Practice Management Small Business

Administrative Considerations for Sales Tax

Written by Diane Yetter

The craziness following the South Dakota v. Wayfair decision is starting to die down. You’re figuring out where your clients should be registered and starting to put the necessary documentation in order. What are the next steps? Chances are, many of your clients are registering in new states for the first time and some of them may have never dealt with multiple states before. Are you prepared to help your clients navigate the administrative tasks necessary to register and stay compliant in multiple states?

South Dakota v. Wayfair decision

Entering a New State

Nexus is the name of the game when deciding if your clients need to register in a new state – a game that was completely changed by the South Dakota v. Wayfair decision. Your clients may now be required to register in states where they don’t have physical presence because the Supreme Court gave the go-ahead for economic nexus. However, nexus established by physical presence, an affiliate, or a referrer has not gone away. Your clients still need to evaluate whether they have substantial physical presence or whether other types of remote seller nexus (click-through, affiliate, marketplace, and notice and reporting requirements) apply to their situation.

 

If your client has established nexus for sales tax and use tax purposes, they are required to register in that state. Unfortunately, sales tax registration requirements are not completely consistent across all states. If your client has nexus in several of the 24 of the Streamlined Sales Tax member states, you can submit a registration application through the Streamlined Sales Tax Registration System instead of registering with each state individually. But the rules of registering under Streamlined still require the seller to collect in ALL of the 23 full member states – even if they don’t have nexus of any kind.

Regardless of how your client chooses to register, you’ll need to gather some data. You should compile data in light of several key questions present on sales tax registration applications. First, which tax is your client’s company required to pay? Some states differentiate between sales tax, seller’s use tax, and consumer’s use tax on both their registration applications and returns. This is particularly important for remote sellers that may be registering following the Wayfair decision. Remote sellers are not subject to sales tax but rather seller’s use tax. Registering for the wrong tax type could lead to charging the incorrect rate to customers.

Second, what is your client’s average annual liability or gross sales or taxable sales? States use this information to determine taxpayer filing frequency. Third, what date did your client’s business start operating in the jurisdiction? If your client began operations before registering, they may have returns due for prior periods. Luckily, states thus far are not planning to enforce economic nexus legislation retroactively. So, if your clients had economic nexus prior to registering, you can plan to help them move forward according to each state’s enforcement date.

Finally, what is the taxability of the products or services your client sells? To answer this, you need to know what your client is selling:

  • Tangible vs. intangible property,
  • Personal vs. real property, or
  • A service.

State definitions of terms like tangible personal property vary – you’ll need to know how each state defines your client’s products or services to determine taxability. You should also take a look at whether the use of the product or service is taxable. Certain individuals (like foreign diplomats) and exempt organizations can make tax-exempt purchases. The layout of your client’s invoices and contracts are another taxability consideration. Make sure your client separately states taxable and non-taxable items on their invoices and contracts. Stating the items on different lines can help ensure non-taxable items don’t become subject to sales tax.

Answering these questions will set your client off on the right foot for sales tax compliance in new states and will help ensure they’re charging sales tax correctly on their sales.

South Dakota v. Wayfair decision

Continued Compliance

Sales tax compliance is an ongoing process involving duties like filing returns, maintaining exemption certificates, and maintaining taxability decisions. Your client may be outsourcing more duties like these to you following the Wayfair decision due to an increasing number of states where they have tax compliance obligations. If your client doesn’t have a tax system and has approached sales tax compliance manually in the past, there is no better time than post-Wayfair to help them select a system. Without a reliable sales tax automation solution in place, you and your client could face growing headaches in attempts to manage and analyze your client’s data for compliance purposes.

An automated tax system will streamline data collection, save time, and help your client avoid errors. For example, following Wayfair, your client will likely be putting together and filing more tax returns. For this major piece of ongoing compliance, your client will need sales data like gross sales and taxable sales. Having an automated tax system that can pull this data is key, especially going forward. More and more states are enacting economic nexus legislation and your client will also need sales volume data (by dollar and transaction (invoice) count) to know if they exceed a threshold.

When people jump into sales tax administration, they are often unaware of how many details are truly involved. Registration is just the beginning. Your client will need an administrative process that doesn’t miss the ever-evolving details in sales tax – from implementing local government changes to dealing with sales tax holidays. Due to Wayfair, sales tax compliance is at the top of a lot of peoples’ minds, so it’s an opportune moment to evaluate your client’s administrative process and test your own knowledge of sales tax administrative issues.

Which administrative tasks give you or your client the greatest headache? Have you run into any issues with state registrations following the Wayfair decision? Let us know in the comments!

About the author

Diane Yetter

Diane L. Yetter, CPA, MST, is a strategist, advisor, speaker, and author in the field of sales and use tax. She is president and founder of YETTER, a sales tax consulting and tax technology firm. She is also the founder of The Sales Tax Institute, which offers live and online courses to educate business professionals about sales and use tax.

Diane works with clients of all sizes and in myriad industries to deliver sales tax services ranging from tax technology to tax policy and planning and training. She also regularly partners with other advisors to help them serve their clients.

As a speaker, Diane is frequently asked to present to industry groups concerning sales and use tax issues. As an author, Diane regularly contributes to various publications, and has published three books and numerous articles concerning sales and use tax issues. She also is the author of the US Sales Tax Chapter for the IBFD VAT Worldwide Research Database. She has also appeared as an expert witness.

Diane is a member of the AICPA, Chicago Tax Club, Chicagoland Chamber of Commerce Taxation Committee, the Practitioner Connection with the Council on State Taxation, and the Institute of Professionals in Taxation. Diane serves on the KU Endowment Association’s Board of Trustees and serves as Past Chair of the Dean’s Board of Advisors, University of Kansas School of Business, where she is also an adjunct professor, teaching topics on state and local taxation and entrepreneurship. Reflecting her expertise, Diane was named one of Accounting Today’s Top 100 Most Influential People in Accounting for 2011, 2012, and 2017. Her Twitter handle, @salestaxinst, is also one of Forbes Top 100 Tax Twitter Handles for 2018.

Diane earned a BS in accounting and business administration from the University of Kansas in 1985 and an MS in taxation from DePaul University in 1994. Prior to founding the company, Diane was a state and local tax manager in the Chicago office of Arthur Andersen LLP, the sales and use tax director for the Quaker Oats Company, and a sales and use tax auditor for the Kansas Department of Revenue.

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