Ever since the Supreme Court ruled that physical presence in a state is no longer the sole requisite for sales tax collection (South Dakota v. Wayfair Inc., June 21, 2018), questions about sales tax collection –and remitting – have multiplied. While most states provide an exception for small sellers, the problem with these exceptions is that they vary widely and that it is not clear who must collect sales taxes on which sales – or pay a “use” tax on their own purchases.
Prior to the Supreme Court ruling, states could only tax sales by businesses with a physical presence in the state. The Wayfair case changed that long-standing rule, as the court found the respondents “economic and virtual contacts” with South Dakota to be a sufficient basis for a tax collection obligation (nexus).
For economic nexus, a security business establishes an obligation to collect and remit sales and use tax by its economic activity in a state. Economic nexus is expected to soon be in effect in 27 states; unfortunately, determining when economic nexus has been established in a state is, once again, complicated – because there is little uniformity between jurisdictions.
Taxes on Services
Thanks to the Wayfair decision, all states may soon be permitted to collect sales tax on remote sales to their residents; and, while a sales tax on goods has been around the longest and is generally the more commonly regulated, many sales taxes also apply to those providing services.
The Wayfair ruling replaced the physical presence requirement for when states can tax remote sales and adopted an “economic nexus” standard based on the amount of business done in a state. The ruling suggested strongly that a South Dakota law requiring remote sellers meet thresholds of $100,000 in annual in-state sales or 200 transactions be followed.
Soon every security business may be required to collect sales and use taxes even if the only connection to the state is a Web page and a customer; in fact, the business may have to collect sales tax even if there is no Web presence. While the rules vary from state to state, actively attending a trade show in a state or having representatives (who may not even be employees) can require collecting sales taxes.
Sales taxes on services have only become common in recent years and are currently less likely to have specific regulations. Services are generally not taxed unless the service is specifically noted as taxable by the state. For example, in South Dakota, New Mexico, Hawaii and West Virginia, all services are considered taxable unless a specific exemption exists, similar to the sales tax rules for goods.
For security businesses that provide goods or services that are exempt in a particular state, those exempt sales must be properly documented. Because most states structure their sales tax laws differently, the need to document exempt sales will likely impact many more security businesses offering services rather than those selling goods.
Although not a simple task, security business purveyors of both goods and services will need to register in each state where their operations exceed the sales threshold.
Enter the Nexus
Despite many states being starved for revenue, economic nexus laws continue to rely on the volume of sales, the number of transactions, or both. Approximately 20 states with economic nexus share South Dakota’s $100,000 in sales, 200 transactions threshold. Remote sellers with less than $100,000 in sales or fewer than 200 transactions in the state usually do not have to collect and remit sales or use tax in the state.
While it might appear relatively easy for a security business that sells only in its home state and South Dakota, businesses with customers in multiple economic nexus states face real challenges. Most economic nexus states closely follow South Dakota’s example, but several have adopted different thresholds. For example:
- In Alabama, a remote seller must do more than $250,000 in sales in the state and engage in certain activities (e.g. solicitation) to trigger economic nexus.
- In Connecticut, the threshold is at least $250,000 in revenue and 200 or more “retail” sales into the state as well as systematic solicitation in the state.
- In Minnesota, the economic nexus threshold is 10 or more sales totaling $100,000 or 100 or more “retail’ sales.
Obviously, determining when economic nexus has been established in a state is complicated by this lack of uniformity; and, once economic nexus has been established, the process for registering to do business varies from state to state.
The operators of many security businesses fail to appreciate the middleman duty and legal obligations they face as a trustee or collector of sales and use taxes. Since the business merely acts as a trustee in collecting and remitting the proper amount, it is clear the sales and use taxes do not belong to the business.
Before any security business can collect and remit tax in a state where it has developed economic nexus, it must first obtain a sales tax permit (i.e., a seller’s permit). Finding what each state requires and properly setting up shop in a state takes time. Some businesses have the resources to handle the task from start to finish, others have fuller plates. Fortunately, some may find help under the Streamlined Sales and Use Tax Agreement (SSUTA).
Streamlined Sales Tax
As mentioned, sales tax laws are extremely complex. Products and services taxed can vary from state to state, as can sales tax rates, rules and regulations. Further complicating matters, there are more than 12,000 U.S. tax jurisdictions.
Few security professionals with growing businesses are satisfied staying within the confines of state borders, and efforts by the states to require out-of-state sellers to collect and remit sales tax have long been contentious. The so-called Streamlined Sales Tax emerged thanks to state efforts to tax remote sales, as well as the complex nature of sales taxes and the emergence of e-commerce.
Unfortunately, the 23-state SSUTA – launched in 2000 to simplify sales tax administration and minimize the burden of complying – has failed to attract a single new member in the seven-month period following the Wayfair ruling; in fact, not a single state has joined since 2014.
That said, a security business can still register to collect and remit sales tax in those 23 states that are currently members of the SSUTA – significantly reducing time and effort. There is no cost for sellers collecting only in Streamlines Sales Tax (SST) states, while there are reduced costs for sellers collecting in both SST and non-SST states.
Use Taxes
Every security business owner is – or should be – aware of long-standing state laws that already compel buyers who make tax-free purchases to self-remit the taxes due. The self-remit rules are often referred to as “consumer’s use tax.”
Although the consumer use tax rules focus on the purchaser’s duty to self-remit use taxes, in some states, a seller may be obligated to collect “seller’s use taxes” on behalf of their purchasers.
Seller’s use taxes are charged to the purchaser on the sales invoice as with sales tax transactions and are required to be collected by sellers in some states. Each state has its own complexities, which can cause occasional confusion for sellers.
As economic nexus rules take hold, sellers of all types will be required to collect sales or seller’s use taxes on sales made all over the country. One result will be a reduced consumer’s use tax compliance burden for some buyers.
The Penalty for Non-Compliance
There are 45 states that have state sales tax laws; and every state will, in all likelihood, want to increase revenue by following the precedent set by the Wayfair ruling. The bad news is that every security business is now – or soon will be – responsible for keeping track of the ever-changing sales tax laws in every state where they have “economic nexus” in order to ensure compliance. Obviously, professional assistance will be needed, because non-compliance comes with a high price.
Failing to collect or misappropriating collected sales and use taxes can put everyone – owners, officers, directors, shareholders and employees – at risk. Each of these individuals, if considered a “responsible party,” can be held personally liable for the failure of the security business to properly collect and remit sales and use taxes.
A responsible party can include not only the individual whose duties involve managing and paying taxes, but often also includes any other person who has the authority or ability to control the payments of the business or to make business decisions. This liability extends beyond the business to each individual’s personal assets, which could be claimed to satisfy the business’s sales tax liability.
Mark E. Battersby is a freelance writer who specializes in tax-related issues. Email him at [email protected].
