AB 2854: Bradley-Burns Uniform Local Sales and Use Tax Law

Breaking news: As of 9/29/2023 AB-2854 has been enacted after being signed by Governor Newsom.

Assembly Bill 2854 (AB 2854) has been introduced by Assembly Member Grayson and requires local agencies to publicly disclose any agreements involving the rebate of local sales tax revenue to a business to increase accountability.

What is local tax and what are the agreements for?

AB 2854 was introduced with the goal of creating more transparency around what are referred to as ‘local tax sharing agreements’. In California, the total sales tax rate is made up of a state (6%), county (varies), district (varies), and local (1%) tax. The 1% local tax is referred to as the Bradley Burns Tax, which is allocated to the city or county in which a sale occurs.

A ‘local tax sharing agreement’, also referred to as revenue sharing agreement, allows businesses and cities/counties to enter into an agreement that is mutually beneficial. This agreement ensures that the local jurisdiction receives the local 1% tax by creating business operations (opening a warehouse, store front, etc.) what would entitle the city/county to the 1% local tax, and that city/county would then share the tax with the business.

There can be wonderful benefits to this agreement, such as job creation and increased revenue to a city/county that otherwise wouldn’t have received it; however, if these agreements are set up with the wrong intentions, they can also be seen to take money away from other jurisdictions.

What is this bill about and why should businesses care?

AB 2854 requires that local cities/counties publish detailed information about rebated/shared local sales tax revenue on their website by April 30th each year. This includes information about the parties involved in the rebate agreements, the amounts rebated, and the terms of the agreements.

Local agencies that have not engaged in any tax rebate agreements must report this to the state by April 30 and are exempt from the posting requirement.

While the predominant imposition of responsibilities is to the cities/counties that enter these agreements, business may be affected by their own agreements being now made public, which could have a negative affect on their reputation. Additionally, we may see a decrease in the number of agreements entered into due to these new publishing rules.

Got Questions?

Curious about how AB 2854 could impact your local agency or business? Schedule a call with us here.

by Monika Miles

California's New Tax Credit: A Boost for Manufacturing and R&D

Hey there, California businesses! We’ve got some exciting updates coming your way. This is the first in a series of posts where we’ll discuss various bills that are currently on Governor Newsom’s desk, awaiting his signature. Today, let’s dive into Assembly Bill 52 (AB 52), which could significantly impact your manufacturing and research and development (R&D) activities.

Stay tuned for our next post, where we’ll cover AB 2854.

Breaking news: Governor Newsom has vetoed this bill. But stay tuned – we’ll let you know if it gets re-instated in future sessions.

What’s AB 52 All About?

A Quick Overview

AB 52 is a new bill that aims to provide an income tax credit for sales and use taxes paid on specific manufacturing and R&D equipment. This bill is designed to kick in for taxable years starting January 1, 2025, and will be in effect until January 1, 2030.

Key Points to Know:

  1. Tax Credit Scope:
    • The credit applies to the amount of sales tax you pay on the purchase of qualifying equipment.
    • This includes equipment used mainly in manufacturing, processing, refining, fabricating, recycling, or R&D.
  2. Who’s Eligible?
    • If your business would typically qualify for the partial tax exemption under the Sales and Use Tax Law but still has a large sales tax amount due because of certain local tax rules, this credit is for you.
    • Corporations can also benefit from this credit.

How Does the Tax Credit Work?

Amount and Application

  • The tax credit matches the amount of sales or use tax you paid during the year.
  • If your credit is more than your tax liability for the year, you can carry it forward to reduce your tax bill for the next eight years.

Important Conditions

  • Make sure to claim the credit on your original tax return.
  • The equipment needs to stay in use in California for at least a year after purchase.
  • The California Department of Tax and Fee Administration (CDTFA) will share relevant information with the Franchise Tax Board (FTB) to help manage this credit.

What Does This Mean for Your Business?

A Competitive Edge

California’s high sales tax rates can make it expensive to buy the equipment you need. This tax credit aims to level the playing field by reducing these costs, making it more attractive to invest in California.

Financial Planning

Think about how this tax credit could fit into your financial plans, especially if you’re planning to buy new equipment in the next few years.

Stay Compliant

Keep detailed records and ensure you file everything on time to take full advantage of this credit. Proper documentation is key!

Real-World Example

Let’s Make It Real:

Imagine your biotech company is buying new R&D equipment worth $1 million in 2025. Normally, you’d pay around $90,000 in sales tax at an 8% rate. Currently, you may be eligible for the partial manufacturing/research & development sales tax deduction of 3.9375% ($39,375). This would leave you with a remaining sales tax due of $50,625.

With AB 52, you could additionally claim an income tax credit for the local portion of that sales tax paid ($50,625), potentially saving you a significant amount.

AB 52 is a fantastic opportunity for California businesses involved in manufacturing and R&D. By reducing the effective cost of essential equipment, this tax credit helps keep your business competitive and thriving in the Golden State.

Got Questions?

Curious about how AB 52 could impact your business? Schedule a call with us here.

Stay Informed

Stay tuned for more updates as AB 52 moves forward. If you need personalized advice or have any questions, don’t hesitate to reach out!

by Monika Miles

Michigan & Wisconsin and Sales Tax – SaaS, Software & Other

This month, we continue our “compare and contrast” blog series with a couple of Great Lakes states – Michigan and Wisconsin – specifically their treatment of technology items for sales tax purposes.

Here’s what you can discover:

  1. SaaS in Michigan vs. SaaS in Wisconsin:
    • Michigan: SaaS is generally not subject to sales tax unless it involves downloadable software.
    • Wisconsin: SaaS is non-taxable as long as the customer does not have physical access to the server or control over it.
  2. Software in Michigan vs. Software in Wisconsin:
    • Michigan: Prewritten software delivered electronically is taxable; custom software delivered electronically is not taxable.
    • Wisconsin: Prewritten software delivered electronically is taxable; custom software delivered electronically is not taxable.
  3. Digital Goods:
    • Michigan: Digital products, such as e-books and music, are not taxable.
    • Wisconsin: Certain digital products, like streaming video and digital audio works, are taxable.
  4. Sales Tax Holidays:
    • Michigan: No sales tax holidays.
    • Wisconsin: No sales tax holidays.
  5. Economy:
    • Michigan: Renowned for its automotive industry, agriculture, and manufacturing, particularly in the Detroit metropolitan area.
    • Wisconsin: Leading in dairy production and agriculture, especially cheese, cranberries, and ginseng, with a strong manufacturing sector focused on transportation and food processing.

Wait! Already know you need help with Michigan or Wisconsin issues? Please reach out to us at info@milesconsultinggroup.com

1. Software as a Service (SaaS) in Michigan vs. SaaS in Wisconsin

Software as a Service (SaaS) is subject to sales tax in several jurisdictions across the country.  Approximately half of states do tax the SaaS revenue stream. As you’ll see below, both states are similar regarding their treatment of sales tax.

Cloud Computing Services are likely to be nontaxable in Michigan.

The state generally looks to whether any piece of the transaction includes a downloadable piece of software.  Software delivered electronically is subject to tax. But rulings in Michigan have found the software merely accessed electronically in the cloud (where nothing is truly downloaded or delivered) is not subject to tax.

SaaS is nontaxable with exceptions in Wisconsin.

For SaaS arrangements, if the customer is simply accessing prewritten software provided by a host and located on the host's server, the service is not taxable as long as the customer does not have physical access to the server or control the operation of the server.

2. Software in Michigan vs. Software in Wisconsin

Michigan does impose sales and use tax on prewritten computer software sold electronically.

Prewritten computer software is subject to sales and use tax in Michigan when delivered via electronic transfer.

Prewritten computer software delivered electronically is subject to tax in Wisconsin.

Prewritten computer software is taxable as tangible personal property when delivered electronically.

The sale of custom computer software delivered electronically is not subject to tax in Michigan.

Custom software is not subject to sales or use tax in Michigan when delivered via electronic transfer.

The sale of custom computer software delivered electronically is not subject to tax in Wisconsin.

Software that is not prewritten software is not taxable when delivered electronically.

3. Digital Goods

States vary in their treatment of electronically delivered goods including e-books, music, and streaming video.  Some states consider all of these types of products to be taxable or not, while others call out specific taxability depending upon the product.

In Michigan, digital products are nontaxable.

Michigan does not impose sales or use tax on the sale of specified digital products.

In Wisconsin, certain digital products are taxable.

Wisconsin imposes sales and use tax on the sale, lease, license, rental, or use of certain digital products.

4. Sales Tax Holidays

States often offer sales tax holidays during specific times of the year, during which certain items are sold tax free. These holidays vary greatly by state. Here’s how Michigan and Wisconsin shake out.

Michigan does not have any sales tax holidays.

Wisconsin also does not have any sales tax holidays.

For more information on sales tax holidays, click here.

5. Economy

Although Michigan has come to develop a diverse economy, it is widely known as the center of the U.S. automotive industry, being home to the country’s three major automobile companies (whose headquarters are all within the Detroit metropolitan area). While sparsely populated, the Upper Peninsula is important for tourism thanks to its abundance of natural resources, while the Lower Peninsula is a center of manufacturing services, and the high-tech industry.

Products and services in the state include automobiles, food products, information technology, aerospace, military equipment, furniture, and mining of copper and iron ore. Michigan is the third leading grower of Christmas Trees with 60,520 acres of land dedicated to Christmas tree farming. The beverage Vernors was invented in Michigan in 1866, sharing the title of the oldest soft drink with Hires Root Beer. Two of the top four pizza chains were founded in Michigan and are headquartered there: Domino’s Pizza by Tom Monaghan and Little Caesars Pizza by Mike Ilitch.

Kellogg’s cereal is based in Battle Creek, Michigan and processes many locally grown foods. Thornapple Valley, Ball Park Franks, Koegel Meat Company, and National Hebrew sausage companies are all based in Michigan as well.

Michigan is home to very fertile land in the Saginaw Valley and “Thumb” areas. Products grown there include corn, sugar beets, navy beans, and soy beans. Michigan’s largest sugar refiner, Michigan Sugar Company, is the largest east of the Mississippi River and the fourth largest in the nation. Potatoes are grown in Northern Michigan, and corn is dominant in Central Michigan. Alfalfa, cucumbers, and asparagus are also grown in the state.

Wisconsin produces about a quarter of America’s cheese, leading the nation in cheese production. It is second in milk production, after California. Wisconsin is second in butter production, producing about one-quarter of the nation’s butter. The state ranks first nationally in the production of corn for silage, cranberries, ginseng, and snap beans for processing. It grows over half the national crop of cranberries and 97% of the nation’s ginseng. Wisconsin is also a leading producer of oats, potato, carrots, tart cherries, maple syrup, and sweet corn for processing. A large part of the state’s manufacturing sector includes commercial food processing, including well-known brands such as Oscar Meyer, Tombstone frozen Pizza, Johnsonville brats, and Usinger’s sausage. Kraft Foods alone employs over 5,000 people in the state. Milwaukee is a major producer of beer and was formerly headquarters for the Miller Brewing Company- the nation’s second-largest brewer- until it merged with Coors Brewing Company.

Wisconsin is home to a very large and diversified manufacturing economy, with special focus on transportation and capital equipment. Some major Wisconsin companies include the Kohler Company, Mercury Maine, John Deere and Oshkosh Corporation.

Fun Facts

Michigan Fun Facts

  • Michigan has 64,980 inland lakes and ponds. A person in the state is never more than 6 miles from a natural water source or more than 85 miles from a Great Lakes shoreline.
  • Michigan has more freshwater coastline than any province of any country in the world (3,126 miles).
  • Michigan has the world’s only floating post office. It delivers mail to ships as they pass under the Ambassador Bridge.
  • Michigan has about 150 lighthouses, more than any other state in the United States.
  • Michigan grows about 70% of tart cherries (sour cherries) produced in the United States (Washington state is the leading producer of sweet cherries in the United States). Traverse City, Michigan claims to be the “Cherry Capital of the World,” hosting a National Cherry Festival and makes the world’s largest cherry pie.
  • Battle Creek, Michigan, is called the cereal capital of the world as it is home to Kellogg’s.
  • Michigan has more miles of freshwater shoreline than any other state in the nation.
  • Frito-Lay, one of the world’s largest potato chip producers, sources around 40% of the potatoes used for chips from Michigan. In fact, one out of every 4 bags of potato chips that are consumed in the U.S. is made from potatoes grown in Michigan.

Wisconsin Fun Facts

  • Wisconsin’s Door County has five state parks and 250 miles of shoreline along Lake Michigan. These figures represent more than any other county in the country.
  • Devil’s Lake was established in 1911. The facility has become one of Wisconsin’s oldest and most famous state parks. It leads the state parks in attendance.
  • The Cheese capital of the world is Monroe, WI. Visit Monroe in September of every even numbered year for their festival called Green County Cheese Days.
  • Known for its dairy production, Wisconsin actually leads the nation in exports of cranberries, whey, ginseng root and sweet corn.
  • The American Birkebeiner, a 52K cross country ski race between Cable and Hayward, is the largest on the North American Continent.
  • The state’s constitution is the oldest of any state west of the Allegheny Mountains. It was adopted in 1848.
  • The state is the 23rd largest state by total area and the 20th most populous state.

Our team at Miles Consulting Group is always available to discuss the specifics of your situation, whether in Michigan, Wisconsin, or other U.S. States, and help you navigate the complex tax structures arising from multistate operations. Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

Additional Reading

For a focus on Michigan, read this article we wrote.

For a focus on Wisconsin, read this article we wrote.

by Monika Miles

Sales Tax Exemptions for Both Sellers and Purchasers

Sales Tax Exemptions for Both Sellers and Purchasers: A Comprehensive Guide

Properly collecting sales tax is a fundamental component of selling goods that impacts pricing and financial outcomes for businesses. Understanding and utilizing sales tax exemptions is crucial for optimizing financial performance and ensuring compliance. We’ve put together this short guide as an overview of sales tax exemptions. Our goal here is to help you, the seller, navigate and leverage these opportunities to ensure proper tax collection and to avoid later issues if proper documentation is not retained. And for the purchaser, the opportunity to reduce sales tax liabilities if exemptions are properly claimed.

Here’s what you can learn:

  1. Understanding Sales Tax Exemptions
  • Overview and benefits of sales tax exemptions for businesses.
  1. Resale Exemptions
  • Overview on resale exemptions and best practices for issuing and obtaining resale certificates.
  1. Types of Typical Sales Tax Exemptions
  • Resale Exemptions
    • Explanation of Resale Certificates
    • How to Obtain and Use a Resale Certificate
  • Manufacturing Exemptions
    • Definition and Qualifying Criteria
  • Agricultural Exemptions
    • Overview of Agricultural Exemptions
  • Non-Profit and Educational Exemptions
    • Eligibility Criteria for Non-Profit Organizations and Educational Institutions
  • Additional Exemptions
    • Medical Devices, Prescription Drugs, and Other Prescriptive Items
    • Food and Sales to Government Entities
  1. State-Specific Sales Tax Exemptions
  • Variation in Sales Tax Exemptions by State
  • Examples of Unique State-Specific Exemptions
  1. Applying for Sales Tax Exemptions
  • Steps to Apply for and Obtain Sales Tax Exemption Certificates
  • Documentation Requirements
  1. Common Mistakes to Avoid
  • Misuse of Exemption Certificates
  • Failing to Keep Accurate Records
  • Ignoring State-Specific Requirements

Not quite what you need? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Understanding Sales Tax Exemptions

Sales tax exemptions are provisions that allow certain sales to be exempt from tax, reducing the overall tax burden for businesses. These exemptions support specific sectors or types of transactions by relieving them from sales tax obligations. Proper utilization of these exemptions can lead to significant cost savings and operational efficiencies for purchasers, and also peace of mind for sellers.

2. Resale Exemptions

Explanation of Resale Certificates

Resale exemptions are designed to prevent double taxation  on purchases intended for resale. When a company buys products for resale, they can issue  a resale certificate to the seller in order to purchase these items tax-free. Then, it is the purchaser’s responsibility to ultimately collect sales tax when they sell to the end consumer.

How to Obtain and Use a Resale Certificate

Sellers of goods are responsible  for collecting sales tax on tangible property sold to the end user. If an item is sold to a reseller/distributor, the original seller must obtain a valid resale certificate from the purchaser. Often, companies mistakenly assume all sales are for resale (or simply don’t understand the obligation to keep records) and fail to collect the necessary certificate. During an audit, sellers must be able to present the resale certificate in their records. This requirement also applies to other exemption certificates, but resale certificates are the most frequently overlooked.

Steps the Purchaser Must Take to Obtain/Issue a Resale Certificate

  1. Register Your Business: Ensure your business is registered with your state’s tax authority. This usually involves applying for a sales tax permit.
  2. Resale Certificate : Obtain the resale certificate  form from your state’s Department of Revenue or equivalent agency. This form may also be available online.

Fill out the form with necessary details, including your business name, address, and sales tax permit number.

Note that many states allow for the use of the Multistate Tax Commission’s Uniform Sales and Use Tax Resale Certificate (https://www.mtc.gov/wp-content/uploads/2023/01/Unif-Resale-Cert-revised-10-14-22.pdf) or the Streamlined Sales Tax Exemption certificate (https://www.streamlinedsalestax.org/docs/default-source/forms/exemption-certificateb926a7ab4a0d43e1ad4fe8eb19e79cbb.pdf?sfvrsn=857843d_7). However, we caution that there are many exceptions imbedded in those forms and not all states accept those certificates.

Come to Miles Consulting – we’ll guide you through the above steps.

Top of Form

Bottom of Form

3. Types of Typical Sales Tax Exemptions

Following are categories of types of typical exemptions offered by states. It’s important to note that these are general categories and that not all states offer all of these exemptions and that the qualifications and recordkeeping requirements also vary from state to state.

Manufacturing Exemptions

Manufacturing exemptions apply to purchases of equipment and supplies used directly in the manufacturing process. To qualify, items must be integral to production and contribute to the creation of finished products.

Agricultural Exemptions

Agricultural exemptions cover products and equipment used in farming and ranching. These exemptions are designed to support the agriculture sector by reducing the cost of essential goods and services.

Non-Profit and Educational Exemptions

Non-profits and educational institutions often qualify for sales tax exemptions on purchases made for their operations. These exemptions can provide significant cost savings, allowing these organizations to allocate more resources towards their core missions and activities, such as educational programs, community services, and research projects.

Additional Exemptions

Medical Devices, Prescription Drugs, and Other Prescriptive Items

Many states offer exemptions for medical devices, prescription drugs, and other prescriptive items. These exemptions are designed to reduce the cost of essential health-related products, making them more accessible to those in need. Common items that may qualify for exemptions include:

  • Medical Devices: Items such as wheelchairs, prosthetics, and hearing aids.
  • Prescription Drugs: Medications prescribed by a licensed healthcare provider.
  • Other Prescriptive Items: Products such as insulin, eyeglasses, and oxygen equipment.

Food

Many states exempt grocery items from sales tax, though the definition of "food" can vary. Some states may tax prepared foods, candy, and soda, while others exempt all groceries.  Also note that some states do tax food, but at a lower rate. (Fun fact – in CA, the purchase of water in a grocery store is exempt, but a bag of ice is taxable!)

Sales to Government Entities

Purchases made by federal, state, and local government entities are often exempt from sales tax. This exemption helps reduce the operational costs of public services. Note that sales to the US government are always exempt (but not so with state government units). The trick is sometimes determining whether an agency or entity is THE US government itself.

Note: Obviously, all of these categories are similar, but taxability can vary greatly from state to state.

4. State-Specific Sales Tax Exemptions

Variation in Sales Tax Exemptions by State

As mentioned, sales tax exemptions can differ significantly from state to state. It is essential for businesses to be aware of state-specific rules and requirements to effectively utilize exemptions. Each state has its own set of guidelines, which can impact various industries differently. Being informed about these specific rules can help businesses optimize their operations and ensure compliance.

Examples of Unique State-Specific Exemptions

Some states offer unique exemptions for specific industries or types of transactions. Below are just a few examples:

  • Digital Goods: In some states, digital products such as e-books, music downloads, and streaming services may be exempt from sales tax. For example:
    • Iowa: Iowa does tax digital products, but there is an exemption when sold to a commercial enterprise for use by the commercial enterprise.
    • Washington: Exempts digital goods purchased for business purposes.
  • Energy-Efficient Equipment: Several states provide exemptions for energy-efficient products to encourage sustainable practices. For example:
    • Florida: Occasionally offers a sales tax exemption for certain energy-efficient appliances during designated tax holiday periods.
    • Maryland: Exempts solar energy equipment from sales tax.
  • Manufacturing Equipment: Many states provide exemptions for equipment used in manufacturing processes to support industrial growth. For example:
    • California: Provides a partial exemption for purchases of manufacturing and research & development equipment.
    • Texas: Exempts machinery and equipment used directly in manufacturing from sales tax.
  • Agricultural Products: States with significant agricultural industries often have specific exemptions for farming equipment and supplies. For example:
    • Kansas: Exempts farm machinery and equipment from sales tax.
    • New York: Exempts certain farming services and equipment from sales tax.
  • Medical Devices and Prescription Drugs: Many states have exemptions for medical-related items to reduce healthcare costs. For example:
    • Massachusetts: Exempts prescription medications and certain medical devices from sales tax.
    • Ohio: Exempts prescription drugs and durable medical equipment used at home from sales tax.
  • Educational Materials: Some states provide exemptions for educational resources to support learning institutions. For example:
    • New Jersey: Exempts textbooks sold to college students from sales tax.
    • Virginia: Exempts certain educational materials and equipment from sales tax.

These are just a few. For more on your state’s specific exemptions, contact Miles Consulting.

5. Applying for Sales Tax Exemptions

General Steps to Apply for and Obtain Sales Tax Exemption Certificates (as a purchaser)

  1. Identify Eligibility: Determine if your business qualifies for sales tax exemptions based on your state's criteria. As mentioned, common exemptions include purchases for resale, manufacturing, and certain nonprofit activities.
  2. Gather Necessary Information: Collect all required documentation, which may include business identification numbers, descriptions of the exempt items, and reasons for the exemption.
  3. Complete any necessary applications: Fill out the sales tax exemption certificate form provided by your state’s tax authority. Ensure all fields are accurately completed to avoid processing delays.
  4. Use the Certificate: When making tax-exempt purchases, present the exemption certificate to the seller. It’s up to the seller to retain a copy for their records.

Some states may require you to get a certified document for some exemptions, but in general the self-reporting and maintenance of the certificate is the norm.

Lastly, rather don’t go at it alone – we can help.

Important: Documentation Requirements

In all matters of sales tax exemption – from obtaining the relevant certificates, to presenting them upon purchase – it’s crucial to have good documentation. We can’t stress this enough:

  1. Maintain Detailed Records: Keep detailed records of all exemption certificates, including the date of issuance, the expiration date (if applicable), and the types of purchases covered.
  2. Retain Purchase Invoices: Store all purchase invoices related to tax-exempt transactions. These invoices should clearly indicate the nature of the purchase and reference the exemption certificate.
  3. Organize Supporting Documents: Include any additional documentation required by your state, such as business licenses, IRS determination letters for nonprofits, or manufacturing documentation.
  4. Regularly Update Records: Periodically review and update your records to ensure ongoing compliance. This includes renewing exemption certificates before they expire and verifying that all documentation is current.
  5. Understand State Variations: Be aware that documentation requirements can vary by state and exemption type. Familiarize yourself with your state’s specific requirements to avoid compliance issues.
  6. Prepare for Audits: Keep your records organized and accessible in case of an audit. Proper documentation is crucial for demonstrating compliance with sales tax exemption regulations.

6. Common Mistakes to Avoid

To wrap up, and before you start your sales tax exemption process, consider these common mistakes. Avoiding these can save your business from costly penalties and audits. Understanding and addressing these pitfalls ensures smoother operations and better compliance with tax regulations. Here are three critical areas to watch out for:

Misuse of Exemption Certificates

Ensure certificates are used correctly and only for eligible transactions. Many businesses overlook the necessity of collecting valid certificates, especially for resale transactions.

Failing to Keep Accurate Records

Maintain thorough records of all exemption-related transactions to support your claims and comply with audit requirements. This is particularly important as documentation requirements can vary, by state and exemption.

Ignoring State-Specific Requirements

Stay informed about state-specific exemption rules to prevent mistakes and ensure full utilization of available exemptions.

Understanding and leveraging sales tax exemptions can significantly benefit sellers by reducing tax liabilities and streamlining operations. Staying informed about various exemptions, applying for the appropriate certificates, and maintaining meticulous records is crucial for maximizing these benefits. It can all seem overwhelming, but remember, you don’t have to go at it alone. Come to Miles Consulting Group - book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

by Monika Miles

Benefits of Outsourcing Sales Tax Compliance

Keeping Up With Sales Tax Compliance: A Guide to Outsourcing for Businesses

Sales tax compliance is a crucial but complex aspect of running a business in the United States. But it’s tax, and so it comes with constantly evolving regulations and varying rules across states that make it a daunting task for many businesses. However, there is a solution that can help you navigate these complexities efficiently: outsourcing sales tax compliance. Let’s talk about that here – we have some practical insights into the benefits of outsourcing and how to choose the right partner for your business.

Understanding Sales Tax Compliance

Sales tax compliance involves adhering to state and local regulations regarding the collection and remittance of sales tax on goods and services. Ensuring compliance is vital to avoid penalties and maintain good standing with tax authorities. However, managing sales tax is challenging due to the varied tax rates, ever-changing laws, and the need for precise record-keeping. Many businesses struggle with these challenges, which can divert valuable resources away from core operations. And that’s when outsourcing becomes a highly practical option.

But what is outsourcing? Let’s unpack the concept here – this is what we’ll cover:

  1. What is Sales Tax Outsourcing?
  • Definition and process of outsourcing sales tax compliance.
  1. Benefits of Outsourcing Sales Tax Compliance
  • Time Savings
  • Accuracy and Compliance
  • Cost Efficiency
  • Access to Expertise
  • Scalability
  • Technology and Tools
  1. A Real-World Example
  • Case study highlighting the importance of human oversight in sales tax compliance.
  1. Selecting the Right Outsourcing Partner
  • Criteria for choosing an effective sales tax outsourcing provider.

Not what you’re looking for? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. What is Sales Tax Outsourcing?

Sales tax outsourcing involves delegating the responsibility of managing sales tax compliance to a specialized third-party provider. This process includes tasks such as registering for sales tax permits, collecting and remitting taxes, and maintaining accurate records, including resale and other exemption certificates. By outsourcing, businesses can leverage the expertise of professionals who are well-versed in tax laws and equipped with advanced tools to ensure compliance. This approach not only simplifies tax management but also provides peace of mind.

2. Benefits of Outsourcing Sales Tax Compliance

Time Savings

Outsourcing sales tax compliance allows businesses to focus on their core activities. By entrusting tax responsibilities to experts, you free up valuable time that can be invested in growth and innovation.

Accuracy and Compliance

Outsourcing your tax functions offers significant advantages in terms of accuracy and compliance. Professional service providers specialize in ensuring that your tax filings are precise and submitted on time, effectively minimizing the risk of errors and avoiding costly penalties. Unlike automated software solutions that often promise a "set it and forget it" approach, human expertise plays a critical role in reviewing nexus, accurately coding revenue items, and offering comprehensive audit support. This human oversight helps to identify and address complexities that software alone might overlook, providing an additional layer of security and peace of mind for your business.

Cost Efficiency

Outsourcing can be more cost-effective than maintaining an in-house tax team. It reduces the need for specialized tax expertise and helps avoid penalties and interest from incorrect filings.

Access to Expertise

Tax professionals bring specialized knowledge and skills that are crucial for maintaining compliance with evolving regulations. Their expertise ensures that your business navigates even the most complex tax scenarios effectively. For instance, at Miles Consulting Group, we excel at determining the optimal timing for starting to collect sales tax, providing guidance on retroactive remediation, and accurately coding revenue items within tax software. Our team’s deep understanding of tax nuances helps ensure that your business remains compliant and well-positioned to handle any tax-related challenges.

Book a consultation.

Scalability

Outsourcing allows your tax compliance efforts to scale with your business. As your operations grow and tax regulations change, your outsourcing partner can adapt accordingly.

Technology and Tools

Outsourcing providers use advanced tax software and tools to streamline compliance processes. These technologies enhance accuracy and efficiency, reducing the administrative burden on your business. However, the human touch is necessary to ensure these tools are used correctly and effectively. And with Miles Consulting as your partner, you get the tech and tools, along with the human expertise to leverage them right. It’s a win-win!

3. A Real-World Example

As we said, managing sales tax compliance can be a complex and challenging task for many businesses. One significant problem that companies often face is the incorrect coding of taxable services, which can lead to substantial financial penalties during audits. Again, the human touch that comes with an outsourced partnership can provide the level of insight that saves businesses money, in complex tax matters such as these.

And we’ve seen it before:

A client of ours decided to streamline their sales tax processes by investing in a sophisticated software program. This software promised to handle the complex task of collecting and remitting sales tax for the company’s various revenue streams. The client’s business was diverse, involving revenue from a SaaS product, electronically downloaded software, consulting services related to the software, and training sessions.

Eager to get things right, the client meticulously coded each item within the sales tax software. They carefully matched their sales categories to the line items suggested by the software’s extensive list of options. However, when it came to coding their consulting services, they faced a challenge. With hundreds of "consulting SKUs" available, they selected one that seemed appropriate but didn’t explicitly indicate whether consulting on software implementation was taxable in a given state.

Months turned into years, and everything seemed to be running smoothly—until the day of the audit arrived. The state auditor reviewed the client’s records and found that the consulting services, which the software had categorized incorrectly, were indeed taxable in the state. This misclassification led to a hefty tax bill, totaling several hundred thousand dollars, plus  interest.

The client’s investment in the software hadn’t shielded them from the consequences of incorrect coding. The audit revealed that despite their best efforts, the software's recommendations and the client's chosen codes had resulted in significant tax exposure. It served as a stark reminder that even advanced tools need careful human supervision and handling, in order to avoid costly mistakes.

4. Selecting the Right Outsourcing Partner

Choosing the right sales tax outsourcing provider is critical to avoiding those kinds of nasty surprises. Ask potential providers about their track record with businesses similar to yours and their approach to staying updated with tax law changes. Evaluate their technological infrastructure and how it integrates with your existing systems to ensure seamless data flow and accurate reporting. Additionally, consider the level of customer support they offer—having access to knowledgeable support staff can make a significant difference in resolving issues promptly. It’s essential to select a partner who understands your specific needs and can offer tailored solutions for your business, ensuring compliance and minimizing the risk of costly errors.

At Miles Consulting Group, this is what we do. Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

 

Outsourcing sales tax compliance provides numerous benefits, including time savings, cost efficiency, and enhanced accuracy through access to expertise. By delegating these responsibilities, businesses can streamline their operations and focus on growth. Our services offer comprehensive solutions to meet your needs:

  • Full compliance management
  • Proper coding of revenue sources to the correct software codes
  • Assistance in selecting the right software provider
  • Managed services to collaborate with your internal team and software provider for reviewing and reconciling monthly or quarterly returns.

Engage us for any or all of these services to ensure your sales tax compliance is handled efficiently and effectively.

by Monika Miles

Vermont is the Latest State to Administer the Taxability of SaaS

If you’re a frequent reader of our blogs, you know that we regularly report on the taxability of Software-as-a service (SaaS). Today, we report that Vermont has joined the ranks of states that do require sales tax collection on revenue from SaaS.  In a recently updated previous blog (What To Know About The Taxability Of SaaS In 18 Key States - Multi State Tax Solutions | Miles Consulting Group), we discuss where SaaS is taxable in 20 states (and also certain local jurisdictions).  As of July 1, 2024, we can now add Vermont to that list of taxable states.

Effective July 1, 2024, a new law in Vermont repeals its sales and use tax exemption on prewritten computer software accessed remotely (i.e., cloud software), thus subjecting items like software as a service to Vermont’s sales and use tax rate of 6%.

The amendment reads that “Tangible Personal Property” means personal property that may be seen, weighed, measured, felt, touched, or in any other manner perceived by the senses. “Tangible personal property” includes electricity, water, gas, steam, and prewritten computer software regardless of the method in which the prewritten computer software is paid for, delivered, or accessed.

If your company is doing business in Vermont and is selling the SaaS product in Vermont too, Miles Consulting Group can assist with any questions that you may have.

Book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

by Monika Miles

Navigating Nexus: Strategic Decisions to Minimize Tax Exposure

So, your business is expanding, and you now have touchpoints in multiple states. That’s great! Remember, though, that with that growth, the ever-watchful eye of state taxing authorities often becomes more intense. As sales channels expand and interstate commerce becomes more prevalent, staying compliant with sales tax regulations across multiple jurisdictions gets trickier. Central to this challenge is the concept of economic nexus, a critical factor that determines a business's obligation to collect and remit sales tax in various states. (For those of you who have been tracking the history of “economic nexus”, note that we just passed the 6-year anniversary of the US Supreme Court’s ruling in South Dakota v. Wayfair (June 2018) – the inflection point for all states to ultimately jump on board and enact nexus rules based on sales volume rather than physical presence. For more on how the Wayfair decision has impacted small and mid-sized business, read this blog we wrote).

This can all seem a little scary – but it doesn’t have to be, and you certainly don’t have to go at it alone.

This article aims to guide businesses through strategic decisions to minimize tax exposure, helping them navigate the intricate landscape of sales tax nexus. Remember, doing it right is essential to avoid making sales tax your liability.

Here’s what you can find out.

  1. Understanding Sales Tax Liability
    • Definition and Importance: Learn about sales tax liability and its impact on compliance and business operations.
    • Types of Sales Tax Liabilities: Distinguish between current and noncurrent sales tax liabilities.
    • Consequences of Noncompliance: Understand penalties, interest charges, and legal issues from noncompliance.
  1. Calculating Sales Tax Liability
    • Steps to Calculate Sales Tax Liability: Follow a step-by-step guide to accurately determine sales tax owed.
    • Pre-payment Requirements: Know state-specific pre-payment requirements and their impact on cash flow.
  1. Strategic Decisions in Sales Tax Management
    • Key Strategies to Optimize Sales Tax Nexus Implications: Explore strategies to manage physical presence, economic thresholds, and exemptions.
  1. Leveraging Sales Tax Incentives
    • Types of Sales Tax Incentives: Identify various incentives like enterprise zones, manufacturing exemptions, and R&D credits.

Not what you’re looking for? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Understanding Sales Tax Liability

Sales tax liability refers to the obligation of a business to collect and remit sales tax on transactions within states where it has established nexus. Nexus, in simple terms, is the connection between a business and a state that triggers the responsibility for sales tax collection. This liability affects both online and brick-and-mortar businesses, necessitating a thorough understanding of the factors that establish nexus. For more on those factors, and nexus in general, read this article we wrote.

It's important to distinguish between current and noncurrent sales tax liabilities. Current sales tax liabilities are taxes collected from recent transactions that a business must remit to the state within a specific period. These are generally straightforward since the sales tax is a pass-through cost that the business collects from the customer and passes on to the state. However, noncurrent sales tax liabilities refer to past due taxes that have not been remitted on time. These can become out-of-pocket expenses for businesses if they did not collect the sales tax from customers when required. Noncompliance with sales tax obligations can lead to penalties, interest charges, and legal complications, making it essential for businesses to stay current with their sales tax filings.

2. Calculating Sales Tax Liability

Accurately calculating sales tax liability is vital for compliance and financial planning. Here’s a step-by-step guide to help businesses calculate their monthly and annual sales tax liabilities:

  1. Identify Nexus States: Determine the states where your business has nexus based on physical presence, economic activity, or other criteria set by each state.
  2. Understand Tax Rates: Research the sales tax rates applicable in each nexus state, including state, county, and municipal rates, as these can vary significantly.
  3. Track Taxable Sales: Maintain detailed records of all taxable sales in each state. This includes online and in-store transactions, ensuring that all sales data is accurate and up-to-date.
  4. Apply Tax Rates: Multiply the taxable sales amount by the applicable tax rate in each state to calculate the sales tax owed.
  5. Utilize Tools: Use sales tax calculation tools and software to automate the process. Tools like Avalara, TaxJar, and others can help ensure accuracy and simplify the calculation process.
  6. Review and Remit: Regularly review your sales tax calculations to catch any discrepancies. Ensure timely remittance to avoid penalties.

It's also worth noting that some states, such as California and New York, require pre-payments of sales tax. Businesses must make these pre-payments in the first and second months of each quarter, with the amounts credited when preparing the quarterly return. This system allows states to receive revenue faster and requires businesses to manage cash flow carefully.

Which states require accelerated sales tax payments?

Here are a few of the larger states requiring prepayments, as outlined by Avalara on their ‘Prepayments’ page. Note that other states may require prepayments as well. We include these states as examples.

California

Determination Period Range: This is subject to state review. If you're uncertain about the determination period for a client, contact the CDTFA.

Requirement Threshold: The average monthly taxable sales must be $17,000 or more.

Frequency: Inverse quarterly.

Due Date: 24th of the month.

State-Approved Calculation Methods: For information on state-approved calculations, refer to the CDTFA website. The calculation method varies depending on the period for which the prepayment is due.

Supported Calculation Methods: 100% of monthly liability.

Reporting Format: Payments are made via the CDTFA website. Prepayments made through the prepayment filing calendar will appear as prior payments on the CA CDTFA 401 A2 or CA CDTFA 401 A2 Outlet return.

Set-Up Instructions: Add the CA Prepayment filing calendar. The default prepayment percentage is set to 100%, meaning the prepayment is calculated as 100% of the current period liability. If a different calculation method is needed, edit the filing calendar and enter a different prepayment percentage:

  • Enter 90% to meet the state's minimum requirement.
  • If a full year of transaction data hasn't been imported, calculate the prepayment amount outside the usual system and enter the amount as a prepayment adjustment.

Filing Method: Manual web file.

Additional Information: For the prepayment period from May 1 through June 15, due on June 24th, a different calculation method is required. This calculation is not automated, so you'll need to manually adjust the prepayment amount when preparing the prepayment filing calendar for that month.

Florida

Determination Period Range: July to June.

Requirement Threshold: If you paid $200,000 or more in state sales and use tax on returns filed during the most recent state fiscal year (July 1 through June 30), you must make an estimated sales tax payment every month, starting with the December return, due January 1.

Frequency: Monthly.

Due Date: 20th of the month.

State-Approved Calculation Methods:

  • Average Tax Liability: 60% of the average monthly sales tax amount during the previous calendar year (beginning on the December tax return due in January).
  • Current Month of Previous Year Tax Liability: 60% of the tax liability from the same month in the previous year.
  • Current Month Liability: 60% of the tax liability that will be due with the next return.

Supported Calculation Methods:

  • 60% of the average monthly sales tax amount during the previous calendar year.
  • 60% current month prior year liability.
  • Fixed amount.

Reporting Format: Prepayments and prior payments are reported on the FL DR15 and FL DR15CS returns.

Set-Up Instructions: Add the FL DR15 or FL DR15CS filing calendar. The default prepayment percentage is 60%, which means that the prepayment is calculated as 60% of the prior calendar year average liability. If a different calculation method is needed, edit the filing calendar:

  • Enter a prepayment percentage of 60% to calculate the prepayment as 60% of the current month from the prior year.
  • Enter a fixed dollar amount.

If a full year of transaction data hasn't been imported, calculate the prepayment amount outside the usual system and enter the amount as a prepayment adjustment.

Filing Method: File electronically.

New York

Inverse Quarterly

Use this prepayment method if the client files the NY ST810 quarterly return and meets the requirement threshold.

Determination Period Range: June to May.

Requirement Threshold: Liability of $300,000 or more in a quarter.

Frequency: Inverse quarterly.

Due Date: By the 20th of the month.

State-Approved Calculation Methods: 100% of monthly liability.

Reporting Format: Payment is made via the NY ST809 filing calendar. Prepayment amounts remitted through this filing calendar flow to the NY ST810 quarterly return as a prior payments credit.

Set-Up Instructions: Add the NY ST809 filing calendar. The default prepayment percentage is 100%, meaning the prepayment is calculated as 100% of the current month's liability.

If a full year of transaction data hasn't been imported, calculate the prepayment amount externally and enter the amount as a prepayment adjustment.

Filing Method: Manual web file.

Determination Period Range: June to May.

Requirement Threshold: Liability exceeding $500,000 between June 1 and May 31.

Frequency: Monthly (refer to the NY Department of Taxation and Finance website for payment periods).

Due Date: Three business days after the 22nd.

State-Approved Calculation Methods:

  • Actual Method: Payment must be at least 90% of the actual sales and use tax liability for days 1 through 22 of the current month.
  • Estimated Method: Payment must be at least 75% of one-third of the liability for the comparable quarter of the preceding year.

For both methods, sales tax participants must also electronically pay the balance of their monthly tax liability for days 23 through the end of the month by the PrompTax due date in the succeeding month.

Reporting Format: Payment is made via the NY PrompTax filing calendar. Prepayment amounts remitted through this filing calendar flow to the NY ST810 quarterly return as prior payments.

Set-Up Instructions: Add the NY PrompTax filing calendar. Calculate the prepayment amount externally and enter the amount as a prepayment adjustment.

Filing Method: Manual web file.

ST-330

Use this prepayment method if the client files the NY ST100 or NY ST101 return and chooses to make an advance payment toward their sales tax liability.

Determination Period Range: June to May.

Requirement Threshold: No threshold requirements.

Frequency: Inverse quarterly.

Due Date: By the 20th of the month.

State-Approved Calculation Methods: None specified.

Reporting Format: Payment is made via the NY ST330 filing calendar. Prepayment amounts remitted through this filing calendar flow to the NY ST100 or NY ST101 returns as a prior payments credit.

Set-Up Instructions: Add the NY ST330 filing calendar. The default prepayment percentage is 100%, meaning the prepayment is calculated as 100% of the current month's liability.

If a full year of transaction data hasn't been imported, calculate the prepayment amount externally and enter the amount as a prepayment adjustment.

Filing Method: Manual web file.

For detailed breakdowns of all states that require prepayment, consult the Avalara website here.

3. Strategic Decisions in Sales Tax Management

Effective sales tax management is critical for businesses aiming to optimize their tax obligations and reduce exposure to penalties. Strategic decisions related to physical presence, employment, inventory, and third-party relationships can significantly impact a company’s sales tax nexus and liability. By making informed operational decisions, businesses can navigate the complexities of sales tax regulations more effectively.

How Informed Operational Decisions Can Optimize Sales Tax Nexus Implications

  1. Physical Presence: Physical presence in a state, such as having a brick-and-mortar store, office, or warehouse, creates sales tax nexus. This means the business is required to collect and remit sales tax in that state. Companies should carefully evaluate their expansion plans, considering the sales tax implications of establishing a physical presence in new locations.
  2. Employees: Having employees in a state, whether they are sales representatives, support staff, or remote workers, can establish a sales tax nexus. Businesses must account for the tax obligations that arise from employing personnel in different states. Strategic decisions regarding hiring and the location of employees can help manage and minimize these tax liabilities. (In today’s economy where more companies are employing remote employees, we are seeing many more clients trip into physical presence nexus.)
  3. Inventory: Storing inventory in a state, either in company-owned warehouses or through third-party logistics providers, also triggers a sales tax nexus. Businesses should consider the tax impact when deciding on warehousing and inventory management strategies. Efficiently managing inventory locations can help optimize sales tax obligations. (Note that programs like Fulfillment by Amazon can also create inventory in states that you may not have planned for. It’s important to consider the costs/benefits of using these types of programs.)
  4. Third-Party Contractors and Services: Engaging third-party contractors, such as those providing white-glove delivery services or installation, can create a nexus if these contractors operate in a state where the business does not otherwise have a physical presence. It’s essential to understand how these relationships affect sales tax responsibilities and to structure contracts and services accordingly.
  5. Software and Digital Products: Selling software or digital products can complicate sales tax obligations, especially with varying state regulations on digital goods. Companies must stay informed about how different states tax software sales and ensure compliance with these rules. For more detail on calculating and collecting sales tax for software and digital products, read this article we wrote.

4. Leveraging Sales Tax Incentives for Purchases made

One effective strategy to minimize tax exposure for businesses is leveraging available sales tax incentives. By identifying and utilizing these incentives, companies can often significantly reduce the amount of sales tax they pay on specific purchases, , leading to substantial savings and enhanced competitiveness.

Identifying and Utilizing Sales Tax Incentives to Minimize Liability

Sales tax incentives are designed to encourage certain activities within a state, such as manufacturing, renewable energy adoption, and environmental conservation. Here are some key incentives businesses should consider:

  1. Manufacturing Exemptions: Many states offer sales tax exemptions on equipment used in manufacturing. These exemptions aim to promote industrial growth and retain jobs within the state. Many states offer a full exemption of sales tax for the purchase of qualifying equipment. However, it's crucial to note that not all states provide full exemptions; some may only offer partial relief.

For example, California offers just a partial sales tax exemption for manufacturing and research and development equipment, which can still significantly lower the cost of acquiring necessary machinery.

  1. Solar and Renewable Energy Exemptions: To incentivize the adoption of clean energy, several states provide sales tax exemptions for solar energy systems and other renewable energy equipment. These incentives not only reduce upfront costs for businesses investing in sustainable practices but also align with broader environmental goals.
  2. Energy Efficiency Exemptions: Similar to renewable energy incentives, some states offer exemptions for energy-efficient equipment. This can include items like HVAC systems, energy-efficient lighting, and other technologies that reduce a business’s overall energy consumption.
  3. Electric Vehicles (EV) Exemptions: With the increasing push towards electric vehicles, some states are now offering sales tax exemptions for EV purchases. Businesses that integrate electric vehicles into their fleet can benefit from these incentives, further reducing operational costs.
  4. Recycling Equipment Exemptions: States like Ohio provide sales tax exemptions for equipment used in recycling. This not only encourages environmentally responsible practices but also reduces the financial burden on businesses adopting sustainable waste management solutions.

It’s important to note that in all the cases mentioned above, states will generally require the purchaser of the qualified equipment to provide an exemption certificate to the seller. These exemptions can come in varying forms across the states, so it’s important for the seller to properly maintain these exemptions in case of an audit.

Effectively managing sales tax liability requires a proactive and informed approach. By understanding the nuances of sales tax nexus, calculating liabilities accurately, making strategic operational decisions, navigating new laws, and leveraging available incentives, businesses can minimize tax exposure and ensure compliance.

Staying informed about the evolving regulatory landscape and seeking professional guidance are essential steps in this process. For expert assistance in navigating the complexities of sales tax nexus and optimizing your tax strategy, come to Miles Consulting Group - book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

As sales tax laws continue to change, businesses must remain vigilant and adaptable, ready to implement best practices in sales tax management. By doing so, you can mitigate risks, optimize your tax position, and focus on what you do best: growing your business.

by Monika Miles

Keeping Up With Sales Tax Law: A Primer for Businesses

Understanding sales tax laws is crucial for any business operating in the United States. Sales tax regulations are not only complex but also continuously evolving, making it essential for businesses to stay informed and compliant. Failure to adhere to these laws can, of course, result in significant penalties and financial liabilities, but we’re here to show you that it’s possible to get your arms around the complexities, as long as you have a roadmap.

Sales tax laws are changing constantly, but the basics tend to stay the same. Specific areas, such as digital goods, software, and books, may change more frequently. Understanding the critical nature of these changes is vital for businesses to stay compliant. Additionally, the expanding base of sales tax now includes hot areas such as digital advertising and services. Here’s what we’ll be covering:

  1. Basics of Business Sales Tax
  • Sales Tax Definition: A consumption tax collected by the seller and remitted to the tax authority.
  • Taxable Items: Typically tangible personal property like furniture, electronics, and clothing.
  • Service Taxability: Varies by state; e.g., CPA services might not be taxable, while dry cleaner services might be.
  • Exemptions: Includes sales for resale, to government entities, non-profits, educational institutions, and certain agricultural products.
  1. Sales Tax Thresholds and Compliance
  • Economic Nexus Thresholds: Vary by state, often based on sales volume or transaction count.
    • Example: $100,000 in sales or 200 transactions annually.
  • Physical Presence Considerations: Payroll and HR contributions to physical nexus.
  • Tracking Compliance: Importance of being aware of varying sales tax rates and thresholds.
  1. Obtaining and Using a Sales Tax Permit
  • Registration Process: Involves registering with state tax authorities and possibly paying a fee.
  • Proper Management: Displaying the permit if required, collecting sales tax accurately, and maintaining detailed records.

Not what you’re looking for? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Basics of Business Sales Tax

Sales tax is a consumption tax imposed by the government on the sale of goods and services. It is typically collected by the seller from the consumer at the point of sale and then remitted to the appropriate tax authority. The scope of what is subject to sales tax varies widely across different states, with each state having its own set of rules and exemptions.

In general, tangible personal property (a buzzword in sales tax discussions) such as furniture, electronics, and clothing, is subject to sales tax. As a general rule, tangible items (things you can touch or feel) typically are  taxable unless an exemption applies. However, services, largely intangible, can follow different paths depending on the state's laws. For example, a CPA's services might not be taxable, while a dry cleaner's services might be. Businesses must look to state laws to determine what applies to their specific products and services.  As states look to increase their tax bases (and subject more things to sales tax), they often expand to additional services.  So, it’s important for companies not to assume that services are exempt from sales tax.

Exemptions

Typical exemptions can include:

  • Sales for resale
  • Sales to government entities
  • Sales to non-profit organizations
  • Sales to educational institutions
  • Certain agricultural products

Note that the exemptions above generally require the purchaser to issue to the seller an exemption certificate or form of some type. The documentation will vary state by state and exemption by exemption.  The burden of proof remains with the seller to ensure that they maintain the proper documentation in case of an audit. As such, understanding which items and services are taxable and recognizing potential exemptions are foundational to ensuring compliance. Keeping abreast of changes in state laws regarding taxable items and services is crucial for businesses to avoid unnecessary tax liabilities. And that’s where Miles Consulting can step in to help, so that you’re not caught unaware. Click here to book a consultation.

2. Sales Tax Thresholds and Compliance

Understanding sales tax thresholds (which create nexus) and ensuring compliance is crucial for businesses operating in multiple states. Each state has its own rules and thresholds for sales tax, which can significantly impact a business's operations and tax obligations. These are the nuances of sales tax thresholds, how they affect businesses, and the importance of meticulous tracking and compliance. For more on how to understand nexus thresholds by state, read this article we wrote.

Explanation of Sales Tax Thresholds in Different States

Sales tax thresholds determine when a business must begin collecting and remitting sales tax in a particular state. These thresholds can be based on either physical presence (physical nexus) or economic activity (economic nexus).

  1. Physical Presence (Physical Nexus): Physical presence refers to a business having a tangible connection to a state, such as owning or leasing property, having employees, or maintaining inventory within the state. Traditionally, physical presence was the primary factor in establishing sales tax nexus.
  2. Economic Nexus: Economic nexus thresholds are based on a business's sales volume or the number of transactions within a state, regardless of physical presence. After the landmark 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., many states adopted economic nexus laws, which require out-of-state businesses to collect sales tax if their sales exceed certain thresholds. These thresholds vary by state but commonly range from $100,000 to $500,000 in annual sales or a specific number of transactions (e.g., 200 transactions).

How These Thresholds Impact Business Operations

Sales tax thresholds can have significant implications for business operations. Here’s how they affect different aspects of a company:

  1. Expansion and Market Entry: When entering new markets, businesses must consider the sales tax thresholds of the target states. Meeting or exceeding these thresholds means the business will need to register for sales tax, collect it from customers, and remit it to the state. This adds a layer of complexity and cost to market expansion plans.
  2. Compliance Burden: The compliance burden increases as businesses expand their footprint. They must keep track of sales in each state to determine if they meet or exceed the economic nexus thresholds. Physical presence must also be meticulously tracked, as sales tax software often struggles to account for factors like employee locations, inventory, and third-party contractor activities.
  3. Manual Tracking Requirements: While sales tax software can automate many aspects of tax calculation and remittance, it often falls short in tracking physical nexus components such as payroll, HR records, and physical assets. Businesses must manually track these elements to ensure comprehensive compliance. This requires close coordination between finance, HR, and operations departments. As in most cases, the human touch is vital when it comes to tax – we are that human touch. Book a consultation.

3. Obtaining and Using a Sales Tax Permit

To legally collect and remit sales tax, businesses must obtain a sales tax permit from each state where they have a sales tax obligation. The process typically involves registering with the state's tax authority, providing necessary business information, and sometimes paying a registration fee.

Once a sales tax permit is obtained, it is essential to manage and use it correctly. This includes displaying the permit at the business location, if required, and ensuring that sales tax is collected accurately on all taxable transactions. Businesses should also maintain detailed records of sales and tax collected, as this documentation is vital for filing returns and in the event of an audit.

Miles Consulting can help. 

Keeping up with sales tax laws is an ongoing responsibility for businesses operating in the U.S. The dynamic nature of these regulations requires continuous education and adaptation. By understanding the basics of sales tax, complying with state-specific thresholds, obtaining and properly managing sales tax permits, utilizing modern software solutions, businesses can navigate the complexities of sales tax compliance with confidence.

And then remember, you don’t have to go at it alone - seeking professional advisory services when necessary is your most vital step in every tax endeavor.

Come to Miles Consulting Group - book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

 

by Monika Miles

Calculating Your Sales Tax Liability: A Step-by-Step Guide

Calculating Your Sales Tax Liability in the US: A Step-by-Step Guide for International Businesses

We all know that there will always be one surefire aspect to business – and that’s taxes. But the question then is: are you sure, wherever you operate as a business, that you know your tax liability? It can be a messy matter, especially if you’re an international business operating in the US. And that’s what we’ll be talking about here – this guide is specifically tailored to help foreign businesses understand the essential steps involved in calculating sales tax in the US.

Navigating the US tax system can be particularly challenging for international businesses. The US has a complex and varied approach to sales tax, which differs significantly from the VAT systems common in many other countries. For foreign companies, understanding these nuances is essential to ensure compliance, avoid penalties, and accurately calculate sales tax liabilities. So, whether you’re selling products or services in all, many, or a few states, determining the correct amount of sales tax to collect and remit will ensure you stay on the right side of tax authorities, and compliant as an international business in the US.

Here’s what we’ll be covering:

  1. Understanding Sales Tax Rates – Explore the variability of sales tax rates across US states and localities with examples.
  1. Finding the Correct Sales Tax Rate – Learn how to determine the correct sales tax rate by identifying the sale location and checking state and local rates.
  1. The Sales Tax Calculation Formula – Discover the formula for calculating sales tax and see a practical example applied step-by-step.
  1. Calculating Sales Price with Tax – Understand the methodology for determining a sales price that includes tax, with a detailed example.
  1. Backward Sales Tax Calculation – Learn how to calculate the pre-tax sales price from a total price that includes sales tax.
  1. State and Local Sales Tax Rates, 2024 – Get a breakdown of state and local tax rates for the year 2024.
  1. Using Sales Tax Calculators – Find out how to leverage automated sales tax calculators for accuracy and compliance, with recommended tools and steps.

Not what you’re looking for? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Understanding Sales Tax Rates

Sales tax rates in the United States vary widely across states and localities. Each state sets its own base sales tax rate, which can be supplemented by local taxes imposed by counties, cities, or special districts. For example, California has a state sales tax rate of 7.25%, but local jurisdictions can add their own rates, resulting in a total rate that can exceed 10% in some areas.

Note: Some states just have a state rate, while others include county or special assessment rates, resulting in a combined overall percentage.

2. Finding the Correct Sales Tax Rate

To determine the correct sales tax rate for your business:

  1. Identify the location of the sale: This includes where the product is delivered or where the service is performed.
  2. Check state and local tax rates: Use resources such as state tax authority websites or online databases to find current rates. Just to make things a little easier though, we’ve compiled the latest rates for you in a table a little further on – keep reading.
  3. Apply the rate to your sale: Ensure that you use the combined state and local rate for the transaction’s location.

3. The Sales Tax Calculation Formula

Calculating sales tax involves a straightforward formula:

Sales Tax=Sales Price×Sales Tax Rate

Step-by-Step Guide

  1. Determine the Sales Price: The price of the product or service before tax.
  2. Identify the Sales Tax Rate: Use the correct combined state and local rate.
  3. Multiply the Sales Price by the Sales Tax Rate: This gives you the amount of sales tax to collect.
  4. Add the Sales Tax to the Sales Price: This gives you the total price that the customer pays.

4. Calculating Sales Price with Tax

Sometimes, you need to determine the sales price inclusive of tax, especially in retail settings where prices are displayed with tax included.

Note: In California, certain disclaimers like ‘we pay your sales tax’ mean the seller is choosing not to collect sales tax at the point of sale, but the tax is still due, representing a liability that needs to be considered.

Methodology

To find the total sales price with tax included:

Total Price=Sales Price×(1+Sales Tax Rate)

Example:

With a sales price of $100 and a tax rate of 8.875%:

Total Price=$100×(1+0.08875)=$100×1.08875=$108.88

5. Backward Sales Tax Calculation

In some scenarios, you might need to work backwards from a total price that includes sales tax to determine the original sales price and the amount of tax included.

To find the pre-tax sales price:

Example

If the total price paid is $108.88 and the sales tax rate is 8.875%:

These formulae and methodologies can be applied universally, regardless of the sales tax rate or the initial sales price, ensuring accurate calculations for both inclusive and exclusive tax scenarios.

6. State and Local Sales Tax Rates, 2024

A breakdown of average state, local and combined tax rates.

Remember, though, these percentages are subject to change on a regular basis. Always be tax-savvy – check these rates regularly to avoid unpleasant surprises at filing time.

Note: City, county and municipal rates vary. Local rates are weighted by population to compute an average local tax rate.
(a) Three states levy mandatory, statewide, local add-on sales taxes at the state level: California (1.25%), Utah (1.25%), and Virginia (1%). We include these in their state sales tax.
(b) The sales taxes in Hawaii, New Mexico, and South Dakota have broad bases that include many business-to-business services.
(c) Special taxes in local resort areas are not counted here.
(d) Salem County, N.J., is not subject to the statewide sales tax rate and collects a local rate of 3.3125%. New Jersey’s local score is represented as a negative.
Sources: Sales Tax Clearinghouse; Tax Foundation calculations; State Revenue Department websites.

Source: Tax Foundation

7. Using Sales Tax Calculators

Automated tools can significantly simplify the task of calculating sales tax, especially for businesses operating in multiple jurisdictions. These tools ensure compliance with varying tax rates and regulations across different locations. (We’ve been around long enough that some of our clients have done calculations manually…but those days are pretty far behind us!)

While automated sales tax calculators, such as those provided by Avalara, QuickBooks, and TaxJar, and through sales portals like Shopify offer robust solutions, human oversight is essential for accuracy. This is necessary to account for potential changes in tax laws and local regulations that automated systems might not immediately reflect. The human touch is vital, and that’s where Miles Consulting can help.

How to Use Sales Tax Calculators

  1. Choose a Reliable Calculator:
    • Look for calculators provided by reputable sources such as tax authority websites, accounting software, and well-known online resources. It’s important to choose tools that are regularly updated to reflect the latest tax rates and rules.
    • Example calculators include those offered by state departments of revenue, accounting software like QuickBooks, and dedicated tax services like Avalara and TaxJar.
  2. Input Sales Data:
    • Enter the sales price of the product or service.
    • Provide the necessary location details where the sale occurs (i.e.; if brick and mortar – then at the store; if in e-commerce, the “ship to” address). This includes the state, county, and city, as local tax rates can vary significantly.
  3. Verify the Results:
    • After entering the data, review the results to ensure the calculator has applied the correct combined state and local tax rates.
    • Cross-reference with official tax rate information from state or local tax authority websites to confirm accuracy.

By leveraging these tools, businesses can streamline their sales tax calculation processes, reduce errors, and ensure compliance with tax regulations across multiple jurisdictions. However, always remember to periodically verify the accuracy of these tools and stay informed about changes in tax laws that may affect your business.

And we’ve said it before, but we’ll say it again, it’s always better to first consult with a human. Come to Miles Consulting Group – book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

by Monika Miles

Sales Tax & California’s 80/80 Rule

 Navigating Restaurant Sales Tax with the 80/80 Rule and Automation

Running a restaurant comes with its fair share of challenges, and one of the often-overlooked complexities is sales tax. Failure to navigate the intricacies of sales tax regulations can lead to costly fines and penalties. California Regulation 1603 and its 80/80 rule stands out as a key determinant in sales tax application for food establishments.

In this article, we’ll unpack the 80/80 rule when applied to sales tax, explain how it works, and how you can ensure all your bases are covered, with regard to your business’s compliance. Here’s what you can learn:

  1. Understanding the 80/80 Rule: Explains the 80/80 rule in restaurant sales tax, determining tax application for food sales.
  2. The Nuance of Restaurant Taxes: Discusses the complexities of restaurant tax compliance, considering factors like food temperature and sales method.
  3. The Role of Automation in Tax Compliance: Highlights the use of automation solutions, like Avalara, to manage sales tax compliance efficiently in restaurants.

Looking for something else? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. Understanding the 80/80 Rule

The world of taxation can be a confusing one. Tax codes are thick with rules and regulations that can be applied a number of different ways.

Case in point: the 80/80 tax rule for restaurants.

The 80/80 rule serves as a crucial guideline in determining whether sales tax applies to food sales. It comes into play when more than 80% of a business's revenue is generated from food sales, and over 80% of those sales are taxable, for example, from food consumed on-premises or served hot.

2. The Nuance of Restaurant Taxes

Despite the apparent simplicity of the 80/80 rule, nuances in tax regulations complicate compliance. Factors such as the temperature of the food and the method of sale—whether in-house dining, takeout, or delivery—can influence tax obligations. This complexity underscores the importance of thorough understanding and adherence to tax laws to avoid legal repercussions.

Here’s a breakdown:

Hot vs. Cold: Tax Distinctions

Tax regulations often distinguish between hot and cold food items, each carrying its own set of tax obligations. Hot meals may be subject to different tax rates or exemptions compared to cold items, introducing a crucial consideration for restaurant owners.

So, let’s say you’re the owner of a coffee shop. A customer orders a pastry and wants it heated up. You’ll likely have to charge them sales tax. Now, what about if another customer orders a cold sandwich? Sales tax may not apply in this situation based on the 80/80 rule. However, things get complicated once you start plugging different numbers into the equation. For instance, different rules may apply if less of your revenue comes from food sales, but most of what you do sell is hot.

Method of Sale: Dining, Takeout, or Delivery

Furthermore, the method of sale also impacts tax liabilities. Whether customers dine in, opt for takeout, or have their meals delivered can influence the applicable taxes.

Top of Form

3. The Role of Automation in Tax Compliance

You can see how things get complicated in a hurry. The takeout (pun intended) is, as a business owner, it’s your responsibility to know the tax codes and how they relate to you.

In addressing these complexities, restaurant owners can turn to automation solutions. Companies like Avalara offer automated platforms tailored to manage sales tax compliance efficiently. Automation ensures accurate calculation of sales tax, facilitates the management of varying tax rates for different sales channels, and streamlines tax reporting, particularly for transactions through third-party ordering platforms.

First, Seek Professional Advice

Always seek professional advice, though, before you automate your processes. Given the complexities of food sales tax regulations, businesses will always  benefit more from consulting tax professionals who specialize in sales tax compliance. Experts can provide guidance tailored to specific business needs and help navigate food sales tax laws – especially when it comes to matters of high complexity, such as the 80/80 rule. Miles Consulting is your expert - we’ll guide you to a clearer tax solution, every time.

Come to Miles Consulting Group - book a consultation, drop us a line, or send us an email at info@milesconsultinggroup.com.

by Monika Miles