By: Michael P. Nunez
Senior Tax Manager
On the State & Local Tax front for 2019, there has been quite a bit of activity for remote sellers of tangible personal property (product & goods), sellers of services and expanding businesses. These businesses are affected in three ways: sales taxes, apportionment and gross receipt taxes.
Sale and Use Tax
The economic sales tax nexus landscape has changed since the June 21, 2018 decision in South Dakota v. Wayfair. Presently 44 state jurisdictions either enforce, or provided an enforcement date, for “economic” sales tax nexus. Missouri and Florida remain the only two states that have not provided enforcement through legislation or regulation.
How to Respond to Wayfair
- Tax savvy sellers must take a “nexus footprint” in the states where they have any presence or business. They must quantify where economic sales tax nexus may have been established by dollar amount and by number of transactions engaged in for each state. Understanding the location of your inventory, sales force or other physical presence” items is still necessary a post-Wayfair. States continue to enforce “click-through nexus, affiliate nexus and use tax reporting for both remote sellers and other retailers.
- Once nexus is confirmed, sellers must determine whether the business has a technical solution or ERP solution available to help automate the tax collection and remittance process. Sellers must consider whether sales in their customer’s states are subject to “marketplace facilitator nexus”, which seeks to impose the sales tax collection and reporting responsibilities onto the entities in a better position to collect. Marketplaces can be online e-commerce sites, auction houses or even payment processors.
- Sellers will need to analyze various tax decisions to mitigate tax exposure and come into compliance. These taxpayers will need to diligently track and maintain state sales volumes and transactions by state in response to state nexus provisions.
Apportionment Sales Factor Sourcing
States continue to enhance how sales are assigned to their states through a single sales factor, double-weighted sales factor or use of market-based sourcing rules. Hawaii, Indiana, New Mexico, and Vermont are among the 27 states adopting market-based-sourcing rules based on the location of where the benefits are received by their respective customers. However, 20 states continue to use the cost-of-performance sourcing rules or iteration thereof. The dichotomy between these two sales factor sourcing rules has the greatest impact on businesses that sell services remotely or via a remote sales force.
Taxpayers should be careful not to of materially underreport or overreport sales among the states.
Businesses with multistate sales must review and update their sales apportionment methodologies to ensure appropriate compliance in this age of remote sellers.
State Taxation of Gross Receipts
States continue to expand the application of the popular Gross Receipts Taxes (GRT).. The GRT is called by many names (corporate activity tax, franchise tax, margin tax, general excise tax or business and occupation tax), however, the gross receipts tax is still a tax on receipts. The tax may be charged multiple times on the same product, as well as, to a business operating at a loss. More states are embracing the GRT as a means to raise additional revenues.
- Oregon has recently enacted the Corporate Activity Tax (CAT) effective 1/1/2020 on persons that have a substantial nexus to the state. Nexus includes, but is not limited to, receipts of $750,000 or more, property of $50,000 or more, or payroll of $50,000 or more. It is assessed on gross receipts of $1 million and above at $250 plus .57% of calculated taxable commercial activity.
- The Texas Franchise Tax is well established. The tax rate of 0.75% and it applies to most entities. Entities with less than $1,130,000 annualized total revenues or less than $1,000 in tax liability owe no tax.
- Nevada’s Commerce Tax began in 2016. Under this tax regime, there are varying rates of tax imposed based on the business category classification for assessment. The rates vary between 0.051% to 0.331%, with a rate of 0.128% for unclassified business. The tax is imposed on receipts of $4 million annually.
- Washington’s Business and Occupations Tax (BNO), is also based on varying rates by business classification. The major classifications are: retailing, wholesaling, manufacturing, service & other. The tax rates range from .00471 to .015.
- Other state GRT regimes include Hawaii’s general excise tax (GTE) and the Ohio CAT.
In order to appropriately address these GRT regimes, business must first determine whether there is nexus to these states based on varying bright-line nexus standards. They must, then, identify their business classification, and lastly be aware of credits and or deductions available as reductions against their gross receipts.