Thanks to Avalara, the 'tax people', we are introducing with this article a new 50 part series. Yes, I said (50 parts), covering sales tax issues associated with each and every state/tax jurisdiction in the US. We will be publishing an article essentially every week over the next year. Who knows, by the end of the year there could be sufficient changes to just start the whole series over again with updated information.
You will want to 'tune-in' every week because we are randomly publishing the states, no alphabetical order so you can 'count-down' to your state, you will just have to check each edition to see if it is your state. In order to start this series out, we are going to cover a few generalities, and then next week, you should find our 'first state', right here.
Avalara is the leader in sales tax automation for businesses of any size. Their SaaS offering provides the most complete set of transaction tax compliance services available, including tax calculation, exemption certificate management, returns processing and 1099 filing and reporting. Avalara was founded in 2004 and has been recognized as one of the fastest growing companies in America.
Sales tax provides critical revenue for states. Other than property and income tax, sales tax is the largest source of tax revenue in the majority of the 46 states that collect it. From a government perspective, making sure every sales tax dollar is collected, through audits, fines, penalties rates and rules, is an exercise for income. It’s easy to be lured into a false sense of compliance when it comes to sales tax. Manual sales and use tax management is prone to error and directs staff time to pass-through rather than revenue-generating activities. Automation via Avalara allows growing businesses to leverage limited resources of time and money to remain fully sales tax compliant without sacrificing productivity.
Sales & Use Tax General Information and Challenges:
Nexus: Nexus is the requirement to collect and remit tax in a certain state or jurisdiction. It is established by a “substantial physical presence”. Most commonly this will be property or payroll in that state but also includes business activity ranging from contract workers to tradeshow attendance to affiliate relationships. These rules vary from state to state.
Exemptions: There are three main types of exemptions: product or service exemptions (see next); entity based exemption, meaning the customer is exempt because of how the business is categorized or defined (government entities); use-based exemptions, meaning that the customer is exempt because of the reason of use for that product or service (resale). The latter two require exemption certificates.
Product and Service Taxability: This type of exemption establishes that a certain product or service is exempt because of what is categorized or defined as, and will vary from state to state. While what is considered tangible personal property (TPP) is taxable in every state, other products and service are non-taxable or partially taxable depending on how each state views that product or service. The most common example of this is freight, but we see it in many industries; predominantly technology, medical, and service.
Rates: There are over 10,000 taxing jurisdictions in the U.S. 45 states plus D.C. have at least a state sales tax rate - most have county, city, and special tax jurisdictions (transportation, police, environmental, etc...) as well. At any location you can have between 0 and 6 sales tax jurisdictions to make up the composite rate to charge. Zip codes often overlay multiple jurisdictions making it necessary to use the exact location to determine the correct sales tax rate.
Returns: States require the remittance of sales tax in various forms and frequencies. Most states offer an online or electric method at this point, but not all. The frequency is typically based on expected sales revenue, and can be annual, semi-annual, quarterly, monthly, or even bi-monthly in some cases.
Audit: Audits will typically cover sales and use tax, as well as exemption certificates. Focus points are around use tax and exemption, because these are areas most commonly overlooked and/or done incorrectly. It is also common for states to focus their targets for audits on companies based outside of their home state, because of an unfamiliarity with laws and unrecognized nexus that leads to greater audit penalties than in-state businesses.