow South Dakota’s example, several have adopted different thresholds. For example:

  • In Alabama, a remote seller must do more than $250,000 in sales in the state and engage in certain activities (e.g. solicitation) to trigger economic nexus.
  • In Connecticut, the threshold is at least $250,000 in revenue and 200 or more “retail” sales into the state as well as a systematic solicitation in the state.
  • In Minnesota, the economic nexus threshold is 10 or more sales totaling $100,000 or 100 or more “retail” sales.

Obviously, determining when economic nexus has been established in a state is complicated by this lack of uniformity. And, once economic nexus has been established, the process for registering to do business varies from state to state.

Becoming A Sales Tax Collector

The operators of many promotional products businesses fail to appreciate their duty and the legal obligations they face as a trustee or collector for sales and use taxes. Since the business merely acts as a trustee in collecting and remitting the proper amount, it is clear the taxes collected do not belong to the business.

Before any professional products supplier or distributor can collect and remit tax in a state where it has established economic nexus, it must first obtain a sales tax permit (i.e., a seller’s permit). Finding what each state requires and then properly setting up shop in a state takes time. Fortunately, some may find help under the so-called Streamlined Sales And Use Tax Agreement (SSUTA).

Streamlined Sales Tax

As mentioned, sales tax laws are extremely complex. Products and services taxed vary from state to state as do sales tax rates, rules and regulations. Further complicating matters, there are more than 12,000 local sales and use tax jurisdictions in the U.S.

Few promotional products suppliers, manufacturers or distributers are satisfied staying within the confines of state borders. Efforts by the states to require out-of-state sellers to collect and remit sales tax have long been contentious. The ironically-called SSUTA was born of state efforts to tax remote sales, the complex nature of sales taxes and the emergence of ecommerce.

Unfortunately, the 23-state SSUTA—launched in 2000 to simplify sales tax administration and minimize the burden of complying—has failed to attract a single new member in the seven-month period following the Wayfair ruling. In fact, not a single state has joined since 2014. However, any promotional products business can register to collect and remit sales tax in all 23 states that are currently members of the Streamlined Sales Tax Registration System. There is no cost for sellers collecting only in SST states, and reduced costs for sellers collecting in both SST and non-SST states.

The SSUTA attempts to simplify sales and use tax administration for all sellers through the following:

  • Central electronic registration system for all member states
  • Uniformity in the state and local tax bases
  • Uniformity in major tax base definitions
  • Simplification of state and local tax rates
  • Uniform sourcing rules for all taxable transactions
  • Simplified administration of exemptions
  • Simplified tax returns
  • Simplification of tax payments
  • State level of administration of sales and use of tax collections
  • Protection of consumer  privacy

Responsible Responsibilities

When it comes to liability, failing to collect or misappropriating sales and use taxes can put everyone—owners, officers, directors, shareholders and employees—at risk. If deemed as “responsible parties,” each of these individuals may be held personally liable for the failure of the promotional products business to properly collect and remit sales and use taxes. A responsible party can include not only the individual whose duties involve managing and paying taxes, but may also include any other person who has the authority or ability to control business payments and decisions. What’s worse, this liability extends beyond the business to each individual’s personal assets, which could be claimed to satisfy the business’s sales tax liability.

Using Use Taxes

As every supplier and distributor is or should be aware, long-standing laws already compel buyers who make tax-free purchases to self-remit the taxes due. The self-remit rules are often referred to as “consumer’s use tax.” However, although the consumer use tax rules focus on the purchaser’s duty to self-remit use taxes, in some states, a seller may be obligated to collect “seller’s use taxes” on behalf of  purchasers.

As with sales taxes, seller’s use taxes are charged to the purchaser on the sales invoice and are required to be collected by sellers in some states. Each state has its own complexities, which can cause occasional confusion for sellers.

Although the rate of compliance to self-remit is relatively low, as more and more sellers are required to collect sales—or seller’s use taxes—economic nexus rules may make so that no compliance is a moot issue and poses less of a challenge for many business purchasers.

As economic nexus rules take hold, sellers of all types will be required to collect sales or seller’s use taxes on sales made all over the country. One result will be a reduced consumer’s use tax compliance burden for some buyers.

The Customer’s Perspective

Whether promotional items are subject to sales tax depends on where the sale is made. The rules, as mentioned, vary from state to state but consider a situation where a company buys items to give to customers. An example are t-shirts with the company’s name imprinted on them given to the company’s regular customers. Customers get a t-shirt regardless of whether a purchase is made or not. In most cases, the manufacturer or supplier should be charging sales tax (or the company paying a use tax) on the t-shirts.

Conversely, a small entertainment venue that books rock bands has a special t-shirt designed for each band. The t-shirt is given free to all customers who purchase a ticket to the event. In this case, the t-shirt is for resale and its cost is included in the cost of the ticket. Accordingly, it is the venue that has purchased goods for resale usually giving the supplier a resale certificate exempting the supplier from collecting sales tax. In other words, the entertainment venue must remit sales tax after ascertaining the portion of the ticket price properly assignable to the t-shirts.

Sales Tax Primer

The Supreme Court’s Wayfair ruling replaced the physical presence requirement for when states must tax remote sales and created an economic nexus standard based on the amount of business done in a state. The ruling suggested strongly that the South Dakota law requiring remote sellers that meet thresholds of $100,000 in annual in-state sales or 200 transactions to collect and remit sales tax.

Soon every promotional products business may be required to collect sales—and use—taxes even if the only connection to the state is a web page and/or a customer. In fact, the business may have to collect sales tax even if there is no web presence. While the rules vary from state to state, actively attending a trade show in a state or having representatives in a state (who may not even be employees) can require collecting sales taxes.

There are 45 states with sales tax laws. Every state will, in all likelihood, want to increase revenue by following the precedent set by the Supreme Court with its Wayfair ruling. The bad news is that every promotional products business is now—or soon will be—responsible for keeping track of the ever-changing sales tax laws in every state where they have “economic nexus” in order to ensure compliance.

For more than 25 years Mark Battersby has been writing about tax and financial topics for magazines, newsletters and the web. He lives in Ardmore, Pennsylvania.

SSUTA States

Sellers registering through the Streamlined Sales Tax Registration System (SSTRS) are automatically registered in each of the full member states. These 23 states are full members in the Streamlined Sales And Use Tax Agreement:

  • Arkansas
  • Georgia
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Michigan
  • Minnesota
  • Nebraska
  • Nevada
  • New Jersey
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Dakota
  • Utah
  • Vermont
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

Tennessee is an associate member state meaning that it has achieved substantial compliance with the terms of the agreement, but not necessarily with each provision as required by the SSUTA.

Source: Streamlined Sales Tax Governing Board Inc.

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For more than 25 years Mark Battersby has been writing about tax and financial topics for magazines, newsletters and the web. He lives in Ardmore, Pennsylvania.

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