How State and Local Tax is Affecting Your Clients
A lot has been said about the impact of state and local taxes (SALT) on businesses of all kinds, often leaving tax and accounting professionals to shepherd clients through to remain compliant. This process has not necessarily been made easier under the new Tax Law.
As such, help from accountants like Michael Fleming, a director at Dallas-based Peisner Johnson & Company, LLP becomes more essential. He is admittedly passionate about sales tax and in proactively helping companies, CPAs and other tax professionals understand the nuances involved, in order to successfully avoid or limit audit assessments.
Michael will be speaking on the topic at the upcoming Avalara Crush event, where he will explain how online marketplace selling is allowing businesses to find buyers more quickly and easier than ever before. You’ll also learn about the common sales and use tax traps that enable you to engage with your clients, while evaluating their risk and assisting them through educated planning.
In a recent Q&A with Michael, we discussed what accountants and their small business clients need to know about SALT, the common questions and his views on the impact of the new Tax Law.
AW: What is the most common issue/question with SALT clients approach you with?
Fleming: The most common question we get is where and when do I or where does my client, have to collect and remit sales tax. Our answer is threefold: 1.) Wherever you have nexus, and 2.) What you sell is taxable, and 3.) Your exposure is material. Which generally spawns a whole other series of questions about nexus, taxability and materiality.
Nexus is just a fancy word meaning link or connection. It is the link or connection with a state that must be present with a state before the state can either require you to collect and remit tax, like a sales tax, or to pay a tax like an income tax.
There are many different activities that can create nexus and they differ from state to state. They even differ between sales tax and income tax. For sales tax purposes there has to be some sort of physical component to sales tax nexus. Although that could change later this year.
AW: Do you feel the new Tax Law has simplified or complicated SALT for retail clients? Explain.
Fleming: This a great question and lots of people have been asking, but when it comes to sales tax it doesn’t have much impact at all. This really impacts income taxes and determining what entity structure is best.
On the sales tax side we are really focusing on the South Dakota v. Wayfair, Inc. case that the US Supreme Court has decided to hear. This case is about whether to abrogate the physical presence requirement of the 1992 Quill case (Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992)).
No matter how the case is decided it will have a major impact on how states approach taxing sales over the internet. If physical presence is deemed not to be necessary we will see economic nexus as the new norm.
In other words just selling into a state can create nexus and sellers could have nexus everywhere. If Quill is upheld, then I think we will see more states follow Colorado’s lead and pursue remote seller use tax notice and reporting requirements.
AW: Can you name a SALT-related issue that you find most clients don't know about but should and why?
Fleming: The Remote seller use tax notice and reporting requirements are becoming a huge issue and many sellers and their advisors are not following this newest trend. States can currently only require that a seller collect sales/use taxes if the seller has nexus.
However, many online sellers do not and the states believe they are missing out on a lot of revenue. Colorado (for example), about eight years ago, came up with the “bright” idea of creating a set of rules for sellers, that do not have nexus, which would make their lives so miserable the sellers would decide to register voluntarily.
AW: For online retail clients, how is online marketplace selling allowing businesses to find buyers more quickly?
Fleming: Another great question. Accessibility is a big part of the answer. There are no geographical limitations, customers from all over the world can buy. There are also no time constraints, the internet never closes and customers can buy at any time of the day or night including holidays.
For sellers who drop ship it can lower inventory costs, location costs and can lower the number of employees required to run the business. We have seen internet purchasers really evolve over the last five - seven years from those looking to avoid sales tax on the internet to those who are looking for a greater selection and a convenient stress free transaction. In our busy lives it is nice for the store to come to us rather then having to go to the store.