Are you at risk of surprise sales tax?

ll rfosr BUSINESS LEADERs are comIVlfortable discussing things like risk, ROI, and market share. They are less comfortable discussing sales tax, but it's a conversation that needs to happen.

States are getting increasingly creative about finding new revenue sources through sales tax. Businesses can easily incur "surprise" tax liabilities without realizing it. Assuming sales tax rules are the same across all your territories can be a costly mistake.

What is Nexus?

Sales tax starts with something called "nexus." Nexus is the relationship a business must have with an authority (like a state or local government) in order for that authority to collect taxes. Let's simplify that. Imagine you have a store in Nebraska: you own your building, pay employees, and complete business transactions in the state. All these things give you nexus in Nebraska, and the state will collect sales tax from your business.

Say you have a customer, Jim, who works in Iowa, but comes to Nebraska to purchase his materials. You probably don't have nexus in Iowa just because your customer works there. But let's change the situation. Jim calls in his orders from Iowa and your employees deliver materials to his jobsites in that state. Now Iowa might argue you have nexus in their state and you owe them sales tax.

The problem businesses face lies in the words "probably" and "might." Each state has different nexus triggers. If your Nebraska store sells an item to people in two different states, you may have nexus in one but not the other. Things like buildings and equipment are almost universal triggers, but many states are starting to define nexus based on activity rather than physical presence. Sending an employee to a trade show, industry conference, or training seminar can all give you nexus in a state. You can establish nexus in Arizona if an employee spends two days of the year there. If your Nebraska store has a lot of Iowa customers like Jim, Iowa might argue you have an "economic nexus" in their state, even if all your sales take place in Nebraska.

Delivery of Goods

Delivering purchased items is a common nexus trigger, but there are a variety of ways states approach the issue. In Georgia, the "taxable event" takes place at the ship-to location, but in Kansas, it occurs at the ship-from location. In some cases, just delivering an item may not trigger nexus, but offering a service can. (It's the difference between delivering a door, and delivering and installing a door.) The method of transportation may be a trigger as well. Are you using your own fleet, a common carrier like FedEx, or a third-party vendor? The bedding store Mattress World is an excellent cautionary tale about ignoring delivery-related sales taxes. Mattress World is located on the Oregon-Washington border. Many Washington residents would cross the border to purchase and pick up mattresses. Mattress World started offering delivery and set-up service to their Washington customers through a third-party vendor. But hiring and sending that vendor across state lines created nexus under Washington's tax code. The company didn't plan for this and ended up with a $1.7 million (plus tax) debt to the state.

Jurisdictional Boundaries

We've been discussing nexus triggers as a state-by-state issue. The truth is you can create additional nexus within the same state by crossing into new tax jurisdictions. States might define their tax jurisdictions by cities or countries, but the boundaries aren't always so clear. To further complicate the matter, some states allow jurisdictions to set their own sales tax rules. Getting business from a new area in town means you could owe a com- plctcly new sales tax to a completely ncw uuthority. Colorudo is notorious fbr this: they have six different rates in a single zip codel

What's in a Name

Definitions arc one of the stickiest points in sales tax, in part becausc they can secm so arbitrary and abscnt of common sense. KitKats, Twizzlcrs and Whoppcrs are not "candy" undcr the Streamlir.rcd Sales Tax definition because thcy all contain f-lour. Indiana categorizcs marshmallows its "candy" (taxablc) and marshmallow crirnc as "food" (cxcrnpt). Pennsylvania does not (ux elothinr'. bul dor's trtr .'l'ur lrti.tl.r." *nien iriclude "urticl.'s m:.rdc ol' woven aninral hair or wc'rol that rcscmble s tur in appearance." (Presumably a wool sweater would be exempt. but a coat with sheepskin trirn would not.)

Calil'ornia's 20 I 3 tax on "certain lumbcr and enginecreci wood products" is a great example of deflnitionrelated chaos. Under this rule, "f-encing. railing and deckin-g" are subject ttt the tir\. but bumboo I'ene ing. pre-e()nstructed railin-q sections. and "deck packages" are exempt. Retailers spcnt countless hours determining which items in their catalclgs were taxablc. lt was a huge investment of time and lroney for the businesses, but it needed to be done. Shortly befbre enacting this new rule. Calilbrnia announced a plan to hire 300 auditors. Businesscs are held responsible for complying with tax rules, cvcn if those rules arc ahnost impossiblc to understand.

The Take-Away

Check thc nc.rus triggers .fbr avcrv territory \'our ( ontpetlt' interuL t.t tt'ith. Don't assun're you need a building or permanent employee in a state to owe sales tax thcrc.

. Cltack lhe tax rule.; re,u,urtling clelivcrie.s .for ever r- oreu \oLr tlaliv'er Io. You mav need tcl collcct additional salcs tax from custolncrs in some arcas but not others.

Chcck the juri.srlictiottal bounclurias .frtr even stule .\'tttt do business lrr. Make sure you'rt: collecting the correct amount of salcs tax for each .jurisdiction and remitting payment to the conect authority.

. Pa)'ottetlliott to definitions uttuched to sulc.s lrr,rc.r. The distinctions between taxable and exerlpt items may seem arbitrary and silly. but the stute is going (o be very scri,rus about collecting fines and penaltics.

Sales tax is incredibly complicatcd. You need a good tetx consultant to rnake sure you tbllow the rules in zill jurisdictions where you have nexus. But once you know what you're suPposed to do, the next step is doing it consistently.

Automating tax calculation is a -creat strategy because it v irtually eliminatcs the risk of human crror. Services like Avalara work with your ERP systern iind calculate thc appropriate late for each transaction. Your software platfbrms should bc robust. yet 1'lcxible enough to handle the inel'itable changes in salcs tax rules.

California's lumber tax impacted products so inconsistently that most POS programs couldn't apply it corrcctly. Many businesscs resorted to calculating sales titx by spreadsheet. A-eility software was one exception. It adapted to the changc casily, and users like Peterman Luntbcr. Fontana, Ca.. and S&J Lumber. Madera. Ca., were able to incorporate the tax without a problem.

You may not want to think about this topic, but it's tar better to discuss sales taxes now with your collea-tues. rather than later with an auditor.

- Je.ssittt Aruttl is conlntwtt(tti()tI (oordinator lbr DMSi Sofnrare, Otrtoltu, Ne. Rern h lrct ttt i(tt ttttl6 dttt.\i .t r'ttt.