United States Sales Tax Series (Blog 2) – The Complex Sales Tax Environment

Posted on: June 26, 2019 | By: Andy Vitullo | QAD Financials, Microsoft Dynamics AX/365, ERP Selection

This is the second in a series of Blogs regarding Sales Tax environments in the United States. This series will describe general considerations, legal environment and other conditions that create impact your business Sales Tax requirements. The complex environment exists because state legislatures create unique sales tax laws. There are some common conventions across the states. They include:

• Sales Tax are calculated based on where the product lands or where the services are performed.
• Tax Rates can exist at each jurisdiction level. The jurisdiction levels can be state, county, city, and special jurisdictions. Special Jurisdictions get created to raise tax revenue for very specific projects (i.e. A new sports stadium in a city).
• Certain States require consolidated (all jurisdictions) filings.
• Other States don’t require consolidated filings which requires filings at multiple jurisdiction levels.
• General, quarterly filings along with remittance of tax collected is the norm.

A company is required to register within a state to collect sales tax when nexus is achieved. Nexus is defined as an out-of-state business entity having “presence” in another state. This presence in a state makes a business subject to sales and income tax within that state. Nexus for a business is determined by each state individually base on corresponding tax laws.

More than one hundred thousand jurisdictions with potential sales tax rates exist in the US. This condition exists because any jurisdiction can impose sales tax. These jurisdictions tend to change over time. A company that manages their jurisdictions with internal resources should monitor monthly changes to tax environments for any their nexus states.

The concept of use tax also exists in the state sales tax laws. Sales Taxes are charged, collected and remitted by the seller of goods. Use taxes are charged and remitted by the buyer. Typically, the use tax rates are the same as the sales tax rates, however, in certain jurisdictions, they can vary.

Certain Industries have an impact on the sales tax environment. For instance, medical devices can be taxed at different rates or not at all depending on the law. These parts-based reduced tax rates or exemptions will need configured and monitored for ongoing law changes.

Periodically, your company can get selected for a sales tax audit. Sales registers, tax registers, certificates of exemptions and tax collected will be reviewed by an auditor for compliance. If your systems are incomplete or loosely managed, your auditor will typically levy an additional tax amount that may include additional fees for non-compliance.

All the above conditions need to be considered in a cost and risk analysis to determine the best approach for compliance. In future blogs, we will examine both cost and risk to determine approach for a robust sales tax transaction system compliant to the law and auditable by the state.