March 19, 2020

What Are Sales Tax and Reporting Requirements?

Small Business
Ronald B. Allen

Online commerce has changed everything, or so it seems. One of the many results of folks buying from online companies is that the state they live in has not been collecting sales tax on those purchases. That may change in many states and where it does not change there will likely be reporting requirements. For many online retailers, this will be a change that will require preparation, help from an accountant like Exigo Business Solutions in the Kansas City area, and an upgraded tracking and bookkeeping system. First of all, what are sales tax and reporting requirements?

Nexus and Sales Tax Requirements

It used to be that if a retailer did not have a physical presence in a state (called a nexus) but still sold goods and services to customers there, they did not have to collect any sales tax. This was something that customers liked because they were not paying a sales tax. And retailers liked it because they did not have to deal with collecting and paying sales tax or the paperwork involved. Obviously, states did not like it! But, things have changed.

Nexus

Nexus is a Latin word that dates back to ancient Rome. It has to do with being connected. In the case of paying sales tax in the modern era, it has to do with having a presence in a state.

Physical Nexus: You have an office or warehouse in a state or otherwise store inventory there. Or, you have one or more employees in the state or a business affiliate.

Economic Nexus: Your business in that state exceeds a given number of transactions or a given dollar amount as defined by the individual state.

Temporary Physical Nexus: You attend a trade show in a state and make sales while there.

To know for sure whether or not you meet the state’s requirement for nexus and the obligation to collect sales tax, you or your accountant will want to check with the state’s taxing authority.

South Dakota v. Wayfair Decision Redefines Nexus for Sales Tax Collection

The U.S. Supreme Court changed the rules of the nexus requirement in June of 2018 when they ruled for the state of South Dakota in a case regarding nexus requirements. Since that ruling states can require that online retailers who sell to folks in their state must follow sales tax collection rules even when they do not have a “physical presence” in the state. For this to happen the state must define economic thresholds that will apply. When such thresholds are exceeded, retailers must register in that state and start to collect sales tax.

(Sales Tax Institute)

If you sell online and are unsure about nexus requirements or for that matter how to go about collecting sales tax, contact us at Exigo Business Solutions for help.

What Are Sales Tax Notice and Reporting Requirements

Although the South Dakota ruling helped states by redefining what constitutes a legal presence in regard to collecting sales tax, it was not enough to satisfy many states. One of the problems is that there are lots and lots of online retailers that could easily sell just enough to make money but not exceed the requirement for economic nexus. And, in fact, a company could “spin off” affiliates in such a way that none of the subsidiaries every exceeded the requirement either. This line of reasoning drove the State of Colorado in their quest to get online retailers to have sales tax notice and reporting requirements.

Colorado adopted a “use tax” back in 1937.

Colorado adopted a Use Tax in 1937, which requires individuals and businesses to pay use tax on tangible personal property purchased from out-of-state vendors if the item is used, stored, or consumed in Colorado. Consumer use tax must be paid by individuals and businesses for tangible personal property used in Colorado for personal or business purposes (not to be resold) when tax was not paid at the time of purchase.

Then, in 2010 they passed a law requiring that out of state retailers who sold things in the state would be subject to reporting requirements on those sales. The law was not enforced due to injunctions until a negotiated agreement in 2017. There are two requirements of out of state retailers who do not collect sales tax.

At the time of purchase, they must provide a Transactional Notice to Colorado customers, informing them that the retailer has not paid Colorado state sales taxes on the item(s) being purchased and the customer may have a tax obligation to the state.

Non-collecting retailers must provide an Annual Purchase Summary to each Colorado customer by January 31 of the following year. This notification should be an end-of-year summary of purchases from the non-collecting retailer to assist Colorado customers in filing their tax returns.

(State of Colorado: Information for Non-Collecting Retailers)

Thus Colorado has two sales tax notice and reporting requirements. Retailers must notify buyers that they have a sales tax obligation and they must send reports to each and every customer in the State of Colorado every year summarizing their purchases from the preceding year. And, not all items sold to residents of the State of Colorado will require a sales tax so these items need to be excluded from the rest!

Penalties for non-compliance are these. For each sale for which notice of need to pay a sales tax does not appear the State of Colorado can fine the retailer $5. For each notice that is not sent summarizing purchases at year end the fine is $10.

(Sales Tax Institute)

General Sales Tax Notice and Reporting Requirements

Colorado is not the only state that wants to collect sales tax when the sale is made by an out-of-state online retailer. A good ball park estimate is that states are losing about $13 Billion a year on sales taxes they would have collected if all sales were by companies in state! Nearly a dozen states now have reporting requirements but at this point, only half a dozen have penalties like Colorado does. But, one might expect to see both the number of states with reporting requirements and those with penalties for non-compliance to increase. To keep up with this issue online retailers will be wise to use the services of folks like Exigo Business Solutions in the Kansas City area.

The rules vary by state but these are the general guidelines.

• Your website should include information (a notice) that purchases from you may entail a use tax paid to their state

• With each sale, there should be a “transactional notice” stating that a use tax may well be due on their purchase

• You will need to send a notice every year of all of the person’s purchases from the previous year and which of such purchases may require the person to pay a use tax. This will typically be necessary for persons who have exceeded either a set number of purchases or a dollar amount.

• A yearly notice will need to be sent to the state taxing authority detailing sellers who owe use tax.

How Does the Online Retailer Deal with Sales Tax Notice and Reporting Requirements?

You are a smart person and you already figured out by reading all of this that what the states really want is for you to give in and simply collect sales tax on all or your sales within any given state. It that option is really what you are considering, contact us at Exigo Business Solutions before taking any further steps.

Basic Steps to Satisfy Sales Tax Notice and Reporting Requirements

Barring any dramatic changes in the law, more and more states are likely to enact legislation in this regard. So, the smart approach will be to assume that all states will eventually have these requirements and gear up for that eventuality. Basic steps will include:

• Update your website to include the correct notices

• Update all invoices to provide the correct information for each state

• Update all emails and other communication to include necessary changes

• Modify your record keeping to track each and every sale by person, state, address, etc., for this purpose

• Invest in and send out tax forms to the buyers who will need them

To make all of this work without undue cost, time, and energy spent, start with getting good advice from the likes of Exigo Business Solutions in the Kansas City area. If you have not already, invest in a decent accounting and bookkeeping software like QuickBooks that is up to the task of tracking what you need to track and providing actionable report help you see problems and make changes as needed.

Most of all, realize that you are in this for the long haul and that the issue is not going away. So, contact us today at Exigo Business Solutions to talk about your situation and make plans to win this battle of sales tax notice and reporting requirements!

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