Sink or Swim: A Guide to Surviving Sales Tax in 2017

Businesses may feel out of their depth as states look to test the waters on tax compliance in the coming year.

Sales and use tax compliance can be a complex problem for many businesses. It almost feels like you need a bowie knife to cut through the regulatory red tape, although knowledge may be a better weapon in this case. So stay sharp with Avalara’s 2017 Sales Tax Survival Guide.

Published every year to help businesses better understand the challenges they are up against when it comes to complying with sales and use tax regulations in the U.S., Avalara’s latest Survival Guide is refreshed for 2017 with insight into what’s new and what’s changed at the state and federal level, common challenges around sales tax compliance, and tips for staying on top of your tax obligations.

sales tax

States are testing the waters in 2017

States are facing budget deficits and they need revenue from taxes. Sales and use tax is one of the largest generators of this revenue, but collecting it has become more difficult as how Americans buy, sell and consume goods and services has evolved beyond what’s defined by state tax laws. For example, Congress has yet to act on outdated federal internet sales legislation; services now outpace goods in consumer spending but aren’t taxed with the same consistency; and digital delivery of software, books and other media and streaming services have states perplexed when it comes to setting standards for taxability.

This has led many states to get aggressive – hiring more auditors, expanding nexus definitions (a connection with a state that triggers an obligation to collect and remit sales tax to that state) to target out of state sellers, implementing use tax reporting policies, increasing state and local sales tax rates, and extending sales tax to more products and services.

Survival of the fittest

While not every aspect of managing transactional tax causes pain for every business, it’s pretty certain that at least some areas will pose a challenge given how quickly the rules changes.

The 2017 Sales Tax Survival Guide walks you through 10 critical compliance challenges, from determining nexus to managing exempt sales to understanding the implications of drop shipping on your business and dealing with audits and lawsuits. Each section is also buoyed with best practices for overcoming these challenges, and links to addition information should you need to go more in depth on a topic.

It’s a must-read reference for anyone who is responsible for tax compliance in their business. And it’s available for download here.

Shore up compliance

As helpful as it is, no guide is a replacement for good practices. The most valuable takeaway from the Survival Guide is a greater awareness of just how burdensome tax compliance can be on a business – large or small. Trying to keep up with ever-changing state tax rates and rules puts a strain on accounting and finance teams in terms of the research and due diligence required.

You can remove that burden with tax automation software like Avalara AvaTax. Much of the work that goes into proving sales and use tax compliance – calculating tax rates, verifying customer information, updating taxability rules, applying exemptions, remitting sales tax and even filing tax returns – can be handled easily and efficiently in your accounting system with little to no manual work required. It’s easy to set up and use, guaranteed accurate, and budget friendly. Avalara is a preferred provider of tax software for more than 500 e-commerce, shopping cart, ERP and accounting systems and used by more than 20,000 companies worldwide. Talk to your system or application provider about using AvaTax to manage transactional tax.

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

Don’t Get Fooled by Nexus Rules

April 1 is commonly known as April Fool’s Day. It’s also the date when Amazon started collecting sales tax in four more states — Maine, New Mexico, Hawaii and Idaho —bringing the total to 45 states and the District of Columbia.

Amazon is no fool and sales tax nexus is no joke. States are tired of losing revenue from tax-free remote sales and are starting to crack down on businesses who fail to register or collect sales tax when their sales activities are deemed substantial enough to warrant it. Amazon’s decision to volunteer to register to collect sales tax in more states may simply be pre-emptive to ensure that, should their sales into that state meet nexus thresholds in the future, their bases are covered.

While merely speculative as to motive, it is a smart move – and one that other companies may want to consider. The Quill v. North Dakota decision is decades old now, and the physical presence standard for nexus doesn’t adequately cover e-commerce. Congress still has yet to rule on new federal online sales tax legislation, despite multiple opportunities to do so. As a result, states are starting to reinterpret nexus to their own benefit in an attempt to collect tax revenues they feel are owed them. Under these broader terms, businesses can establish nexus through such activities as attending trade shows, engaging drop shippers, hiring remote employees, and (yes) online sales.

If you can’t beat ‘em, join ‘em

Amazon was one of the first e-commerce sellers to challenge remote seller nexus rules – an action which dubbed those policies “Amazon tax” or “Amazon laws.”  In the nine years since the e-commerce giant took New York to court over its 2008 Amazon tax law, the floodgates have opened to even more nexus changes at the state level, first with affiliate nexus and click-through nexus, and more recently with economic nexus laws.

The penchant for states to change or introduce new nexus laws has made it increasingly difficult and risky for businesses who sell online or into multiple states to keep track of their sales tax obligations. While it may not make sense for smaller to mid-size e-commerce sellers to volunteer to collect sales tax as universally as Amazon is now doing, it would be wise to have a solution in place to help you manage sales tax nexus — one that will scale with your business as it grows or changes.

Know your nexus

Nexus is an issue that Avalara gets asked about a lot. So much so, that they created a page on their website dedicated solely to helping companies understand nexus and even find out what nexus laws apply to each state where they do business.

Companies frequently engage Avalara’s professional services tax experts to help them determine their nexus obligations. And complying with multistate nexus is one of the biggest motivators to companies deciding to onboard Avalara’s tax automation solutions. Avalara’s software makes critical sales tax decisions automatically, pulling from the largest and most comprehensive tax database in the world and applying accurate, verified, up-to-the minute rates and rules to all your transactions. In most cases, Avalara is a simple integration to existing financial systems so setup is fast and easy. Avalara can also assist with exemption certificate management, as well as filing and remitting of sales tax returns.

For a refresher on nexus obligations, read Avalara’s guide, Everything you wanted to know about nexus (but were afraid to ask).

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

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Election Day Brings Changes to Sales Tax

Repost from Avalara

While the focus in the latest general election has been the presidential race, there were plenty of local ballot issues that will affect businesses in a very personal and immediate way. These include votes on sales taxes, several of which were passed in major metropolitan areas.

Businesses need to be aware of sales tax changes so that they are charging the right rate. But there may be other effects of sales tax changes on businesses, such as when a sales tax rate increase may encourage customers to purchase in lower-tax locales, for instance.

Here’s a rundown of some of the major sales tax ballots across the country and the results.

Sales tax restriction

Approved: Missouri Constitutional Amendment 4. This was probably the most far-reaching sales tax issue on the ballot in the U.S. While most sales tax ballot measures proposed sales tax increases, the Missouri measure will limit sales taxes, preventing the state from levying sales tax on any new service or transaction that was not subject to sales tax as of January 1, 2015.

The measure was put forward by the Missouri Association of Realtors as a way to protect real estate services from being taxed, but broadly prohibits any new sources of sales taxes.

The measure can be seen as a reaction to a trend in which states with stretched finances have increasingly sought new sources of revenue. In recent years, services have become much more of an economic engine, now making up approximately two-thirds of the current United States economy. In tandem with that growth, states have increasingly looked to services as a new base for sales taxes.

For businesses that provide services or sell goods that are not now subject to sales taxes in Missouri, the certainty that they will not have to deal with sales taxes in the future will probably be a source of relief.

However, the other side of the story is that limiting the sources of sales tax revenue could mean higher sales tax rates on eligible transactions since the state is now restricted to those categories. Allowing new categories of transactions to be taxed would spread taxes over a larger number of transactions, meaning that the overall sales tax rate would not necessarily need to be as high. Restricting the sales tax base could also hamstring states’ abilities to reform their tax codes in order to stay competitive.

It remains to be seen whether other states will see similar proposals to limit sales taxes.

Sales tax increases

All the other sales tax ballot measures in the Nov. 8 election dealt with raising sales taxes in states and major metro areas.

California

A handful of big metro areas in California sought sales tax increases for transportation funding.

  • Approved: Measure M in Los Angeles County. This will raise the county’s base sales tax rate by 0.5% to 9.5% effective January 1, 2017, with local sales taxes going on top of the base rate. The tax rate hike will increase to 1% in 2039 and continue indefinitely. The increase will raise an estimated $860 million per year for the most ambitious transit expansion in Los Angeles County history, including expanded rail lines.

Currently, Los Angeles’ sales tax is the 13th highest of major cities in the United States; the new 9.5 percent sales tax means L.A. will tie with Oakland for eighth highest, according to the Tax Foundation.

  • Defeated: Measure B in Sacramento County would have raised the sales tax by 0.5% for 30 years, bringing the combined sales tax rate to 8.5 percent in Sacramento County and 9 percent in the City of Sacramento. The funds raised would have gone toward transit projects including a new expressway, a downtown Sacramento streetcar and a light rail extension to the airport. The measure was opposed by taxpayer activists who pointed to the Measure A sales tax already in effect that would have overlapped with Measure B for 20 years.
  • Defeated: Measure A in San Diego County would have raised the sales tax by 0.5% to 8.5% for 40 years in order to pay for new rapid bus lines and a trolley line, among other transit improvements. Local Republican and Democratic parties, environmental groups, labor unions and transit advocates opposed the measure for different reasons.

San Francisco

Defeated: Proposition K in San Francisco. San Francisco’s sales tax increase measure was unique in that the money raised would go to homeless services as well as transit improvements. This actually involved two different proposals: Proposition K, which would raise taxes in the city by 0.75% to a total of 9.25%, and Proposition J, which would require that $50 million per year from those sales tax funds go to homeless services and $101.6 million per year to be spent on transportation. 65% of voters rejected the sales tax increase. A “kill switch” provision for Prop J allows the mayor to nullify one or both funds by Jan. 1 if Prop K doesn’t pass.

Georgia

As in California, the sales tax ballot issues in Georgia centered on increasing sales taxes to fund transportation.

  • Approved: Fulton County transportation special purpose local option sales tax (TSPLOST)This measure will raise the sales tax by 0.75% for five years beginning April 1, 2017. The tax will raise up to $655 million over five years to widen and repair roads and bridges and add sidewalks in Fulton’s cities and the county’s unincorporated area.
  • Approved: Atlanta TSPLOST and MARTA sales tax. The Atlanta TSPLOST will raise sales taxes by 0.4% for five years, starting April 1, 2017, to fund improvements to the BeltLine, streets and sidewalks. Another measure will raise sales taxes by 0.5% to expand the MARTA transit system. The new increase would be on top of an existing 1 percent MARTA sales tax, which will decrease to 0.5% in 2047. Both the old and new MARTA taxes will expire in 2057.

With both the Atlanta transit and MARTA sales taxes approved, Atlanta’s sales tax will rise to 8.9 percent, increasing from tied for 51st highest of major U.S. cities to 14th highest, according to the Tax Foundation. By law, Atlanta can raise its local sales tax no higher than 9%.

North Carolina

Approved: Wake County public transit referendum. This ballot measure will raise the sales tax by 0.5% in order to fund a 10-year, $2.3 billion transit plan that will include a new rapid bus system and commuter rail between Raleigh and Durham. The increase will bring the total Wake County sales tax to 7.75% in the spring of 2017.

Oklahoma

Defeated: Oklahoma Question 779. This measure would have raised the statewide sales tax from 4.5% to 5.5% in order to raise an estimated $550 million for education, including teacher salary increases.

Combined with Oklahoma’s local sales taxes, the increase would have brought the average combined state and local sales tax in Oklahoma to 9.85%, the second highest in the U.S. after Louisiana, according to the Tax Foundation. Opponents questioned the effect the tax would have on the economy and whether funds would be distributed as promised.

Texas 

Approved: Arlington baseball stadium measure. This ballot measure will increase the local sales tax by 0.5% to raise $500 million in sales tax revenue to help build a new baseball stadium for the Texas Rangers. The hike will bring Arlington’s total sales tax rate to 8.5%, taking it from the 51st highest sales tax in the U.S. to the 21st highest, according to the Tax Foundation.

Virginia

Defeated: Fairfax County meals sales tax. In Fairfax County, a suburb of Washington. DC, with a population of around 1 million, the ballot included a proposed 4% sales tax increase on restaurant meals and prepared food. The increase would have brought the total sales tax on prepared food and beverages to 10%.

Opponents, including the Northern Virginia Chamber of Commerce, argued that the proposed tax was unfair to the restaurant industry and said the increase would be too much on the heels of a $100 million real estate tax increase earlier this year.

Washington

Approved: Washington Proposition 1. This measure affecting King, Pierce, and Snohomish Counties will raise the sales tax by 0.5% to contribute to the ambitious Regional Measure Sound Transit 3 plan, which would expand the region’s light rail network, rapid bus transit and commuter rail. The increase, beginning Jan. 1, 2017, will come on top of an existing Sound Transit 0.9% sales tax and will raise Seattle’s total sales tax to 10.1%, the sixth highest of major cities in the country, according to the Tax Foundation.

Stay up to date on sales tax rates and returns

Sales tax rates change all the time, not just in election years. And it can be easy to miss a change and charge the wrong sales tax rate—which can invite a visit from the state tax auditor. Avalara’s sales tax automation software can help. Avalara can also make sure you file sales tax returns correctly and on time. To learn more, download States and Dates: The one-stop guide to filing sales tax returns.


Attend the 2017 Sales Tax Changes webinar on Dec. 15

To learn more about these changes and how they affect you, sign up for the 2017 Sales Tax Webinar on Dec. 15. Even if you can’t attend, register to receive the recording and a free copy of the 2017 Sales Tax Changes report.

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2017 Sales Tax Changes Take Effect Jan. 1

Repost from Avalara

Sales tax doesn’t often make headlines, but soda taxes, marijuana sales, tampon exemptions, and online sales tax did in 2016. That trend is likely to continue in 2017. The New Year will bring new taxes, new exemptions, and renewed efforts by states to implement internet sales taxes. It will also bring plenty of the usual suspects, like sales and use tax rate changes.

Read on for some of 2017’s most newsworthy sales and use tax changes. You can also register for the webinar to learn more about these changes and get a copy of the 2017 Sales Tax Changes report.

State sales and use tax

The state sales and use tax rate in California 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.

To offset a recent gas tax hike, the state sales and use tax rate in New Jersey will decrease from 7% to 6.875% on January 1, 2017. 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.

However, 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.

Soda tax

Soda taxes are slowly sweeping the nation. The Navajo Nation decided in 2014 to impose higher taxes on sugary drinks and “minimal-to-no-nutritional value food.” Special taxes on sweetened beverages took effect in Berkeley, California in January 2015 and in Vermont six months later.

On November 8, voters in four cities approved proposed soda taxes, and two days later, the Cook County Council did the same. Philadelphia’s soda tax takes effect on January 1, and similar taxes take effect in Boulder, Colorado, Oakland, California, and Cook County, Illinois on July 1, 2017.

Pundits predict more cities and states will soon follow suit, now that soda taxes have been successfully enacted in these areas. Certainly, there is interest. Alabama Governor Robert J. Bentley has been calling for a tax on soft drinks for years and is likely to renew those efforts in 2017.

Tampons

A number of states enacted so-called “tampon tax” exemptions in 2016. The New York tampon tax exception took effect in September, while Connecticut’s won’t take effect until July 2018. The exemption for feminine hygiene products in Illinois takes effect on January 1. As with soda taxes, there’s a distinct possibility that other states will follow suit with tampon tax exemptions. Already, the District of Columbia Council is poised to exempt feminine hygiene products and diapers.

Netflix

Streaming services such as those provided by Netflix, Hulu, and HBO Go will be subject to sales tax in Pasadena, California, beginning January 1. Pasadena isn’t the first city to specifically tax these (they’ve been subject to tax in Chicago, Illinois since July 1, 2015) and it is unlikely to be the last: a number of other cities in California — including San Bernardino and Santa Monica — are being advised to collect tax on streaming services.

Tobacco

As of January 1, California is extending cigarette and tobacco taxes to e-cigarettes and similar vaping products, “any component, part, or accessory of a tobacco product,” and “any product containing, made, or derived from nicotine” and intended for human consumption. In addition, California’s tax rate on tobacco products will increase significantly once Proposition 56, approved on November 8, takes effect in early 2017.

Sales tax exemption changes

New exemptions

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.

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

Repealed exemptions

A temporary exemption for tangible personal property used for or in the renovation or expansion of qualifying aquariums in Georgia terminates as of January 1, 2017.

In North Carolina, retail sales of tangible personal property, certain digital property, and taxable services by certain nonprofits will no longer be exempt from sales and use tax as of January 1, and nor will purchases by a manufacturer of fuel or piped natural gas used solely for comfort heating.

Finally, the Wyoming Joint Revenue Committee looks favorably upon eliminating the sales tax exemptions triggered by economic development incentives. It remains to be seen whether or not that will come to pass.

Local sales tax

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

  • Arkansas
  • Florida
  • Illinois
  • Kansas
  • Minnesota
  • Nebraska (also boundary changes, which can impact rates)
  • Oklahoma
  • Utah
  • Washington
  • Wisconsin

More local rate changes for 2017 will soon be announced; on November 8, local sales and use tax rate increased were approved in several states, including California, Georgia, and Nevada.


Attend the 2017 Sales Tax Changes webinar on Dec. 15

To learn more about these changes and how they affect you, sign up for the 2017 Sales Tax Webinar on Dec. 15. Even if you can’t attend, register to receive the recording and a free copy of the 2017 Sales Tax Changes report.

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Bill to fight online sales tax introduced in Congress

Repost from Avalara

A bill has been introduced in Congress that would take the legs out from under existing remote sales tax laws. Tired of Congressional inactivity on internet sales tax, a growing number of states have enacted legislation enabling them to tax sales made by out-of-state sellers. The majority of these laws maintain that a connection between a state and seller is created by a seller’s affiliation with in-state residents, such as referrals or a link on a website (affiliate or click-through nexus). More recently, several states have enacted economic nexus legislation affirming that there is an economic need to tax remote sales.

These states, determined to win the right to tax online sales once and for all, hope their laws will be challenged so they can argue their case before the United States Supreme Court and ultimately reverse Quill Corp. v. North Dakota, the 1992 case that upheld the physical presence requirement for nexus. As state after state has created laws, Congress has remained mostly silent on the issue.

And now the fallout.

Three internet sales tax bills have been gathering dust in Congress since the start of 2015:

  • Marketplace Fairness Act of 2015 (MFA)
  • Remote Transactions Parity Act (RTPA)
  • Online Sales Simplification Act (OSSA)

The first two, MFA and RTPA, differ in the details but are similar in nature. Both allow states to tax sales (above a certain threshold) by remote sellers and both provide exceptions for small remote sellers. The third, which exists in draft form only, is quite different from the other two: sales would be sourced to the origin rather than destination state and a flat rate of tax would be established for remote sellers from states with no sales tax. States could require in-state sellers to collect tax on all interstate sales, and there would be no small seller exception. There has been little follow-up to these measures since their inception.

Last week, a fourth piece of legislation was introduced, this one seeking to prevent states from taxing any seller lacking a physical presence. The No Regulation Without Representation Act of 2016 (H.R. 5893) seeks to codify the physical presence requirement upheld in Quill.

Taxation with representation only

According to bill sponsor Congressman Jim Sensenbrenner (R-Wis), “States should not have the ability to tax non-citizens, plain and simple. This legislation would help reduce burdensome overregulation, keep government overreaches in check, and ensure that only residents of a state are subjected to tax obligations.” Under his bill, “a state may not obligate a person to:

  1. Collect a sales, use or similar tax;
  2. Report the sale;
  3. Assess a tax on a person; or
  4. Treat the person as doing business in a state for purposes of such tax, unless the person is physically present in that state during the relevant tax period.

The bill also establishes a de minimis physical presence under which “physical presence” does not include any of the following:

  • Referral agreements with in-state persons who receive commissions for referring customers to the seller
  • Presence for less than 15 days in a taxable year
  • Product delivery in-state by a third-party
  • Internet advertising services not exclusively directed towards, or exclusively soliciting, in-state customers

Finally, it protects non-sellers: “Sales tax payment, collection or reporting obligations may only be imposed on a purchaser or seller having a physical presence in the taxing State.” It would take effect January 1, 2017 — long before a challenge to Quill is likely to make its way to the Supreme Court.

Possible fallout

It’s too early to tell if this measure will have any traction. However, if enacted, the click-through and affiliate nexus laws in place in numerous states would likely be trumped by the bill’s de minimis provision. Notice and reporting requirements such as the one established in Colorado would also be preempted by the physical presence requirement. And there would be little point in continuing the legal battles currently underway over the Alabama and South Dakota laws (with an eye to reverse Quill), as the federal law would take precedence over the Supreme Court.

No matter what happens, sellers should be prepared. Avalara’s AvaTax sales tax automation software keeps you up-to-date and in compliance – even when the rules change. For a summary of the latest tax legislation the states have enacted this year, check out the 2016 Fiscal New Year – July Sales Tax Changes whitepaper.

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