The rise and proliferation of online commerce has increased the number and value of transactions with out-of-state retailers and in-state customers. A recent court decision has cleared the way for states to enforce sales and use tax reporting requirements and enforce tax collection laws on those transactions, which has put a heavier burden on businesses to comply.
“Because states are now more aggressively pursuing collection laws, companies that conduct interstate business need to be prepared to collect and pay the sales tax to the states,” says Jeff Stonerock, tax director at Clarus Partners.
Smart Business spoke with Stonerock about these laws, what they mean for businesses and how to comply.
What regulations exist for reporting sales and use tax obligations?
In 2010, Colorado passed a law requiring out-of-state sellers to either collect tax based on the amount of sales into the state of Colorado, or if the seller does not collect sales tax, to begin changing their invoices to customers to notify them that sales tax is due on their purchase even though the seller is not collecting the sales tax.
This law requires sellers to provide a year-end statement, similar to 1099s, to all of their customers as to the total amount of purchases that the sales tax is owed. There is also a requirement for the seller to provide a statement, similar to the 1096, to the state identifying customers and their total amount of purchases in the year.
Since 2010, there has been a long court battle with the Direct Marketing Association that was decided in favor of Colorado in the Tenth Circuit court allowing Colorado to impose this law. This past December, the U.S. Supreme Court upheld the decision.
What had been the state tax regulations before the recent court decision?
The prior state tax regulations required some physical presence in a state before the state could impose its laws for sales tax reporting and collection. The states, for over a decade, have been trying to get a law passed by the U.S. Congress to allow them to impose sales tax on out-of-state-companies. The Marketplace Fairness Act was one such bill that is introduced each year to require out-of-state sellers to collect sales tax just like an in-state brick-and-mortar company. Tired of waiting on Congress to pass a law, Colorado took matters into its own hands and became the first state to try to impose tax laws requiring reporting of the sales from the out-of-state seller to its in-state customers.
What is the trend in sales tax reporting?
States are now beginning to impose an economic nexus standard instead of a physical presence standard on businesses. This means the amount of sales or the number of sale transactions allows the state to impose its tax and requirements to collect and remit sales tax on businesses. In some states, companies are required to collect and file sales tax returns if their amount of sales are $10,000 or they have 200 sale transactions to customers in the state in a year.
What does compliance look like?
To start collecting sales and use tax, businesses need to know the sales tax rates in each state. Throughout the U.S. there are more than 12,000 tax rates, so companies must know the address of the customer where the sale takes place or where the product is shipped. They also must understand the unique tax laws in each of those states. Then the company must decide if changes need to be made to its invoices, as well as where sales tax needs to be collected and where returns need to be filed.
There are software programs available that determine the tax rate where transactions occur and automatically add it to the invoice. Many companies that don’t have the volume it takes to justify purchasing such software must manually look up the rates to calculate the sales tax or outsource the compliance to a company that specializes in this area. In any case, the company must register with the state or local jurisdiction to get a vendor’s license number that allows it to properly report and pay the tax. It may be a challenge to adjust billing, but it’s less painful than facing collections through an audit for unpaid sales tax plus the additional penalties and interest.
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