10 Sales Tax Rules to Live By

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1 10 Sales Tax Rules to Live By Chuck Marcouiller, Tax Technology Expert Avalara Avalara

Chuck Marcouiller Tax Technology Expert, Avalara 20 Years in tax technology and education Held operational and training roles and payroll and human

2 Chuck Marcouiller Tax Technology Expert, Avalara 20 Years in tax technology and education Held operational and training roles and payroll and human capital management company ADP Currently oversees tax technology and compliance industry training at Avalara Chuck. 2

3 In 2016, Americans will pay $3.3 trillion in federal taxes and $1.6 trillion in state and local taxes, for a total bill of almost $5.0 trillion, or 31 percent of the nation s income. This means that collectively, America will spend more on taxes than it will on food, clothing, and housing combined. (Tax Foundation Apr 2016)

4 Fair Tax Sales Tax is the fairest form of tax. It applies to everyone equally. 4

Other taxes 3.9% Corporation net income taxes 5.

8% Total selective sales taxes 16.6% Property taxes 1.

3% When general sales tax and selective sales tax are

revenue General sales and gross receipts taxes 30.

5 Where do States turn for tax revenue? Total State Government Tax Collections by Category Other taxes 3.9% Corporation net income taxes 5.3% Total license taxes 6.8% Total selective sales taxes 16.6% Property taxes 1.6% Individual income taxes 35.3% When general sales tax and selective sales tax are combined, sales tax makes up 47% of total state revenue General sales and gross receipts taxes 30.5% Source: US Census Bureau, Census of Governments: Finance Survey of State Government Tax Collections at

6 Challenges of sales tax compliance Sales Tax is a statutory requirement Companies are always at risk of an audit (when, not if) Audits frequently result in back taxes and penalties Manual sales tax management It s labor-intensive Human error leads to inaccurate results Expensive Rules are always in flux: 2014 had close to 14,000 rule changes in U.S. 100% non-revenue generating activity It makes sense to automate with a technology solution

mistake if audited for sales and use tax.

7 Sales tax compliance is time-consuming, risk prone, and expensive $301,496 75% of tax professionals believe an auditor would find a mistake if audited for sales and use tax. Average total cost for businesses to manage a sales tax audit Source: Wakefield Research, July 2017

8 Sales tax compliance is time-consuming, risk prone, and expensive

9 sales tax rules

10 1 Nexus Rules and Amazon Laws Apply to Everyone Remote sellers can no longer assume that Quill v. North Dakota means they don t have to collect sales tax Nexus-creating activities (examples) Independent agents Remote sales force Affiliate Nexus Trade show participation Amazon Laws Cyber Monday, 2013: SCOTUS leaves NY click-through affiliate law in place 21 States have already passed Amazon Laws

11 1 Nexus Rules and Amazon Laws Apply to Everyone (cont.) Rules and rates vary between states The following industries have varying taxability rules Software / hardware Digital goods Services Medical device / equipment Food / beverage Clothing / apparel School-related products Dietary supplements And many other industries / products

Presence Once Nexus is created, Seller Inherits Legal Obligation to

12 1 Nexus Rules and Amazon Laws Apply to Everyone (cont.) When to Register The concept of Nexus Nexus = Substantial Physical Presence Once Nexus is created, Seller Inherits Legal Obligation to Collect Common Nexus Triggers Owns An Office Owns a Warehouse Remote Employee on Payroll Owns Property

13 1 Nexus Rules and Amazon Laws Apply to Everyone (cont.) But a lot has changed since Founded 1994 Founded 1995 Founded 2005 Founded 2011

14 1 Nexus Rules and Amazon Laws Apply to Everyone (cont.)

15 1 Nexus Rules and Amazon Laws Apply to Everyone (cont.)

16 1 Nexus Rules and Amazon Laws Apply to Everyone (cont.)

17 1 Nexus Rules and Amazon Laws Apply to Everyone (cont.)

18 2 Services are taxable but not always Know the difference between Tangible Personal Property Real Property Services Professional Services Hint! States often define taxable services differently.

19 2 Services are taxable but not always

20 2 Services are taxable but not always All States that impose a sales and use tax impose its tax on some services State that do tax (many) services Connecticut Hawaii New Mexico South Dakota West Virginia States that do not tax (many) services Alabama Florida North Carolina Oklahoma Utah

21 3 Product Taxability is (always) Changing Taxable Candy with or without flour can determine if it is taxable Exempt Taxable Exempt Non-carbonated with supplement label is taxable Non-carbonated with nutritional label is exempt

22 4 Tax Rates are not tied to zip code Taxing jurisdictions don t always follow ZIP Codes! Individual counties and municipalities levy sales taxes in addition to state rates Tax rates can vary significantly within a ZIP code ZIP codes Are a blunt instrument for determining sales tax rates and boundaries Will almost certainly lead to calculation mistakes Can lull you into a false sense of security

23 4 Tax Rates are not tied to zip code (cont.) Don t rely on zip codes! Ex. Greenwood Village, CO has one ZIP code, but four different sales tax rates! Automation Tip! Geolocation technology determines the exact point of taxable transaction.

24 5 Collecting exemption certificates is a source of risk Know which transactions are exempt Three primary exemptions Product-based (generally does not require exemption certificate) Entity-based (requires exemption certificate) deduction specifically related to the exempt status of the purchaser Use-based (requires exemption certificate) exemptions covering products and services which are used for a particular purpose

25 6 Know the remittance processes for each state Know where and how to remit sales tax Every state is different Auditors are looking for new ways to identify potential offenders Hint! Failure to prepay where required, late payment, or payment to incorrect jurisdictions can increase audit risk.

26 7 Know the difference between Bill to and Ship to Sourcing. Most states are destination-based (they charge sales tax based on the location of the end-user), there are several that base sales taxes on the seller s location.

27 8 Pay Use Tax Sales tax Collected by the seller on the gross receipts from a retail sale Use tax Paid by the buyer on the consumption or use of tangible property or services in state Purchases of equipment and supplies from out-of-state for use in business Withdrawals of inventory for taxable use such as R&D, promotional materials, warranty repairs, etc. The difference Sales Tax Imposed on the activity of a seller Use Tax Imposed on the buyer

tax exempt at certain times in as many as 17 states.

28 9 Track Sales Tax Holidays Know the holidays in each state Clothing, school supplies, and even firearms are tax exempt at certain times in as many as 17 states. Holidays are always in flux. Good luck trying to remember them all!

29 10 Audit Trails are mandatory Avoid these common mistakes Failing to file a return Failing to report sales Taking excessive credits or exclusions on a return Filing returns with errors Return information that doesn t match other records Mistakes found in previous audit Previous finding of exemption certificate misuse Not reporting use tax

30 10 Audit Trails are mandatory (cont.) How to reduce audit risk You should: Do a nexus study Stay up-to-date with rate, rule, and boundary changes Report consumers use tax Be compliant from day one, especially new businesses Automate with technology Make sure you have: An understanding of your filing requirements Calculations that are rooftop accurate Product taxability coverage Detailed sales records A process for managing exemption certificates

31 Why cloud software is the answer.. Tax rates SaaS $ Remittances Customer invoice systems ERP, Ecommerce, POS / MPOS, Payments, etc. Real-time, accurate sales tax calculation Automated storage, management of tax certificates, exemptions, etc. Automated returns processing and remittance Government

32 HOW We do this with Cloud Based technology partnered with expert services. 32

33 Request a Demo morgan.coleman@avalara.com 33

34 How can Avalara help? AvaTax user CPA Calculate the right tax rate every time for every sale Get ahead of sales tax risk for your clients Easily track, validate, and store exemption and resale certificates Be proactive and trusted advisor in all areas of state and local tax Transfer tax data instantly for faster, easier returns filing Know whether clients are at risk of non-compliance Reduce manual workload of sales tax management Be a part of a growing CPA community Learn more and experience AvaTax here: Get started: (206)

35 Questions?

How to Avoid E-Commerce Tax Pitfalls

How to Avoid E-Commerce Tax Pitfalls Featuring: Shane Ratigan, Avalara Inc. Eric Smith, Modern Distribution Management Sponsored by: July 27, 2017 Avalara helps make sales tax compliance simple and automatic