Navigate Sales Tax Rules Across Jurisdictions, State Lines, and International Borders
SMBs must keep abreast of the various sales and use tax rates and regulations wherever they operate. (The U.S. alone contains more than 10,000 tax jurisdictions.) The first step is to determine if the company has a requirement to collect sales or use tax. This is called “nexus” and refers to the presence a company may have with a particular jurisdiction, and it can be a topic of debate between the jurisdictions and the companies. Nexus is the basis for the sales tax collection obligations of an out-of-state business. Nexus means that a vendor has established a tax presence with the state or jurisdiction. This tax presence gives the state or jurisdiction the right to require the vendor to collect and remit sales tax on its sales to its in-state customers. Without nexus a jurisdiction does not have the authority to require a business to register to collect and remit tax. Nexus requirements will vary by jurisdiction and tax type. However, a business can voluntarily register to collect and remit the tax as a convenience for its customers. Nexus is affected by factors such as whether a retailer uses its own trucks to deliver packages in a state, contracts with a third-party delivery service for fulfillment, or maintains a distribution center, just to name a few. Some of the more common nexus criteria that could require a business to register to collect and remit tax are as follows:
- A physical presence/location, such as a store, office warehouse, etc.;
- Solicitation by company sales representatives;
- Company owned vehicles delivering tangible personal property into the jurisdiction;
- Company owned tangible personal property, such as capital equipment or inventory, stored or located in the jurisdiction;
- Training classes held in the jurisdiction;
- Tangible personal property leased or rented to someone located in the jurisdiction;
- Repair or maintenance of tangible personal property located in the jurisdiction.
When a business entity meets one or more of the examples of nexus criteria listed above, then it is required to register to collect and remit the appropriate sales and use tax.
Rates are another issue: Some jurisdictions charge additional rates on top of the state’s basic rate. Missouri, for example, has approximately 2,000 local tax rates. In most cases the rate is based on where the product is delivered (this is called a destination state,) but there are still a few states that source local taxes on intrastate transactions back to where the sale originates (this is called an origin state.) However, some states are Modified Origin sourcing states, like, for example, California. The county tax only, not including county imposed district taxes, is sourced at the origin. The district tax imposed by either the county or city is sourced at the destination. These rates do not remain static. In fact, according to Vertex Inc., 2015 saw 612 sales and use tax rate changes in the U.S., up from 492 in 2014. From 2006 to 2015, the average annual rate has been 405 changes per year.
One tool that can be used to keep up with these changes is a product taxability report that provides state-by-state, jurisdiction-by-jurisdiction data on sales tax rates and taxability regulations. This report can be found within a sales and use tax automation solution and can be referenced with the click of a button. Without an automated solution, expansion into new markets could quickly overwhelm a company’s capabilities. Using an automated, cloud based solution ensures the rates will be accurate and updated for you in real time.
Operating across international borders raises another host of tax management challenges that will accelerate with increased cross-border sales. For example, in Canada there three different levels of taxes that are levied:
- Goods and Services Tax (GST) is a value added Federal level tax;
- Provincial Sales Tax (PST,) sometimes called the Retail Sales Tax, is a separate sales tax collected in certain provinces; or
- Harmonized Sales Tax (HST) is a value added tax, which is a combined rate of both the PST and GST that is used in certain provinces.
Forrester Research projects that online B2C (business-to-consumer) sales will more than double in the next five years, reaching $424 billion by 2021. Growth will be strongest in developing markets such as China, with Latin America, Asia Pacific, Africa, and the Middle East expected to register double-digit compound annual growth during this period.
For more information read 5 Steps to Simplify Sales and Use Tax for Retailers.
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