Current State of Sales & Use Taxes
A growing number of companies are conducting their business in part or in whole in the virtual sphere. This means that they have the potential to reach customers in all 50 states. Each state sets its own system of sales and use taxes, and many providers of products and services are not up-to-speed with regard to their tax responsibilities in each state where they might do business. This has led states to tighten up their tax laws in an effort to enforce collection of the taxes that are due to them.
Sales taxes in brick-and-mortar operations are relatively straightforward. A consumer purchases goods or services at the store, and the state sales tax is charged at the time of purchase. States may also impose a use tax when a consumer buys goods that originate from another state but will be used within the state where the purchaser resides. The obligation to pay the use tax typically rests on the purchaser. However, if the selling entity has a connection known as a nexus with the other state, then the responsibility to charge the use tax and remit it to the state may fall to them.
A business may have a nexus with another state if they have a physical location or employ workers in that state. Without a nexus, the use tax won’t be collected by the seller, and since buyers don’t typically report such purchases to the taxing authority themselves, the tax is never collected.
Future of Sales & Use Taxes
This has become a larger problem as more people buy everything online. Now, states are enacting new legislation that is aimed at collecting use taxes for online transactions. Colorado is one of the most significant of these as the state passed legislation in 2010 that forces out-of-state retailers that do not collect the required use taxes to inform the consumer of their responsibility to pay the use tax to the state. Retailers must also produce annual purchase reports for customers who spend more than $500 with them during the year. A copy of the report goes to the Colorado Department of Revenue if total purchases exceed $100,000.
Louisiana recently enacted a law that is similar to Colorado’s, and Oklahoma and Vermont are soon to follow suit. Others will probably join them, and this means that the question of charging and reporting use taxes will need to be at the top of the to-do list for many retailers.
Sorting through the various use and sales taxes can be difficult, especially for busy businesses who would rather be doing other things. However, it makes a lot of sense to stay ahead of these tax law changes so you don’t end up paying too much or overlooking an important requirement.