Special Sales Tax Report: The Key Issues Accountants Need to Knowby
Sales taxation is an evergreen topic on everyone’s agenda but now it’s especially prominent in discussions at state and federal levels, and for several reasons. Diane Yetter, CPA and founder of the Sales Tax Institute in Chicago and founder and president of sales tax consultancy YETTER, offers five sales tax hot topics.
Nexus: Also known as sufficient physical presence, it means that a business’ direct or representative presence in a state allows the state to require that the company pay taxes. Nexus is based on a temporary or permanent presence of people, such as employees or independent sales and service agents; and property, including offices, warehouses and inventory. But it’s not uniformly defined by states.
States now are considering what’s called "click-through" nexus. That refers to the payment of customer referral fees to affiliates, tracked through online promotion or tracking codes that let the seller know where the sale originated.
Where once companies used salespeople to knock on doors, now websites can include a link to a seller’s site and sellers can track those clicks from the site, and pay a commission.
Last year, several bills proposed various ways to expand how retailers are defined, such as Senate Bill 2609, dubbed the Marketplace and Internet Tax Fairness Act, which died after the last Congress failed to take any action.
The bills would have abolished nexus for remote sellers and require all remote sellers that do business in a state to collect sales taxes without any substantial presence, Yetter says.
As states have waited for federal action, they have responded with click-through bills to tie in existing state laws that apply to a company’s agents, she says.
Internet Tax Freedom Act: The bill bans states from imposing new taxes on Internet access fees or discriminating against online transactions. Most states don’t tax the access fee anyway. The use tax applies to all purchases of taxable items regardless of the method of ordering (mail order, Internet, out-of-state, home shopping). “The word on the street is that the Tax Freedom Act will pass because it has bipartisan support. It was extended through Oct. 1 of this year,” Yetter says. (The original law was designed for a particular period, but has been extended multiple times.)
Base expansion: It’s all about what is subject to sales tax—and historically that was sales of tangible property. “We see states looking to make drastic changes in the tax structure and expanding the consumption tax base, which is sales tax, and reducing income taxes,” Yetter says.
Software taxation: This is a companion issue to base expansion, Yetter says. As economic and business models change, and how we buy things changes, software is a biggie. “You used to buy canned computer software, then it was electronically delivered and now you don’t buy it at all, it’s hosted in the cloud,” Yetter says. “Are you buying software as a service (SaaS)? Which jurisdiction has the right to tax it—where the users are who log in or the providers’ billing address?”
Class-action lawsuits/Qui tam: The lawsuits turn on when a company has over-collected taxes and qui tam actions are based on under-collection. “In both cases, the challenges are brought by private citizens,” Yetter says. Driving the cases is the ability in certain states to bring class-action suits on taxation and sales tax laws typically involving companies that sell to the public. Cases have involved taxes on shipping and handling charges, and even pizza deliveries. “There are a lot of settlements when there isn’t even a basis for the suit,” says Yetter. “Companies don’t want bad press.”
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.