Sales tax compliance is complex and labor-intensive – Wacky Tax Wednesday
Tax wonks, policy geeks, and retailers of all sizes were on the edge of their seats yesterday as the Supreme Court of the United States heard oral arguments in South Dakota v. Wayfair, Inc. If the court sides with South Dakota when it issues its decision in June, it could become easier for all states to tax out-of-state sellers.
Precedent upheld by a 1992 Supreme Court decision, Quill Corp. v. North Dakota, holds that a state can’t compel retailers with no physical presence in the state to collect and remit sales or use tax. In Quill and other rulings, the court worked to limit state burdens on interstate commerce.
Of course, the very nature of sales and use tax can make compliance burdensome, even for brick-and-mortar businesses that only sell out of one store. Therefore, it doesn’t surprise me that South Dakota v. Wayfair has brought certain sales tax compliance challenges to light.
Complex and labor-intensive
Prior to the April 17 oral arguments, eBay told the court that “determining the sales tax due in myriad jurisdictions is a complex and labor-intensive task.” In a brief of amici curiae submitted in support of Wayfair, it explains:
- “When shipping to Minnesota, a standard blanket is subject to sales tax … but a baby receiving blanket would be exempt from tax” (emphasis theirs).
- “When shipping to Texas, deodorant is subject to sales tax … but deodorant with antiperspirant would be exempt” (emphasis theirs).
That’s the kind of statement that makes me don my Wacky Tax Wednesday hat.
Smell sweet, stay dry
Sure enough, the Texas Comptroller lists “deodorant (not including antiperspirant)” under “Examples of taxable items.” Antiperspirant is on the list of exempt “Over-the-counter drugs and medicines (when required by the FDA to be labeled with a drug facts panel)” (Publication 94-155).
For many consumers, myself included, one stick of deodorant seems much like the next stick of antiperspirant. My eyesight being what it is, I usually can’t even read the small print that makes such distinctions. It’s a good thing I don’t sell these products (either the taxable or exempt kind) in Texas.
The way Texas taxes — and exempts — these products has confused taxpayers in the past. In 2008, one taxpayer asked the Comptroller to “please clarify whether antiperspirants or deodorants are taxable?”
The Comptroller responded with this explanation: “Tax Code Section 151.313 (a)(3) exempts an over the counter drug or medicine that is required by the federal Food and Drug Administration (FDA) to be labeled with a ‘Drug Facts’ panel. If an over the counter item you sell, such as antiperspirant, is required by the FDA to be labeled with a ‘Drug Facts’ panel, then that item is exempt from sales tax. Typically antiperspirants contain drug ingredients which require the product be labeled with a drug facts panel; deodorants are typically not required by the FDA to be labeled with a drug facts panel since they do not contain drug ingredients regulated by the FDA.”
That’s a long way of saying that sellers need to read labels in order to properly determine the taxability of deodorant and antiperspirant.
Swaddle me, baby
In Fact Sheet 105, the Minnesota Department of Revenue categorizes “baby receiving blankets” as “nontaxable clothing for general use.” However, “crib blankets” are considered “taxable clothing accessories or equipment.”
A little digging provides some clarification. In Fact Sheet 148, the department explains, “Clothing meant to be worn on the human body for general use is not taxable, but some accessories are taxable. Baby clothing (including receiving blankets used as clothing) is not taxable.” Or, as Minnesota sales and use tax rules put it, baby blankets and receiving blankets must be “used as babies’ clothing” to be exempt from sales tax.
Hmm. Back in the day, my husband and I may have purchased teeny tiny blankets to swaddle our babes, but if memory serves, they spent more time as capes and slides — and being incorporated into furniture forts — than they ever did “clothing” our newborns.
But of course, most retailers don’t interrogate their customers: “What do you intend to do with that baby blanket?” It would be bad for business. They simply follow the letter of the law.
Sales tax is complicated. That’s why automation helps.
eBay is correct that taxability laws can be crazily complex and that complying with them can be labor-intensive. No matter what the Supreme Court decides in South Dakota v. Wayfair, that’s unlikely to change.
Fortunately, sales tax automation can greatly simplify sales tax compliance, leaving more time for working up a stinky sweat while building forts out of sofa cushions and baby blankets.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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