Part II of the Sales Tax series The Good, The Bad, and The Ugly

DISCLAIMER

This is just an overview of sales tax; I am not an auditor (but have been though many audits) and I am not a tax accountant (but know a few) and am not a lawyer (obviously). This article is written from my viewpoint and understanding of processes learned over the many sales tax audits I have endured.  Please consult with your own company's tax experts if you have questions about sales tax.  There may be attachments to this article, and they are based on the State information found at the time this article is published.

The Bad - WAYFAIR

This one word/name is being used to discuss the court case South Dakota v. Wayfair that has changed and is changing the way sales tax is assessed in each State. Many people are under the false assumption that this case only affected consumer sales not commercial sales but my credit friend...it will affect your company if it has not already. The Wayfair case has changed what each State is calling a nexus and has or will change the tax laws and regulations.

Nexus you say - what is a nexus? Patriotsoftware.com says this about nexus: "Sales tax nexus determines whether a business has a significant presence in an area to collect sales tax. Nexus presence includes your business, employees, warehouses, and inventory. Sales tax nexus requires companies doing business in a State to collect and pay sales tax in that specific State." If you are unfamiliar or even if you are familiar with nexus then be aware that many States have changed what were the typical definitions of having a nexus in a State. In the past each State had and has a slightly different take on nexus but in general your company would have had a nexus in a State if your company had employees who lived in a State, if you had assets/equipment in a State, if you had a salesman who regularly visited and had had customers in a State. After the Wayfair case those rules changed. Now nexus can be based on the above items AND the number of transactions in a State and/or dollar volume of sales in a State.

States have now made changes to their laws and regulations to accommodate the court ruling on Wayfair and as a result more companies need to register, collect and pay sales and use tax in other States. Here are a few interesting changes to nexus I have learned from classes and webinars over the past year.

Some States are including in the nexus changes that having any employee working in their State is a nexus. This does not include training but would include any other type of work. For example (this is an example using State names you may be familiar with-not that these particular States have made these exact changes) your Utah or Arizona based company sold a piece of equipment to a Nevada company. The equipment had a failure and the failure was covered under warranty. Your company sent an employee to the Nevada company site to do the warranty repair work. Even though the Nevada company never received an invoice from your company, in some States this would mean your company has a nexus in Nevada and needs to register in Nevada and file sales tax and employee related reports.

Some States are not including resale items, some States are counting gross sales by State where the ship to address sent products. This type of nexus would affect some of you who are a distributor or are a middleman. Your customer calls you and orders parts, your customer wants you to directly ship the parts to their customer in Maine. You ship the parts to Maine. Maine has adopted economic nexus laws and depending on how the tax department eventually interprets the regulations and the dollar value of the items sold, your company may have a nexus now in Maine and owe sales tax and reports to Maine. This is big change to the nexus rules and has a bigger impact than we thought once we did some research. I knew my company sold a lot of product to other States but until we ran a report showing both total number of invoices and total dollars sold by State I did not realize just how large a number that was and how important it would be for us to understand nexus laws in all 50 States.

A few other interesting nexus items are: Some States have nexus for consignment parts or equipment. Other States are including online sales. If your company has an online presence for ordering of product to be shipped anywhere to companies or individuals, your company could be affected by the Wayfair nexus changes. Advertising in other markets either physically (like a sign or newspaper ad) or virtually in an online market like Machinery Trader may affect your company and nexus.

I have attended many classes on this topic and plan to attend more. Please take a moment to search out more information about the Wayfair decision and how it is affecting your company. The internet is a wonder tool that is often underrated. Using the internet, we can easily connect to State web sites and find the laws and rulings we credit managers need to control costs and risks for our companies. We can also find and take webinars and read PowerPoint presentations about topics we need to better understand.

Next up - what you could expect in an audit.

Happy Holidays!!!