Be Aware of the Tax Man
Stricter regulations can have an impact on dealers doing business across state lines.
The Washington Department of Revenue recently ruled that one Internet sports apparel retailer had substantial “nexus” with the state merely because a representative visited the state for “sizing nights” during which he helped local teams determine the correct uniform size. Unfortunately, the retailer was unable to show a lack of connection between its nexus creating activities and sizing night sales.
Even before last year’s Supreme Court Decision in South Dakota v. Wayfair, allowing states to require remote sellers with no physical presence to collect and remit the applicable sales or use tax on sales delivered to location within their state, Washington state had extended it Business and Occupation (B&O) tax economic nexus provisions to retailers, expanding its sales/use tax nexus provisions to remote seller, marketplace facilitators and referrers as well as creating new use tax reporting requirements.
Collecting Sales Taxes
The states were once prohibited from taxing sales by businesses with no physical presence in the state. However, the Supreme Court overruled the physical presence restriction. The court determined that an out-of-state business could establish a sales tax collection obligation through economic and virtual contacts with a state, or economic nexus.
Since the Wayfair decision, more than 30 states and the District of Columbia have adopted economic nexus policies requiring certain out-of-state sellers to collect and remit sales taxes. Fortunately, all states with remote seller sales tax policies allow an exception for small sellers.
The Supreme Court’s Wayfair decision required remote sellers with no physical presence, such as online and mail order companies, to collect and remit the applicable sales or use tax on sales delivered to locations within their state. In other words, states can now force out-of-state retailers who did business via the Internet to collect tax in a state even if the only connection to the state was their Web page and a customer.
However, in reality, sales taxes may have to be collected even if the team sports operation has no Web presence. The rules vary from state-to-state, but actively attending a trade show in a state or having representatives (who need not be employees) can require sales tax collections.
As mentioned, economic nexus will soon be in effect in many states. Unfortunately, determining when economic nexus has been established in a state is complicated by the fact that there is little uniformity between jurisdictions. And, once established, the process for getting things rolling by registering varies from state to state. Enter the Streamlines Sales Tax Initiative (SSTI).
More than 30 states and the District of Columbia have adopted economic nexus policies requiring certain out-of-state sellers to collect and remit sales taxes. Fortunately, all states with remote seller sales tax policies allow an exception for small sellers.
Streamlining the SST
This is where it can get confusing for team dealers — and dangerous if you don’t know and adhere to the new regulations.
As part of the Supreme Court’s Wayfair decision, it referenced the Streamlined Sales Tax (SST). Essentially, SST was born of state efforts to tax remote sales, the complex nature of sales tax and the emergence of e-commerce.
With 12,000 tax jurisdictions in the U.S., what is and what isn’t subject to sales tax and with rates that vary from state to state, sales tax collection can be a challenge for anyone.
There are currently 23 full SST member states and one associate member state. Member states remain autonomous taxing authorities — they still decide what to tax and what to exempt. However, they also adhere to certain conforming provisions. For example, while all SST member states use the same definitions for clothing and food, each state determines whether clothing and food are exempt or taxable.
Significantly cutting down on time and expense, a team sports business can register to collect and remit sales tax in all member states through the Streamlined Sales Tax Registration System (SSTRS). There are also financial benefits to registering through the SST. Member states currently subsidize or fully cover the cost of outsourcing sales tax administration to an SST Certified Service Provider (CSP).
There is no cost for sellers collecting only in SST states and there are reduced costs for sellers collecting in both SST and non-SST states. The CSP works with a seller’s accounting system to identify the taxability of products and services, apply the appropriate rate and maintain a record of the transaction. And, don’t forget, businesses that utilize a CSP are protected from audit liability.
Many team sports businesses fail to appreciate the middleman duty and legal obligations they face as a trustee or collector for sales and use taxes.
Too Small to Count
The Supreme Court’s Wayfair ruling replaced the physical presence requirement for when states can tax remote sales and adopted an economic nexus standard based on the amount of business done in a state. The ruling suggested strongly that the South Dakota law requiring remote sellers that meet thresholds of $100,000 in annual in-state sales or 200 transactions to collect and remit sales tax.
Despite many states being starved for revenue, the economic nexus laws continue to rely on the volume of sales, the number of transactions, or both. Approximately 20 states with economic nexus share South Dakota’s $100,000 in sales, 200 transactions threshold. Remote sellers that have less than $100,000 in sales or fewer than 200 transactions in the state usually don’t have to collect and remit sales or use tax in the state.
While it might appear relatively easy for a team sports business that sells only in its home state and South Dakota, businesses with customers in multiple economic nexus states face real challenges. Most economic nexus states closely follow South Dakota’s example, but several have adopted different thresholds. For example:
• In Alabama, a remote seller must do more than $250,000 in sales in the state and engage in certain activities (e.g. solicitation) to trigger economic nexus.
• In Connecticut, the threshold is at least $250,000 in revenue and 200 or more “retail” sales into the state as well as systematic solicitation in the state.
• In Minnesota, the economic nexus threshold is 10 or more sales totaling $100,000 or 100 or more “retail’ sales.
Many team sports businesses fail to appreciate the middleman duty and legal obligations they face as a trustee or collector for sales and use taxes. Since the business merely acts as a trustee in collecting and remitting the proper amount, it is clear the sales and use taxes do not belong to the business.
Becoming the Tax Man
Today, every team sports business must determine whether sales are made to customers in another state, whether the products sold are subject to that state’s sales tax, whether the customer is or isn’t exempt from sales tax and how extensive are the sales to customers in that state?
Exceeding the sale/transaction thresholds mean signing up as a tax collector for that state either directly, or if available, through the SSi.
Soon every team sports business may be required to collect sales – and use – taxes even if the only connection to the state is a Web page and a customer.
In fact, the business may have to collect sales tax even if there is no Web presence. While the rules vary from state to state, actively attending a trade show in a state or having representatives (who may not even be employees) can require collecting sales taxes.
Each of the 45 states with sales tax laws will, in all likelihood, want to increase revenue by following the precedent set by the Supreme Court with its Wayfair ruling.
The bad news is that every team sports business is now – or soon will be – responsible for keeping track of the ever-changing sales tax laws in every state where they have “economic nexus” in order to ensure compliance. Obviously, professional assistance will be needed.
Exemptions and Exceptions Abound
In addition to the almost indecipherable “nexus” rules, every state has its own rules for tax exemptions that can be based on the product, the intended use of the product or the status of the buyer. Product-based exemptions are often extensive, but usually pretty straightforward.
So-called “use based” exemptions usually apply to products that are intended for resale. In most cases, this is because the reseller will charge sales tax when these items are purchased by the end user.
Non-profit organizations or government agencies are often not required to pay sales tax.
If a tax exemption applies to everyone in a given tax jurisdiction, sellers don’t have to collect an exemption certificate for those sales.
However, when an exemption is narrower in scope, a buyer must provide an exemption certificate in order to prove to the seller that sales tax should not be charged.
Entity-based certificates are for organizations that are exempt because of their standing as a non-profit, government agency or some other qualifying status. These certificates allow organizations to purchase items without paying tax, regardless of how the product will be used.
Usage-based certificates allow for the purchase of items used for qualifying purposes, such as if they are to be resold. An organization with an exemption for resellers – often called a “reseller permit” or “resale certificate” – can only avoid paying sales tax on items it will resell. Naturally, sales tax must be paid on products the organization would use for other purposes, such as office supplies.
While sellers must still know which exemptions apply to each state, the Streamlined Tax Exemption Certificate is valid in 44-member states and the District of Columbia. It can be used for a single purchase or as a blanket certificate in multiple states. For the record, buyers can be charged criminally for misusing exemption certificates and sellers can encounter trouble if they don’t collect tax correctly.