sales tax

Article Dean Dorton

It’s an annual tradition for the President of the United States to pardon a turkey at Thanksgiving. Which president started the trend is up for debate, but White House history dates the first turkey clemency to 1865, when Abraham Lincoln’s son took a liking to a bird intended for Christmas dinner.

Repost from Avalara

Since then, dozens of turkeys have been given a reprieve by POTUS. But is America really the land of the free fowl? In Lincoln’s case, it’s lucky the First Family was living in the White House at the time of the pardon. The former president’s home state of Illinois requires breeders who sell animals (including livestock) as pets to collect sales tax. California, Tennessee, New Jersey and several other states have similar laws. So the Lincolns could have been on the hook for consumer use tax since they didn’t eat the bird as intended.

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Had the Lincoln turkey made it to the White House table, tax would have been a non-issue as the District of Columbia does not charge sales tax on livestock, groceries or chef services. Although 14 states do tax groceries and some, including Washington and California, add retail sales tax to home-cooked meals prepared by professional cooks. Georgia even extended that rule to chefs marketing their home cooking services online, requiring sales tax to be charged on the transaction.

What about the Nixon and Reagan era turkeys that were sent to petting zoos? If they spent their final days on display in Louisiana, Oklahoma, or Maryland, it would cost visitors more to get a glimpse of these fortunate fowl. These states, among others, charge sales tax on admissions to certain entertainment or amusement venues, which can include zoos.

And what about Honest and Abe, the two turkeys plucked from the Twittersphere, flown via Turkey One (seriously) from Foster Farms in Modesto, CA to Washington DC and pardoned by President Obama last year? The duo retired to Turkey Hill in Leesburg, Virginia where they will live out the remainder of their lives. Unless they try to make a run for the border together. Canada is cool with Americans bringing one U.S. turkey into the country, but try and get two past customs and the duty increases by 154 percent!

In addition to Honest and Abe, two other (less fortunate) turkeys, also from Foster Farms, were dressed and delivered to the Obamas in 2015 to donate to a DC-area food bank.

How does all this fly from a sales tax perspective? Foster Farms may have owed use tax on the donated birds because they took them out of their inventory. And possibly on their feeding and care. But if only eight Foster Farms birds made the trip to DC from California in the last six years – four being pardoned (Honest and Abe in 2015; Cider and Apple in 2010) and four being charitable donations – it’s likely that the poultry producer was spared from having to register and collect sales tax in the U.S. capital.

But let’s fan this out a bit for fun. In the 17 weeks it took those turkeys to go from farm to table (or farm to capitol to farm, in this case), a whole flock of sales tax nexus-creating scenarios could have cropped up. What if a third-party trekked those toms from California to the Capital instead of a commercial jet? The gobblers’ Hill staffers (the ones who stayed with them at the Willard Hotel, toured them around the Rose Garden and drove their motorcade to the White House) could have considered remote employees (a nexus triggering activity). And the whole social media campaign, complete with plush turkey toys? Well there’s some click-through nexus for you right there.

Having a hard time stuffing all this into your brain? We don’t blame you. Multi-state sales tax nexus is a lot to have on your plate.

While there is no tradition where state auditors grant clemency to companies for tax compliance, here are 10 tips from 4 (former) state tax auditors that could help. And, thankfully, there’s Avalara sales tax automation software to make the job easier.

Article Dean Dorton

Drop shipping can be a big boon for online sellers, especially small businesses that don’t have the funds or space to stock up on and store inventory. With drop shipping, sellers can take orders from customers for an item and then turn around and order that item from a supplier, which then ships it to the customers. The seller doesn’t have to handle the physical item at all, the customer gets his or her order, and everyone’s happy.

In many ways, this is a win-win, but using drop shipping can create complexity when it comes to sales tax.

Know your nexus

As with any sales tax situation, the first step is knowing where you have nexus or a relationship with a certain jurisdiction that requires you to collect sales taxes. In general, if you have nexus in a state, you will be responsible for collecting the right rate of sales tax for that state on any sales to customers within that state. That applies whether you are using drop shipping or delivering in some other way.

What if you don’t have nexus, but your supplier does?

Drop shipping can be tricky precisely because it’s not only the seller’s nexus that comes into play but, potentially, the supplier’s or shipper’s nexus as well. As the seller, you are generally only obligated to collect sales taxes on the sale when the seller lacks nexus, including California, Connecticut, Florida, Hawaii, and others. In turn, the supplier’s obligation could require you as the seller to either pay sales tax to the supplier or to come up with an exemption certificate so that you don’t have to pay tax.

Exemption certificates

In most states, sales taxes are only levied on retail sales, not wholesale transactions. In this case, even if your supplier has nexus, the supplier will not have to collect sales tax on the transaction with you as long as the supplier can present valid resale exemption certificate from you, the seller.

However, even if the sale between you and the supplier is exempt, if you don’t provide the supplier with a valid resale exemption certificate, that transaction can be considered a retail rather than a wholesale sale and could legally obligate the supplier to charge you sales tax on the transaction.

Resale exemption certificate procedures are individual to each state. Many states will accept an out-of-state resale certificate, multijurisdictional form or alternate documentation in a drop-shipping situation.

However, in the states that don’t accept these, the seller may have to deal with some unexpected requirements. For example, in California and other states that have stricter requirements for resale certificates, a seller may have to register with the state in order to provide a valid exemption certificate. By registering in order to get a certificate, the seller would now be obligated to collect sales taxes from customers in that state even though the seller previously did not have nexus.

Creating nexus with drop shipping

In some states, the use of a drop shipper in the same state as the customer by an out-of-state retailer can create nexus for the seller. States, where this may be an issue, include California, New York, Texas, and Florida.

Getting it right

Drop shipping can be a successful solution for sellers, but it can also add new layers of sales tax complexity. One way for businesses to make the most out of drop shipping and other innovative solutions is sales tax automation software such as Avalara AvaTax. AvaTax’s accuracy is 100% guaranteed, so you can be sure that you’re getting sales tax right no matter how your products are getting delivered.

For more on the rules for online retailers around drop shipping, download the whitepaper – Shipping and Not Handling Sales Tax.

Article Dean Dorton

 
Repost from Avalara: Dealing with sales tax can be a ghoulish task, especially if you do business in multiple states. The rates and rules vary widely by state and it can be frighteningly difficult to know how to calculate and apply them correctly. Take Halloween, for example. Who doesn’t love to dress up in costume, carve pumpkins and indulge in seasonal sweets? But figuring out if and when to apply sales tax to these getups and goodies is far from a treat.

Pumpkins

There’s something magical about transforming garden-variety gourds into grinned jack-o’-lanterns. But be aware: not all pumpkins are created equal. In some states like New Jersey, Pennsylvania, and Washington, taxability depends on if your pumpkin is tricked-out or treat-worthy. Pumpkins to be used for decoration ( painted, varnished or carved) are taxed while pumpkins used for food ( like pie) are tax-exempt. Massachusetts is a little more lenient; the decorating needs to have already happened to tax to apply. Pumpkins sold in their raw state are exempt, even if you carve or paint them after purchase. In Iowa, all pumpkins used to be taxed, head to the pumpkin patch. Pumpkins are exempt only when sold by the person or corporation that planted, cultivated, and harvested them, and the seller must provide proof of origin for buyers to get the exemption.

Costumes

Sales tax holidays aren’t just for back to school supplies. In states like Georgia, you can snap up Halloween costumes for the whole family during this tax-free period. But in Texas, the exemption applies only to kids’ costumes. In Vermont, costumes are exempt but costume masks and other accessories aren’t. In Georgia, both costumes and mask are tax-exempt if sold as a set, however, if sold separately, the mask is taxable but costume apparel is exempt.

International borders are trickier. Import taxes can really carve a chunk out of your costume budget in tariffs and duties. In the 1990s, the US Court of International Trade reclassified imported textile garments- including costumes- as “wearing apparel” ( subject to duty) instead of “festive articles” ( duty-free), based on a lawsuit brought ironically by a customer company. The amount of the duty varies by article. For example, a multi-piece Santa suit has different tax rates charged on the trousers, jacket, bread, wig, shoes, gloves even the sack-ranging from zero ( tax-free) up to as much as 32 percent.

Candy

Handling out candy for Halloween? Don’t get tricked into paying more for those treats. Some states, including Washington, North Carolina, Illinois, Colorado, and Connecticut have a lower sales tax rate for items classified as “food” based on having flour as an ingredient. This includes some candy items like Kit Kat and Twix. The flour factor can shows just how nuanced states can get with product taxability and complicated it can be for sellers to get sales tax right. In fact, as an investigation in North Carolina uncovered that retailers were overcharging sales tax on candy that should have been exempted under this rule.

States sales tax regulations can be tricky and it’s no treat trying to figure them out on your own. It’s easy to get caught up in the complex web sales tax rules and rates. You know what else is scary? Trying to manage sales tax without dedicated software to do it for you. Ward off the evils of calculating tax and filing returns by automating sales tax in your ERP, e-commerce or billing system with Avalara AvaTax. For the bigger story on better sales tax management, check out A Tale of Two Accounting Departments.

Article Dean Dorton

Mike Harbold, Associate Director of Tax Services, is presenting two topics at the Sales and Use Tax in Kentucky seminar in downtown Louisville, KY on Friday, November 6, 2015. Mike has more than 20 years of experience in providing tax services to Kentuckiana companies.

This basic-to-intermediate level seminar is essential for accountants, attorneys, financial officers, controllers, business and tax advisors, enrolled agents, and business owners who are interested in understanding the impact of sales and use taxes on them or their client’s businesses.

Register online via the National Business Institute.

Course content:

  • Reviewing Recent Developments
  • Clarifying Nexus Confusion
  • Complying with and Enforcing Sales and Use Tax
  • Identifying Tax Exemptions and Exclusions
  • Understanding State Sales and Use Tax
  • Resolving Sales and Use Tax Disputes
  • Answering your Real World Questions – Q&A Session

Feel free to reach out to us if you have questions. To learn more about how our tax team can help you, contact your Dean Dorton advisor or Mike Harbold at mharbold@deandorton.com.

Our services include:

  • Forensic Accounting and Litigation Consulting
  • Business Consulting
  • Business Valuation
  • Financial Statement Audits and Reviews
  • Forensic Accounting and Litigation Consulting
  • Healthcare Consulting
  • Merger and Acquisition Analysis
  • Tax Planning, Returns, and Representation (including Charitable and Wealth & Real Estate)
  • Technology Consulting

Article Dean Dorton

How Much Sales Tax Risk Do You Carry?

Sales tax. It is one of those tasks that can drive your accounting department or bookkeeper crazy. It is also one of those unavoidable statutory requirements. Undoubtedly you have developed a process that works, but do you know how that process will hold up in an audit? Most companies cannot afford to screw up sales tax. The average audit penalty of $34,000 means the consequences of making mistakes are dire.

In a time where states are short on revenue and looking at uncollected sales tax to help make up that gap, sales tax practices are increasingly under the microscope. Now is as good a time as any to examine your sales tax process and determine just how much risk you carry. Here are a few things to consider:

Are you manually managing sales tax in Microsoft Dynamics or Intacct?

Perhaps you look up sales tax rates by ZIP code or download rate tables to implement into your ERP. This can be time consuming and error prone. ZIP codes were created for the postal service and do not always line up with taxing jurisdictions. Relying on ZIP codes to determine tax rates can mean over or undercharging your clients.

Does the taxability of your products vary by jurisdiction?

Products that are taxable in one state may not be in another. For example, some Indiana localities have adopted a local food and beverage tax when a food or beverage is sold, served or prepared for consumption. In neighboring Ohio, most food items are non-taxable unless they are consumed on the premises where they are purchased.

Are you doing business in multiple states?

Instead of thinking of sales and use tax obligations in terms of where your business is located, think about where you do business and the activities you engage in within those states. Why? Rules vary from state to state when it comes to what creates sales tax nexus. For example, certain trade show activities can trigger sales tax liability in Illinois, Texas, Nevada, Florida and California.

Reduce your risk:

Sales tax can be tricky, especially when manually keeping up with rate, rule and boundary changes in multiple jurisdictions. Reduce your risk of a negative audit by taking time to examine your sales tax process and develop a consistent, defined work flow. Then, look for ways to increase sales tax calculation accuracy. Automating the sales tax calculation and decision process can save time, money and effort. Avalara sales tax automation solutions integrate with Microsoft Dynamics and Intacct, along with most e-Commerce shopping carts and POS systems to help you achieve compliance and accuracy for all your transactional tax needs.

For more information on how to reduce your risk, join us for an upcoming webinar:

The Hidden Dangers in Your Rate Tables
1PM ET, Wednesday, April 23, 2014
Register Here