Sales Tax: The Game Has Changed and Companies Must Comply
What do South Dakota and Wayfair (highly advertised online seller of a zillion things for office and home) have to do with the sales tax your startup has to pay?
If your answer is “plenty,” you are on the money.
And the money became considerably larger after a 2018 Supreme Court case (South Dakota V. Wayfair, Inc.) changed sales and use tax rules for remote sellers nationwide. Broadly speaking, this case gives states the authority to pass laws that require the collection of sales tax by remote sellers even if those sellers do not have a physical presence in that state.*
In this Q&A, John Schroepfer, Rev1 Managing Director and CFO-in-Residence, shares suggestions related to sales tax best practices. Neither John (nor anyone else at Rev1 Ventures) provides tax advice. John can and does alert entrepreneurs to matters they should be discussing with their tax advisors, attorneys, or CPAs.
REV1: The burden of sales tax collection and remittance is on the seller, right?
JS: Most states have established economic thresholds, based on dollar volume or number of transactions within a period, that once exceeded, place the burden of collection and remittance on the seller. Before the 2018 Supreme Court ruling, products sold by companies like Wayfair, Overstock.com, Newegg.com, and, of course, Amazon that didn’t have a physical presence in a state didn’t have to collect sales tax. Now they do.
Software companies, both those offering a product license and those offering their software as part of a service (SaaS), should pay particular attention to the rules and definitions adopted by each state.
A local CPA firm with a State and Local Tax (SALT) practice or a law firm, experienced with state sales tax issues can be particularly helpful interpreting state tax laws and helping these digital companies comply with them.
REV1: Are there any standard rules?
JS: There may be similarities state to state, but, no it’s all over the place. There are more than 10,000 taxing jurisdictions nationwide. That’s why every startup that has a product sold online or digital service offering should consult with a professional who understands the generalities and nuances of sales tax. There are CPA and legal firms that deal specifically with sales tax issues. Look for firms with an established SALT practice. Become informed enough to ask questions, then hire an expert for advice. Every state has a website where you can find information. Research the requirements of the state where you are located and the states where you plan to sell. Then invest in a couple of hours with a legal or accounting professional who is experienced in dealing with entrepreneurs and sales and use tax implications before you set up your website, engage your first sales partner, or begin selling to your first customer.
The first thing to understand is whether or not your product is subject to sales tax. Some digital services are taxable in some jurisdictions and not in others. Some are classed as services, some as personal property.
REV1: Are the state tax rules still evolving?
JS: State sales tax is continually evolving. Once you determine whether or not your product or service is taxable, then the challenge becomes keeping up with tax rates and tax law changes. There are software tools that constantly monitor the rate changes and can help companies comply at a reasonable price. A SALT CPA can provide guidance. Sales tax determination is a consideration for any new product or service. Make a discussion with your CPA or sales tax advisor a step in every product development plan.
REV1: What if our company intends to comply and works to try to follow the laws but we make a mistake?
JS: Increasingly there is communication between states. If you are generating sales and tax revenue in Ohio, and you start selling in Indiana, but you’re not collecting and you should, be aware, that Ohio and Indiana talk. There may be amnesty programs available for a period of time that can help you come into compliance. Ask your attorney or CPA. When you discover you have made a mistake, come forward, do not wait to be found out.
*Forty-five out of 50 states, plus the District of Columbia, and thousands of municipalities, generate revenue by charging statewide sales tax on the sale of goods and services. Local jurisdictions can layer more sales tax on top of that. These taxes are determined by state and local laws.
Tax statutes can require the seller to collect and remit the tax when the seller has a sufficient connection (nexus) with that state. For decades, nexus was based on a sellers physical presence (e.g. sales office, employees). Faced with declining revenue and untaxed Internet sales, states were motivated to expand the definition of nexus and increase the number of companies required to collect and remit state sales tax. South Dakota V. Wayfair, Inc. expanded the standard of nexus beyond a physical presence standard and include an economic nexus standard.
Note: This is not tax advice and is offered only as a commentary on non-specific circumstances or investments. We are not tax advisors. We recommend that entrepreneurs and startup companies always consult their tax advisor and attorneys on the specifics of their situations, any tax-related matters, or to learn more about the subject discussed in this article.