Sales tax laws are constantly changing, and sales tax audits have increased since states and local agencies have become creative about finding new ways to generate revenues. For example, if a company in North Carolina does any business out of state, with customers or out of state vendors, sales tax rules apply. If a company does real property improvements in Texas, regardless of where the company is based, be ready to file sales tax in that state. Take some time to review sales tax procedures to remain in compliance.
From state to state, the taxability of items varies, and companies who do any business out of state need to know the differences. For example, data processing services including web hosting and graphics are taxable in Texas but not California. Because of these intricacies, it makes sense to consult an expert in this area. If you need an advisor in this area, please let us know. We have a great relationship with a CPA whose sole practice is in State and Local Tax (“SALT”).
The buzzword in sales tax is “nexus,” which simply means presence. But nexus varies from state to state and seemingly minor or innocent factors can create nexus where there wasn’t before. If a business has nexus in a state, certain items could be taxable. Like a lot of tax law, nexus can be a little gray area, but here are a few examples of some characteristics that the courts have decided prove nexus.
- If a company has employees or contractors working in a state, they are liable to collect and remit sales tax. This can play havoc if the company has virtual or remote workers. Even if they are part-time, nexus applies to that state. For example, a salesperson lives and works in for a company in a different state. The parent company must file pay applicable sales tax on sales made in the other state.
- If a company outsources inventory fulfillment in any way (think Amazon sales), then there is nexus in states where there is a physical warehouse that houses the products for distribution.
- Owners of business property in a state must file sales tax.
- Participation in trade shows or public speaking also establishes nexus where the conference or event is held.
Some out of state vendors don’t charge sales tax. Be aware of which vendors operate this way, to ensure taxes are paid in the purchasing/using state. We heard of an example where a bottle manufacturer sold bottles to a customer in California and didn’t charge or pay sales tax. The California purchaser had to pay the CA sales tax each quarter or risk an audit.
New North Carolina Rules
North Carolina updated the sales and use tax code March 1, 2016 to include sales of repair, maintenance, and installation services such as
- Preventative maintenance
- Calibration of equipment
- Restoration services
- Troubleshooting charges
- Installation of equipment
There are some exceptions, such as tangible personal property installed by a real property contractor related to a real property contract. Please let us know if you would like help understanding these complex new rules and how they apply to your business.
Failure to collect and pay taxes in a state where a company has nexus is expensive. All taxes are due from current and prior years, and there are penalties on top of the tax owed.
For example, a company with annual revenues of $5 million does 10% of revenue ($500K/year) in Texas, and those revenues are subject to sales tax. The tax liability is up to $41,250 per year. So, failure to file a return and pay taxes adds up over several years. Penalties are on top of the tax liability, and it’s not a small amount. It can wipe out an entire year’s profit. Sales tax liability is also an issue when selling a business. A traditional valuation always includes a sales tax risk analysis.
Don’t risk the financial exposure associated with sales tax. Please talk with us about assessing nexus or taxability for your business.