46 states start their fiscal year on July 1. With that comes a whole new set of sales tax laws to follow. Are you up to speed with what you need to know about the big changes taking effect? The proposed changes could impact your business when they’re enacted as law.
When it comes to the 50 states and sales tax, it is confounding and frustrating to keep up with the new regulations. If your business sells nationally (whether by the Internet, catalog or other means), it is time to review the systems, software and rates you are using.
(Not all systems will automatically update to the latest rates and rules)
To help you get your team up to speed, we have an overview of the basics about sales tax, new laws and what’s “in the news” regarding proposed sales tax regulations.
Below you will find a graphic showing a comparison of sales tax rates state by state in a map and alphabetical order.
Sales tax rate differentials can induce consumers to shop across borders or buy products online. It makes sense for your business to offer an alternative method for purchases vs in-store. The changes in sales tax from point-of-origin to destination has put the burden on the seller to collect and pay the taxes. (refer to SSUTA below in this article)
Sales taxes are imposed by most states and some localities on the price at retail sale of many goods and some services. Sales tax rates vary widely among jurisdictions, from 0% to 16%, and may vary within a jurisdiction based on the particular goods or services taxed. Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
Sales taxes in the United States
The average effective sales tax for different income groups of the combined 50 States
Data Source: Carl Davis, Kelly Davis, Matthew Gardner, Robert S. McIntyre, Jeff McLynch, Alla Sapozhnikova, "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States", Institute on Taxation & Economic Policy, Third Edition, November 2009, pp 118.
There is not yet a federal sales or use tax in the United States. All but five states impose sales and use taxes on retail sale, lease and rental of many goods, as well as some services. Many cities, counties, transit authorities and special purpose districts impose an additional local sales or use tax. Sales and use tax is calculated as the purchase price times the appropriate tax rate. Tax rates vary widely by jurisdiction from less than 1% to over 10%. Sales tax is collected by the seller at the time of sale. Use tax is self-assessed by a buyer who has not paid sales tax on a taxable purchase.
Unlike value added tax, sales tax is imposed only once, at the retail level, on any particular goods. Nearly all jurisdictions provide numerous categories of goods and services that are exempt from sales tax, or taxed at a reduced rate. Purchase of goods for further manufacture or for resale is uniformly exempt from sales tax.
Most jurisdictions exempt food sold in grocery stores, prescription medications, and many agricultural supplies. Generally, cash discounts, including coupons, are not included in the price used in computing tax.
Who administrators the sales tax?
Sales taxes, including those imposed by local governments, are generally administered at the state level. States imposing sales tax require retail sellers to register with the state, collect tax from customers, file returns, and remit the tax to the state. Procedural rules vary widely. Sellers generally must collect tax from in-state purchasers unless the purchaser provides an exemption certificate. Most states allow or require electronic remittance of tax to the state. States are prohibited from requiring out of state sellers to collect tax unless the seller has some minimal connection with the state.
Excise tax in the United States:
Excise taxes may be imposed on the sales price of goods or on a per unit or other basis. Excise tax may be required to be paid by the manufacturer at wholesale sale, or may be collected from the customer at retail sale.
Excise taxes are imposed at the federal and state levels on a variety of goods, including:
- Diesel fuel
- Telephone service
- Air transportation
- Unregistered bonds
- and many other goods and services.
Some jurisdictions require that tax stamps be affixed to goods to demonstrate payment of the tax.
Sales Tax Changes:
Streamlined Sales and Use Tax Agreement – SSUTA - 2005
The Streamlined Sales and Use Tax Agreement (SSUTA) focuses on four major requirements for simplification of state and local tax codes:
1) state level administration
2) uniform tax base
3) simplified tax rates
4) uniform sales sourcing rules.
State-level administration - Under SSUTA, sales taxes will be remitted to a single state agency and business will no longer be required to submit multiple tax returns for each state in which they are conducting business.
Uniform tax base - This would require each state to make their jurisdictions use the same tax base. This means the same goods and services would be taxed or exempt the same way within each state. Each state would retain the choice of whether an item is taxable and at what rate.
Simplified tax rates - This would require the same tax rates be applied across a state's tax jurisdictions. There can be an exception rate for food and drugs.
Uniform sales sourcing rules - For in-state sales, the seller would be expected to collect the tax rate for the vendor location. This is defined as "origin" sourcing. For sales into a state from a remote seller, the vendor would collect the applicable statewide rate for the destination state. This is defined as "destination" sourcing.
For in-state sales, the seller would be expected
to collect the tax rate for the vendor location.
This is defined as "origin" sourcing.
For sales into a state from a remote seller, the vendor
would collect the applicable statewide rate for the destination state.
This is defined as "destination" sourcing.
The Internet and the Marketplace Fairness Act of 2013
If you are selling goods or products online, the Internet sales tax rules might keep you up at night. The issue of whether to require online retailers to collect sales tax in states where they have no physical presence continues to be debated at both the state and federal level.
Some states have enacted legislation requiring large online sellers to collect sales tax even with no physical presence in the state. These laws, sometimes referred to as “Amazon laws,” have been enacted in a number of states and being considered in many others.
The federal government has considered legislation - the Marketplace Fairness Act of 2013 - which would affect large online retailers and how online sales taxes are collected in all states. The proposed federal law would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
There are more changes in sales tax laws yet to come. Here is recent news about sales tax changes:
Wall Street Journal
Republican Congressman Pushes Internet Sales Tax Plan >
Rep. Bob Goodlatte’s proposal would upend the legal framework for sales taxes across state lines
Congress Looking at New, “Simplified” Way For States To Collect Online Sales Tax >
With billions of state and local tax dollars going un-collected each year because a number of online retailers either aren’t required to collect the taxes or are shirking their responsibilities, a proposal circulating around Congress takes a new “simplified” (but really kind of complex) approach to get more e-tailers collecting sales tax.
Times Free Press
Gov. Haslam determined to create rule forcing internet retailers to collect state sales tax >
Gov. Bill Haslam says he's determined to set up a process requiring out-of-state retailers to collect Tennessee sales taxes, declaring he has little confidence Congress will agree on a near-term solution.
Birmingham Business Journal
Major online retailers to begin collecting sales tax for Alabama >
According to the Dothan Eagle, Amazon, one of the world's largest online commercial sites, will begin collecting and remitting an 8 percent sales tax on Nov. 1 through Alabama's Simplified Use Tax Remittance Program Act of 2015.
Money Talks News
South Dakota just filed a lawsuit against Newegg, Overstock, SystemaxInc, and Wayfair
over failing to collect sales tax >
On March 22, South Dakota Gov. Dennis Daugaard signed Senate Bill 106 into law. It requires out-of-state online retailers that sell a minimum of $100,000 or complete at least 200 separate sales transactions annually within South Dakota to register with the state and collect and remit sales tax, Internet Retailer reports.
Execution in operations:
Collecting, administrating and paying sales tax falls into an automated software system which is supposed to remove the risk of non-compliance, prepare for potential audits and avoid over-payment.
Administering sales tax is a favorite task of few and a mandatory requirement for all businesses. Doing sales taxes manually or even semi-manually can result in errors in sales tax rates and rules, collection and remittance and associated audit-related fines and penalties.
When considering which sales tax solution software works best for your company, price is only one aspect of the decision.
The questions about sales tax administration are more related to
“Which software system, ERP, sales tax software should we use”
“Which is better? A Cloud sales tax solution or an on premise sales tax solution?”
Most often you will look to the point-of-sale system you are currently using or e-commerce platform. Hopefully they are set-up for your specific type of business, products, services and keep up to date with the latest sales tax changes.
Please do not tackle this on your own. Accountants, attorneys, e-Commerce specialists and sales tax solution providers can become priceless resources to help you avoid un-anticpated calamaties. You will also benefit for a quarterback, a systems engineer to be sure your company is executing well.
Contact us here to talk about your options.
To grow revenue, you take advantage of new opportunities. Our team can offer support to help you with the systems and software to ensure your compliance. More importantly, we can help you avoid the pain of software and legal obstacles and make a revenue growth plan with confidence.
Additional whitepapers and resources about sales tax and sales tax solutions:
State and Local Sales Tax Rates in 2016 - pdf whitepaper
A Coast-to-Coast Comparison of Sales Tax Laws Across the U.S. - pdf whitepaper