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.

2. 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.

3. 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

Arizona & Colorado and Sales Tax – SaaS, Software & Other

This month, we continue our blog series with a contrast of a couple of western states – Arizona and Colorado – specifically their treatment of technology items for sales tax purposes.

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

Software as a Service (SaaS) in Arizona vs. SaaS in Colorado

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, these  two states vary significantly regarding their treatment of sales tax for technology products.

Cloud Computing Services are subject to sales and use tax in Arizona.

Arizona imposes a transaction privilege tax (see below) on gross receipts derived from the sale of computer software programs and applications regardless of the method that a retail business uses to transfer the information to its customers. As such, companies selling a SaaS subscription based product to Arizona customers must collect tax on the transaction.

SaaS is not taxable in Colorado.

Effective July 1, 2012, computer software is not taxable when delivered through an application service provider, delivered by electronic computer software, or transferred by load and leave computer software delivery. As such the state of Colorado does not require collection of tax on SaaS subscription based products.  However,  it is important to note that SaaS is taxable in the cities of Denver, Colorado Springs, Boulder and some of the other larger jurisdictions in the state.  (Colorado has adopted an interesting (and also confusing) system by which municipalities can adopt “home rule” status and essentially administer their own tax rules, which may differ from the state – as in the case of SaaS.)

Software in Arizona vs. Software in Colorado

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

Canned computer software delivered electronically is subject to Arizona's transaction privilege tax under the retail classification and to the corresponding use tax.

Prewritten computer software delivered electronically is not subject to tax in Colorado.

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

The sale of custom software delivered electronically is considered a nontaxable service and therefore not taxable.

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

Custom software delivered electronically is exempt from tax.

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 Arizona, digital products are taxable.

Gross receipts from sales of digital products that are delivered electronically are subject to tax under the retail classification in Arizona.

In Colorado, digital products are also taxable.

Effective July 1, 2021, Colorado specifically includes digital goods in its statutory definition of “tangible personal property.” Prior to this amendment, however, digital goods were not specifically excluded from the statutory definition, and the method of delivery did not impact the taxability of tangible personal property.

Sales Tax Holidays

States often offer sales tax holidays during specific times of the year, during which certain items are sold tax free. Items often include clothing, school supplies and computers, and often coincide with the “back to school” months of the year.  These holidays vary greatly by state. However, neither Arizona nor Colorado offers specific sales tax holidays.

For more information on sales tax holidays, click here.

Special Notes

Although commonly referred to as a sales tax, the Arizona transaction privilege tax (TPT) is actually a tax on a vendor for the privilege of doing business in the state. Various business activities are subject to transaction privilege tax and must be licensed. For more information on the TPT, click here.

Economy

Early in its history, Arizona’s economy relied largely on the “five C’s:” copper, cotton, cattle, citrus, and climate (tourism). Copper is still extensively mined from many expansive open-pit and underground mines, accounting for two-thirds of the nation’s output.

Today, the composition of the state’s economy is moderately diverse; although health care, transportation and the government remain the largest sectors.

Arizona’s agricultural output is pretty evenly distributed between crops and livestock. About 47% of Arizona’s agricultural production is in livestock. The other 53% is in crops. In terms of revenue generated, Arizona’s top five agricultural products are cattle and calves, lettuce, dairy products, cotton and hay.

Colorado is considered the 8^th largest state area wise and has a very diverse geography. From the Colorado Eastern Plains to the Rocky Mountains, the state takes full advantage of the land and much of it is favored towards the agriculture industry. In fact, over 60% of Colorado’s land is used for agriculture. Livestock is one area of agriculture that has done especially well. Colorado has over 15,000 beef producers, 200 feedlots, and 20 USDA certified slaughter plants. Beef is the number one agricultural commodity from the state. In addition to livestock, the state is also the nation’s leader in producing beer, with nearly 150 breweries. Denver, Colorado is known as the “Napa Valley of Beer.”

The extensive geography plays in the state’s favor also for tourism. Colorado is considered the “Switzerland of America,” because of its collection of mountains that are ideal for winter sports. These mountains attract millions of tourists to flock to ski resorts and has contributed in making Colorado #1 in the nation for overnight ski visits. Asides from the winter attractions, Colorado’s outdoors is just as enjoyable in all the other seasons.

 Arizona Fun Facts:

• Arizona leads the nation in copper production.
• Oraibi is the oldest Indian settlement in the United States. The Hopis Indians founded it.
• The famous labor leader, Cesar Estrada Chavez, was born in Yuma.
• The world’s largest solar telescope is located at Kitts Peak National Laboratory in the city of Sells.
• The age of a saguaro cactus is determined by its height.

Colorado Fun Facts:

• The 13^th step of the state capital in Denver is exactly 1 mile above sea level.
• Colorado was nicknamed The Centennial State because it became a state 100 years after the US Declaration of Independence (1776).
• In Denver, Colfax Avenue is considered the longest continuous street in America, running 53.3 miles.
• Colorado has the highest mean altitude (6,800 feet) of all the states.
• Katherine Lee Bates wrote “America the Beautiful” after being inspired by the views from Pikes Peak.
• Colorado is the only state in history to turn down the Olympics. Denver could have hosted the event in 1976, but state voters voted against it.

We invite you to further explore Arizona and Colorado in these earlier blogs we crafted over the years. For Colorado, click here. For Arizona, click here. Our team at Miles Consulting Group is always available to discuss the specifics of your situation, whether in Arizona, Colorado, 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.

by Monika Miles

Indiana Economic Nexus Threshold Amended

On March 13, 2024, Indiana Governor, Eric Holcomb, signed an emergency law amending Sales and Use Tax provisions in the state. The most notable of these provisions was to amend the economic threshold for sales tax nexus by removing the number of annual sales transactions in the state as one of the two triggers that require retail merchants to collect and remit state sales tax.

Background of Economic Nexus

In a past blog, we discuss the origins of economic nexus and where we were in 2023 – 5 years after the Wayfair case was decided:

https://milesconsultinggroup.com/blog/2023/06/13/on-the-5th-anniversary-of-the-wayfair-decision-the-impact-of-economic-nexus-on-small-and-mid-sized-businesses/

Have questions about economic nexus in Indiana or another state? Click here to schedule a free consultation:

In most states, the threshold began as either a sales limit or a transaction limit. For example, when South Dakota’s economic nexus law was enacted, it established a threshold of 200 transactions or $100,000, which many states later modeled  as they passed their own economic nexus legislations.

Indiana’s original economic nexus law came into effect on October 1, 2018, and before this law change, the threshold was the lesser of $100K of sales OR 200 transactions.

Transaction Threshold Often an Unnecessary Burden

In their eagerness to pass economic nexus laws after Wayfair, many states followed the lead of South Dakota’s law which introduced both thresholds, a dollar amount and a number of transactions.

However, even at the beginning many states did not include the number of transactions in their threshold (i.e., CA and TX to name a few).  A few states drafted their rules to read that a company must meet both thresholds (i.e.; New York, which requires $500,000 AND 100 transactions.)

In recent months a few other states have removed the transaction threshold as they realize that it puts an unnecessary burden on smaller companies selling small dollar value items.  (For example, if a company sells a trinket worth $2.00, they’d hit the burden of having to register, collect sales tax, remit the tax and file either a monthly or quarterly return after selling just 51 trinkets.)

The following states currently only have dollar amount thresholds: AL, AZ, CA, CO, FL, ID, IA, KS, MA, MO, MS, NM, ND, OK, PA, SC, SD, TN, and TX.  But stay tuned – several other states have indicated changes in the transaction thresholds are ahead. It seems that states are realizing that simply having a threshold based on sales dollar volume of $100,000 makes a lot more sense!

Other items in the newly signed law

The amendment to the law also includes a few other provisions that we’ll now discuss:

• It allows a retail merchant that receives 75 percent or more of its receipts from the sale of prepared food to elect to claim a sales tax exemption on transactions involving electricity equal to 50 percent of the tax imposed on the transactions;
• It specifies the pass through entity tax liability for pass through entities in certain circumstances;
• It makes changes to certain statutes of limitations provisions and technical changes; and
• It provides multiple effective and expiration dates for several provisions.

Click here to read more on this law.

Economic nexus is still an issue

While it seems like we’ve been talking about economic nexus for quite some time (we have – since the Wayfair decision in June 2018), we still see this as an area that clients need assistance to navigate.

If you are a retailer selling goods online, a SaaS company selling subscriptions in the cloud, or a technology company selling digital goods and related consulting, we can help determine your nexus start date and filing requirements in Indiana and every other state.

If you have any questions regarding this change in the law, please contact us at info@milesconsultinggroup.com.

by Monika Miles