Let Barnwell Consulting assist you in finding answers to these questions – and provide you with practical solutions.
Whether your company should collect sales tax should be a simple matter. But it’s not. Most consumers are aware that companies like Amazon collect sales taxes in certain states but not in others. If you have a growing internet business, it is important to understand whether your company should collect, and if so in which states. And while you may determine that your company should collect tax, simply registering and beginning to collect could be disastrous.
While authority on the question of tax collection is technical and confusing, you can get a good understanding by reading the U.S. Supreme court’s decision in Quill Corp. v. North Dakota 504 U.S. 298 (1992). Bottom line, if you company has a “physical presence” – generally meaning it has employees or agents in the state or owns property in the state it will likely need to collect tax. But the devil’s in the details. For example, if you have agents, what do the agents do? Or does the existence of software on a hard drive constitute physical presence? Assuming you can answer the physical presence question you are in a good position to judge whether you have “nexus” (the level of contact required by a taxpayer before a state can impose a tax). If you have nexus in one or more states your company should probably collect tax.
While Quill sets the basic stage, states have their own nexus rules. Many states have adopted controversial “click through” and “affiliate nexus” statutes. For example, in Texas, the mere ownership of a company in the same line of business may create nexus for an affiliate. Many of these statutes are likely unconstitutional, but the decision to rely on a constitutional analysis could lead to years of litigation with an uncertain, and material outcome.
But even if under Quill or state nexus rules your company should collect tax, does this mean your company is required to do so? The answer is a resounding “No”. Your analysis needs to consider your existing business, nexus – but also strategic implications. At the top of the list is how significant a competitive advantage a “non-collection” policy is. If your competitors collect tax and your company can avoid it, will that help sales? And if you have nexus in many states, are the nexus creating activities critical? Is there a way to isolate such nexus creating activities in a separate company? Barnwell can assist you with this important strategic analysis. Decisions you make at this point have a direct bearing on the company’s success.
Also, if your activities create nexus your company faces a dilemma. If you fail to collect tax from your customers in a state where you should be collecting, the state may hold you responsible for the uncollected tax. We call this “inherited liability”. For most companies, this number can be significant – essentially an average sales tax rate (say 7%) times your company’s sales – with potential interest and penalties. All too often we encounter companies that failed to collect with disastrous consequences. But if you register to collect in most states, you must disclose when you began selling. And since your company has never filed sales tax returns in that state there is no statute of limitations – meaning a state can assess your company for sales made in the state back to the beginning.
Fortunately, in such circumstances many states have “voluntary disclosure” processes, which under certain facts will enable your company to anonymously settle with the state for a smaller amount or even in exchange for prospective collection. If your company has exposure, Barnwell Consulting can assist you in evaluating how to proceed, including assistance with voluntary disclosure programs.
If your company has nexus and should be collecting – in one or more states – you will need to consider whether your company will need sales tax compliance software. Barnwell can assist you in evaluating whether your company needs software, and if so, assistance with selection of the package and implementation. The evaluation of software should include consideration of local tax issues. While there are only 45 states that impose sales taxes, there are thousands of cities and counties and other political subdivisions that impose taxes – often based on different products and services, and often at different rates.
Even if your company has nexus and must collect taxes, at least there is a silver lining. Since technically a company is collecting consumer “use tax”, most states view sellers as providing a type of tax collection service for the state. Many states offer vendor discount allowances, and in some states and cities sellers may negotiate incentives – at times over long contract periods. Barnwell has extensive experience turning use tax collection burden into a net positive.
In sum, we believe the “simple” question of tax collection isn’t as simple as it may seem. Please contact us if you would like to discuss.