Sales Tax Forum Q&A Part 1: Audits, SaaS, More
- Sales and Use Tax
- February 4, 2014 | Shane Ratigan
Knowing about a sales tax law is one thing; understanding how the law applies to your business is another thing entirely. During the most recent Avalara Thought Leadership webinar, we gave businesses the opportunity to ask their most pressing sales tax questions, and boy did they ask! (You can listen to the recording here.)
We got so many quality questions that we've taken the overflow, grouped them by theme, and will be posting the questions with answers from Shane Ratigan, JD, LLM (Tax) here on the blog. This first group of questions consists of general sales tax queries, with themes that include tax audits, tax on services, and SaaS sales tax.
Take it away, Shane . . .
NOTE: The answers provided here do not constitute legal advice. The answers are not intended to convey legal advice. My goal is to provide knowledge and insight into sales tax compliance and sales tax law, especially with general replies to your submitted questions. Please consult with your tax professional to determine the very best approach for your company.
The state expects me to make a reasonable effort to collect, record and remit taxes according to its regulations. What does "reasonable effort" mean?
A reasonable effort is subject to interpretation, but at a minimum means that a vendor must act diligently in determining whether the sales tax rules of a given jurisdiction do or do not apply. The effort cannot be passive; the basis for your decision to collect or not collect should be recorded and updated and have some reasonable basis in law.
Is there a generally accepted definition of capital improvement? E.g. We were told if we do half a roof it's taxable, but a whole roof is not taxable.
For sales tax purposes, the distinction made between a project that is the delivery of a service and a project that creates a capital improvement does not necessarily rely on GAAP definitions or industry habits. The states all look at similar elements of a project, but in interpreting their own rules, many have carved out (sometimes quirky) specific rules. Diligent effort is required for contractors working projects that straddle the line.
Not a question new to 2014, but from past years around the Durbin Amendment - say I run a coffee shop and sell a cup of coffee for $1.50 and provide a 10¢ discount for customers who pay with cash (meaning those paying with debit/credit pay $1.60 for the same cup of coffee) - do I calculate the sales tax based on $1.60 or $1.50? What about with sales for industries that are inclusive of tax/fees, like gas stations and vending machines?
For fuels and vending machines, most states have particular rules that apply only to those types of vendors.
For retailers in general, the general consensus among the states is that any discount you offer out of your own good hearted nature (and bottom line) is not part of the tax base. The tax base is the amount of the sale subject to tax. In the alternative, coupons distributed by a manufacturer that reimburse a vendor are considered part of the tax base.
Put another way: as long as the retailer is ‘eating’ the discount, the sales tax is on the discounted amount. A discount for use of a certain payment method adds an interesting wrinkle.
What is the code for SaaS or how can it be found?
Our tax engine offers a taxability tax code for SaaS. AvaTax pro code customers can use SW052000 for SaaS products.
I have a non-profit client who does not sell merchandise, but they did have a book event for one of their founders. Sales tax was collected. What are the steps to make sure they are compliant?
I would need more information about the book event to precisely answer. However, if sales taxes were collected on any sales, the tax collected must be remitted to the state. If the client has not sold items before, they may not be registered to collect sales tax yet. In any event, they have a compliance requirement now to remit those funds to the state.
A Missouri client has an LLC that publishes a political newsletter here in Missouri. They do not have tax exempt status from IRS. Do they collect sales tax on ads placed in newsletter?
Big picture, the tax exempt status of an organization for IRS purposes is not necessarily conclusive or even relevant as to whether an organization’s sales (or purchases) are exempted or excluded from sales tax. Even in MO, where the federal status is part of the analysis and the state is fairly generous with its exemptions, there are specific rules covering certain transactions and entities.
As far as the actual taxability of the advertisements, these types of services are not widely taxed among the states. Please consult with a tax professional who can review the actual delivered objects and make a complete analysis.
Talk about tax audit for a multi-state business. Does one state audit only the transactions for their state? What about cities? If they are not on the state program, do they audit separately? If there is a sales tax audit, would it only be one state doing the audit? Or would information be shared with other states?
There is not a major precedent for multi-state audits in the sense of highly organized collaboration between multiple states’ revenue teams. And, given that each state has different laws, it is unlikely that one audit team could successfully audit for more than the state in which it has been trained. Note that does not means many companies will never see a day when multiple states are in house conducting sales tax audits. It happens a lot.
The state auditors are only looking at the compliance with their own state’s laws, so technically each state is only interested in their own. However, the scope of an auditor’s request for information may easily extend to transactions outside of what you might expect.
I can't speak to information sharing, but I would say that technology has certainly made information much more transparent and fluid.