I'm not a lawyer, I'm not a CPA.
You are obligated to collect sales tax only in states where you have a "nexus" (basically, a physical presence). In other states, assuming they impose a tax of this sort, your customers (not you) are obligated to remit a "use tax" to their own state. It's not up to you to prove to anyone that they paid use tax -- it's up to them. No nexus -- then they have no taxing authority over you -- tell them politely to go away -- or better yet, just ignore any letters you receive. Google "Quill v. No. Dakota" if you want some background.
I would think that having employees in a state would definitely give you nexus there. You are obligated to collect sales tax in those states.
You put a lot of questions in one paragraph. :p Let me know if I missed anything.
Categories: Operations and Legal
We are a company in Canada selling software to customers in USA, we have employees in several states conducting selling and implementation support for customers. We did not charge sales tax on invoices. Starting now we are charging sales tax on sales to Texas as we now assessed to have substantial nexus. We have only 2 customers there and we obtain a direct payment certificate from them so we are lucky not to have to pay sales tax on past sales, same for State of Washington which we obtain direct payment cert that proving the customer paying their use tax. However, we still have potential problem in some states as we have employees and sales to customers there as well. The States are California, Ohio, Georgia, Tennessee. I don't know if out of state suppliers do they need to register and charge sales tax, what if customers pay use tax on their out of state purchases, how do we prove that our customers take care of their sales or use tax payment, what kind of certificate or documents we can obtain from customers in the above states proving them to be responsible for their sales tax liability.
Thanks in advance for your advice.
I'm not a lawyer, I'm not a CPA.
It's not that you have to collect it, but that the states WILL collect it from you. So if you don't bill it to the customer, you still have to pay it.
I┬?m not a tax lawyer, but I can provide some background information that may be helpful.
A state may tax goods sold within its borders to the extent permitted under the U.S. Constitution. Sales taxes are collected by sellers upon the sale of tangible property within the seller┬?s state. So, for example, a consumer in California who buys an **** from a local retailer pays a sales tax that is collected by the retailer.
Use taxes compliment a state┬?s sales tax and are imposed so that a consumer would theoretically have nothing to gain by shopping out-of-state. It works like this: in the above example, if the consumer purchases the **** out-of-state (say from a mail order or online retailer in New York), he/she would be liable to pay a use tax on the purchase at the same tax rate as if the purchase had been from a California retailer.
In short, sales taxes are mandated to be collected by retailers, while use taxes are imposed directly on consumers, most of whom do not report and pay a use tax on out-of-state purchases. The result: states lose significant tax revenues on out-of-state purchases of tangible goods.
Because individuals fail pay use taxes, states have sought to find ways to impose a sales tax collection burden on the out-of-state retailer. In 1992, the US Supreme Court ruled that states could only require out-of-state retailers to collect a sales tax if they have a ┬?nexus┬? (i.e. a physical presence) in the state. This case is Quill v. No. Dakota which Charles cited in his commentary.
Underlying the Quill v. No. Dakota decision is the commerce clause of the U.S. constitution which ensures that the actions of a state will not impede interstate commerce. The Supreme Court reasoned that the current patchwork of approximately 7,500 taxing jurisdictions in the United States is so complex that it would place an unreasonable burden on out-of-state retailers to charge and collect sales taxes. In order to impose a burden on out-of-state retailers to collect sales taxes, the existing tax rules would have to be simplified. To date, despite efforts to streamline ┬?- most notably the Streamlined State Sales Tax Project ┬? the required streamlining has not happened.
Two developments are creating the pressure to bring the issue of an Internet sales tax to a head this year -- the expiration of the moratorium on Internet taxes due to expire on November 1, and pressure by the states through the National Governors Association, to find new sources of tax revenue. Will the states be able to agree on the required streamlining? What position will Congress take? These are key questions as this issue takes shape later this year. Be on the lookout for the Congressional Joint Economic Committee┬?s report in August that will signal the direction Congress may move on this important matter.
Disclaimer: my comments on this forum are for informational purposes only; they do not constitute legal advice, and should not be construed as such.
Sorry! Chip got hit by our anti-advertising word filter. For "****" in Chip's message above, read the brand name of a popular personal music player marketed by Apple! :D
Also, I have not checked with Chip on this but I assume what I am going to post is okay with him. Chip is of course an attorney who specializes in high-tech issues. Chip puts out an occasional (6 times a year?) newsletter. The latest newsletter dealt in somewhat more detail with the subject Chip discusses above: interstate sales taxation. I'll bet that if you wrote to Chip and asked he would send you a copy. ccooper (at) digicontracts (dot) com. As I indicated above, he doesn't spam you -- I think about 6 pieces a year.
The newsletter which Charles references is described below.
Title: Website Legal Alert
Author: Chip Cooper
Focus: Legal Developments Affecting Ecommerce Websites
How Often: Monthly
Cost: It's FREE
To subscribe, email me at firstname.lastname@example.org and put SUBSCRIBE in the subject line. It's easy to unsubscribe at any time.
The ones that should be paying use tax -- it's their responsibility -- forget about them -- it's not your problem. If they don't pay it, it's their problem, not yours.
The ones from whom you should be collecting sales tax -- you can't change the law with a contract. The law says it's your job to collect and remit the tax. The amount of the tax is on the customer -- that's why when you go in the store, the "contract" price of a candy bar is a dollar, but you pay the store $1.09. But it's your legal obligation to collect it and file a return.
You keep asking about certificates and registration. The theory is very simple: if you have a nexus in a sales tax state, then you have to collect sales tax. What constitutes a nexus can be a question. Texas once claimed we had a nexus because we did one trade show there (no floor sales). But I would guess that having employees in a state is not a debatable situation -- you have a nexus.
If you do not have a nexus -- well, I'm not going to advise you here to throw the letter in the wastebasket, and hang up on phone calls -- but that's what I did, and I'm not in jail.
Charles is correct. Forget about the use tax; it┬?s the purchaser┬?s responsibility to pay it (and most of them don┬?t).
You can┬?t change the sales tax law by contract if you have nexus in a state. As Charles pointed out, if you have nexus, its your responsibility to collect and pay the sales tax. If you don┬?t have nexus, then you have no responsibility to collect and pay sales tax. It┬?s that simple (however, determining whether you have nexus may not be simple in some cases).
Regarding the question of nexus if you have employees in a state, I believe Charles is also correct in that this would be deemed to be nexus in most states. The employee-nexus issue is a difficult one for companies that have employees working out of state in home offices.
The new development that I alluded to in my comments involves a move by various states to force out of state sellers to collect and pay SALES tax, EVEN IF THE SELLERS HAVE NO NEXUS. To accomplish this, states would have to streamline and harmonize sales tax laws as required by the Quill v. No. Dakota case. This would be a significant change for out of state sellers.
Disclaimer: my comments on this forum are for informational purposes only; they do not constitute legal advice and should not be construed as such.
Chip says it so much more eloquently, doesn't he?
EW, I suspect you are anticipating the burden of disparate state sales tax returns. You're right! The burden that the Court referred to in Quill v. No. Dakota is real. I was in business at the time of Quill. I anticipated -- as did many if not most others -- that Quill would lose. (In those pre-Internet days, Quill, an office supply company, had a little office supply sales program than ran on a customer's PC. Like most software, the click license said that Quill continued to own the installed software. So Quill owned a little mini-store on customer desktops. If that's not nexus, what is?) I anticipated that I would have to add a half-time equivalent to my staff of 10 just to comply with various state tax regulations: tracking down the right forms, filling them out, and dealing with various follow-up issues. And we only had customers in about 20 states -- imagine a company with customers in all or nearly all 50 states.
One other thing, EW, and others following this thread. As Chip says, many companies and most consumers don't pay use taxes. Do you? (Rhetorical question -- don't post the answer here.) When you buy a computer from Dell, do you send your home state a check for $65 in use taxes? (Actually, in most states, it's an annual return, part of your home state sales tax return.) If you buy your business a box of CD-Rs, and you take some home, do you send your state a check for the use tax on these items converted from business to personal use? I'm not going to lecture you on civic responsibility, but keep in mind that if you do get audited by your state sales tax folks for any reason, they will ding you for three or so years of back use taxes -- it might be easier to pay as you go.
From an entrepreneur's point of view, that is a great solution. You quote the price of your product as $12,000, you negotiate with the customer to $10,000 -- and then after the deal is closed and the license signed, you send them a bill for $10,850. They either pay the bill including tax or provide a good reason not to. Either way, it costs you nothing in either dollars or lost sales, and it keeps you out of trouble.
As a political libertarian, it makes me sad to say the above -- I'm encouraging you to collect taxes whether they are legitimate or not, and force the taxpayers to argue with you if they feel these presumed legitimate taxes are in fact not owed. Milton Friedman always felt bad that he had invented the withholding tax (during World War II) because it made it so much more invisible for the government to raise taxes.
Milton Friedman also said "The most important ways in which I think the Internet will affect the big issue is that it will make it more difficult for government to collect taxes."
Be gald it isn't the VAT, the ulimate invisible tax, unless you're a tourist.
I know this is a very old thread, but it does address issues pertinent still.
Having had a service company for a short time, I read carefully the laws governing my business and the responsibility of sales tax. My reading showed that as a service/retailer, I was responsible for paying sales tax on my service (which was sold to the customer) and any product on which I made any portion of a profit if I had paid sales tax myself. If my product was sold with no increase in my cost, I did not have to pay sales tax.
The law then permitted me to recover all of my cost of sales tax. So the sales tax was then passed directly onto the consumer.
The law was clear that I did not have to pass that cost on, but in order to remain profitable, as with any retailer, all costs to the retailer are passed onto the consumer.
The idea of 'use' tax is completely different. That is the responsibility of the consumer. If sales tax and use tax are the exact same in a state, then there is no issue. If one purchases from out of state from a retailer without a nexus in their state, I understand the consumer then is responsible to their own state to pay them the use tax.
Is this correct?