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Sales Tax, Who has to pay what from where?

Sales Tax Calculation

We have recently noticed an increase in e-commerce businesses and retail businesses that are incorrectly collecting sales tax for the wrong states of their customers. Below are some tips to help you identify who has to pay sales tax, and how to identify the issues related to filing an incorrect sales tax return. The big key details to be on the lookout for are: where does control of the tangible product change, the laws in your home state with regards to sales tax, and physical presence in another state.

Consideration #1: Sales Tax, Who Has Control?

The biggest thing most people get incorrect with sales tax is when ownership changes on a product that has been purchased. Ownership/control is the generalized rule most states have agreed on when it comes to shipping products across state lines. Generally speaking, if the business retains control of the product until it arrives at the consumer's location, the sales tax to be collected is the consumer's residency state, not the business. Let’s look at a few examples of this in action:

If a customer in Tennessee purchases a product from your online store in Georgia, and you ship the product to Tennessee, you would collect Tennessee sales tax on the sale and remit payment to Tennessee. This is the simplest version of a transaction that is normal across the U.S. right now.

What happens if you relinquish liability on the product with a disclaimer saying you are not responsible for the product once it ships to the client? Most states have not enacted rules yet about the disassociation between liability, and control of the product. Even though your business may make the claim you are not responsible for the product once it has shipped, your business is still in control of the product until it arrives at the consumer's residence in their home state. This would result in needing to collect the sales tax in their home state and not the state of residence of the business.

Normal Transaction involving Sales Tax

There is a catch though to the rules of control. Same situation as above where a consumer in Tennessee has purchased something in Georgia. The difference though, is instead of the business shipping the product to Tennessee, the consumer arranges for a courier (FedEx, Post Office, personal friend, etc.) to pick the product up from the place of business and bring it to their physical residence in their home state. In this scenario, control changes when the consumer’s courier, who is employed and within the control of the consumer’s directives, picks up the product and begins delivering it to the consumer. Now, sales tax will be charged based on the location of the business in the home residency state where the change of control took place.

It's important to get this right when selling products online or even dealing with out-of-state consumers as there can be penalties and interest applied to the sales tax forms that are filed with the states if the state deems your business to be under-reporting sales tax.

Consideration #2: Physical Presence Sales Tax Requirement

When you are first starting with your business, you may only have one location or only an online presence until the cash starts flowing in so you can support growth. Then you open one or two more locations, and eventually, the growth leads you to decide to open a new location in another state. This is a good thing in terms of making more money, but it is also bad because the issue is now you have what is called physical nexus in that state and would be required to file certain forms and filings within that state including state sales tax. This creates a few problems because as the previous paragraphs mentioned, most states exercise based on the control option. However, if you have a physical location in the state, then the majority of the consumers in that state, except for very special circumstances, will need to be charged the sales tax from that state regardless if the product’s control is changed out of state or not. The reason is, with a physical nexus in the state it could be misconstrued as tax evasion if you claim sales from clients in the same state were due to control exercised out of the state. To avoid this, it’s best practice to charge clients in the same state as your physical location that state’s sales tax to avoid any ambiguity that could result in audits and decisions against your company.

Places of Business

Consideration #3: State Sales Tax The Laws

Every state in the United States has a different law on sales tax. There are a few items that they generally agree should be taxed (groceries, other tangible goods that are not for resale, etc.), but the laws vary. If you do not have a specialized employee to monitor for state sales taxes, you should invest in quality software that is designed to crosscheck your consumer’s locations to ensure the proper sales tax is charged, or professional tax bookkeepers that are familiar with states and their tax laws to assist you in avoiding making mistakes on your sales tax filings.

Summary Sales Tax Who Has To Pay

Above are just a few tips to consider while working in your business and dealing with the state regulations as it comes to things with sales tax. These three items are not all-encompassing, and sales tax can get very detailed especially when products are crossing multiple states to arrive at a consumer's address. If you still have questions on Who has control, the issues with physical presence, or The Laws as they relate to your business, reach out to and let us take a look into your situation to find out how we can help you deal with your unique situation.



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