Spice Up Your
State Tax Strategy
Jon Wellington's Winning Recipe for Success
PART 1: Sales Tax Obligations
Selling products or services to customers across the country is easier than ever, but it also can come with overwhelming sales tax obligations. Every state has its own rules and quirks when it comes to sales tax, and it is important for you to understand these rules to avoid any potential legal issues or surprise tax assessments.
Sales Tax Thresholds
In recent years, most states have adopted new sales tax laws that require sellers to collect and remit sales tax if their sales exceed a certain volume or dollar threshold – even without any physical presence in the state. The most common thresholds are 200 transactions and/or $100,000 in sales in the prior 12 months within a state, although states vary wildly in the details. Once you exceed the threshold, you must register for a sales tax permit and begin collecting and remitting sales tax. Failure to collect the tax will not relieve you from owing the sales tax to the state, not to mention additional penalties and interest.
One of the many challenges with sales tax compliance can be determining the taxability of each charge, especially if you are selling a combination of taxable and exempt products or services. For example, in some states, digital products such as e-books or software are considered taxable, while in other states, they may be exempt. Other charges such as shipping and handling, installation, or technical support may also be subject to sales tax. Further, otherwise taxable transactions could be eligible for an exemption. For example, some states offer exemptions for products or services used for agricultural or manufacturing purposes, while others may offer exemptions for charitable organizations.
Once you know the taxability of a product, the next step is determining the applicable tax rate. States differ in how they source sales with respect to local tax rates (for example, is the local rate based on your location or the customer's?) and sometimes impose reduced rates for certain types of products and services. Tax rates can change over time as well, and it is your obligation to make sure it is collecting and remitting the correct amount.
Vendors, like yourself, with limited resources may find it difficult to handle all these sales tax obligations. However, failure to comply can lead to disastrous results. This is where our firm’s sales tax professionals can be of great help. We can review your processes to ensure you are handling your sales tax responsibilities correctly. We can conduct a nexus study to identify any jurisdictions where you should be filing and how to minimize any potential exposures. We can also process and file sales tax returns on your behalf and give you one less thing to worry about.
NEED HELP WITH YOUR STATE TAX?
Our state and local tax professional, Jon Wellington, would be happy to discuss your issues and provide you with the best answers. Contact him today.
Part 2: Your Guide to Filing Income/Franchise Tax Returns in Other States
If you are a Texas business owner who has customers or employees outside of Texas, you may be wondering if you need to worry about filing income/franchise tax returns in other states.
The short answer is yes - many states take the position that if a taxpayer generates income from the state, it owes an income/franchise tax return, even without a physical presence in that state.
However, the good news is that there are ways to potentially avoid or minimize these taxes. In this article, we'll take a closer look at what you need to know about filing income/franchise tax returns in other states and what steps you can take to minimize your tax liabilities.
“Nexus” refers to the degree of connection between a taxpayer and a state. If you have sufficient nexus with a state, that state can impose its taxes on you. Different nexus standards can apply to different taxes, so it is possible that you can have nexus with a state for sales tax but not income tax, or vice versa.
Historically, a “physical presence,” such as having in-state offices or employees, was needed to generate nexus. With remote work growing in popularity, many taxpayers have created nexus in additional states without realizing it by having their employees work from home. Further, many states now take the position that just having “economic nexus” (in-state customers) can create an income tax filing requirement, even with no physical presence.
Do You Have to File Tax Returns in Other States?
If your activities generate income tax nexus with a state, that state will expect you to file a tax return and pay taxes based on your income generated from that state. States vary greatly in determining how much income was earned within that state, adding to the compliance complexity.
The good news is that there are exceptions to the filing requirements in many states. For example, some states have "de minimis" thresholds that exempt businesses with a low level of sales or activity in the state from the filing requirement. There are also certain constitutional and other limitations on states’ ability to tax nonresident taxpayers.
Minimizing Your Tax Liabilities
If you have customers or employees outside of Texas, you may wish to consider a nexus study that will provide a comprehensive review of your business activities to determine where you have nexus and potential tax liabilities. We can also help you identify areas of risk and develop a plan to minimize any existing or potential tax exposures. If you anticipate expanding your business to other states in the future, it is also important to develop a tax strategy that considers your growth plans.
As a Texas business owner, it's essential to be aware of your potential tax liabilities in other states if you have customers or employees outside of Texas. Conducting a nexus study can help you understand your potential tax obligations and take steps to minimize them.
Recipe for Income/Franchise Tax Returns
- Texas business owners with customers or employees outside of Texas may need to file income/franchise tax returns in other states
- Many states now acknowledge "economic nexus" in addition to physical presence
- If your operations establish income tax nexus with a state, you may have to submit a tax return and pay taxes on your state-generated income.
- Legal and other constitutional limitations may exempt businesses from filing requirements in some states
- Conducting a nexus study can help identify areas of risk and develop a plan to minimize existing or potential tax exposures
- Developing a tax strategy that considers growth plans is important for Texas business owners anticipating expansion to other states
Part 3: A Guide to Texas Sales Tax for Business Owners
As a Texas business owner, having a proper understanding of the state's sales tax laws is an essential part of ensuring proper compliance and avoiding unpleasant surprises. In this article, we will cover the most common questions business owners have about Texas sales tax and provide additional information to help you better understand your responsibilities.
What do I need to know about Texas sales tax as a vendor?
If you are selling tangible personal property to Texas customers, then you should be collecting sales tax from your customers and filing Texas sales tax returns. The only legitimate reason not to collect tax would be if the particular items you are selling are exempt from sales tax or you are selling to an exempt customer. Customers can be exempt because of their character (nonprofit or governmental agency) or their use of the property (manufacturing equipment, purchases for resale). It is important to note that you may need to collect exemption or resale certificates from your customers to prove to any sales tax auditor that you properly did not collect tax.
If you are providing a service, services are typically not subject to sales tax, but Texas does in fact impose sales tax on many services. For example, any services relating to hosting or updating a website, janitorial services and repair services are usually taxable.
What about when I purchase a product or service and am not charged tax?
Just because a vendor does not charge you tax does not mean you do not owe tax. Many out-of-state sellers do not collect Texas sales tax, but as a consumer, you are supposed to self-report "use tax" to Texas. Use tax is a tax on the storage, use, or consumption of taxable items or services that were purchased tax-free or outside of Texas. This is an area where taxpayers often get unpleasant surprise assessments from sales tax audits.
Am I going to get audited?
The Texas Comptroller has increased its audit staff, and if you have not been subject to a sales tax audit in the past, you are likely to be audited in the future. Having all the necessary documentation is a critical component to a strong audit defense.
What can LGT do to help?
At LGT, we can review your processes to ensure you are charging sales tax and remitting use tax when you are supposed to, as well as maintaining the proper documentation to support your audit defense. If you do have any exposure in this area, we can take steps to minimize any tax, penalties, or interest that would be due and take steps to prevent these liabilities from growing in the future. We can also file your sales tax returns for you. In other words, our team of experienced professionals can provide guidance on all aspects of Texas sales and use tax, from registration to reporting, and everything in between.