Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Gaining favor among customers by absorbing sales tax

Like the rest of us, state governments want the money that is owed to them. In a growing trend, however, states are caring less about who is paying the money. Forty-five states and D.C. have sales tax requirements. It used to be the law that a seller with nexus must collect the tax from the buyer and remit it to the state. Being negligent in this duty could result in fines and willful disobedience could lead to jail time.

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On October 1, 2019, Pennsylvania and Texas will join the growing list of states that are allowing sellers to “absorb” the sales tax due on behalf of the purchaser. As long as the state is getting its money, it’s happy. These states join Georgia, Hawaii, Louisiana, Maryland, Massachusetts, Michigan, Missouri, New Mexico, South Carolina, South Dakota, Tennessee, Washington, and Wisconsin in allowing the absorption. States that expressly prohibit absorption by sellers are Alabama, Arizona, California, Colorado, Connecticut, D.C., Florida, Iowa, Kansas, Kentucky, Nebraska, Nevada, New Jersey, North Dakota, Ohio, Oklahoma, Vermont, and West Virginia.

Considerations

Of course, absorbing sales tax upon your customers’ behalf can result in paying a substantial amount of money a seller is not obligated to pay. Additionally, any sales tax not paid in full or on time can result in interest and penalties also owed by the seller. If a seller is going to absorb the tax from one customer, some states require that the seller absorb the tax from the rest of the seller’s customers in the same predetermined class as that one customer. This can result in large payments to government agencies affecting a seller’s bottom line.

There can also be benefits, though. In most of the fifteen states that allow absorption, a retailer may directly or indirectly advertise, hold out, or state to a customer or the public that the retailer will pay the tax for the customer. This may be a unique and creative ploy to gain favor among potential customers in a competitive market. It could also ease the administrative burden of the seller by eliminating the need to follow up on any short-paid invoices or disputes with customers.

Regardless, businesses will need to work through the state registration process, ensure sales tax is paid at the proper rate and, if sales are eligible for an exemption, maintain proper exemption certificate documentation.

Consult with a Henry+Horne tax advisor that has experience handling sales tax issues to make sure your business stays compliant.

 

Brian Ess