Tax Changes: What’s New?

Surprise – we’re back! We disappeared for a while, but we’re back to share some important updates on, you guessed it, taxes!

It should come as no surprise there are constant changes in the tax world, and staying up to date on all these changes and regulations can be taxing (don’t worry, we haven’t lost our sense of humor).

So, what’s been changing? We’re glad you asked.

Physical Nexus

A while back we brought you info on nexus (you can check it out here if you need a refresher). States are now looking to overturn the physical nexus requirement for sales tax and replace the current presence test with a new test which would be based on sales or transaction volumes. These changes are important to pay attention to, as they just might have an effect on your nexus and filing duties.

Sales Tax Reporting

Changes are happening to sales tax reporting in Colorado, which is important if you do business in the state. Back in July, reporting requirements began for sellers who don’t currently collect Colorado sales tax and have annual sales greater than $100,000. If the seller doesn’t let the buyer know on the invoice they need to pay use tax, the seller will be penalized.

Penalties are also being imposed on those who fail to provide their buyers with a year-end transaction summary – if the customer makes more than $500 in purchases. Customer information also must be provided to the state.

Other states such as Kentucky, Louisiana, Vermont and Washington have put similar requirements in place, and it’s likely others will follow. It’s important to pay attention to these changes – your state could be next!

Economic Standard

As if changing the sales tax reporting requirements wasn’t enough, states are also imposing an economic standard for any business conducted in a state that leads to an income tax requirement. The standard for “doing business” generally looks like:

  • $50,000 in property or payroll in a state
  • $500,000 of sales into a state
  • An amount of activity in the above categories that is more than 25% of the company’s total

Of course, these minimum amounts of sales, payroll and property can vary by state. The following states currently have similar definitions for doing business:

  • Alabama
  • California
  • Colorado
  • Connecticut
  • Michigan
  • New York
  • Ohio
  • Tennessee
  • Virginia
  • Washington

The Market-Based Method

Businesses who don’t sell tangible property have been using the “cost of performance” method of revenue sourcing for quite some time. However, states are now starting to source this kind of revenue using a market-based method.

Unsure of what a market-based method is? This method means the sale is attributed to the actual location of the customer, rather than where the work was performed. This change has been adopted by many states, with a lot more likely to play copycat. Stay aware of these changes – filing requirements and taxes may be due in states where taxpayers haven’t previously filed.

This is great info, but why should I care?

Understanding these issues and changes can help you prevent costly surprises. Simply filing in a state where a company has a physical location is no longer valid, and is even considered an invalid excuse for failing to handle sales and income taxes.

Taxes are important. To learn more, or ask some questions, reach out. We’re here to help you!

A version of this blog first appeared on eidebailly.com

Sales + Use Tax: E-Commerce Happened

There are more than 10,000 local taxing jurisdictions in the United States. Not to mention, the tax rules in each of these jurisdictions can be different (ugh!). So bottom-line, the tax rules surrounding e-commerce are too complex to cover within the context of a blog. However, we can make you aware of some of the issues surrounding sales and use tax in e-commerce.

Nexus: Brick + Mortar to E-commerce

Let’s be honest, the tax system is old. Back in the day, most sales took place under the brick and mortar business model; customers came to you to purchase tangible goods (we’re talking about goods you could physically touch). Every sale was taxable and only one local (county, city) jurisdiction applied; unless an exemption was applicable.

When e-commerce happened there were concepts like virtual, intangible, etc. that weren’t defined by the tax rules. In addition, determining nexus became more complex. As a result, we began to see a marketplace in which not all sales were taxable.

So, what changed?

The customer’s shopping habits changed. Now, customers can (and a lot of them do) shop online. Not all of the online sales transactions are even taxable. It it all depends on nexus and the rules aren’t even the same everywhere.

Speaking of selling online… if you use a fulfillment agency (like Amazon), ownership is the key to determining nexus. If you retain the ownership of your goods while they are stored in the fulfillment warehouse, you have created nexus in the taxing jurisdiction in which the warehouse is located. If the fulfillment agency purchases the goods from you, the transaction does not create nexus in the taxing jurisdiction in which the warehouse is located.

Intangibles

How goods are delivered changed. Now, goods have become intangible (those are goods you can’t physically touch but still have value) such as cloud-based software, mobile applications and online paid content (we’re talking newspapers and magazines delivered online).

Thinking back a few years, customers bought software off the shelf at the store or had their newspapers or magazines delivered to their homes. These were both tangible goods (and the tax rules knew how to handle that). Now, customers download software from the cloud or view their newspapers or magazines online. So depending on where you have nexus, those rules apply (and yep, they aren’t the same everywhere).

Virtual Employees

Where our employees could work from changed. Now, having virtual employees is easier than ever. But this complicates your responsibility to collect sales and use taxes because those virtual employees create nexus.

Moral of the Story…

There are plenty of other considerations when it comes to e-commerce because (in case you hadn’t guessed), the sales and use tax rules are far from straightforward (in many cases). That’s why we recommend having a sales and use tax expert on your side (and there are some online solutions that can help too). Don’t forget, we have experts who are ready to help your business comply.

I’m Profitable … Now What?

You’ve got something great and now you’re profitable. Congratulations! But it’s not all sunshine and rainbows. What do you need to consider now that you’re profitable?

TAX PLANNING 

We all are familiar with Uncle Sam (everyone’s favorite uncle after all) and now that you’re profitable, he’s entitled to a piece of your pie. With combined federal and state tax rates of over 40%, Uncle Sam’s portion can be a pretty big piece. So how do you make sure he is only getting his piece, no more, no less?

Tax professionals can advise you on factors affecting your tax liability. These factors include, but are not limited to, entity selection (LLC, S-Corp, C-Corp, etc.), organization (ownership) structure, and nexus.

Reminder: Nexus, at its simplest, is the responsibility to file and pay taxes in a state that you may be selling goods or providing services.

In addition, tax professionals can strategize with you to minimize your tax liability. Those strategies include deferring income or accelerating deductions (within the tax regulations, they’re not in the business of tax avoidance) for tax reporting purposes.

To sum it all up, tax professionals strive to assist you in ensuring you are filing taxes in all the states you are required (and only those states) and paying the amount of taxes you need to pay (and only the amount you need to pay).

STRATEGIC PLANNING 

You got to this point, but where will you go next? We think it’s a safe bet that most of you want to do more and be more, but how do you get there?

Strategic planning is all about helping you assess who you want to be today, who you want to be tomorrow and how you will get there.

Business advisors can facilitate your strategic planning. The role of the business advisor is to help you develop a clear, concise and compelling strategic vision for your business and to hold you accountable in attaining that vision.

How? Business advisors will ask you the hard questions, draw on your knowledge (and the knowledge of others you involve in the process) and use available resources and connections to help you find (or reinvent) your strategic vision.

And it doesn’t stop there. The business advisor will be by your side during the implementation stage and help you track your progress in attaining your strategic vision. You can think of the business advisor as your personal guide through the strategic planning process.

TRANSACTION PLANNING 

You might be one of those serial entrepreneurs and, now that you are profitable, you want to move on to your next idea. But do you know what key drivers affect a business’s value (guess what, it’s not just profitability)? Have you done your due diligence (and no, that’s not just for buyers)?

Business advisors in this arena have expertise in financial analysis, valuation, sale preparation and other areas. They are available to help you through every step of the transaction process. They can help you determine the value of your business by providing market data research, valuation models, and one-one discussions about value drivers and pro forma financials (that’s accountant speak for projections). In addition as your advisor, they can help with document preparation and negotiation.

You don’t have to feel alone when selling your business (or looking at bringing in an investor for that matter). There are people out there to help you navigate the path and help you position yourself to achieve the maximum results.

When you become profitable, there are many considerations (the above are only a few of those considerations). However if there is one hidden message… it is important to find your advisory team (because it really takes a team). A team that helps you think holistically (there are a lot of moving parts in a business). A team that is proactive and engaged. A team that will have your back.

What You Want to Know: Sales & Use Tax

We want to give you a better experience, where you feel connected to your financial journey and confident that you’re making the best decisions for your business. As part of this, we’ll feature blog posts on frequently asked questions. No question is a dumb question, so if you want to learn more about something, just ASK.

You started your business with a dream. Now you’ve created a product people love and they want to buy it. As you get ready to sell, the first thing on your mind is sales tax right?

Don’t worry, we’re here to help. While it might not be as sexy as creating or selling your product, sales tax is important … and it can cost you dearly if you don’t pay attention to it.

First a few definitions …

NEXUS = a responsibility to collect tax

Typically, nexus in a state occurs if you:

  • Own or rent property in the state
  • Have employees including salespeople or independent contractors in the state
  • Employees make deliveries
  • File an income tax return in the state

Sales tax

A tax imposed by your friends at the government on the sale of goods and services. Sales tax is typically levied (collected) at the point of sale (when you purchase the product or service). The sales tax is collected by the business and then passed on to the government. A business must charge sales tax if it has nexus in that particular area (hence why we explained nexus first).

Use tax

To correct the price advantage out of state retailers have over retailers who have to collect sales tax, there’s a little thing called use tax. This is also a tax imposed by your friends at the government and is assessed at the same rate as sales tax. So how are they different? Well use tax is applied not when a product or service is sold, but after the sale. In other words, tax was not paid on the initial purchase, so instead it is paid to “use” the product.

Exemption Certificates

Some customers may claim to be treated as exempt (off the hook) from paying taxes. However, you should never take them at their word. Rather, always treat them as taxable until you are provided an exemption certificate.

As a rule of thumb, update your exemption certificates every three years.

We now further convolute this by saying that there are different types of exempt organizations (see this list) and not every item is subject to tax as there are different tax rules in every state. So (you guessed it) it’s best to work with your accountant when it comes to exempt organizations and items, as well as sales tax in general.

So how do you know when sales and use taxes are applied and when they’re not?

The answer is a little less than simple. But here’s the basic gist:

You should consider all sales subject to tax unless:

  • You do not have a responsibility to collect tax (cough nexus cough) in the state of delivery
  • Purchaser presents a valid exemption certificate.
  • Item is exempt from tax at point of delivery.

Use tax applies to all taxable purchases including:

  • Office equipment and supplies
  • Paper
  • Staples
  • Computers
  • Pens
  • Office furniture

Do you really need to be concerned?

Sales and use tax rules are constantly evolving and growing more complicated. This lovely complexity makes it vital for companies of all sizes to understand their environments so they’re in compliance with tax obligations.

Here’s just one example. Certain activities, such as selling a product over the Internet, or advertising through an online marketing company, can inadvertently establish nexus in a state, making you subject to that state’s tax laws. What does that mean for you? Well, if you have unknowingly established nexus, you can face responsibility for back sales tax, as well as super fun things like penalties and interest.

So yeah, you should probably pay attention to sales and use tax. The best way is to work with a trusted accountant who can help you see where you’ve established nexus, where you might potentially have issues, and help you track your tax obligations.