2017 Mid-Year Sales Tax Changes

Repost from Avalara

Dealing with change is standard operating procedure for many companies: employees leave and are hired; new products are introduced and old ones phased out; there are booms, and there are busts. On top of all that, companies need to account for sales and use tax changes. Significant changes in rates, regulations, and product taxability often take effect July 1, which is the start of a new fiscal year in all but a few states.

At the end of 2016, we shared many of the sales tax changes set to occur January 1, 2017. These included state sales tax rate changes in California and New Jersey, the expansion of sales tax to certain services in North Carolina, the prohibition of taxing more services in Missouri, and a bevy of recently enacted soda taxes and tampon tax exemptions. At mid-year, we’re seeing a few propositions that signify a dramatic shift in online sales tax revenue.

States want to collect more tax revenue from remote sales

Perhaps the most notable trend of 2017 is states’ push to obtain tax revenue from remote sales. This isn’t new. States have been working to tax out-of-state sellers for years, but their efforts have been hampered by Quill Corp. v. North Dakota, 504 U.S. 298 (1992) — the landmark Supreme Court ruling that a state can only tax businesses physically located within its borders.

In recent years, states have found creative ways to work around the physical presence precedent upheld by Quill. They’re taxing businesses with ties to in-state affiliates and those that generate a certain amount of business through links on in-state websites (commonly known as click-through nexus). Increasingly, they’re also taxing companies with a certain amount of economic activity in the state (economic nexus). Unfortunately for states in need of additional sales tax revenue, these affiliate, click-through, and economic nexus laws are difficult for states to enforce.

Therefore, many states are looking to different and more aggressive approaches. Two methods, in particular, have been gaining steam this year: use tax notification and reporting requirements, and taxes on online marketplace providers such as Amazon and eBay.

Use tax notification and reporting requirements

Colorado paved the way for states to impose use tax notification and reporting requirements on non-collecting out-of-state sellers. After spending years stuck in court, its policy takes effect July 1 — the same date a similar policy starts in Puerto Rico. Vermont recently passed one and made it effective retroactively, on January 1, 2017. Other states, including Pennsylvania and Texas, are considering use tax notification and reporting measures.

Sending annual reports of consumer purchase activity to consumers and state tax authorities is more work for remote retailers, and Colorado and the other states could be using their policies as a back-door approach to getting out-of-state companies to register and collect. Even if companies choose to not take that route, use tax reporting should help states increase their use tax collections.

sales tax

Taxing online marketplaces

Minnesota is the first state to enact a tax on marketplace providers. HF 1 will take effect at the earlier of July 1, 2019, or when the Supreme Court modifies its decision in Quill — though the effective date could change if Congress passes legislation allowing states to tax remote sales.

North Carolina, Texas, Washington, and a number of other states are also interested in taxing marketplace providers, and their efforts are likely to continue or resume as 2017 wanes. But not all agree it’s a good idea: New York lawmakers blocked Governor Andrew Cuomo’s attempt to tax them earlier this year.

Congress could tackle online sales tax

Federal lawmakers are much preoccupied with tax reform and repealing or revamping the Affordable Care Act. Allowing states to tax remote sales transactions, or definitively preventing them from doing so, seems to be low on their list of priorities. However, we’ve learned to expect the unexpected from Washington, so a federal solution to the problem of untaxed remote sales should not be entirely ruled out.

Two bills have been introduced that would authorize states to tax certain interstate sales: the Marketplace Fairness Act of 2017 and the Remote Transactions Parity Act of 2017.

A bill that would codify the physical presence standard set by Quill and further limit states’ ability to tax interstate sales has also been introduced: the No Representation Without Representation Act of 2017.

Other sales tax changes

Many of the trends seen at the start of the year are continuing as 2017 progresses. Florida has enacted a tampon tax exemption, Seattle a soda tax. Tennessee is lowering the state sales tax rate on food and food ingredients, there are calls to add a statewide sales tax in Alaska, and although he failed to achieve it this session, Governor Jim Justice has been pushing to raise the state sales tax rate in West Virginia. The taxation of services — including online music and movie streaming services — remains a hot and hotly contested topic. And, as always, a plethora of local sales tax rate changes take effect at the start of each new quarter.

Don’t be lulled into complacency during the dog days of summer: There’s a lot happening in the world of sales tax right now. Staying on top of these and other changes will allow you to prepare for them. Download Avalara’s 2017 Sales Tax Changes Mid-Year Update to learn more.

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4 Signs Your Growing Business Needs to Rethink Sales Tax

Repost from Avalara

What’s new with your business? If it’s any of the below, then congratulations are undoubtedly in order. And, while we certainly don’t want to put a damper on the wrap party for your latest launch, we do want to pipe in with a quick tax-wise nugget: New business growth often leads to new sales and use tax obligations.

When you’re busy growing and promoting your business, it’s easy for such obligations (known as nexus) to sneak up on you. But never fear. We’re here to help you better understand the potential sales tax implications of four of the most common — and exciting — ways your business may be expanding.

rethink sales tax

If you have recently or will soon engage in similar activities, it’s a sure sign that it’s time to rethink what nexus entails for your business.

  1. New products
    Adding new products to your lineup? They may be taxed differently from the items or services you already provide. Updating products may change the product taxability rules as well.For example, say you sell software. Traditionally you’ve focused on packaged software delivered on discs but are now expanding into digital downloads. The latter will most likely be taxed differently from the former. Be sure you understand the differences — and account for them in your tax reporting software — before your digital sales begin.Not only are there many nuances in how seemingly similar products are taxed, every state and jurisdiction does it differently. You may sell in one state where digital downloads are not taxed at all. In another state, they may be taxed at a different rate than their analog counterpart.
  2. New sales channels
    So you’re a brick-and-mortar business that’s going online or vice versa — it happens! You’re in for a world of sales and use tax changes. Online sales greatly expand your reach, and selling into new states may create nexus for you in those states. If it does, how will you calculate sales tax correctly given there are more than 12,000 tax jurisdictions in the U.S. alone?If you’re an online retailer setting up your first physical location, you’ll need to account for sales tax refunds when someone returns an online order in the store. These and a slew of other scenarios are best addressed in the planning stages to help minimize tax missteps from the outset.
  3. New go-to-market efforts
    You’re likely planning to make sure news about what’s new with your business travels fast. Say you’re an Illinois company planning to attend a New York trade show and launch an online advertising program in both New York and New Jersey. If you sell your products or services at that trade show, you’ll create nexus for yourself in New York. Moving forward, you’ll need to collect sales tax on all transactions to New Yorkers, and that includes online sales.Both New York and New Jersey are two of about 20 states with click-through nexus laws. So if those online ads lead to a certain amount of sales and commissions, you’re further expanding your nexus into New Jersey. (New York nexus was already established with the trade show sales.)There are other ways to create nexus, too, which is why it’s so important to conduct regular nexus studies — particularly every time your business tries something new.
  4. New relationships
    As your company grows, you make it a point to maintain the same high level of customer service you’ve had from the start. To do so — as well as to expedite order delivery — you may strike up a deal with a fulfillment center or a drop shipper. The former would store your inventory for you, packing and shipping products when a new order arrives. The latter would manage its own inventory, packing and shipping products you sell but don’t actually stock. Both can create new sales tax obligations for you.Fulfillment centers, for example, may disperse your inventory to various warehouses across the U.S. If you store inventory in a state, even through a third party, you typically have nexus in that state. With drop shipping, both your own nexus and that of the drop shipper’s may come into play.

Remember, if it’s new to your business, it may be creating new nexus for you. Activities like expanding your product line, advertising online, contracting with a drop shipper, and more can all have a positive impact on your bottom line. But if you don’t understand how they affect your sales tax obligations, the negative impact can be staggering.

An audit, for example, costs an average of $100,000, according to Wakefield Research. Just think if multiple states audit you in the same year, each fining you for not correctly identifying and/or managing your nexus responsibilities. It’s simply too much to risk. That’s why it’s better to address nexus as part of every growth initiative. If you plan ahead, you can oftentimes minimize trouble with nexus and audits. If not, you may soon realize that your business growth came at too high a price.

How does your growing business handle nexus?
Get your free copy of the Evolving for Growth whitepaper for more tips on evolving — and automating — your tax compliance as your business grows into new areas.

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Growth Activities That Can Be Life (And Tax) Changing

Growth isn’t a one-size-fits-all approach. In fact, companies expend a great deal of energy and resources deciding which pursuits will move the needle the furthest toward achieving specific goals, and where to prioritize their time and investment.

Oftentimes sales and use tax gets left out of this equation, especially when it doesn’t appear to directly correlate to the task at hand. Certain growth activities, like adding new locations, products, or sales channels, instinctively signal a need to alter sales and use tax compliance practices. With others like financing rounds, acquisitions, or technology platform changes, tax implications aren’t as obvious and therefore are more likely to be overlooked. Yet these are often the situations where compliance strategies can have the greatest and most lasting impact.

growth tax

Below is a brief glimpse of how sales and use tax compliance can come into play for 3 business growth activities that can be life (and tax) changing: financing events, M&A, and technology platform integration projects.  Here’s what you should be aware of when going through these processes.

Financing events

For any financing event, public or private, investors look closely not only at how you plan to grow the business, but also how you are managing it now. Poor sales tax management practices or unfavorable audit outcomes can impact valuation, jeopardize funding, or even nullify deals. High visibility events like funding rounds and IPOs can also bring your business to the attention of state auditors looking to draw in more tax dollars.

Mergers and acquisitions

The meshing together of people, assets, systems, and processes is no simple feat. So, it’s not surprising that business integration issues following M&A transactions are one of the biggest things keeping company execs up at night.  Between due diligence, integration, accounting/financial reporting, and post-acquisition compliance, who has time for the minutia of sales tax? It can be easy to overlook tax obligations or liabilities, which can raise red flags with investors early in the process, or with auditors later.

Technology platform changes, consolidations or upgrades

During change events, it’s good practice to evaluate your financial systems and fill any gaps with new solutions or functionality that can advance your growth objectives. For example, tax automation software that unites critical transaction data from disparate systems and processes can alleviate compliance issues during post-merger integrations, reducing audit risk and avoiding delays in closing the books.

Download the complete whitepaper for further insights from leading industry leaders.


Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

Risky Business: 5 Industries that Raise Audit Red Flags

States target certain businesses for sales tax audits according to data.

For most companies, the mere idea of a sales tax audit is a daunting prospect, and “fingers crossed we don’t get picked” is a popular strategy. But for certain types of businesses, just doing what you do can be enough to attract the attention of the state auditor. According to state departments of revenue data, certain industries are at a higher risk of being audited simply based on how sales and use tax regulations impact their business. The more complex the rules, the higher the odds that errors or oversights will happen. These mistakes can be costly – both for states that are missing out on tax revenues and the companies that fall short on compliance.

sales tax audit

The Audit Process Uncovered

Unless you’ve been through an audit before, you likely have no idea what to expect, never mind why the state is looking at you or why your business has been selected for an audit. Sometimes, companies are chosen at random. But more often, something you are doing (or not doing) in your business has raised the red flag for state auditors.

Sales and Use Tax Audits Uncovered, a new report by Avalara and Peisner and Johnson, aims to set the record straight on why some businesses get audited more than others and the behaviors driving these trends. Analysis compiled from real audit data from two of the four Big Four states, Texas and California, and findings from more than 64,000 audits conducted over a 27-year period went into the writing of the report. Some interesting patterns emerged from this data on the types of companies that tend to get audited, the reasons why they get audited, and what activities make them more vulnerable to an audit.

For example:

  • 60% of audits target only four industries
  • One-third of audits are now conducted out of state
  • The two most frequently identified audit errors are improperly managing exempt sales and out-of-state purchases

Lax Tax Practices are Red Flags

The study found that certain factors, such as audit history and having a high ratio of exempt sales to total sales, led to a higher risk of being audited. While these seem straightforward, other characteristics like industry type are less understood. What exactly is it that puts these businesses in the state auditors’ crosshairs when it comes to tax compliance?

For starters, certain tax practices can put any business at greater risk of audit. According to the California Board of Equalization, the top three most frequently seen problems are:

  • Not charging tax on out-of-state sales
  • Recorded versus reported difference in taxes collected and remitted
  • Not properly documenting tax-exempt sales

Which Industries are a Target?

According to audit data, the industries targeted most by auditors are Retail, Food Service, Manufacturing, Wholesale (/Distribution), and Construction. These were ranked in the top five in both California and Texas. It’s likely that these industries attract attention based on the types of compliance errors auditors uncover when auditing these businesses. For example, sales tax nexus was a common hurdle shared among all five of these industries. Not surprising, given that states have vastly changed the definition and thresholds for nexus beyond the physical presence standards.

Beyond nexus, audit triggers were more specific to the tax complexities experienced by each industry. For example, product taxability can be especially burdensome for retailers, wholesalers, and food services, especially given how differently states tax different products and services. Use tax and exempt sales tend to trip up manufacturers and construction companies. And drop shipping can complicate compliance for distribution companies. These and other audit triggers are covered in more depth in the report, along with audit profiles and outcomes for each of the high-risk industries.

The report also reveals that states are getting more serious about sales tax audits — especially in recouping lost revenues from e-commerce sales — hiring more auditors and focusing greater efforts on audits conducted out of state. What exactly does being caught in non-compliance cost nowadays? According to Wakefield Research, small to mid-size businesses are out approximately $114,000 in taxes, fees and penalties if auditors find problems. It can be nearly four times that amount for larger firms.

Reduce risk with sales tax automation

While you may not be able to head off a sales tax audit forever, you can make the process far less painful by managing tax compliance more efficiently. This starts with having a clear understanding of your tax obligations and a reliable way to ensure you can comply with them — now and should they change. Tax automation software like Avalara can provide this assurance.

Get your free copy of the Sales and Use Tax Audits Uncovered report to learn more about audit triggers, how to avoid them, and how to protect your business against unnecessary tax compliance risk.


Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

Get Ready for New Changes to Sales and Use Tax in 2017

In 2017, when it comes to sales tax, states are taking stances on everything from soda to streaming content, tobacco to tampons. The New Year will also bring renewed efforts by states to implement internet sales taxes and continue the legal battle to overturn existing legislation.

Here is a summary of 2017’s most newsworthy federal and state sales and use tax changes:

The Great Nexus Debate

The push by states for online sales tax revenue will likely continue in 2017. Oklahoma created new reporting obligations for remote sellers starting in November of this year and Tennessee implemented a new economic nexus policy that takes effect on July 1, 2017. A new use tax notification requirement for remote sellers is also set to take effect on July 1, 2017 in Louisiana.

States are also busy challenging existing precedent. Attorneys general in 11 states called for the U.S. Supreme Court to overturn Quill Corp. v. North Dakota — the 1992 decision that established that states cannot impose a tax collection obligation on businesses lacking a substantial physical presence in the state.

And four pieces of online sales tax legislation continue to languish on Capitol Hill; three look to impose tax on remote sellers: The Marketplace Fairness Act, the Remote Transactions Parity Act, the Online Sales Simplification Act, and one, the No Regulation without Representation Act, aims to prevent it.

Product and Services Tax Changes

Soda tax

Several states, cities and counties and the Navajo Nation impose higher taxes on sugary drinks like soda, which have “minimal-to-no-nutritional value food.” Philadelphia joins the ranks on January 1, followed by Boulder, Colorado, Oakland, California, and Cook County, Illinois on July 1.

‘Tampon tax’ exemptions

A number of states enacted so-called “tampon tax” exemptions in 2016. More are likely to follow suit starting with Illinois where the exemption for feminine hygiene products takes effect on January 1, 2017. Connecticut’s exemption doesn’t take effect until July 2018.

Streaming services

Streaming services such as those provided by Netflix, Hulu, and HBO Go will be subject to sales tax in Pasadena, California beginning January 1. Other cities in California may follow suit. Chicago, Illinois imposes a similar tax.

Tobacco, e-cigarettes and vaping

California is extending cigarette and tobacco taxes to e-cigarettes and similar vaping products starting January 1. The tax rate on tobacco products will also increase significantly once Proposition 56 takes effect in early 2017.

State Sales and Use Tax Rate Changes

California’s sales and use tax rate will drop from 7.5% to 7.25% under Proposition 30 (which temporarily increased the rate by 0.25% through December 1, 2016). The state rate decrease also affects certain partial state tax exemptions.

New Jersey’s sales and use tax rate in New Jersey will decrease from 7% to 6.875% on January 1, 2017 to offset a recent gas tax hike. It will drop further in 2018.

North Carolina use tax will apply to businesses storing tangible personal property or digital property in the state for any period of time. This expansion of use tax is due to the enactment of Senate Bill 729.

Missouri sales and use tax will not be expanded to any currently exempt services in 2017. On November 8, voters approved prohibiting the expansion of sales tax to any services not taxed as of January 1, 2015. It will be interesting to see if Missouri legislators attempt to capture additional sales tax revenue another way.

Tax exemption changes

Ohio will once again exempt investment bullion from sales and use tax beginning January 1.

Maine is expanding the sales tax exemption for products used in certain commercial activities as of January 1. Additional information will soon be available from the Maine Revenue Services.

North Carolina will exempt certain service contracts sold by or on behalf of motor vehicle dealers, in addition to certain sales of food, prepared food, soft drinks, candy, and other items of tangible personal property at school sponsored events. Certain sales of repair, maintenance, and installation services that are part of a real property contract will also be exempt.

Georgia terminated a temporary exemption for tangible personal property used for or in the renovation or expansion of qualifying aquariums in Georgia effective January 1, 2017.

North Carolina will no longer exempt retail sales of tangible personal property, certain digital property, and taxable services by certain nonprofits from sales and use tax as of January 1. Purchases by a manufacturer of fuel or piped natural gas used solely for comfort heating will also no longer be exempt.

Local sales tax changes

Several states have announced local sales and use tax rate changes, effective January 1.

More details on all of these changes, including a state-by-state breakdown, can in Avalara’s newly released 2017 Sales Tax Changes report.

Automation can simplify sales tax

Understanding how these sales tax changes impact your business is important, but can also be overwhelming, especially if you are obligated to register, collect and report tax in several states. Automating sales and use tax compliance in your accounting system, ERP or e-commerce system can alleviate much of this strain. Avalara’s tax management software ensures accurate tax calculation (including current changes), proper management of tax exemptions and streamlines the remittance and filing process for sales tax returns in every U.S. jurisdiction.

Get a free copy of the 2017 Sales Tax Changes report.

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Permission to reprint or repost given by Avalara. Some content was previously published at www.avalara.com/blog.

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