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Sales Tax Law Basics for Successful Accountants and Tax Planners

Operating a profitable business requires a lot from its owners – time, energy, persistence, industry knowledge – and truly effective leaders know when to ask for help. When prospects reach out to you for advice, helping them with income taxes may be the low hanging fruit. But sales taxes can be another area where your help can add value to their organization. Sales tax laws are notoriously murky, and business owners often overlook just how instrumental sales tax compliance can be to their operations’ success. To be a successful accountant, you must understand the basics of sales tax law and be able to apply those fundamentals to any client that walks in your door. And that’s where we can help.

What Are Sales Taxes?

Sales taxes are transactional taxes levied on sales of goods or services. When the end consumer purchases an item – with cash, credit, a promise to pay, or some other form of consideration – sales taxes should be top of mind. But transferring title of an asset is not the only way to make a taxable (or potentially taxable) sale. Purchasing a service, signing a lease, or renting a car might also be taxable. To determine which transactions are taxable, you must look to the presiding state’s tax laws.

Although the Federal government sets precedents for interstate transactions, there are no Federal sales tax laws. Sales taxes are levied at the state level. States determine which transactions are taxable, and together the state and individual localities determine the tax rates.

The sales tax laws in the United States are unique. While other countries assess similar transactional taxes, few place the tax burden solely upon the end user. Many other countries employ “value-added taxes” (VATs) where the tax burden is spread among the entire supply chain.

Who is Liable for Sales Taxes?

The consumer is responsible for paying sales tax, but the seller is responsible for collecting that tax and remitting it to the appropriate jurisdiction. If a business makes a taxable sale but fails to collect tax on the transaction, they will be responsible for paying sales taxes out of their own earnings.

Even though the tax liability lies with the purchaser, compliance can be costly to the sellers. Establishing the operations needed to assess, collect, report, and remit taxes to the correct jurisdictions can be tricky, and if your clients fail on their compliance responsibilities, they may be forced to pay back taxes, interest and penalties.

What Sales are Taxable?

When answering your clients’ questions about sales taxes, you may find yourself saying “it depends.” Many of your answers should hinge on you gathering additional information, like what jurisdictions your client is selling in, where their customers are located, how their sales were completed (over the phone, online, in-person), and how the product or service was delivered. In general, sales of tangible property and services are taxable in the jurisdiction where the sale took place or the service was completed. But there are hoards of exceptions to these rules. A noteworthy exception presented itself in June of 2018 when the Supreme Court ruled in South Dakota v. Wayfair.

In a 5-4 decision in favor of South Dakota, the United States Supreme Court ruled that states are permitted to levy sales taxes on businesses that have no physical presence within the state. “Economic presence” is enough to make businesses liable for a state’s sales tax laws. In the years since this ruling, almost all fifty states have implemented economic nexus guidelines to capitalize on this new ruling. While each state is different, many states modeled their economic nexus doctrines after South Dakota’s. South Dakota says that out-of-state businesses must comply with state sales tax laws when they (1) complete more than 200 transactions to individuals within the state, or (2) make $100,000 or more sales transactions into the state.

This groundbreaking Wayfair ruling overturned a decades-long precedent established by the 1992 Supreme Court Case Quill Corp. v. North Dakota. The Quill ruling stated that imposing sales tax collection responsibilities on remote businesses would be too administratively burdensome and would therefore impede interstate commerce. The Court had ruled that out-of-state businesses must first establish a physical connection with the state before the state could impose its filing responsibilities. Uprooting this precedent made waves across the nation. Now that most states have economic presence doctrines, sales taxes became more burdensome to businesses selling across state lines, especially those using virtual storefronts and online marketplaces like eBay or Etsy.

How Can You Help Your Clients with Sales Tax?

In light of the Wayfair decision, your clients should take a close look at their filing responsibilities. They might be falling short in one jurisdiction or another, racking up back taxes and late filing penalties. The sooner you can help them, the better.

The best way for you to determine your client’s filing obligations is to perform a nexus study. Nexus studies are fact-finding missions you can undertake to determine what exposure a business has in each state. When performing a sales tax nexus study, you will need to do a few things:

  • Gather information about your client’s sales to determine where they have physical and/or economic nexus
  • Research tax laws of states where your clients have nexus
  • Look for voluntary disclosure or amnesty programs if your clients have been noncompliant for some time
  • Calculate potential back taxes, penalties, and interest that your clients may owe

As states continue to hammer out their economic nexus doctrines, you and your clients will need to be on your toes, ready to change tax collection procedures on a dime.

If you begin working with a new client, you can set yourself apart as a successful accountant by bringing up sales taxes and using tools such as a tax planner software to help maximize their tax savings. It is unlikely other accountants will think to place such emphasis on sales taxes or see if their clients are overpaying in taxes. 

Ask them about their operations – Do they sell online? Do they advertise their products online? Do they use third-party marketplaces like Amazon or eBay? Where are they filing income taxes? Where do their employees work? Do they travel to other states to complete sales? When you have the entire picture, you can include sales tax recommendations in your sales pitch. And with a good tax planning software for accountants, you can present this strategy alongside your other recommendations so that you can make the sale.

Our Corvee Tax Planning Software allows you to create and finalize multi-strategy, multi-entity, multi-year tax plans for clients in minutes, with ready-to-send, professional and customizable PDF files that show just how much money these clients or prospects will save by adopting your strategic plan. If you want to see a demo of how this product works in practice, contact us today.

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