Mid-year is generally the time we see implementation of Sales Tax Changes as it is the start of a new fiscal year for most governmental agencies. If your business is involved in interstate ecommerce, you are a remote seller or even if you sell services, there are some sales and use tax changes and trends that you’ll want to make sure you stay on top of. Some changes could impact your business immediately while others are likely to have an impact in the future. Here is a rundown of some of the more significant changes and trends.

Marketplace Fairness Act

If you have an ecommerce business and sell products interstate, you are probably aware of the Marketplace Fairness Act (MFA). As a reminder, the MFA will

  • Allow states to require out of state businesses to collect sales tax
  • Require some tax simplification
  • Apply to anyone making remote sales

As it relates to the MFA, a remote seller is defined as any out-of-state business entity that sells into a state in which that seller “… would not legally be required to pay, collect, or remit state or local sales and use taxes unless provided by this Act.” Put another way, even if you do not have Nexus in a state, if your business falls under the provisions of the MFA, that state can require that you collect sales tax for products sold to residents of said state.

The MFA was first introduced in February 2013 and, like much proposed legislation, has been moving at glacial speed. In May 2013 the Senate passed the bill (69 to 27). Over a year later the bill is still in the House Judiciary. If the bill is passed, how would it impact small business? The MFA would:

  • Grant authority to states to require qualifying remote retailers to collect sales tax
  • Significantly change Nexus for sales tax purposes
  • Include a $ threshold for compliance (currently set at $1 million in annual sales)
  • Require collection on all remote sales everywhere, once the aggregate threshold is reached,
  • NOT alter existing Nexus rules for businesses not obligated under the proposed bill
  • Not be limited to internet/online sales: think catalog, traveling sales person etc.

Sales Tax Trends

There is a move by state and local governments to make some services subject to sales tax. This trend could have a significant impact on small business. Many small businesses provide services and these have historically been exempt from sales tax. Governments are eyeing everything they can to increase taxes and services are on their radar. The first move is to start taxing services associated with the sale of taxable objects, even when the services are exempt when described stand-alone. An example of this would be installation services. The next move is to expand the definition of taxable services. One area of particular interest to states and one that could impact many small businesses is cloud based services.

Once governments have squeezed everything they can on the sales tax front, they are next turning to see how they can collect more in Use Tax. Expect more emphasis on Use Tax compliance in our future.

Also on the horizon is increased scrutiny of Exemption Certificate Management and the associated Audit Risk. If you are making sales of taxable property, you are required to register to collect sales tax in any state in which you maintain a substantial physical presence. If you then make a sale in a state where you have registered, you are required to collect sales tax on any order delivered to that state unless a valid exemption is applied - applicable to the purchasing entity or the nature of item sold.

Exemption documentation requirements vary by state but generally it is recommended that the retailer always ensure that the following information is included in the exemption documentation:

  • the type of exemption being claimed
  • the names and addresses of both the purchaser and seller involved in the transaction
  • a description of the goods being purchased
  • the purchaser's tax registration number or business license (as appropriate)
  • a statement that if the purchaser uses the items in a taxable manner that they will be responsible for the use tax
  • a signature of the purchaser (or their agent or employee) and the date signed

Exemptions are generally determined based on the Type of Good, Type of Use, or Type of Purchaser. Common Types of Exemptions:

  • Necessity goods including foods, medicines and clothing are often exempt from sales tax (or sometimes taxed at a lower rate). In addition, items such as services, real property, and intangibles such as digital goods may be statutorily exempt. These types of exemptions do not require any form of exemption documentation. Note: See previous mention of trends related to services and digital goods.
  • Resale goods if purchased in the form they are to be resold in may qualify for a resale exemption. Alternately, if goods are processed (or incorporated into other goods) prior to resale, they too can be exempt from sales tax. Additional use exemptions are often available in certain industries including agriculture, manufacturing or industrial processing.
  • Exemptions for Drop Shipments: Generally, if a seller has nexus in a state and has registered to collect sales tax, they are required to collect sales tax on all taxable sales delivered into that state. Drop ship transactions differ somewhat in that the purchase by the retailer (from the product supplier/shipper) is in effect a purchase for resale - which is normally exempt from sales tax. However, drop ship taxation often becomes more complicated, as often the retailer is not registered in the ship-to state but the supplier/shipper is. In such cases, the supplier/shipper is obligated to collect tax from the retailer on the drop ship transaction unless the retailer can provide valid exemption documentation that is deemed acceptable by the ship-to state.
  • Goods that are sold to the federal government cannot be taxed. Similar exemptions are also often available to state and local governments and agencies - as well as non-profit organizations or other recognized charitable, religious or educational groups.

California specific changes as of July 2014:

A new law beginning on July 1, 2014 allows manufacturers and certain research and developers to obtain a partial exemption of sales and use tax on certain manufacturing and research and development equipment purchases and leases. To be eligible under this law, you must meet all three of these conditions:

  • Be engaged in certain types of business, also known as a “qualified person.”
  • Purchase “qualified property.”
  • Use that qualified property for the uses allowed by this law.

Effective July 1, 2014, taxable sales by mobile food vendors (that is, food truck operators) are presumed to include tax, unless a separate sales tax amount is added to the charged price. This presumption does not apply when mobile food vendors make sales as caterers hired by a private party to provide food and/or drink on the customer's premises (see Sales and Use Tax Regulation 1603, Taxable Sales of Food Products ).