It’s been over 18 months since businesses across the U.S. announced that, due to the COVID-19 pandemic, employees should work from home. With the stay-at-home mandate, revenue from transactions subject to the highest sales tax rates—hotels, car rentals, restaurants—have plummeted. Yet, even Illinois, a state with one of the lowest credit ratings, announced that revenue surged during the fiscal year ending 30 June 2021.
One driver of increased state revenues is the Wayfair case. In June 2018, the U.S. Supreme Court overturned its prior court decisions and held that a seller can be required to administer U.S. sales taxes even if the seller has no physical presence in the state where the goods are shipped or delivered. In the years following Wayfair, all states that impose sales tax have enacted a law that requires remote sellers to collect and remit sales taxes on retail sales if the seller has a sufficient “economic” presence in the destination state, which is generally triggered when a seller derives sales of USD 100,000 or more in a year. Only one state, Missouri, has delayed the effective date (until 1 January 2023) of its legislation.
Companies located outside the U.S. are not immune to the consequences of Wayfair. Non-U.S. companies that ship or deliver goods to customers in the U.S.—even if they are not engaging in any other activities in the U.S.—also are required by law to charge, collect and remit U.S. state and local sales taxes on retail sales if they have either (1) an in-state physical connection (e.g., in-state employees or independent sales representatives), or (2) a sufficient “economic” or virtual connection with the state.
States also impose sales taxes on service transactions. Four states—Hawaii, New Mexico, South Dakota and West Virginia—generally tax all services, absent an exemption. Some of these states even impose sales tax on invoices issued by accountants. All other states tax only specifically enumerated services. Each states’ list of taxable services varies significantly.
The complexity of administering U.S. sales taxes also varies widely from one seller to the next. Some of the drivers include:
- Nexus (a connection) with each state: It all starts with nexus, which determines whether a business has a sufficient presence in a state for the state to tax the activities of the business. Are you making over-the-counter sales or are you making sales to customers located in various states?
- What you are selling: The taxability of products and services can vary widely, particularly with food products. In some states, a small marshmallow is a low/no tax product (baking), while a large marshmallow is taxed at a high rate (candy). Licorice might not be taxed as candy because it includes flour. The same is true for the Twix candy bar.
- Who is the buyer: Are you selling to the federal or state government? Or is your buyer a not-for-profit entity? Some states do not require sellers to charge sales tax from governmental or non-profit customers, and in other states, that is true, but only if the seller collects a valid exemption certificate. However, there are states that impose sales tax on transactions with the government or non-profits. The rules vary from state-by-state.
- Tax rate: Only a few states have a single sales tax rate. In contrast, the number of taxing jurisdictions in Missouri, Texas, Iowa and Alabama are over 1,200, 1,100, 900, and 800, respectively, with differing tax rates, by taxing jurisdiction. Nationwide, the number of taxing jurisdictions has been estimated to be over 12,000. And, sales tax rates can change periodically throughout the year.
- Tax filings: Sellers making sales to customers throughout the U.S. should be mindful that some states require both state and local tax returns to be filed. Louisiana has over 60 parishes, each of which requires the filing of tax returns. Colorado has 70 home-rule cities with tax filings. Alabama has 85 local tax filings (towns/cities/counties). Chicago has local filings. Alaska has no state tax, but there are local sales tax filings.
With all of the complexity, taxpayers often seek guidance on how the tax laws apply to their transactions. States frequently publish their letter ruling responses (often with the taxpayer’s name redacted). One area where states have issued recent guidance includes online training. Think of all the Zoom, WebEx and Teams meetings you’ve had in the past 18 months! If you pay for an online training, is it a non-taxable service? Or, is the learning a pre-recorded session that might be subject to sales tax as the sale of computer software or, alternatively, software-as-a-service (SaaS)? It depends!
In the wake of the 2018 U.S. Supreme Court decision in Wayfair, states are now collecting tax revenues on transactions where it was common for neither sellers nor buyers to pay any sales or use tax. For those sellers (including sellers outside the U.S.) that ignore these law changes and fail to charge, collect and remit sales taxes, the states’ future tax revenues may be borne directly by the seller (upon audit), rather than a trust tax collected from the customer on each transaction. With sales tax rates averaging around 8%, plus interest and penalties for non-filing and late payment, sellers that are not in compliance with the sales tax laws should consider seeking professional advice on ways to mitigate historical exposures and ensure compliance.