for live program only sales and use tax fundamentals...
TRANSCRIPT
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Sales and Use Tax Fundamentals: Mastering Tax Base,
Compliance, Nexus, and Other Essential Multistate Concepts
TUESDAY, JANUARY 29, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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Jan. 29, 2019
Sales and Use Tax Fundamentals
Joseph F. Geiger, Jr., CPA, Consulting Tax Manager
Vertex, Berwyn, Pa.
Monika Miles, President
Miles Consulting Group, San Jose, Calif.
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Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
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VertexSales and Use Tax Fundamentals
January 29, 2019 | 1:00 pm – 2:50 pm EST
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• Joseph F. Geiger, Jr., Esq., CPA, MST, MSA
• Senior Tax Consultant, Vertex
• Over 30 years in accounting, audit and tax
• Public accounting and industry experience
• Specializing in indirect taxation, consulting and automation
• Represented audit clients at local, state and federal levels, including U.S. Tax Court
Presenter
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© Miles Consulting Group, Inc. 2018
Presenter: Monika Miles
Founder - Miles Consulting GroupWebsite: MilesConsultingGroup.com;
www.JumpstartRain.comEmail: [email protected]
Professional Affiliations: AICPA, Texas Society of CPAs, CalCPA NAWBO - Silicon Valley, AFWA (Past National President)
Honored To Be Recognized As:
• “25 Most Powerful Women in Accounting” by CPA Practice Advisor
(2012, 2013, 2014 and 2015)
• “Women of Influence” by San Jose Silicon Valley Business Journal
(2014)
• Woman of Influence – AFWA National 2016
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Tax Types
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Tax Type: Sales Tax
Sales Tax – General Definition?
• Sales tax applies when seller has nexus and is subject to the state taxing authority
• A tax on the sale of tangible personal property or service
• Seller may pass tax on to the consumer; must be separately stated on the invoice
• Applies only to intrastate transactions
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Tax Type: Sales Tax
Five states without a sales tax:
• NOMAD States:
• New Hampshire
• Oregon
• Montana
• Alaska (local jurisdictions may impose a tax)
• Delaware
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Tax Type: Privilege Tax
Privilege tax – General Definition?
• Imposed on seller’s gross receipts for privilege of doing business in state
• Seller is liable for tax, but can pass tax on to the purchaser
• Can be included in the sales price or, separately stated on the invoice
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Tax Type: Transaction Tax
Transaction tax – General Definition?
• Tax imposed on the sale of tangible personal property or services
• The purchaser is liable to the seller for the tax due
• The tax must be separately stated on the invoice
• If the seller is not registered in the state where goods are received, the purchaser is liable under audit for tax due on their purchases
• Examples: Colorado, Florida, Texas, and Virginia
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Tax Type: Gross Receipts
Gross Receipts – General Definition?
• Similar to transaction tax, but with fewer exemptions or exclusions to the taxable base
• Hawaii - if the tax is passed on to the purchaser, the tax becomes part of the gross receipts for tax calculation
• The tax must be separately stated on the invoice
• In some states it is like the income tax and cannot be passed on (Washington B&O, Ohio CAT, Texas Margins)
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Tax Type: Consumer Levy
Consumer Levy – General Definition?
• Imposed on the buyer with responsibility for collection by the seller
• Seller is still required to remit the tax even if it is not collected from the buyer, but it is usually easier to recover the tax from the buyer
• Generally imposed on the privilege of using or consuming the products or services purchased
• Under audit, the state can collect the tax from either the seller or the purchaser
• Most of the states are considered Consumer Levy states
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Definition: Use Tax
Use Tax – General Definition?
• Imposed on the storage, use, or consumption of a taxable item or service on which no sales tax has been included on the invoice
• Complementary to sales tax
• Purchases made outside the taxing jurisdiction but used in the taxing jurisdiction
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Tax Type: Use Tax
Types of Use Tax
• Seller’s use – tax collected by registered vendor on interstate sales
• Consumer’s use – tax owed by the purchaser when the vendor does not include tax on the invoice
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Illustration: Intrastate Sales Tax vs Interstate Seller’s Use• Sales tax applies to supplies of taxable goods and
services when the transaction occurs within a state.
• Vendor has a physical location in the state of the buyer – warehouse, branch location, corporate office
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Illustration: Intrastate Sales Tax vs Interstate Seller’s Use • Seller’s use tax applies to supplies of taxable goods and
services when transaction occurs between two states
• Vendor shipping product out of state
• Vendor approving order out of state
• Customer receipt of goods or service from out of state vendor
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Intrastate Sales Tax vs. Interstate Seller’s Use Tax
• Some locals within a state impose sales tax, but not seller’s use tax
• Examples include:• Alaska: no state sales tax, but local sales tax rates
• Arizona: many cities impose a sales tax, but not seller’s use tax
• Colorado: many home rule cities impose a seller’s use tax (intrastate transactions) while state administered cities do not
• Illinois: Chicago imposes a sales and consumer’s use tax, but not seller’s use tax
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Intrastate Sales Tax vs. Interstate Seller’s Use Tax
• Some locals within a state impose sales tax, but not seller’s use tax.
• Examples in Pennsylvania:• Allegheny County is the only county in the state that
imposes tax at the county level. Allegheny county imposes sales and consumer’s use tax, but not seller’s use tax.
• Philadelphia City is the only city in the state that imposes tax at the city level. Philadelphia imposes sales and consumer’s use tax, but does not impose seller’s use tax.
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Tax Type: Summary
• Intrastate Transactions - What tax type applies?• Sales tax
• Interstate Transactions – What tax type applies?• Seller’s use
• Purchase Transactions – What tax type applies?• Consumer’s use
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© Miles Consulting Group, Inc. 2018
Nexus:
Some (Very)Hot Topics
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© Miles Consulting Group, Inc. 2018
Nexus – Then & Now
• General Sales Tax Concepts
• Physical Presence Nexus
• Economic Nexus
• South Dakota v. Wayfair (2018)
• Wayfair Q&A
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© Miles Consulting Group, Inc. 2018
The concept of sales tax is prevalent
in daily conversations because:
• States Need Revenue
• Increased On-line Transactions
• Smaller companies are able to expand their sales
footprints quickly because of increased
technology.
• There’s been some national media and a US
Supreme Court Case!
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© Miles Consulting Group, Inc. 2018
Recapping What Joe said…
• Sales tax and complementary use tax are
imposed by state and local jurisdictions on
retailers for the privilege of selling “tangible
personal property” and certain services in the
jurisdiction.
• 45 states and DC impose a sales tax.Sales Tax
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© Miles Consulting Group, Inc. 2018
How About Some History?
Let’s call it “Recent History”!
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© Miles Consulting Group, Inc. 2018
Nexus – For 50+ years
• “The sufficient connection that an entity must have in
order for a state to impose a tax.”
• Generally physical contact between a taxpayer and
state must occur.
• Defined by U.S. Constitutional principles and U.S.
Supreme Court cases.
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© Miles Consulting Group, Inc. 2018
Nexus – OK! Now What?
• Once nexus is established, seller is obligated to collect sales tax.
• Unless there is a specific exemption.
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© Miles Consulting Group, Inc. 2018
U. S. Constitutional Basis for Sales Tax
Our current system stems from various state
statutes and regulations:
• From the U.S. Constitution:
- Due Process Clause
- Commerce Clause
• From U.S. Supreme Court Decisions in multi-
jurisdictional cases:
- Quill Corp v. North Dakota 504 U.S. 298 (1992)
- South Dakota v. Wayfair (2018)
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© Miles Consulting Group, Inc. 2018
Quill
In Quill (in 1992) the U.S. Supreme Court concluded that in
addition to any minimum connection with a state (Due
Process Clause), a business must have substantial
physical presence nexus (under the Commerce Clause)
before the state could impose sales/use tax collection
requirements.
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© Miles Consulting Group, Inc. 2018
Catalog vs. the Internet
VS
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© Miles Consulting Group, Inc. 2018
The Growth of Internet Sales
• Non-existent when the High Court decided Quill.
• No tax collection obligation on seller without a
physical presence in a state (like catalog sellers).
• Large part of the problem has been uncollected
use tax
– Complementary to sales tax
– Paid by purchaser directly
– Protects in state companies (if remitted)
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© Miles Consulting Group, Inc. 2018
Uncollected Use Tax – Pop Quiz
The National Conference of State Legislators
(NCSL) recently calculated the estimated amount
of uncollected use tax in 2015 to be:
a. $2.6 Million
b. $26 Million
c. $2.6 Billion
d. $26 Billion
e. $260 Billion
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© Miles Consulting Group, Inc. 2018
Uncollected Use Tax – Pop Quiz
The NCSL recently calculated the estimated
amount of uncollected use tax in 2015 to be:
a. $2.6 Million
b. $26 Million
c. $2.6 Billion
d. $26 Billion
e. $260 Billion
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© Miles Consulting Group, Inc. 2018
“Economic Nexus”
• A minimum amount of sales $$ or transactions
creates nexus
• Even before Wayfair ruling, a growing number of
states had passed these laws – some examples:
– South Dakota, Alabama, Indiana, Rhode Island,
Wyoming, Maine, Massachusetts
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© Miles Consulting Group, Inc. 2018
South Dakota: A “good fact pattern”
• Wayfair and other retailers sold more than $100K or 200
transactions to SD customers;
• State said that its economic nexus law applied and wanted
them to collect sales tax;
• Companies disagreed and appealed all the way to South
Dakota Supreme Court; and the state lost
• South Dakota appealed to US Supreme Court
• Early 2018 USSC granted certiorari – agreed to hear case
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© Miles Consulting Group, Inc. 2018
US Supreme Court: Agrees to hear South Dakota case
• South Dakota v. Wayfair
• Court heard the case in April 2018; rendered its
decision on June 21, 2018
• We knew it would be close…
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© Miles Consulting Group, Inc. 2018
US Supreme Court – Wayfair Decision
Overturned Quill• Ruled 5-4 in favor of South Dakota
• Sales in excess of $100,000 or 200 transactions
can create economic nexus
• Physical presence test under Quill no longer has to
be met (in South Dakota)
• So…nexus will be easier to trip into
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Nexus?
Taxability of
Product?
Exemptions?
Sales Tax Quick Decision Tree
Register &
File (maybe)
Register &
File (maybe)Copyright © Miles Consulting Group, Inc. 2018
Materiality?
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South Dakota v. Wayfair
Some Relevant Q&A
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© Miles Consulting Group, Inc. 2018
Question 1:
Q: Since this case is about “economic nexus”,
does that mean physical presence doesn’t
matter anymore?
A: No. Physical presence DOES still matter.
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© Miles Consulting Group, Inc. 2018
Question 2:
Q: Do we need to start filing in the 45 states
that have a sales tax immediately?
A: You may not have to file in all states
immediately, but it’s time to do some serious
analysis.
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© Miles Consulting Group, Inc. 2018
Question 3:
Q: Does this case address retroactivity? Are
we going to have to go back many years and
pay prior years’ taxes?
A: The South Dakota statutes (and most
others) were written for no retroactivity.
But…there’s still some retroactive exposure to
consider.
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© Miles Consulting Group, Inc. 2018
Question 3 (continued):
Q: Does this case address retroactivity?
A1: If you had physical presence before and
ignored it, it’s not going away and you may
have exposure.
A2: It’s January 2019. Many states have
required filing since late 2018. Now you MAY
have retroactive exposure!
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© Miles Consulting Group, Inc. 2018
Question 4:
Q: Does this case relate to internet sellers
only?
A: It sounds like it does, but the answer is NO.
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© Miles Consulting Group, Inc. 2018
Question 5:
Q: If we are a SaaS, software, or services
company, could we be affected by this
decision?
A: Absolutely! The ruling made it easier to
have nexus – it doesn’t impact the taxability of
the product.
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© Miles Consulting Group, Inc. 2018
Question 6:
Q: Have other states already jumped on the “Wayfair
bandwagon” and crafted similar legislation?
A: Yes. As of 01/15/19 – the following 37 states have
indicated they have economic nexus statutes similar to
Wayfair:
HI, ME, VT (7/1/18); MS (9/1/18); NC, NJ, SC, SD (11/1/18); CO, CT (12/1/18)
AL, IN, IL, KY, MD, MI, MN, ND, WA, WI (all 10/1/18);
GA, IA, LA, NE, UT, WV (1/1/19);
CA (4/1/19); TX (10/1/19)
Officially “Pending”: NV, TN, WY
Some special states: MA, OH, OK, PA, RI, NY (varying dates & thresholds)
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© Miles Consulting Group, Inc. 2018
Question 7:
Q: Do all sales (even resale and sales to non-
profit entities) count in the economic nexus
threshold?
A: States vary in their definitions and what
sales count in the threshold. But we
recommend that early/high-level analysis
consider all sales.
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© Miles Consulting Group, Inc. 2018
Question 8:
Q: How do you count a “transaction” to get to
the 200 transactions? By invoice, or line item,
or some other way?
A: While some interpretation by state is still
recommended, it appears that most states will
defer to: an invoice = a transaction.
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© Miles Consulting Group, Inc. 2018
Question 9:
Q: What’s likely to happen next at the state or
federal level?
A1: At the state level, we anticipate the
remainder of the states to enact economic nexus
laws. (Most already have.)
A2: Congress could still go back and
codify Quill or enact other legislation.
But will they? It’s unlikely!
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© Miles Consulting Group, Inc. 2018
Question 10:
Q: What do we recommend as next steps for
clients?
• Begin the nexus/taxability question TODAY
(or yesterday!)
• Perform a nexus study
• Track upcoming economic nexus legislation
• Be prepared to develop a compliance
system
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Why It’s Important?
“Sales tax is a pass through tax. The thing that
concerns most companies is the burden and cost
of collection and remittance of the taxes”
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© Miles Consulting Group, Inc. 2018
Collecting & Remitting = Compliance
Compliance 101
• Nexus?
• Rate?
• Exemptions?
• Registration
• Forms - Electronic vs. Paper
• Due Dates (vary)
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© Miles Consulting Group, Inc. 2018
Sales Tax Exemptions
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Nexus?
Taxability of
Product?
Exemptions?
Sales Tax Quick Decision Tree – Once Again
Register &
File (maybe)
Register &
File (maybe)Copyright © Miles Consulting Group, Inc. 2018
Materiality?
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© Miles Consulting Group, Inc. 2018
Sales of TPP & Services
• In general, unless otherwise exempt,
sales of TPP are subject to sales tax.
• In general, unless specifically
enumerated, sales of services are
exempt
BUT
• States are increasing enumerated
services or broadening the definitions
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Sales Tax Exemptions
• Due to the nature of the buyer
• Nature of the property/service
transferred/performed
• Intended use by the purchaser
• Nature of the transaction
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© Miles Consulting Group, Inc. 2018
Sales Tax Exemptions
Due to the nature of the buyer:
• US Government
• Some state governments
• Some exempt entities
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© Miles Consulting Group, Inc. 2018
Sales Tax Exemptions
Due to the nature of the property or service
transferred/performed:
• Food
• Medical
• Manufacturing
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© Miles Consulting Group, Inc. 2018
Sales Tax Exemptions
Due to the intended use by the purchaser:
• Resale
• Manufacturing
• Construction
• Pollution Control
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© Miles Consulting Group, Inc. 2018
Sales Tax Exemptions
Due to the nature of the transaction:
• Load & Leave Software
• Cloud applications (SaaS)
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© Miles Consulting Group, Inc. 2018
Sales Tax Exemptions -
Mechanics
• Determine if exemption applies
• Determine who claims it
• Determine how to claim it
• Document it fully (today)
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Situs and Sourcing Transactions
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Situs
• Situs Definition?
The jurisdiction to which tax is legally due.
• Origin
• Destination
• Administrative Origin
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Situs on Goods vs. Service
• Situs rules are different for sales of Tangible Personal Property (goods) vs. sale of services.
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This Photo by Unknown Author is licensed under CC BY-NC-ND
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Situs Rules on Goods vs. Service
• Situs Rule on Goods• Interstate Transactions
- Situs determination is ship to location
• Intrastate Transactions- Situs determination depends on state
• Destination states
• Origin states
• Modified origin states
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• Situs Rule on Services• Situs is determined by:
• Where received
• Where performed
• Where enjoyed
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Situs on Interstate Transactions
• Goods shipped from one state and delivered across state lines to another state
• Taxing situs is where the goods are consumed
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List of Origin and Modified Origin States
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Situs: Intrastate Transaction on Sale of Goods in Origin State
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• Ship-to is Erie, PA and physical origin is Philadelphia, PA
• Pennsylvania is an origin state
• Taxing Situs is?
• Origin: Philadelphia, PA
• Tax type is?
• Sales Tax
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Situs – Some Things to Keep in Mind
Once you registered with a state:
• Review whether or not the state is an origin or
destination state (for local tax application)
• Review whether or not you have any physical presence
in the state
• Determine software requirements for correct situs
determination outcomes
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State and Local Tax Jurisdictions
Transaction tax at state and local tax jurisdictions can be
taxed differently:
• Local taxes are authorized by state statute
• Some items have reduced rate at state and exempt at local
• Home rule jurisdictions administer tax separately from states
• Some state have locals that override the other local rates
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Situs Determination for Intrastate Transactions in Colorado
Colorado wants to know the vendor’s relationship with the buyer
• Does the vendor have a physical location in the same county as the buyer?
• Does the vendor have a physical location in the same city as the buyer?
• If yes, collect sales tax in destination
• If no, collect seller’s use tax in destination
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Revenue Agency Administration of Sales Tax
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Filing Frequency
• State and local filing frequencies• Monthly, quarterly, semi-annually or annually
• Each jurisdiction has its own guidelines – frequency can change
• Thresholds• Dollar amounts
• Time period
• Registrations• Initial frequency
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E- Electronic Filing (E-Filing)
• State and local jurisdictions may require e-filing of returns
• Automated solutions – save time and money
• Manual filing – takes more time and increase risk of error
• Third-party providers• Reduce compliance burden
• Simplify filing process
• Provide reconciliations
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Electronic Filing (E-Filing)
• May be required if taxpayer is required to make E-Payments
• May be required based on the combined tax liability of a taxpayer
• All types of returns cannot be filed electronically (e.g., consumer tax returns in KY)
• Amended returns
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E- Payment
• State and local jurisdictions may require E-Payments
• Dollar amount thresholds
• May be required based on the combined tax liability of a taxpayer
• Automated solutions – save time and money
• Manual filing – takes more time and increase risk of error
• Third-party providers
• Reduce compliance burden
• Simplify payment process
• Provide reconciliations
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V Vendor Compensation
• Some states offer vendor compensation or a “discount” to taxpayers
• Timely filing (due date in most states is the 20th of the month following reporting period)
• Compensation is calculated on the amount of tax the vendor has collected
• Compensation/Discount may be limited by dollar amount per return or period (See Federation of Tax Administrators – State Sales Tax rates and Vendor Discounts List - January 2019)
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States with Sales Discounts
• The following states have sales tax discounts:
• AL, AZ, AR, FL, GA, IL, IN, KY, LA, MD, MI, MS, MO, NE, NV, NY, ND, OH, PA, SC, TN, TX, UT, VA, WI, WY
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Vendor Compensation Example
• Calculate the amount of tax the vendor has collected for the state of Georgia.
• Multiply the total tax collected by 3 percent, or ".03."
• Subtract $90 from the total, and multiply the remaining total by .167. The vendor compensation in Georgia only applies to 3 percent of the total tax collected up to $90, which is based on collecting the first $3,000. Anything collected above $3,000 is based on 1/2 of 1 percent, or .005, of the tax collected. This compensation is accrued on a monthly basis.
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© Miles Consulting Group, Inc. 2018
Some Final Thoughts…
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© Miles Consulting Group, Inc. 2018
Some Final Thoughts
• Don’t be on Defense (Offense is
always better)
• Wayfair developments don’t change
retroactive exposure that might exist
as a result of prior physical presence
nexus
• Income tax questions will arise as
well!
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© Miles Consulting Group, Inc. 2018
Some Final Thoughts…
Miles Consulting is a resource:
• Monthly Newsletter
• Weekly topical blog
• ½ hour Complimentary Consultations
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© Miles Consulting Group, Inc. 2018
How Can Miles Consulting Help You
Provide Client Value?
• Perform Nexus Reviews
• Perform Taxability Studies
• Determine Appropriate Exemptions
• Wayfair/economic nexus navigation
• M&A Due Diligence
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© Miles Consulting Group, Inc. 2018
Sign up for our newsletter &
Preview our State Tax Checklist Here
http://www.milesconsultinggroup.com/CPA-checklist-signup.html
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© Miles Consulting Group, Inc. 2018
In Summary
It’s a crazy, interesting time
• States are aggressively pursuing
revenue (really!)
• Wayfair ruling has changed the game
• Multi-state companies have interesting
issues (and usually need help)
• Don’t go it alone!
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© Miles Consulting Group, Inc. 2018
Questions
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© Miles Consulting Group, Inc. 2018
Thank You!
Monika Miles(408) 266-2259
http://www.milesconsultinggroup.com
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C Contact
• Joseph F. Geiger, Jr., Esq., CPA, MST, MSA• Vertex Consulting
• Telephone: 484.595.6353
• Email: [email protected]
https://www.vertexinc.com
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Questions?