Tuesday, November 6, 2018

Sales Tax Shuffle

By Ben Kinsey, CPA

Image courtesy of flickr
Ben Franklin said it best when he coined the phrase, "In this world nothing can said to be certain, except death and taxes."  But as all business owners know, while death calls but once, there are many different kinds of taxes they are expected to pay at different times of the year. While income taxes are paid but once a year, business owners are required to frequently pay sales tax on many of the things they sell, as well as a number of things they buy.  The second kind of sales tax is referred to as Use Tax.
What’s the Use?

Use tax in Jacksonville is normally 6% to the state and 1% to Duval county.  However, this year they’ve dropped the use tax for commercial rental properties to 5.8% plus a ½ a percent or 1% county tax depending on the county the property is located. In many cases to get the taxation right, commercial property owners may have to redo their lease agreements. While taking advantage of a .2% lower tax rate isn’t going to make them rich, it’s still the property owner’s responsibility to charge the correct amount of tax.

Internet Sales Tax
The biggest difference to any business owner who does business online is that they are soon going to be required to collect and remit sales tax to any state in which they sell taxable goods.  It used to be that they only had to collect and remit sales tax to any state in which they had a physical location.  Until recently, if you were a Florida corporation with an office in Florida, you only had to collect and remit Florida Sales tax.  If you had a second office, say in Georgia, you were also required to collect and remit Georgia sales tax.  Regardless of where else you sold your goods, you weren’t required to collect and remit sales tax to any other state in the Union.

Image courtesy of Pixabay
New legislation has recently been enacted that states if your website deposits cookies, this will be considered a physical presence in that state, requiring you to collect and remit sales tax for any of the states that have legislated this change.  Now I know what you’re thinking.  How can a cookie be considered a physical presence, and won’t it only be a short time before a corporation challenges this ruling in court?  To that I have good new and I have bad news.  The good news is that Wayfair Inc. has already taken the matter to the Supreme Court.  The bad news is the court overturned the ruling set down in 1992 which required a retailer to have a physical presence in a state in order to collect sales tax.  Wayfair did not have a physical office in the state of South Dakota, but the Supremes ruled 5 to 4 that the test was met through the use of cookies.

An article in the Journal of Accountancy sums up the situation below:
“In 2016, South Dakota enacted a law, S.B. 106, requiring out-of-state sellers that annually delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods or services into the state to collect and remit sales taxes to South Dakota. Because South Dakota’s Legislature was aware that its new law would be unconstitutional unless Quill was overturned, it included a provision for expeditious judicial review if the law was challenged. Therefore, South Dakota filed a declaratory judgment action in state court against Wayfair Inc., Overstock.com, and Newegg Inc., all large internet merchants that have no employees or real estate in South Dakota and do not collect sales tax for the state. The state also sought an injunction requiring these companies to register for licenses to collect and remit sales taxes as required under the act. The companies moved for summary judgment in state court, arguing that the act is unconstitutional. After the law was declared unconstitutional by South Dakota courts, the Supreme Court granted certiorari.”

As a result of this ruling, thirty additional states have jumped on the bandwagon by requiring out of state companies to collect and remit sales tax for internet sales.  This means not only major online etailers are going to be subject to this law, so is any internet vendor that uses a platform that deposits cookies.  If you run an eBay store, you will be required to collect sales tax in states other than the one in which your business operates.  Do you vend products on Amazon?  The same law applies.  In fact, if you use most any ecommerce engine on the market today to transact sales, you will be on the hook to collect and remit sales tax in 31 states.  (This number is expected to rise as the rest of the states in the Union quickly follow suit.)

Image courtesy of Pixabay
The reason for this sea change has to do with the losses in taxable income that online commerce has wrought.  In 1995, online sales amounted to only $16 million.  It was barely a blip on the radar. But by 2016, that number had jumped to more than $3 trillion. Since 2016, online sales during the Christmas holidays have actually exceeded those of brick and mortar retailers.  And those numbers are only expected to increase.  Since out of state etailers were not required to pay sales tax to states other than the ones they had an office in, this left state legislatures scrambling to find a way to fill their coffers.  South Dakota vs. Wayfair Inc. was the first successful shot across the bows of the online retail industry.

Here’s the way the Supreme Court interpreted the law:
“In deciding to overrule Quill and Bellas Hess, the Supreme Court found that the rule banning sales tax collection when businesses lack “physical presence” in a state was an incorrect interpretation of the Commerce Clause. The Court criticized the Quill decision on several grounds. First, the physical presence rule is not a necessary interpretation of the “closely related” nexus requirement from Complete Auto Transit v. Brady, 430 U.S. 274 (1977)Second, the Court found that Quill creates, rather than resolves market distortions, calling it a “judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services” to a state’s residents.”

While the supposed intent of the court was to level the playing field by providing states the opportunity of avoiding being bled dry by an ever-expanding online retail industry, the results may prove to be devastating to small mom and pop etailers.  While collecting sales tax in a number of states is not that high of a hurdle for etailers, remitting those same taxes on a monthly basis could wind up being the straw that breaks the camels back.  This is no easy task when you consider what to takes to meet sales tax requirements in the state of Florida, with all it’s many counties.  Multiply this task by 30-50 states and it’s probable that many small etailers will be forced to close up shop, since the added cost needed to satisfy each and every state they do business in could prove to be too much to take.

What it comes down to is only time will tell whether the online sales tax shuffle will level the playing field or simply be a game ender for many small online retailers.

Ben Kinsey, CPA of Small Business Group works with owners of closely held corporations in the Northeast Florida region.  If you work in the North Florida area we offer a FREE initial Consultation at our office, please contact Small Business Group if you would like to know more about strategies for your business.

(904) 731-2221   

1 comment:

  1. Sales taxes are a big deal to any reatier. Your information really help to determine if selling products online makes sense.