Significant Effects Of The Wayfair Decision Four Years Later
It is hard to believe that it has been just over four years since the landmark decision in the Supreme Court case of South Dakota v. Wayfair (2018) that changed the sales tax landscape across the country.
The decision made it so that states could require companies who met certain sales thresholds to collect and remit sales tax on sales, even if the company did not have a physical presence in the state. The ruling, however, did not automatically make economic nexus the standard in every state. Since it was a South Dakota case, the ruling technically applied just in that state until the other states individually changed their statutes. Since then, states across the country have enacted similar legislation based on the Wayfair decision. As of today, every state that has sales tax has enacted some sort of economic nexus law.
In the past four years, we have covered many sales tax issues related to Wayfair and economic nexus. As with most areas of multi-state tax legislation, even though every state now has economic nexus requirements, they are all complex and can vary, so questions often arise. Today, we will discuss Wayfair's significance four years later and what you can expect for the future of economic nexus challenges.
Wayfair's Significance In 2022
NetReflector/Potentiate surveyed hundreds of businesses to gauge the impact of Wayfair four years after the landmark decision. Key findings of the study include that awareness and impact of economic nexus have never been greater for businesses of all sizes and is particularly high for smaller businesses. Not only are more businesses than ever aware of economic nexus, they are also feeling the effects more than ever before, with 83% of all respondents recognizing that Wayfair has impacted how their company does business - the highest number since the survey was first conducted in 2019.
The survey also found that fewer businesses believe they've done all they can to be compliant. While informal, we can share that we are also still fielding calls daily from companies who are becoming more familiar with the economic nexus concept, but that still need help navigating all the nuances.
Marketplace Facilitation & Wayfair Laws
The survey also found that awareness and impact of marketplace facilitator laws have dropped among small businesses and increased in larger businesses.
Marketplace facilitator laws began to appear in 2017, but have dramatically increased since Wayfair, with every state with economic nexus legislation now also implementing marketplace facilitation legislation. This shifts the obligation to collect and remit sales tax to the marketplace instead of the individual seller. As we reported on in a recent blog, part of what makes the marketplace facilitator laws confusing is that legislators didn't write the laws for the myriad ways companies transact business in this space. Things like the taxation of services and rentals, to name a few, weren't necessarily considered in the passed legislation. So in some cases, taxpayers end up having to work with states to make sure they're complying with badly written laws. Just like economic nexus laws, even though every state with sales tax now has them, they vary depending on the state. For example, some states (such as Connecticut and Hawaii) require third-party sellers to register and file sales tax returns, even if they don't have a physical presence in the state. Oftentimes the trouble lies more in the documentation even than in the actual collection of tax. But, documentation is key and in an audit situation, companies want to make sure they are covered currently, as it is much harder to go back and try to pull documentation at a later date..
The Future Of Economic Nexus Legislation
If we have learned anything the past four years, it is that the tax landscape is unpredictable and constantly changing. Tax legislation will most likely continue to evolve as state governments look for new ways to generate revenue. Just like we have seen complications arise for marketplace facilitators as a result of the Wayfair decision four years ago, we expect to see additional sales tax obligations and economic nexus complications come up for digital products, services, NFTs and the metaverse, to name a few.
Still Have Economic Nexus Questions?
As you can see, even four years later, businesses can create economic nexus in a state without realizing it. Even if you are aware that you have nexus across multiple states, it can be difficult to know where to begin in your analysis and overall compliance. Working with an experienced team of state tax consultants like Miles Consulting Group is a great way to do this correctly. If you have questions about your economic nexus tax liability or have any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on South Dakota
So, in honor of the 4 year anniversary of that ruling, we travel to the Upper Plains state of South Dakota. South Dakota is the 5th least populous state in the U.S. and is also the 5th least densely populated state in the country. The state is bisected by the Missouri River, dividing the state into two geographically and socially distinct halves, known to residents as "East River" and “West River.”
When you’ve been writing “State of the Month” blogs for several years, you end up hitting all of the states eventually, but South Dakota has certainly received its share of “publicity” from us over the last four years, as we’ve been referring to the US Supreme Court case of South Dakota v. Wayfair almost daily since that decision was handed down in June 2018. Seems fitting that, as state tax professionals, we have some affinity for the state that gave us economic nexus and created much confusion and consternation for companies all over the country!
Huge Sales Tax Questions Every Marketplace Facilitator Should Consider
A marketplace facilitator (or “MPF”) is a business or organization that contracts with third parties (“sellers”) to sell goods or services on its platform, facilitating the sales that arise (such as Amazon or Etsy). As the name seems to indicate, these companies facilitate sales of goods or services between a seller and a buyer – but generally the MPF does not take title to or even carry the inventory. Following the 2018 South Dakota vs. Wayfair U.S. Supreme Court decision eliminating the physical presence standard for sales tax nexus, most states have in the last 4 years started requiring the marketplace facilitators to collect and remit the sales tax on behalf of the third party sellers. This places a burden on MPFs to be the company which collects and remits and reports the sales tax to the various states in which they’ve established nexus.
However, not all marketplace facilitators are as large as Amazon or Etsy, and in their haste to pass laws to incorporate filing requirements on marketplace facilitators, many states didn’t give much consideration to businesses that might be outside the “norm” of simply facilitating the sale of tangible property on the marketplace.
Because of the complexity that arises for such marketplace facilitators, we often share articles detailing the most up-to-date issues. You can read some of our past articles here and here. Today, we focus on some unique circumstances that we’ve had with clients in their roles as marketplace facilitators.
Client Example 1: Marketplace Facilitators & Services
The taxation of services already varies state to state, making it complex for multi-state providers to keep up. As you can imagine, adding marketplace facilitation to the mix just further complicates the process. One client we’ve worked with is a company which matches providers of a service with the consumer who need that specific service performed (like home repair, yard work, etc). The marketplace facilitator provides a platform (and payment system) that helps match the need with the service. While this can be a useful system for consumers, it does come with sales tax consequences for the marketplace facilitator. First, if the marketplace facilitator charges any kind of separately stated platform fee, that can be subject to sales tax in many states. Also, many services are subject to sales tax and may require the marketplace facilitator to both understand which services are subject to tax in each of the states in which they create nexus and be able to collect it. Since taxability of services varies from state to state, this can get complicated quickly. A few common services subject to sales tax are: fabrication and installation, catering, and specific types of construction and landscaping.
Client Example 2: Sales Tax Complications For Marketplace Facilitators & Rentals
Another specific situation we’ve seen is a client who is a marketplace facilitator that connects people who own specialty equipment that they make available for rent to people looking to rent such equipment for a short time period. In a state like California where sales tax isn’t required to be collected on the rental stream as long as tax was paid up front on the purchase of the property, it may seem relatively straightforward. But what if the person putting equipment out on the marketplace platform for rent can’t readily prove that they paid sales tax on the original purchase? This is often the reality, especially if the item was originally purchased years ago. In this case, the marketplace facilitator may be required to collect tax on the rental stream. It then becomes more of a question of how to properly document the original payment of tax. Based on our detailed conversations with representatives at the California Department of Tax and Fee Administration (“CDTFA”), they certainly hadn’t considered all of the ramifications of such a fact pattern and the necessary documentation required when the state legislature passed the marketplace facilitation legislation. We’ve been working with our client and the state agencies to get to a good resolution. Also, that’s just California! Other states may treat the rental stream (and documentation thereof) differently.
Client Example 3: Liquor Sales As A Marketplace Facilitator
What happens if a regular online seller of unique gift items becomes, in effect, a marketplace facilitator because it begins to sell the occasional bottle of specialty liquor or wine, which, by their nature are subject to special rules? States generally require a seller of alcoholic beverages to be specially registered with the state’s alcoholic beverage commission. Thus, does the flow of goods through the website constitute a reseller relationship or make the company a marketplace facilitator because it can’t directly sell liquor to an end consumer without a liquor license? We recently had a client with this issue and found that the answer took us in a few different directions.
As you can see, marketplace facilitation and sales tax issues are not always as straightforward as you might think. Sometimes you may not even realize that you are a marketplace facilitator and need to be aware of this legislation.
Do You Need Help With Your Marketplace Facilitation Tax Compliance?
If you find yourself with questions regarding marketplace facilitation or sales tax, please give us a call! We recommend that people new to marketplace facilitation legislation connect with professionals like Miles Consulting Group to make sure they are compliant with the marketplace facilitation legislation in their state from the beginning. We would be happy to help you and clarify any tax issues you are trying to navigate. Contact us today.
Update to the California Partial Manufacturing Sales and Use Tax Exemption
Since 2014, qualified companies have been eligible for a partial exemption from sales tax for purchases of machinery and equipment used in qualified manufacturing and research and development activities. California was late to the table, as most states have long had exemptions for such purchases. The exemption has also been unique in that it has been a partial exemption, and allowable only on the first $200 million of qualified purchases.
Important Colorado Sales Tax Changes Retailers Need To Know Now
Sales tax legislation is constantly evolving, and while the changes can be complex and difficult to keep up with, sometimes the legislation is actually an attempt to simplify the sales tax obligations already present in the state. Colorado is one state that is working on changing their complex sales tax legislation.
After being introduced in January of 2022, Senate Bill 22-032 was signed by Colorado Gov. Jared Polis in April. This bill outlines several changes to Colorado's tax code, which we discuss in detail below.
The Complexities Of Colorado State Sales Tax
Back in February, we wrote an article about the sales tax process in Louisiana, where retailers are required to collect and remit sales tax in each parish (or county) in addition to the state level. In that article, we broke down the lawsuit that Halstead Bead Inc. filed against the state, which stated that requiring businesses based out of other states to file reports in each parish creates a "compliance nightmare."
The state of Colorado also has sales tax legislation that can be difficult to comply with, referred to as the "Home Rule" city system. This system allows certain cities in the state to set their own sales tax rates, rules and regulations. As a seller, this requires you to collect, file and remit sales tax in each city separately, plus file with the Colorado Department of Revenue for the state's portion of the tax. This is similar to the "parish-by-parish" requirements in Louisiana. In 2017, the Sales and Use Tax Simplification Task Force was implemented in Colorado to simplify the process. As a result, Colorado also implemented the Sales & Use Tax System (SUTS), a statewide portal for tax collection put in place by the Department of Revenue (DOR) in 2o2o. As of today, close to 50 of Colorado's 70-plus Home Rule cities can receive sales tax returns through SUTS. Check out the full list here.
In addition, in January 2022 Gov. Polis signed HB22-1027, which extended the small business exception to destination sourcing requirements. According to the bill, state sales tax is currently calculated based on the buyer's address when the taxable product or service is delivered to a consumer, and this is known as "destination sourcing." There is an exception that allows small retailers with less than $100,000 of retail sales to source their sales to the business's location, regardless of where a purchaser receives the tangible personal property or service. This exception, however, expired on February 1, 2022. The bill extends the repeal of the exception from February 1, 2022 until October 1, 2022.
What Changes Does Bill 22-032 Bring To The Colorado Sales Tax System?
Bill 22-032 aims to simplify local sales and use tax compliance and administration for retailers that make sales in local taxing jurisdictions where they have limited physical presence.
To streamline the sales tax compliance process, this bill asks the Department of Revenue to require sufficient information be collected from the retailer through SUTS at the time of application or renewal of their state standard retail business license. This information also needs to be available to the local taxing jurisdictions to ensure all concerns are addressed. The department is also required to consult with local jurisdictions prior to filing to help determine what information is needed. This all needs to be completed by July of 2023.
Beginning in July 2022, Bill 22-032 prohibits local jurisdictions from charging fees for general business licenses to retailers who already hold a standard license issued by the state (unless their license had been revoked in the past for noncompliance). It also requires the Department of Revenue to consult with business owners to address any "reasonable concerns" they have about taxes. Additionally, the bill prohibits the local taxing jurisdiction from requiring retailers with a license to apply separately with them for a business license, though this part of the bill will not begin until July 2023. These changes, while they sound complex, should make sales tax compliance less of a headache for retailers who do business across the state.
Do You Need Help With Your State Sales Tax Compliance?
As you can see, tax legislation is constantly evolving, and it is important to ensure you meet all of your sales tax compliance requirements state-to-state. Working with an experienced team of state tax consultants like Miles Consulting Group is a great way to do this. If you have questions about your tax liability or have any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Tax Legislation Updates From 2022 You Need To Be Aware Of
Tax legislation is constantly evolving, and it can be nearly impossible to keep track of all the nuances. That's why, for our multistate readers, we believe it's helpful to have a state tax consulting partner to help. It is crucial to stay as up to date as possible to ensure you meet all of your sales (and other state) tax obligations. In this article, we dive into some of the most relevant 2022 tax reforms we have seen so far this year.
Kansas Food Tax Reform
Back in December, we published an article about Kansas Gov. Laura Kelly's plan to introduce a bill to "Axe the Food Tax" and completely eliminate sales tax on groceries in the state. In the beginning of May, the Kansas Legislature passed a bill with strong support from both parties to gradually decrease the tax over the next three years.
The first sales tax decrease from 6.5% to 4% will go into effect in the beginning of 2023, will drop from 4% to 2% in 2024 and will be eliminated entirely by the beginning of 2025.
Some foods do not qualify and will still be taxed at the same rate. For a full list of items which remain subject to tax, check out this link, but they include prepared foods, alcoholic drinks and food sold with eating utensils.
Other states, including Illinois, Oklahoma and Tennessee, are considering proposals to temporarily suspend sales tax on groceries as well.
Income And Sales Tax Reductions
With many states experiencing budget surpluses this year, tax reform has become a popular trend. As discussed previously, one example of this is states suspending sales tax on groceries, but another has to do with income tax. Multiple states have already enacted income tax reductions this year including individual income tax reductions in Idaho, Indiana, Iowa, Utah and Mississippi. Additionally, Idaho, Iowa and Utah have enacted corporate income tax reductions and New Mexico has permanently reduced sales tax with legislation enacted on March 8th. The bill is set to reduce the GRT rate from 5.125% to 5% on July 1, 2022 and to 4.875% on July 1, 2023. To learn more about the change in New Mexico, click here. Many other states have legislation currently being considered. For more information on how income tax reform may continue to develop, visit this link.
Gas Tax Reform
With gas prices hitting an all-time high, another area of 2022 tax reform we have seen so far has been the suspension of the gas tax. Connecticut, Georgia, Maryland and New York have already enacted legislation for this summer and lawmakers in 22 states have introduced legislation to do the same. To see if gas reform legislation in your state has been vetoed, introduced or neither, check out this helpful guide.
Colorado To Simplify Sales Tax Burden For Retailers
Back in February we wrote an article about the complex sales tax state of Louisiana, where they require retailers to collect and remit sales tax in each parish (or county) in addition to the state level. Colorado is another state with similar legislation, but in April Gov. Polis signed Senate Bill 32 to ease some of this burden on their retailers and simplify the sales tax requirements in the state.
The new law is set to begin July 1, 2022, and requires each local jurisdiction to grant a free general business license to retailers who have a standard retail license issued by the state (unless the retailer's business license has been revoked in the past for noncompliance). Another part of the bill prohibits the local taxing jurisdiction from requiring a retailer with a license to apply separately to them for a business license. This begins in July of 2023. For more information on Senate Bill 32, visit this website. We plan to keep you updated on this major legislation on our blog, so stay tuned!
Do You Need Help With Your Sales Tax Compliance?
As you can see, taxes are constantly evolving and it is important to ensure you meet all of your sales tax compliance requirements. Working with an experienced team of state tax consultants like Miles Consulting Group is a great way to do this. If you have questions about your tax liability or have any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Important Distinctions Between Collecting And Remitting Sales Tax For New Business Owners
We are often approached by newer business owners who may recently have started an e-commerce site or other business and whose sales are ramping up. Sales tax compliance is a topic that comes up quickly in these circumstances. As our company, Miles Consulting, celebrates its 20 years in business this year, it's always exciting to me to help start-ups envision their dreams.
There are many words you might not often hear if you are not in a tax-related field, but as a new business owner, it is crucial to understand their meanings to ensure sales tax compliance. Today, we are going to look at a couple of these words - "remit" and "collect," and break down how they differ when it comes to tax compliance. Keep reading to learn how to make certain you are meeting all of your business's sales tax collecting and remitting obligations.
Sales Tax Process For New Business Owners
First, let's clarify the steps of the sales tax process. When you think about it from the customer perspective, it seems fairly straightforward. The process is similar state to state as a customer - you are just charged the rate on your purchases as you bring them to the register or check out online. However, as the seller of merchandise (and certain services) there are other areas you need to navigate first. As a new business owner you may not know how sales tax requirements can vary by state. Some major differences include the taxability of the products themselves, the tax rate charged and whether exemptions are available. Another major difference is that some states allow businesses to absorb the tax for their customer, whereas others require the sales tax to be collected specifically from the customer. Close to 20 states allow this absorption, and the rest do not.
What Is The Difference Between Remitting And Collecting Sales Tax?
Collecting sales tax can be complex, especially for a new small-business owner, but this helpful guide may give you a good starting point to make sure you are checking all your boxes. We recommend starting with nexus - determining which states your company has met the threshold to require compliance with sales tax rules. Nexus can relate to either physical presence in a state (your HQ, where you have employees, where you store inventory) or where you have economic nexus. The determination used to be somewhat straightforward, especially as a brick-and-mortar store - you had nexus in a state and would collect the sales tax at your state's rate. But just about four years ago, the Supreme Court Case of South Dakota v. Wayfair (2018) changed the sales tax landscape and complicated it. Now, every state with sales tax requires companies who meet certain sales thresholds to collect and remit sales tax for them, even if the company had no physical presence in the state.
The next steps to ensure proper compliance include determining whether your product or service is taxable, registering for a sales tax permit, determining the appropriate tax rate and calculating and collecting the tax due during the checkout process, and finally remitting the tax due and filing necessary sales tax returns.
Collecting and remitting therefore refer to two unique steps business owners have to complete to ensure sales tax compliance. Collecting is the process of receiving money from your customers to cover your sales tax obligations, whereas remitting is specifically passing the money on to the state. One very key thing to keep in mind between these two steps is that as the seller and collector of the tax, you essentially become a fiduciary of the state's money for a short period of time. The seller holds on to the money until a date in time when he/she remits the funds to the state. It's crucial to remember that those collected sales tax funds must be set aside and not used for other purposes. Those funds must be available by the time the tax return is filed (and sometimes sooner), to satisfy the liability. Again - the seller is just the keeper of the funds for a short period of time. We emphasize this because we have seen cases (many of them, actually) where a seller registers, turns on the collection feature on software and begins collecting sales tax on purchases, but then doesn't complete the final steps of remitting the tax and filing the supporting tax returns. These types of mistakes in remitting the money to the state can result in substantial penalties and interest if not remedied quickly. If you have any questions, our team of multi-state tax experts is here to help!
Also note that in most states, you only need to remit tax at the state level, but a few, like Louisiana, Colorado and Alabama require you to file at a city or parish level. To complicate the matter more, each state also has its own deadline for when you need to file. If you are doing this on your own, it can be extremely time-consuming and overwhelming.
Do You Need Help With Remitting And Collecting Sales Tax For Your New Business?
As you can see, state sales tax issues are complex and vary in many areas. It is important to consistently ensure you meet all of your sales tax compliance requirements. Working with an experienced team of state tax consultants like Miles Consulting Group is a great way to do this, especially as a new business owner. If you have questions about your tax liability, or have any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on Connecticut
This month, we travel to the Southern part of New England, Connecticut. The “Constitution State” is the third smallest state according to land size, but its population is actually bigger than 20 other states. The has a mix of coastal cities and rural areas dotted with small towns. Mystic is famed for its Seaport Museum filled with centuries-old ships, and the beluga whale exhibits at Mystic Aquarium. On Long Island Sound, the city of New Haven is known as the home of Yale University and its acclaimed Peabody Museum of Natural History.
Business Climate
The state’s key industries include finance, insurance and real estate. Major financial industry employers include The Hartford, Travelers, Cigna, Aetna, Mass Mutual, People’s United Financial, Bank of America, Realogy, Bridgewater Associates, GE Capital, William Raveis Real Estate and Berkshire Hathaway.
Manufacturing is a huge sector contributing to the state’s GDP. Raytheon Technologies and its subsidiaries, Pratt & Whitney and Collins Aerospace, is the state’s leading manufacturer. Lockheed Martin subsidiary, Sikorsky Aircraft operates Connecticut’s single largest manufacturing plant in Stratford, where it makes helicopters. Other major manufacturers include the Electric Boat division of General Dynamics, which makes submarines, Boehringer Ingelheim, a pharmaceuticals manufacturer and ASML, which makes precision lithography machines used to create circuitry on semiconductors and flat-screen displays.
Over half of the state’s agricultural production is the result of nursery stock production. Connecticut’s agricultural products include milk, eggs, vegetables, fruit, tobacco and shellfish.
Tax Climate
The top individual income tax rate is 6.99% and the top corporate income tax rate is 7.5%.
Apportionment: Connecticut taxpayers apportion income tax using a sales formula.
Connecticut sources services using destination-based sourcing.
Sales Tax Structure
The state sales tax rate is 6.35% and the highest combined rate is also 6.35%.
Generally, sales of digital products in Connecticut are taxable. Sales of prewritten computer programs delivered electronically are subject to sales and use tax, but with exceptions. Effective Oct. 1, 2019, sales of prewritten computer software delivered electronically are considered sales of tangible personal property and are subject to the state’s standard rate. However, if prewritten computer software delivered electronically is purchased by a business for use by such business it is taxable at the 1% rate for computer and data processing services, which is reduced from the regular state rate for sales tax. Sales of custom computer programs delivered electronically are not subject to sales and use tax. Connecticut imposes sales and use tax on sales of software as a service. How products are produced, sold and delivered is critical to determining the tax status.
Connecticut has an economic nexus law where if an out of state seller sells $100,000 and comprises 200 transactions into the state, sellers need to collect and remit sales tax on those transactions. This threshold applies to all transactions within the 12-month period ending on September 30 immediately preceding the monthly or quarterly period when liability is established. Transactions that are included in the threshold include gross receipts from tangible personal property (including digital products and SaaS) sold into the state, exempt sales and exempt services. Transactions that are excluded from the threshold include services, sales for resale and sales through a marketplace. This legislation went into effect on July 1, 2019.
Marketplace facilitators that facilitated retail sales of at least $250,000 during the prior 12-month period are required to collect and remit sales tax on behalf of their marketplace sellers. A marketplace facilitator is defined as anyone that provides a forum that lists or advertises taxable tangible personal property for sales by marketplace sellers; directly or indirectly collects receipts from the customer and remits payments to the marketplace seller; and is compensated for such services. This legislation was enacted on December 1, 2018.
Many states have annual sales tax holidays, during which certain items the state wants to promote the purchase of (like school supplies emergency preparedness supplies, or energy efficient appliances) can be purchased sales tax free. Connecticut had a sales tax holiday from the from Sunday, April 10 to Saturday, April 16, 2022. During this week, certain gas taxes and sales and use taxes on certain clothing and allocating funds for free public bus services were subject to the tax exemption. For more information on the sales tax free week, click here.
Our team at Miles Consulting Group is always available to discuss the specifics of your situation, whether in Connecticut or other U.S. States, and help you navigate the complex tax structures arising from multistate operations. Call us to help you achieve the best tax efficiencies.
Random Facts
- Connecticut and Rhode Island never ratified the 18th Amendment (Prohibition).
- Connecticut is home to the oldest U.S. newspaper still being published: The Hartford Courant, established in 1764.
- The first speed limit ever set was passed into law in Connecticut in 1901, a neck breaking limit of 12 miles per hour.
- Connecticut was the first state to have permanent license plates, starting in 1937.
- Cattle branding in the United States began in Connecticut when farmers were required by law to mark all of their pigs.
- The first lollipop-making machine opened for business in New Haven in 1908. George Smith named the treat after a popular racehorse.
- The inventor of the process of vulcanization, Charles Goodyear, was born in New Haven. Goodyear was a self taught chemist and engineer.
- Noah Webster, of Webster’s dictionary, was born on October 16, 1758, in the West Division of Hartford, CT (now West Hartford). He attended college at Yale in New Haven. His first edition of his dictionary was published in 1806.
- Eli Whitney was famed for inventing the cotton gin, was from New Haven, CT.
An Important Update On SaaS And Sales Tax: Answering Client Questions
The Software-as-a-Service (SaaS) industry has continuously grown since the first SaaS company was founded in 1999, and remains a complex and ever-changing field. It can be especially complicated when it comes to sales tax, and we constantly receive questions about it. The very nature of the product (is it a service or a software?) is a large part of the confusion, and as a result, states may define SaaS differently, which makes it hard for businesses, especially smaller ones, to keep up. SaaS is now taxed in over 20 states, but for different reasons. Other areas unique to SaaS companies in the realm of sales tax include the sourcing of revenue to the correct state, timing of the recognition of the sale and the application of the tax (versus recognition of revenue for financial/book purposes).
If you are new to the application of sales tax to SaaS, we recommend you check out our previous articles on the topic, including this one here, where we discuss in-depth what makes SaaS sales taxation so complex. In the current article, we discuss answers to specific SaaS sales tax questions and clarify how we can help companies move forward.
Q: How Has The SaaS Industry Grown This Year?
Before we dive into our SaaS and sales tax client questions, we want to share some SaaS industry updates to set the precedent for how large this industry has become. Since 2015, the SaaS industry has grown from $31.5 billion to an estimated $171.9 billion. That equates to 500% growth in only seven years. Overall, the annual growth rate is projected to surpass 17% in 2022. As you can see, this is a fast-growing field of technology, and it is important to stay ahead of your sales tax obligations.
Q: Do All States Tax The SaaS Revenue Stream?
Currently, not all states tax the SaaS revenue stream, though many do. It gets a little complicated because SaaS is considered a service in some states and not in others. To make matters more difficult, some states tax these types of services, while some do not. For example, in Arizona, SaaS is considered a taxable service. In Washington, however, SaaS is considered to be a tangible software and is subject to sales tax because of that. In Texas, SaaS is regarded as a taxable data processing service and subject to 80% taxability (vs. 100%). Similar to all other aspects of sales tax, each state, and sometimes each city, has different tax legislation for different products and services. For instance, while the states of Colorado and Illinois do not tax the SaaS revenue stream at the state level, the cities of Denver and Chicago do! (Trust us, there's some nuance there, so if you have nexus in those cities, give us a call!) Discover more about SaaS taxability by state in our previous articles here and here.
Q: What About A SaaS Company Engaged In An M&A Transaction (Or Thinking About It)?
We often see SaaS companies in the middle-market (MM) space become targets for acquisition. These companies are often not as well-represented by tax advisors (specifically in sales tax) as the purchasing company. Oftentimes, the company hasn't considered all the ramifications of sales tax on SaaS until the purchaser brings it up in the due diligence process. Unfortunately, that can often be too late, as the seller is then left with significant exposure that can affect the purchase price, holdback, etc. and make a real financial impact on the seller shareholders. Ideally, a company planning an exit strategy via acquisition should engage in internal due diligence around this matter before getting deep into the deal. Here at Miles Consulting, we can help MM companies to either shore up their state tax exposure before a deal or during the due diligence process as an advocate for the seller. Coming in earlier is ideal, as it takes some of the urgency away and allows companies a bit of time to prepare analysis, take steps toward remediation (which may also include reaching out to customers regarding self-assessment) and overall employ an offense instead of defense. We often assist with determining how much companies potentially owe in retroactive sales tax (exposure analysis), how to come forward and fix it (remediation) and a plan to move forward.
Q: What Do We Do as SaaS Company That Needs To Register In Various States And What Are The Ramifications Of Prior Year Exposure?
We are frequently introduced to clients wishing to become sales tax compliant. Ideally, they'd like to register and simply move forward with collection, remittance and compliance. Unfortunately, they often haven't considered prior liabilities created by having nexus in a state (either physical presence or economic nexus). During the registration process, states will ask when nexus was created. If that date was in the past (and it frequently is), the state will expect the delinquent returns to be filed and overdue tax be paid.
We assist with that process by determining clients' nexus creation dates, estimated amount of exposure, an overall game plan for remediation and then actually doing the "heavy lifting" of assisting with voluntary disclosure agreements (VDAs) or backfiling. There are some nuances of when you would want to do a VDA versus backfiling; this is something that we can help with as well! Once we help a client become sales tax compliant, we can also assist them with a plan to move forward with a strong sales tax compliance strategy.
Q: How Can I Implement Software To Assist With Sales Tax Compliance?
Once a SaaS client becomes sales tax compliant for retroactive liabilities, they'll need to consider how they would like to move forward in the actual collection of tax from customers, remittance of tax to the states and filing returns. They have many different options. One option is to do this internally, which can be cumbersome in a smaller organization as it takes a lot of time and effort. Clients can also choose to acquire a software solution, such as Avalara or TaxJar (Miles Consulting Group partners with these companies), to assist with collecting the correct amount. To determine how to remit tax, file returns and stay in sales tax compliance, businesses also have many options, depending on cost, convenience, technical experience, complexity, etc. They can choose a complete software solution, a complete human solution or a combination of the two. This last option is where we often come in to help - we work with software but also apply a human approach by including a level of review that cannot be achieved with software alone.
Do You Need Help With SaaS And Your State Sales Tax Compliance?
State sales tax issues are complex and constantly adapting, especially when it comes to SaaS companies. It is important to consistently ensure you meet all of your sales tax compliance requirements. Working with an experienced team of state tax consultants like Miles Consulting Group is a great way to do this. If you have questions about your tax liability related to SaaS, or have any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on Missouri
This month we travel to the “Show Me” state of Missouri. The people of Missouri have earned their motto as the “Show Me” state for their very practical skepticism of the fads that sweep other parts of the country. This attitude manifests itself in the state government’s approach to business encouragement and regulation.
The state is the 21st most extensive by area and is geographically diverse. North of the Missouri River, the state is primarily composed of rolling hills of the Great Plains and south of the Missouri River, the state is dominated by forests. The Mississippi River forms the Eastern Border of the State, eventually flowing into the swampy Missouri Bootheel.
