Multistate taxation + online sales tax
Two pounds of SALT in a one-pound bag
Brock R. Yates, CPA, M.T.
In today’s ever-expanding online presence, it seems the ability for you to buy just about anything from an online retailer is infinite. Heck, I don’t even bother going to the pet food store anymore. Why would I, when the convenience of having my dog’s food delivered to my front door is too great to pass up? Believe it or not though, these online purchases and increasingly interstate transactions are creating a nightmare scenario for both lawmakers and taxpayers across the U.S. All forms of tax, including income, sales, use and even the estate tax, vary across state borders. If that’s not complicated enough, the application of rules, regulation of taxpayers and collection of taxes differs as well and is enough to make anyone’s head spin. Let’s look at some of the overarching rules regarding multi-state taxation and how it may impact you and your business.
Sales + use taxes
Forty-five of the 50 states impose some sort of consumption tax, typically a sales tax on purchases. Some of these taxes can be as high as 10% on the value of goods purchased. They are collected by the retailer and remitted to the state revenue agencies on a periodic basis.
For the past quarter-century, the ruling Supreme Court case was Quill Corp. v. North Dakota. For the 25 years before Quill, National Bellas Hess ruled the land as the premier case in this area. Both cases determined that if a company did not have a physical presence in a state, it was not required to collect and remit sales tax on purchases from customers in that state. Physical presence is, as it sounds, a standard by which a taxpayer must have a substantial nexus, or connection, within a state to be liable for collecting sales tax. This can include:
- A distribution center
- Salespeople with authority to approve orders
Public Law 86-272 also provides a standard by which a salesperson who merely acts as a conduit between the headquarters and the customer (i.e., is not able to approve orders) does not subject the taxpayer to the substantial nexus standards.
As you can see, it used to be very easy for consumers to escape paying sales tax on certain items – you just needed to find a retailer that did not have some form of substantial nexus in your state. States were keen to this and increasingly raised pressure on companies to voluntarily submit to collecting sales tax, even on out of state purchases. Arizona, specifically, at one point had a line on the individual tax return for people to self-report their online purchases for which they paid no sales tax, hoping to get the tax voluntarily out of consumers. That line was scrapped in the past few years as, shockingly, very few taxpayers utilized it.
Colorado recently passed legislation that was litigated in the Supreme Court (before being remanded back to the 10th Circuit) that requires certain online retailers without physical presence to remit to Colorado a list of Colorado residents who purchased goods and escaped the sales tax. Colorado would then go after those taxpayers for their taxes due.
On June 21, 2018, the sales tax debate came to a head as the Supreme Court ruled in the case of Wayfair v. South Dakota, or as many described it, the Kill Quill case. The Court overruled Quill and found constitutional a law enacted by South Dakota that treated retailers with over $100,000 of sales, or more than 200 transactions into their state, as having physical presence and, therefore, liable for sales tax.
The Court found no provisions of the law were imposing on the Commerce Clause of the Constitution and felt that given today’s environment, companies with the means to track these sales (i.e., companies with large sales such as Wayfair, Amazon, etc.) should be remitting sales taxes to the states. The thresholds of $100,000 of sales or 200 separate transactions, coupled with the provision that the rules were only applicable going forward (i.e., the state could not pursue back taxes in prior years under this law), made the law fair in the Court’s eyes.
The Court opinion mentioned that states in total were losing nearly $33 billion in lost sales tax revenue under Quill, and for states to provide necessary services, the ruling was justified. It remains to be seen what laws other states will enact given these proceedings, but you can bet that nearly every state will enact similar legislation, changing, fundamentally, the landscape of sales tax in the U.S.
Income + franchise taxes
While nearly everyone who purchases goods online may be impacted by the items mentioned above, the changing landscape of multistate income tax will typically only impact those individuals and businesses that live and/or have businesses with cross-border relations.
Typically, companies that are registered with a state’s secretary of state should be filing income/franchise tax returns with those states to be in good standing. Failure to do so could lead to revocation of your license to do business in the state and can be a real pain to undo.
The question of state filing beyond that can be a bit more confusing. Historically, states have been intentionally vague in determining which companies need to file income tax returns with that state to avoid setting a certain precedent, rather relying on terms like “nexus” (and hopelessly confusing taxpayers and CPAs). Recently, there has been a shift away from a presence type nexus and a move toward an “economic nexus.” That is, a company need not have a physical presence, just a sufficient amount of sales to have a filing requirement in that state. A handful of states have enacted such legislation and more are jumping on board year by year. It’s important to talk to your Henry+Horne CPA if you have a business transacting in multiple states to see if you may be subject to these filing requirements.
If you own certain businesses with multiple state returns, you, as the owner, may also need to file in several states for your personal taxes. Additionally, if you work in multiple states as an employee, your payroll may be taxed in the various states you do work. Your employer should be withholding taxes correctly based on your work schedule, however, you will always need to file in your “home state” if your home state imposes an income tax. Your home state can be determined by facts and circumstances, such as where you are registered to vote, where you receive bills and other mail, etc. If you find yourself in this situation, it may make sense to check with a qualified tax professional to see if you are handling these issues correctly.
The landscape of multistate taxation is sure to become only more confusing as companies move from the traditional brick-and-mortar models toward an online presence. Further complicating matters is the treatment of certain service providers, such as software-as-a-service (SaaS).
This article has just touched on a few of the aspects of multistate taxation and you should be speaking with a qualified professional should you have questions or concerns on these matters. Contact us to help you with your business; states are becoming more and more aggressive in collecting taxes, so it helps to have someone in your corner to make sure you’re only paying your fair share! Our professionals help clients in a variety of industries including construction, dealerships, restaurants, technology and more.