The 7 Most Important Sales Tax Compliance Considerations for Retailers
We all know sales tax compliance for retailers is complex, even more so when omni-channel sales and e-commerce are factored in.
From omni-channel tax challenges to shipping taxes, there are ample compliance landmines. Be sure your retail clients are prepared by keeping abreast of these seven important sales tax compliance considerations.
1. Omni-channel Taxation
Your retail clients need to ensure each of their sales channels is collecting the right amount in each state where they’re required to collect sales taxes. The more channels a retailer deals with, the more opportunity for error.
A customer’s increasing omni-channel expectations can create sales tax compliance challenges. Customers now expect multiple fulfillment options when shopping online, including the ability to order online and pick up in the store or on site. For online orders, sales tax will be applied based on where the customer lives.
If an online store includes the fulfillment option “pay in store,” the sales tax obligation would be based on the store’s location. States with hyper-local taxes, such as cities or counties, can add additional complexity and confusion for customers.
As more sales channels are added, special attention should be paid to the nexus that these channels may create. Nexus can be triggered through affiliate programs, click-through referrals from other websites, sales representative activities and other sales capture methods.
2. Taxing Sales, Discounts and Promotions
With limited exceptions, sales tax applies to the gross selling price received from the sale, but the specific definition of gross selling price may vary between states. Generally, your retail clients will owe tax on the final price, not the value, regardless of the method of discount, such as dollars off or percent reduction. This is also true for coupons.
However, if the discount, whether by promotion or coupon, is sponsored by a third-party such as a manufacturer or the distributor, and your client is reimbursed for the reduced price, the sales tax base is the full sales price – not the reduced amount – except in some states such as Texas. Check your local state tax laws and ensure your client adjusts its collection and remittance accordingly.
For special promotions such as BOGO – “Buy One, Get One” – consult the business’ local requirements because taxation requirements for this category of promotion vary widely. It is likely that, in most instances, a use tax will be required by the state where the property is withdrawn from inventory and not in the state where the property is shipped. Ensure your client understands that sales tax requirements will differ between BOGO and “Buy Two and Get 50% Off” promotions.
3. Gift Card Concerns
Gift card purchases are tax free, but ensure your retail client is aware and has a sales system that can process such transactions. Gift cards are treated as cash, with the tax assessment based on what is bought and how it’s bought.
The primary sales tax consideration for gift cards, aside from avoiding unnecessary tax collection, is escheatment or unclaimed property laws. These laws specify that once a gift card is considered abandoned by the state or left unused for an extended period, the state can charge the vendor sales tax on the gift card amount or a percentage of that amount.
Refer to the National Conference of State Legislators’ (NCSL) chart, covering state-by-state escheatment statutes and unclaimed property legislation, for more details. In most states, unclaimed property is returned to the state of the owner's last known address.
However, if the address is unknown, the unclaimed value is escheatable to your client’s state of incorporation or organization.
4. Taxable Shipping
If your client’s store lists a combined shipping and handling charge, the cost of shipping is taxable. In some states, including Maryland, shipping fees are not taxable if handling is listed separately, but is taxable if they are combined. In most states, shipping is not taxable if listed separately from the price of the item.
Several states consider the shipping a taxable activity, regardless whether sales tax is part of the price, while other states determined that shipping charges are not taxable if included in the price. Keep a close watch on the states to which your clients ship goods.
5. Services for Goods
Sure, offering a warranty is a nice service to provide customers and good incremental revenue, but it causes additional sales tax compliance headaches. In North Carolina, and other states, warranties that service personal property are taxable.
Similarly, your client may think that cleaning a swimming pool or installing an already purchased item is in the clear for sales tax because the sales tax on the property was already paid. However, this is not the case in many states. In numerous jurisdictions, including Delaware, New Mexico and Washington, a retailer must charge sales tax for these services.
There are numerous additional compliance considerations relating to servicing goods, including definitions specific to the intended use of a good or service, as well as the secondary nature of your service as it relates to the good. If you have retail clients with service offerings, read up on the specific requirements of the states in which your client’s business has nexus.
6. Taxation of Product Assortment
If your retail client has a diverse product offering, including in-store food, it might behoove the client to selectively offer certain elements of its inventory once it expands the business to new states. In some states, grocery items are not taxable or are taxed at lower rates, while other states tax food at regular rates.
In the states with higher food-related taxes, it will likely simplify your client’s business operations to decline to offer food in those locations. This could also apply to retailers with luxury, high-priced goods or products made from animal products. Both categories of goods can be taxed at elevated rates in some states.
7. Location, Location, Location
Where your client conducts business, including where its affiliates are located or where it makes a sale, are major considerations for sales tax compliance. Where sales occur, and where goods are stored, can trigger nexus in that location.
Advise your clients to keep you well appraised of such activities and to consider choosing locations or distribution centers with favorable local sales taxes compliance regulation relating to nexus.
There’s no doubt sales tax compliance is complex, but as your clients’ most trusted advisor, you can help ease the burden through education and leading the discussion. No doubt, too, you’ll learn something along the way!
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Joni Johnson-Powe, JD, CPA, is the Founder/CEO of Taxnologi Solutions, LLC located in Aurora, CO. She has worked for over 17 years in federal and multi-state tax income tax compliance and consulting, sales and use tax, tax automation, and property tax compliance.