As the sales landscape continues to quickly evolve to more online and less brick and mortar selling, retailers are finding that they must now be even more knowledgeable than ever about managing their sales tax compliance.
This article delves into the intricate relationship between direct sales and sales tax, shedding light on the multifaceted aspects that direct sellers need to navigate. Here’s what you can find out:
1. Types of Direct Sales Subject to Sales Tax:
Direct sales include in-person, online, and multi-level marketing transactions, each with unique implications for sales tax.
2. Record-Keeping and Documentation:
Precise record-keeping is essential for substantiating tax obligations, deductions, and exemptions, reducing audit risks.
3. Calculating and Collecting Sales Tax:
Sellers need to understand sales tax rates, jurisdictions, calculation methods, and the importance of timely remittance.
4. Registering for a Sales Tax Permit:
Obtaining a sales tax permit is the first step towards compliance, but it involves answering questions accurately and understanding nexus.
5. Consequences of Non-Compliance:
Non-compliance can result in penalties, fines, and audits by tax authorities.
6. Navigating Tax-Saving Mechanisms:
Businesses should explore deductions and exemptions based on factors like buyer type, transaction nature, and item category, while navigating state-specific rules.
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1. Types of Direct Sales Subject to Sales Tax
As we write about direct sales here, we’re talking about commerce that is business to consumer (“B2C”) and business to business (“B2B”). Direct sales encompass a spectrum of transactions, each with its own distinct characteristics and implications for sales tax. These include:
- In-person sales (brick and mortar location): These traditional sales take place at physical storefronts, requiring sellers to consider state and local sales tax rates that vary based on jurisdiction. Accurate determination of the applicable sales tax rate is crucial.
- Online and e-commerce sales: The digital age has given rise to online sales, which carry their own set of complexities. Sellers must determine “nexus,” or their level of connection to a particular state, which determines whether they are obligated to collect sales tax on sales made to customers in that state. The 2018 Supreme Court decision in South Dakota v. Wayfair further complicated the criteria for establishing nexus. Here’s everything you need to know.
- Multi-level marketing sales: In the realm of multi-level marketing (MLM), sales tax obligations often extend beyond the initial seller to subsequent tiers of the distribution network. Determining the responsibilities of each party within the MLM structure is crucial to avoid compliance pitfalls.
2. Record-Keeping and Documentation for Direct Sales
Precise record-keeping substantiates tax obligations, deductions, and exemptions. These records provide a safeguard in the event of an audit. Carefully maintaining properly completed (and signed) exemption certificates, resale certificates and other items contemporaneously (rather than having to try to track them down during an audit) is key to good record keeping.
To note – while it is possible to compile some of these documents retroactively, it is so much easier to obtain them at the time of sale.
3. Calculating and Collecting Sales Tax on Direct Sales
Understanding sales tax rates and jurisdictions: The patchwork of sales tax rates across states and localities can be confusing and difficult to track. Sellers also need to navigate the concepts of origin-based and destination-based sales tax, which respectively consider the point of sale and the buyer’s location when determining the appropriate tax rate. Most states are destination based, but origin based does come into play occasionally.
Calculation methods for sales tax: Depending on the state, retailers may need to charge sales tax at either a single-rate (in states such as Massachusetts and Indiana), or a blended-rate which can include the state rate, plus county, city or special district add-ons (as in California, Texas and New York). Because rules and rates are different state to state, it is essential to have a well thought out plan for compliance to accurately calculate tax owed.
Collecting and remitting sales tax to tax authorities: Direct sellers must not only collect sales tax from customers but also ensure its proper remittance to the appropriate tax authorities. This demands meticulous record-keeping and a sound understanding of filing deadlines. The worst “sin” in the sales tax world is when a retailer collects tax but doesn’t remit it to the authorities in a timely manner. Sales taxes are fiduciary in nature (similar to payroll taxes) in that the state is entrusting the retailer to collect the state’s money on its behalf and remit timely.
4. Registering for a Sales Tax Permit
Obtaining a sales tax permit triggers tax compliance in a state. It is but the first step in the process of being a good corporate citizen and committing to regularly file in the state. Here are a few notable points in the process:
Navigating the Application Process
The process of registering for a typical seller’s permit is reasonably straightforward and is similar from state to state. However, it is very important to answer the multiple questions accurately and truthfully. We get calls all the time from potential clients who want to know if they can just register for a seller’s permit in a state and then begin to be in compliance from then on. Unfortunately, it’s not that easy. States ask a series of questions on the registration form that ultimately determine a company’s nexus start date with the state, which may likely be in the past and require some form of remediation. We always caution clients to determine nexus start dates BEFORE quickly filling out a registration form and to work with a professional to make sure they understand the possibility of retroactive liability before finalizing the registration with the state. And as always, we can help!
Be prepared to answer questions about the business, when you began making sales into the state, whether you’ve had any employees or contractors in the state, whether you hold inventory in the state, etc. Taxpayers must also be ready to identify a corporate officer (with their social security number and/or driver’s license) as the “responsible person” for any unpaid taxes or penalties for failure to remit or file. Some of these matters become trickier for foreign-based companies doing business in the US without US employees or a domestic mailing address.
Embracing the Concept of Nexus
The application process reinforces the concept of sales tax nexus – the connection between a business and a jurisdiction that mandates the obligation to collect and remit taxes. As mentioned above, reviewing nexus triggering dates must come before registration for a sales permit. As direct sellers provide goods or services within specific states, they trigger this connection and the corresponding tax responsibility.
5. Consequences of Non-Compliance with Sales Tax Regulations
Penalties and fines for non-payment or underpayment of sales tax: Non-compliance can lead to steep penalties and fines, draining resources that could be better utilized elsewhere.
Audits related to sales tax compliance: Tax authorities have the power to conduct audits to ensure compliance. A rigorous adherence to regulations can help mitigate the risk of audits and their associated disruptions.
6. Navigating the Array of Tax-Saving Mechanisms
In the sales tax world, in addition to determining when a company is required to start filing in a state (has achieved nexus), and determining which products are subject to sales tax, taxpayers also must consider if there are any deductions or exemptions that they can avail themselves of. Exemptions may be based on a variety of factors, including the nature of the buyer (i.e.; a government entity, a non-profit organization – in some states), the nature of the transaction (i.e.; sales for resale), or the nature of the item being sold (i.e.; food items, medical devices, etc.). And again, we note that while these are examples of typical exempt items, they are not the same from state to state. So, it’s really important to navigate each state’s rules, and their rules on keeping documentation to support the exemptions.
Unlocking Tax Relief Through Eligibility Criteria
Eligibility for these tax-saving opportunities hinges on meeting specific criteria that might resonate with the broader goals of certain economic behaviors or even, at its most dramatic, societal well-being. Businesses need to engage in a careful analysis of their offerings and the corresponding tax regulations to identify where these deductions and exemptions apply. This process of alignment not only saves costs but also aligns with the spirit of fostering accessibility and growth within a community. An example of this might be an exemption or deduction allowable for the purchase of equipment used in research and development activities. Or an exemption allowed for the installation of energy saving appliances or solar.
By grasping the various types of direct sales, accurately calculating and collecting sales tax, and following best practices for compliance, direct sellers can work towards financial success. And as you know, you don’t have to go it alone with us as your guide. Contact Miles Consulting today to determine the best direct sales and sales tax solution for your online business.
