SA_LOGO_4C

Understanding Sales and Use Tax Audits

Sales and use taxes are the lifeblood of many state and local governments. But for businesses, navigating the complexities of sales tax compliance and facing a potential audit can be stressful. This blog aims to shed light on what sales and use tax audits are and how to prepare for them.

What Is a Sales and Use Tax Audit?

A sales and use tax audit is a formal examination conducted by your state or local tax authority to verify the accuracy of your sales and use tax reporting. Auditors will review your business records, including:

  • Sales records
  • Purchase records
  • Exemption certificates
  • Tax returns

The goal of the audit is to determine if you have collected and remitted the correct amount of sales and use tax. In some cases, the audit may also cover past tax periods.

What Triggers a Sales and Use Tax Audit?

There are several reasons why your business might be selected for a sales and use tax audit. These include:

  • Discrepancies in your tax returns: Inconsistencies or missing information on your sales tax returns can raise red flags for auditors.
  • High sales volume: Businesses with a large volume of sales are more likely to be audited.
  • Industry trends: Certain industries may be singled out for audits based on past trends of non-compliance.
  • Random selection: In some cases, audits are chosen randomly to ensure fairness and compliance across all businesses.

Preparing for a Sales and Use Tax Audit:

While an audit can be daunting, here are some steps you can take to be prepared:

  • Maintain accurate records: Keep all sales and purchase records, exemption certificates, and tax returns for the required period (typically 3-4 years).
  • Understand your sales tax obligations: Familiarize yourself with the sales tax laws in the jurisdictions where you do business.
  • Consider sales tax automation software: Using software can streamline recordkeeping and ensure accurate calculations.
  • Seek professional help: If you are selected for an audit, consider consulting with a tax professional who specializes in sales and use tax.

Facing the Audit:

  • Stay calm and cooperative: Auditors are there to do their job. Be polite and professional throughout the process.
  • Provide requested documentation promptly: Having your records organized and readily available will save time and frustration.
  • Ask questions when needed: If you don’t understand something, don’t hesitate to ask the auditor for clarification.

The Bottom Line:

Sales and use tax audits are a normal part of doing business. By understanding what they are, why they occur, and how to prepare, you can minimize stress and navigate the process more effectively.

Additional Tips:

  • Keep copies of all communication with the auditor during the audit process.
  • If you disagree with the audit findings, you have the right to appeal the decision.

Remember, maintaining good sales tax compliance practices throughout the year is the best defense against a stressful audit experience.

You Received a Sales & Use Tax Audit Notice. What Do You Do Now?

Sales & use tax audit notices are never a great letter to receive in the mail. But, by following the steps outlined in this article, they may not be as bad as they seem.

Whether you are running a service or product-based business, it does not take much for sales & use tax laws to become relevant. Sales & use taxes are a complex beast. Businesses need to:

There can even be the requirement to notify customers of their requirement to accrue use tax in instances where, as a result of specific circumstances, you are not required to charge them sales tax at the point of sale.

To make matters even mirkier, this works on a state by state (often county by county) basis – where rules vary markedly in each jurisdiction. Complicated, right?

Receiving an Assessment Notice

Being that sales & use tax is as complex as it is, it should not come as a surprise when a state comptroller or department of revenue sends a business an assessment notice.

A sales or use tax assessment notice is a communication received from the state or county (generally by mail) that requests documentation pertaining to a company’s purchases and sales activities.

The notice will have a due date for which the documents must be sent to the assessor.

 

Upon review of the information, the assessor will likely notify the business that it has been delinquent in its sales & use tax filing or payment requirements, and outline the estimated amount of unpaid taxes, penalties, and interest that the company owes.

This notice will be accompanied by a request for additional information, and another deadline.

All this communication from the state or county can be daunting and difficult to digest – especially when the figures provided are high, and the business owner’s knowledge of the subject is limited.

Here are five steps to follow if you find yourself in this predicament.

1. Don’t Worry, You’re Not Alone

First things first – breathe. The notice may seem dauting, and you may be caught off guard, but it likely seems like a bigger deal than it is.

These notices are quite common, and they are based on assumptions and generic data that is unlikely to align with your business’s exact fact pattern.

The key is not to react or fret. There is a process to follow, and the outcome is almost always going to be less harsh than the assessor may originally make it seem.

2. Request an Extension

In almost all cases, and deadline provided by an assessor is flexible. It is important to be aware that you have the ability to ask for more time.

Be reasonable, though. What you are looking for is some time to digest the information, review your circumstances, and seek advice before responding.

3. Keep Communications Limited

Outside of requesting an extension, communication with the state should be limited. Every document, email, or phone call you have with the state can be interpreted in different ways, which can result in confusion and heartache down the line.

4. Enlist the Help of an Expert

There are people out there with a wealth of experience in navigating these notices – and diligent business owners will take the first opportunity they get to seek out assistance from such practitioners.

A CPA is generally not a sales & use tax expert (unless the CPA firm has a sales & use tax specialty arm. Experts are specialists in this area of tax law and are best placed to work with a CPA in gathering information and providing responses.

Enlisting this assistance comes at a cost. However, the cost is almost guaranteed to be paid back in spades, as experience enables these specialists to negotiate reductions in assessments amounts, penalty abatements, and so on.

5. Consider Your Other Sales & Use Tax Liabilities

Receiving an assessment notice provides the opportunity for business owners to consider their potential exposure in other states that are not under audit.

Getting ahead of the curve is important, as dealing with exposure prior to receiving an assessment notice costs the business far less financially and enables the company to sidestep the disruption that audits typically cause.

Multi-state businesses can use the one assessment notice as cue to review their affairs in other states and put mechanisms in place to avoid the same scenario occurring elsewhere.

Refund of Tax Paid on Software Purchases

Refund of Tax Paid on Software Purchases by Companies Located Illinois, Massachusetts, New York, Pennsylvania, Washington or Utah

The multiple points of use (“MPU”) exemption is a provision in sales and use tax laws designed to address situations where software is purchased for use in multiple jurisdictions. The MPU exemption allows for allocation of tax based on the proportionate use in each jurisdiction. This results in a refund of sales tax paid on software purchased.

Why do companies overpay sales & use tax on software purchases?

The purchase of specific software licenses or many cloud-based products, such as SaaS, PaaS, and DaaS, products are subject to sales tax in various (but not all jurisdictions) across the country. Typically, sales and use tax laws require tax to be charged based on the location where the software is billed to as this is assumed to be location of ALL OF ITS use. Many companies, especially post COVID-19 have employees that are located in jurisdictions across the country either working out of satellite offices and / or working from their homes. In these situations, companies are overpaying sales & use tax on software purchases because they are paying tax for users that are located in jurisdictions outside of where the software purchases were billed to.

How does the company qualify?

There are no industry and / or purpose of use qualifications to meet in order qualify for this exemption. The only qualification for the MPU exemption is that the software should be capable of being used in multiple locations or by multiple users. While there may be other exemptions applicable to software, the MPU exemption is primarily for companies that are based out Illinois, Massachusetts, New York, Pennsylvania, Washington or Utah.

What is the opportunity?

Once identified there are several ways to recover the overpayments of sales & use tax. The taxpayer can get the refund from the vendor and / or from the state the overpayment was made. In instances where the taxpayer has an open audit, it can be used to offset any audit assessment liability.

How can a taxpayer claim the refund?

Analyze your company’s purchases to identify which vendors are charging sales tax on software or any cloud-based products, such as SaaS, PaaS, and DaaS products. Source Advisors has developed proprietary technology to make this task simple. Our platform allows us to analyze, identify and collect all the documents necessary to file refund claims with minimum resources from our clients.

Regardless of how you chose to pursue the refund claim proper documentation is essential to support the application of the exemption. This will definitely include the purchase invoice, it may also include contracts, usage agreements, and other relevant documentation. Source Advisors has developed relationships with many of the larger technology companies to facilitate the recovery process. Source Advisors is extremely well versed with the sales & use tax refund claim process with these states having submitted, substantiated, and secured hundreds of refund claims.

Sales Tax Due Diligence in a Post Wayfair World

Over the past five years, sales tax awareness has increased amongst the private equity world as states have expanded their ability to tax remote sellers through economic and marketplace nexus rules. However, as a result of the South Dakota v. Wayfair, sales tax has worked its way to the top of the due diligence list.

In fact, the enforcement dates for many states began as early as July 1, 2018, resulting in any deal currently in the pipeline potentially facing major sales tax exposure that may affect your ASC 452 accrual – and as a result, directly impacting EBIDTA.

What is a Remote Seller Under Wayfair?

Many professionals are confused and have assumed that Wayfair only applies to e-commerce transactions. This is not the case. Although many states have not clarified the definition of a remote seller, several have, and the definition is broad as states will cast a wide net.

For example, Nebraska defines remote sellers as “retailers that do not have a physical presence in Nebraska, but sales to purchasers in Nebraska” and Maryland defines a remote seller as anyone who “sells or delivers tangible personal property or a taxable service for use in Maryland”.

What is the Result of South Dakota v. Wayfair?

In 2018, the Supreme Court released its decision on the landmark sales tax case, South Dakota v. Wayfair. The Court overturned the “physical presence” standard that previously governed the determination of when sales tax was due. Wayfair held that the correct standard in determining the constitutionality of a state sales tax law is whether the tax applies to an activity that has “substantial nexus” with the taxing state.

State officials around the country continue to implement a range of possibilities for taxing sales by remote sellers to take advantage of the new economic Wayfair test, and the landscape is changing rapidly.

The Wayfair decision has made it critical for remote sellers to review their current business against existing and quickly evolving state legislation to make determinations as to which states they may now be required to collect and remit sales tax.

Utility Studies for Sales and Use Tax Exemptions

While specific exemptions vary from state to state most manufacturers are aware that all states offer some type of sales & use tax exemptions for having operations located within their state. Manufacturers always capture all of the savings pertaining to sales tax exemptions on raw materials, machinery and equipment, but often overlook the utilities exemptions. Some jurisdictions exempt manufacturers from paying sales tax on energy sources, such as electricity, natural gas, and water, when used in the manufacturing process.

What Is a Manufacturer?

The definition as to what qualifies as manufacturing varies from jurisdiction to jurisdiction. The key is that manufacturing involves the transformation of raw materials or components into finished goods through a series of processes. Different business activities and operations that can be considered as manufacturing including assembly, fabrication, processing, machining, chemical production, printing, textile production, automative manufacturing, wood working, plastic molding, food and beverage production, pharmaceutical manufacturing, aerospace manducating, and packaging.

welder welding steel

What Is a Utility Study?

A utility study, in the context of sales and use tax, refers to an examination and analysis of utility usage within a business to determine the portion of utility expenses that may qualify for tax exemptions. The goal of a utility study is to identify and document the usage of utilities—such as electricity, natural gas, water, and other energy sources—that are related to qualifying activities, typically those associated with manufacturing or other specified processes.

The sales and use tax regulations in most jurisdictions provide exemptions for certain types of utility usage, particularly when those utilities are consumed in specific activities that contribute to the production process. By conducting a utility study, businesses aim to segregate and document the utility consumption that qualifies for these exemptions, with the ultimate objective of reducing or recovering sales and use taxes paid on non-exempt utility usage.

What Are the Steps to Doing a Utility Study?

Performing a utility study to obtain a refund of sales and use tax for utilities used in the manufacturing process involves a systematic approach to document and analyze utility consumption. The process may vary based on jurisdiction, but here is a general guide:

The utility study process requires careful documentation and adherence to tax regulations to support any claims for exemptions or refunds. It is advisable for businesses to work with tax professionals or consultants who specialize in sales and use tax matters to ensure that the study is conducted accurately and in compliance with applicable laws.

Different Types of Sales Tax Nexus for E-Commerce

For online businesses, navigating the ever-shifting sands of sales tax can feel like wandering through a labyrinth. One wrong turn, and you could face unexpected tax liabilities and penalties. Understanding sales tax nexus – the connection that triggers your obligation to collect and remit sales tax in a state – is crucial for ensuring compliance and avoiding costly missteps. 

The Big Four of Sales Tax Nexus:

While the definitions can vary state-by-state, there are four main types of nexus you need to be aware of:

  1. Physical Nexus:
    The classic brick-and-mortar scenario. Having a physical presence, like a store, office, or warehouse, in a state automatically creates nexus. This is the most traditional form of nexus and occurs when a business is physically in a state. Some examples include:
    • Having a store, office, warehouse, or other physical location in the state.
    • Hiring employees or contractors who work in the state, even if remotely.
    • Storing inventory or other property in the state.
  2. Economic Nexus:
    This type of nexus is based on a business’s economic activity within a state, regardless of whether it has a physical presence there. Since the landmark ruling of Wayfair vs South Dakota in 2018, states have adopted economic nexus laws, which often trigger a sales tax obligation if a business meets certain thresholds for sales, transactions, or revenue generated within the state. These thresholds vary by state and can be based on factors like gross receipts, taxable revenue, number of transactions, or a combination of both.

  3. Affiliate Nexus:
    This type of nexus arises when a business has a relationship with another entity (an affiliate) that has physical nexus in a state. If the affiliate refers customers to the business or assists with sales in any way, the business itself may be found to have nexus and be responsible for collecting sales tax. However, the specifics of affiliate nexus vary by state, so careful analysis is important.

  4. Click-Through Nexus:
    This type of nexus is relatively new and less common, but it’s worth mentioning. It generally applies when a business operates solely online and uses an affiliate in a state to link to its website and generate sales. Some states have laws establishing click-through nexus, but the legal landscape is still evolving and varies widely.

Navigating the Labyrinth:

Staying compliant with sales tax nexus can feel daunting, but here are some helpful tips:

Failing to comply with sales tax nexus can result in significant penalties, interest charges, and even potential audits. By understanding the different types of nexus and taking proactive steps, you can navigate the sales tax labyrinth with confidence and ensure your business stays on the right side of the law.

Sales Tax Nexus with Source Advisors

When it comes to sales tax nexus studies, it’s crucial to explore your options and find the right solution for your business. Source Advisors is well-versed in the complexities of sales tax nexus and offers expert assistance to businesses in need. Our team of seasoned professionals can guide you through the process and provide accurate and comprehensive sales tax nexus studies. 

Our tailored approach means we consider the unique aspects of your business. Whether you operate as an e-commerce business, a brick-and-mortar store, or a combination of both, we provide a sales tax nexus study that meets your specific needs. 

signing paper

Sales Tax Nexus Explained

For businesses operating across state lines, understanding the concept of sales tax nexus is critical. It’s the determining factor on whether a business has an obligation to collect and remit sales tax in a particular state. A sales tax nexus study is thus an essential instrument that helps businesses assess these obligations.

The study involves a thorough analysis of a company’s operations, including aspects such as sales, workforce, inventory, and physical presence, to ascertain if it meets the criteria for establishing nexus in a given state. Businesses can then identify the states where they are required to register for and collect sales tax.

What is Sales Tax Nexus?

Sales tax nexus is a vital concept for businesses to grasp for tax compliance. But what does it mean? Simply put, it’s the connection or presence a business has in a state, triggering the obligation to register for, collect and remit sales tax on taxable transactions within that state.

Sales tax nexus impacts businesses in two main ways.

  1. It dictates whether a business is obliged to collect and remit sales tax:
    If a business establishes nexus in a state, it must register for a sales tax permit and charge sales tax on taxable sales.
  2. It affects a business’s total tax liability:
    With nexus in various states, a business may have to cope with different tax rates, exemptions, and filing requirements.

Understanding sales tax nexus is thus a vital step for businesses aiming to stay compliant, avoid penalties, and manage their tax obligations efficiently.

Some of the Common Activities that Trigger Nexus Include

With These activities in mind, a nexus study is essential for businesses that are:

What is a Sales Tax Nexus Study?

A sales tax nexus study is a vital process that helps businesses determine their sales tax obligations across different jurisdictions. The study involves analyzing various business activities to identify if they establish sufficient presence or nexus. This helps businesses understand where they need to register, collect, and remit sales tax.

Conducting a sales tax nexus study carries several benefits.

By evaluating their operations and the specific nexus rules of each state, businesses can enhance their sales tax collection processes and potentially save money.

A sales tax nexus study is a critical tool for businesses to remain compliant with tax regulations. It helps identify sales tax obligations, avoid penalties, optimize sales tax processes, and streamline tax compliance efforts.

Selecting the Best Sales Tax Nexus Solution

When it comes to sales tax nexus studies, it’s crucial to explore your options and find the right solution for your business. Source Advisors is well-versed in the complexities of sales tax nexus and offers expert assistance to businesses in need. Our team of seasoned professionals can guide you through the process and provide accurate and comprehensive sales tax nexus studies.

Our tailored approach means we consider the unique aspects of your business. Whether you operate as an e-commerce business, a brick-and-mortar store, or a combination of both, we provide a sales tax nexus study that meets your specific needs.

Source Advisors Tax Update: What to Expect in 2024

State and Local Tax: The Good, The Bad, and The Ugly

The year 2024 is poised to usher in a series of sales tax changes that will impact businesses across various industries. From the constantly evolving rates to amendments in compliance requirements, companies need to be proactive in staying informed to mitigate potential risks. But what’s new & what should you be on the lookout for?

This article will tell you what trends our team at Source Advisors are seeing in the use of automation tools, where we are noticing an uptick in audits, and some state specific insights for certain industries to be prepare for another fun year in tax changes. The Good, The Bad, and The Ugly plus how we can help.

Marketplace Facilitator Laws

We will start with the GOOD…

+ Simplification of Taxes:

Some states are removing the 200 transactions rule from remote seller thresholds such as Lousiana and South Dakota in 2023 following other states lead in 2022. Colorado created the Sales and Use Tax Simplification Task Force to better understand how a simplified sales tax system would benefit sellers. The Ohio Commercial Activity Tax (CAT) is undergoing changes on January 1, 2024 for small businesses. The CAT is out of the bag and the tax will be eliminated for those businesses with less than $3M in Gross Receipts – this threshold is expected to change again in 2025.

Lots of companies we talk to say they are immediately going to de-register for some of these local taxes. There is a concept called trailing nexus which means that even if you do not hit registration qualifications in a particular year, your company may still have the obligation to collect and remit for a certain period of time. Source Advisors can provide guidance on the state specific rules and take the tedious work out of manually filing returns if you would like to outsource them completely. 

+ AI and TaxTech Tools:

Let’s face it – AI can make life easier. Many sales tax automation companies have developed AI modules and are adopting Machine Learning (ML) tools like Ocular Character Recognition (OCR) technology to enhance their software and help streamline manual processes like data entry. Avalara, for instance, uses OCR technology to help read exemption certificates and map to customer records in some ERP systems/e-Commerce Carts. The taxability of these new technologies is still widely undefined but AI is spreading like wildfire in popularity so we may see changes on the horizon…you might even be considered a late adopter if you have yet to try AI in some form. 

Keep in mind the free version of ChatGPT is dated a few years. We are an Avalara Partner – meaning we have access to many of the premium tools and can make recommendations for any manufacturers/wholesalers/resellers on if ML or automation tools make sense for your exemption certificate collection & renewal process.

+/- Holiday Spending & Retail Growth Forecasted at an All-Time High:

The National Retail Federation predicted November and December spending to grow between 3% and 4% but then Robinhood said consumers are continuing to shop for discounts post-Black Friday/Cyber Monday. The NFR predicts retail sales overall in 2023 will grow between 4%-6%. We will have to see how the retail sector of the economy pans out once 2023 financials are wrapped up…but this may mean the states will ensure they collect on the sales tax revenue.

Throughout the last few years, many companies have had to pivot adding omni-channel revenue stream and things like Marketplace sales have it’s own unique set of challenges. We can provide advice on different channels & systems and perform risk assessments to keep you compliant. Holiday sales can quickly surpass the thresholds starting at $100,000 per state – contact us if you would like a year-end review.

Now, we have to be honest and say that some of the good has overlay with the BAD…

+/- Rates changes to accommodate inflation

Stripe reports that some states have introduced more sales tax holidays than in previous years. Tennessee has a grocery sales tax holiday that exempts grocery items for a three-month period. South Dakota decreased their sales tax rates and New Mexico lowered their gross receipts tax. Texas is exempting menstrual products, baby bottles and diapers – we see you TX!  This trend is great for consumers but is hard for businesses to manage plus may lead to more audits.  Others states like Colorado and New York have implemented Retail Delivery Fees and Minnesota’s goes into effect January 2024. The Chicago Lease Tax (or Personal Property Lease Transaction Tax) remains which applies to remote sellers and includes many SaaS companies, whose sales into Chicago exceed the threshold of $100,000.

For companies that don’t have tax automation, Source Advisors will assist these clients with annual reviews to ensure their compliance processes are up-to-date. Even with sales tax automation, we notice many SaaS clients who are missing unique tax codes for the Chicago PPLT and are offering free consultations to check your tax codes. Also, we can provide audit support if that terrible, horrible, no-good time comes.

2024 was a banner year for sales tax collection which also means it’s a banner year for sales tax overpayment:

Many companies don’t realize they overpay on their products or services just as much as they underpay. Companies need to be diligent to make sure they are issuing the proper exemption certificates on their business purchases.

We have a large team dedicated to helping companies identify if they have overpaid on their purchases. If you think you may have overpaid, then please reach out.

And finally, we can’t avoid the UGLY…

Undeniable uptick in audits:

At the beginning of last year, many companies were not fearful of audits, saying the states will likely face the same staffing shortages as all employers but now it seems they are operating at nearly full capacity. Towards the end of this year, we have seen an increase in audits for SaaS-based companies in WA or NC – where things like canned vs. customized software make a difference in taxability or who your customers are make it difficult to collect accurately, respectively. TX is coming after solar companies. The common thread: there’s a service element to most, whereas, at the beginning of the year, the focus was on remote sellers or omni-channel companies.

Remember it’s important to have representation even if there is no negative assessment as it may mean you are due a refund your auditor is not telling you about.  

In summary, the trend of combining services with software is quickly becoming the optimal strategy to give you peace of mind and ultimate assurance that your company is getting state and local tax right because one thing is certain….in 2024, sales tax continues to be so complicated that it even makes us SALT-y at Source Advisors.

Contact Source Advisors if you would like to learn how we can help your business.

A CPA’s Basic Guide to SALT Requirements

State and local taxes affect every business in Illinois in one way or another. To ensure their clients remain tax compliant, it’s important for CPAs to know the fundamentals, red flags, and where to look for additional guidance.

State and local taxes (SALT) refer to any tax that isn’t administered by the federal government. Instead, these taxes are administered by the state revenue department, the state comptroller, tax commissioner, or the city’s/county’s department of finance, and operate completely independent of federal taxes.

While SALT requirements vary significantly state by state, there’s some level of uniformity in terms of the types of taxes collected by a state. While certainly not exhaustive, the list below covers some of the more popular state taxes:

  • Sales and Use Tax: for the consumption of certain goods or services within the state.
  • Income Tax: for the opportunity to generate income from within the state.
  • Franchise Tax: for the opportunity to exist as a legal entity within the state.
  • Excise Tax: a levy on certain manufactured products that’s charged on a per-unit basis.
  • Property Tax: a tax for the privilege to own property within the state.
  • Gross Receipts Tax: for the opportunity to generate income while being in the state, irrespective of the income’s source.

In Illinois, corporations are expected to file the following taxes on a yearly basis:

Like many other states, Illinois also has a series of local taxes that businesses are expected to pay. These are paid on top of the state-wide taxes listed above. For CPAs that focus on federal tax compliance, here’s an overview on various SALT requirements to be aware of and how states can differ from one another.

Tax Exemptions in Illinois

One of the key areas where states differ from one another when it comes to SALT is the way in which they define taxability.

Each state has its own list of exemptions, which span across products, services, and entities. In Illinois, for example, there’s a comprehensive list of exemptions when it comes to the Retailers’ Occupation Tax.

Notably, software as a service (SaaS) and other information system services are considered exempt from sales tax in Illinois, which isn’t necessarily the case in other states.

Assuming a product, service, or entity is exempt means that sales tax isn’t expected to be collected on the product or from the customer.

It’s also important to note that nexus with the state of Illinois is established based on gross receipts, which includes exempted transactions (more information on this below).

Chicago’s PPLT Tax

The Personal Property Lease Transaction (PPLT) tax is an example of a local Illinois tax, which businesses based in Chicago are expected to pay. This tax was designed to levy businesses leasing certain goods or services, as opposed to purchasing them (where Sales and Use Tax would be required).

Originally, this tax was used to tax the lease of computers. However, as technological trends continue to advance, the tax now covers nonpossessory computer lease services, which refers to expenses pertaining to cloud computing, information systems, and SaaS-type services.

Importantly, given that SaaS isn’t taxable on a state level in Illinois, the PPLT tax has the potential to catch businesses off guard and be easily overlooked, so it’s important not to fall victim to this oversight.

An interesting point about Chicago’s PPLT tax is that it’s only required for the lease of these products or services for those physically based in Chicago. This means any business with a remote workforce outside of the city doesn’t need to pay this tax for that portion of its workforce.

Often, SaaS or cloud computing companies will charge this tax for the bulk transaction to the company headquarters, not taking into account that it wouldn’t be applicable to users and accounts outside of the city. If this occurs, there’s a method through which the overpaid PPLT tax can be recouped retrospectively, and the costs can be apportioned in an official capacity.

Nexus and Remote Sellers

If the above is only just a taste of SALT in Illinois, one can only imagine how complex SALT can be for businesses based outside of Illinois that are conducting business within the state. Not only does a remote seller need to consider the SALT requirements of their own home state, but they also need to consider what other states require of them.

The requirement to deal with (i.e., register for, pay, collect, etc.) state taxes as a remote seller into any state comes down to whether the business has sufficient activities or connections with the state. This is referred to as the establishment of nexus.

There are two ways in which nexus can be established in any state:

  1. Physical Presence: office, inventory, remote workers, etc.
  2. Economic Nexus: sufficient economic activity (revenue and/or transactions) within the state.

Each state has its own expectations, rules, and guidelines on how to define economic nexus. In Illinois, it’s defined as either:

  • $100,000 or more in gross receipts from the sale of personal property in the state.
  • 200 or more individual transactions relating to the sales of tangible personal property in the state.

Prior to 2021, remote retailers that established nexus in Illinois were only required to collect the state Use Tax from their customers in the state. As of Jan. 1, 2021, this requirement was extended to include the state and local Retailers’ Occupation Tax, effectively the same tax that local retailers are expected to collect.

Of course, care must be taken for remote retailers that were registered prior to 2021 to ensure that the transition outlined above occurred in their sales tax collections in Illinois. Importantly, this process would have needed to be manually updated in order to prevent under-collection and potential penalties or interest.

When in Doubt, Consult With an Expert

As you can see, SALT is constantly in flux—rates are changing, rules are shifting, and guidelines are constantly evolving.

Unless they possess the internal capabilities of a specialized SALT practice, most CPA firms aren’t prepared to provide ongoing guidance on complex SALT or multistate tax issues. Additionally, clients are generally unaware of this nuance and expect their CPAs to be all-knowing.

CPAs can rest assured that there are specialists out there who they can liaise with and seek guidance from—whether it’s with tasks as straightforward as state tax registrations or as complex as defending a sales tax audit. There are also endless amounts of articles and guidelines available to CPAs on state websites that cover basic matters and protocols on SALT.

Remember, as matters deepen in complexity, so do SALT requirements. Reach out to a SALT expert for guidance and assistance when needed to ensure your clients are compliant with each state’s tax requirements.

State and Local Taxes: A Guide for CPAs, CFOs, and Business Owners

Mastering State and Local Tax Planning

Tax year planning for state and local taxes is a critical aspect of financial management for individuals and businesses alike. By mastering the complexities of state and local tax regulations, CPAs, CFOs, and business owners can optimize their tax strategies and minimize their tax liabilities.

When it comes to tax year planning, there are several key considerations to keep in mind:

  1. Stay Updated with Tax Law Changes
    These laws can vary significantly from one jurisdiction to another, and staying informed is essential.
  2. Timing is Everything
    Be aware of specific due dates for each jurisdiction.
  3. Deductions, Exemptions, and Credits
    Utilizing all eligible deductions and credits can significantly reduce your overall tax burden.
  4. Avoid Common Pitfalls
    Overlooking the impact of taxes on business decisions can lead to unexpected costs.

Strategies to Maximize State and Local Tax Deductions

When it comes to tax year planning for state and local taxes, understanding the available deductions is crucial. By exploring these deductions, CPAs, CFOs, and business owners can effectively reduce their tax liability and maximize their savings.

Here are some key deductions and strategies you should consider:

Understanding available deductions for state and local taxes:

State and local tax deductions can include income taxes, property taxes, and sales taxes. It’s important to research and understand the specific deductions available in your jurisdiction. Some states may offer additional deductions for certain expenses, such as education or healthcare.

Implementing strategies to maximize deductions for state and local taxes:

One strategy is to bunch your deductions. This involves timing your expenses so that you can maximize the deduction in a single tax year. If you have the flexibility to pay property taxes early or make an additional estimated tax payment, it may be beneficial to do so in order to increase your deduction for that year.

Understanding the limitations and restrictions on deductions:

It’s important to be aware of the limitations and restrictions that apply to state and local tax deductions. The Tax Cuts and Jobs Act of 2017 introduced a cap on the deduction for state and local taxes at $10,000 for married couples filing jointly. Additionally, some deductions may be subject to income limitations or phase-outs.

List of Key Deductions:

  • Income taxes
  • Property taxes
  • Sales taxes
  • Education expenses (where applicable)
  • Healthcare expenses (where applicable)

Navigating State and Local Tax Workarounds

Tax recovery

Intelligent Workarounds within the Legal Framework

When it comes to tax planning, understanding and effectively navigating state and local taxes is essential. State and local tax workarounds refer to strategies and techniques that CPAs, CFOs, and business owners employ to legally minimize their tax liabilities within the framework of existing tax laws.

List of Individual Strategies:

  • Deductions for property taxes
  • State income taxes
  • Sales taxes

List of Business Strategies:

  • Establishing operations in tax-friendly jurisdictions
  • Strategic structuring of business operations

While tax workarounds can offer significant benefits, it is crucial to navigate the legal and ethical implications of these strategies. It is important to ensure that any tax workaround implemented is following the applicable tax laws and regulations. Engaging with experienced tax advisors and professionals can help individuals and businesses understand the legal boundaries and make informed decisions.

Navigating state and local tax workarounds requires careful consideration and expert guidance. By staying informed about available options, exploring effective strategies, and adhering to legal and ethical standards you can successfully plan taxes and optimize your financial outcomes.

Marketplace Facilitator Laws

Implementing Proactive State and Local Tax Planning Strategies

When it comes to managing state and local taxes, proactivity is key. By minimizing tax liabilities, utilizing tax credits and incentives, and planning for future tax law changes, CPAs, CFOs, and business owners can effectively navigate the complex landscape of state and local taxes.

Here are a few proactive measures you can take for your business to minimize state and local tax liabilities:

1. Strategic Planning

Proactivity in tax planning is not just beneficial; it’s a necessity for the savvy business. To effectively manage state and local taxes, a forward-thinking approach centered on minimizing tax liabilities is crucial. This proactive stance entails a meticulous analysis of the tax laws and regulations that impact your business across various jurisdictions. Understanding the intricacies of state and local tax codes allows businesses to identify and leverage opportunities to lower their tax obligations. This could involve taking full advantage of tax exemptions, deductions, and credits that are often underutilized.

2. Harnessing Tax Credits and Incentives for Business Growth

The landscape of state and local taxation is not solely about obligations but also about opportunities. Tax credits and incentives are powerful tools offered by many states and localities to encourage businesses to invest in their communities. These financial incentives can range from credits for new hires to benefits for investments in specific industries or research and development initiatives. Smart utilization of these incentives can significantly reduce tax liabilities while simultaneously fostering business growth and innovation.

3. Anticipating Changes in Tax Legislation

In the ever-evolving world of tax legislation, readiness to adapt is key. The proactive business must remain vigilant, keeping abreast of legislative trends and potential changes that could affect their tax stance. This means not only being reactive to new laws as they come into effect but also anticipating shifts and planning strategies accordingly. By staying informed and consulting with expert tax advisors, businesses can position themselves to respond to changes in tax laws proactively, ensuring they can capitalize on new opportunities and mitigate risks.

Benefits of Proactive Tax Planning

  1. Minimize tax liabilities:
    Understand and apply exemptions, deductions, and credits.
  2. Leverage incentives:
    Utilize state and local incentives to reduce taxes and encourage business growth.
  3. Future-proof your business:
    Anticipate and prepare for changes in tax legislation to maintain compliance and optimize tax positions.

While tax workarounds can offer significant benefits, it is crucial to navigate the legal and ethical implications of these strategies. It is important to ensure that any tax workaround implemented is following the applicable tax laws and regulations. Engaging with experienced tax advisors and professionals can help individuals and businesses understand the legal boundaries and make informed decisions.

Navigating state and local tax workarounds requires careful consideration and expert guidance. By staying informed about available options, exploring effective strategies, and adhering to legal and ethical standards you can successfully plan taxes and optimize your financial outcomes.

Source Advisors Can Help You

At Source Advisors, we specialize in unraveling the complexities of state and local taxes, providing you with proactive strategies tailored to your unique business needs. Our expertise is your asset when it comes to navigating the tax terrain.

Contact us to fortify your tax year planning and harness the full potential of proactive tax management.