Sales tax ramifications of doing business in multiple states

What can happen when your business takes you across state borders?

These days it is not uncommon for even small businesses to work in many states simultaneously. While this is excellent for growing a customer base, doing business across state lines can create very complicated sales tax ramifications.

There are several factors that will create nexus for an out-of-state company. Nexus is generally defined as a physical presence or the appearance of “doing substantial business” in a given state and makes a company liable for collecting sales taxes and filing tax returns in that state.

Sales tax ramifications of doing business in multiple states

The taxability of installation across state borders varies according to many factors.

Service providers often do not create “tangible personal property” which is the starting point of most definitions of taxability. Frequently, but not always, they are not responsible for collecting sales tax on those services even though they may still have to file a sales tax return in that state.

Even if a company’s primary function is non-taxable, one example would be cleaning furnaces installed at the consumer’s residence, just stepping foot into another state can muddy up an already murky tax liability.

Here is one example of just how complicated it can get. A company I will call ABC Design is an interior design firm that specializes in furnishing senior living complexes. They are physically located in Texas but do work in 16 other states. They ship and store furnishings, fixtures and appliances near the work sites while construction takes place and then perform the installations.

That opens up a lot of tax/no-tax scenarios and ABC Design contacted me for advice. While I am not certified or licensed to dispense legal advice, I did some research and provided direction so they would know what kind of information to provide each state. Most states are quite proactive in helping companies figure out their full tax liabilities, so often they will provide sales tax determinations upon request.

Here is some of the information ABC Design needs to provide to each state they do business in and ask if they need to A) as a company, pay sales/use tax on, and B) collect and remit state sales tax for:

Products for resale: Most states do not tax wholesale items intended for resale, but this can depend on the type of item, whether the item can be considered a capital improvement, as well as the state of origin of the item.

Kind of service: While many services are tax exempt, there are some states with very specific and obscure rules about the types of services that this applies to. For instance, Colorado and Indiana have specific statutes making “the furnishing of rooms” a taxable service.

Shipping: Were the products shipped by common carrier or ABC Design’s own delivery vans? About half of the states do not tax shipping when performed by common carrier, like UPS, as long as it is stated separately on the invoice.

Warehousing: While storage of items creates nexus just about 100% of the time, whether the storage fee ABC Design pays is taxable or not was beyond my experience. This could depend on the wholesale status of the items being stored.

Installation: This one was tricky because it depends on many variables specific to both the kind of installation as well as various state law. I found that installations are taxable in 20 different states and it often depends on whether the installation is part of the purchase price and is required as part of the sale of the item. For instance, I might own a light fixture that I pay ABC Design to install – this service might not be taxable. But say for instance that I buy a light fixture that ABC Design can only sell me if they perform the installation, then that installation would be taxable. In states where installation charges are non-taxable, it almost always must be stated separately on the invoice. Also, certain states that tax most installations don’t tax installations on capital improvements, construction, or water and sewer improvements.

The basic takeaway from all this is that companies in doubt should seek a clear and concise determination, in writing where possible, from each and every state they do business in. While this still does not guarantee audit security, at least you will sleep better knowing the scope of questions you have to ask.

Exemption Certificate Management

Make sure you document which transactions are or aren’t taxable

Not everything that is sold is necessarily subject to state sales or use tax. Each state has different regulations governing what is and what is not exempt from the collection and remittance of tax. One general rule of thumb is that the purchaser is responsible for proving that their transaction is tax exempt by providing the seller with a valid certificate of exemption.
As an example, the state of California offers full and partial sales and use tax exemptions.

ECM

Don’t let a hectic work day be an excuse for keeping sloppy records or letting your exemption certificates lapse.

A partial exemption means that the qualified sale is exempt from the state general fund portion of the sales tax, but it is still subject to the statewide tax rate plus any applicable district taxes. A full exemption includes the state general fund portion of the sales and use tax, the statewide tax rate and district taxes.

Burden of proof #1: It is the responsibility of the purchaser to “prove” their transaction is tax exempt by providing a valid exemption certificate to the seller.

To claim a sales and use tax exemption, the appropriate certificate must be obtained from the Board of Equalization (available online at http://www.boe.ca.gov/sutax/staxformsa.htm) and properly completed. A partial exemption certificate will require a description of the property that was purchased. For example, a retailer of packing equipment would describe the property on the partial exemption certificate as “packing equipment.” The operator of a hardware store who sells hand tools, nuts and bolts to a qualified person for a qualified use could enter the description on the partial exemption certificate as “agricultural tools and parts for farm machinery and equipment.”

Burden of proof #2:It is the seller’s responsibility to maintain an up-to-date file of exemption certificates to “prove” to the state that any given transaction should be tax exempt.

An exemption certificate must be filed with the retailer, provided in a timely manner, filled out properly, and renewed regularly. This means that for exemption purposes, the exemption certificate (partial or otherwise) will be considered timely if it is taken any time:

  • Before the retailer bills the purchaser for the qualified property,
  • Within the retailer’s normal billing or payment cycle,
  • At or prior to delivery of the qualified property to the purchaser or his or her representative, or
  • No later than 15 days after the date of purchase.

As each state takes a different approach to exempt sales, exemption types and information required, not to mention the various certificates and forms that may be required, be sure to consult with a professional CPA or a tax lawyer.