Why’s Everybody Picking on Me?

States now harassing small out-of-state businesses for use tax collection

Use Tax Many revenue starved states are now using a new strategy of harassing small out-of-state businesses for tax collection. Here is what you need to know.

Sales/use tax obligation

Whenever you purchase an item that has a sales/use tax obligation attached to it, the purchaser is required to pay the tax. To enable the collection of this tax, states have passed this collection obligation to the retailer. The seller must then collect the sales tax on behalf of their customer and send it in to their state revenue department. When your purchase is made from an out-of-state business, if that business does not have a physical presence in your state (called nexus), the purchaser (you) is required to send the correct tax to your state by complying with the state’s use tax laws.

What is happening now

As no surprise to anyone, widespread self-reporting of use tax is not being done. To combat this challenge there is pending Federal legislation called the Marketplace Fairness Act that would create requirements for the collection of these internet and interstate sales. No one is sure this bill will see the light of day. In the meantime, many states are taking matters into their own hands by sending notices to out-of-state businesses. States are telling these businesses they must fill out forms to show they adhere to their state tax laws. These forms are often complicated and the unwary business owner could inadvertently create a tax liability if they are unsure how to respond. Here are some things to know:

Action 1 Understand nexus rules. In order to have the responsibility to collect sales tax for a state that is not your own, you must have a physical presence in that state. These nexus laws are there to protect small businesses from the complex nature of state and local tax laws that vary dramatically from place to place. If you do not have a physical presence in a state you generally do not need to figure out and collect their taxes for them.
Action 1 Common carrier is key. If you ship product into a state, you still do not have nexus if you use a common carrier like USPS, Fed Ex or UPS. If you use your own trucks you could be creating a sales/use tax collection obligation despite the fact that you do not have a physical presence in a particular state.
Action 1 Careful about trade shows. If you attend trade shows in a state, you could be creating nexus. This is especially true if you sell product at your booth while at the trade show. Your safest bet is to display only and not sell your product if you wish to avoid the need to collect sales and use tax.
Action 1 Certain states are active harassers. States like California and Michigan are sending out complicated forms and demanding small businesses fill them out or they provide thinly veiled threats of penalties for non-reporting. These states are “reminding” you of their nexus laws, that may or may not comply with the nexus laws established through Supreme Court tax cases.

Unfortunately, small out-of-state businesses are readily identified during state sales tax audits of other in-state businesses. State auditors follow the invoice trails and send out their notices. The paperwork burden this is putting on out-of-state small businesses that already follow sales tax laws can become overwhelming. If you receive any of these notices from out-of-state revenue departments, please call for help.