Sales Tax Nexus Explained

Franklin Chow on February 16, 2024

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.

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.
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:

Expanding into new markets
Making sales in new states
Launching new products and services
Moving or expanding an international business into the U.S.
Acquiring new companies
Looking to become compliant after receiving a penalty

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

Franklin Chow on January 24, 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.

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

Franklin Chow on January 22, 2024

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:

Physical Presence: office, inventory, remote workers, etc.
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

Franklin Chow on January 17, 2024

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:

Stay Updated with Tax Law Changes
These laws can vary significantly from one jurisdiction to another, and staying informed is essential.
Timing is Everything
Be aware of specific due dates for each jurisdiction.
Deductions, Exemptions, and Credits
Utilizing all eligible deductions and credits can significantly reduce your overall tax burden.
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

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.

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

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

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.

Benefits of Combining a Sales and Use Tax Refund Review With an Audit

Franklin Chow on May 10, 2023

When a state informs a company of an ensuing sales & use tax audit, there is always uncertainty and stress. The stress is caused by the concern about tying up the business’ resources and the fear of potential liability that may exist. Combining a Sales and use tax refund review with an audit may alleviate some of these concerns.

Many of an audit’s time-consuming aspects center around gathering the documentation. What is the state going to ask us to provide? These documents need to be reviewed by the auditor to determine if a tax liability exists. Conversely, the documents can also determine if sales and use tax overpayments were made. State auditors are not obligated to identify tax overpayments they discover in their review.

The benefits of combining the two projects include efficiency (in time and resources), lower overall payments, and more money available for refund review.

Efficiency

The same documents are utilized for both reviews. Having pulled the documents for audit, there is little additional work required to review the documents for refund opportunities. Handling both projects simultaneously will result in fewer inquiries from your tax personnel than if they were conducted separately. Any errors resulting in over or underpayments can be addressed simultaneously.

Lower Payments

Rarely does an audit result in a “no change” finding. When combining a refund with the audit, the refund will offset any liability found, not just of the tax due but also of the interest and potential penalties. Due to high-interest rates (15%+) imposed by states, the interest amount due can be significant.

More Money Available

Most states typically have a three-year or four-year statute of limitations for audits, meaning that is the time legally open for review. An open audit results in that period also being open for refund review, resulting in a longer than normal period being open for refund review. A refund review done separately from an audit is limited in the amount of purchases you can review for overpaid tax. If an audit goes back five years, those periods are open for potential liability and refunds.

Source Advisors can Help You with Your State and Local Tax Credits

Navigating an audit or a refund review requires knowing the process needed to be successful. Combining the two can streamline the process and generate positive results. If you have any questions or would like more information, please contact Source Advisors.

The Federal Universal Service Fund Fee

Franklin Chow on April 25, 2023

The Role of Telecommunications in the Federal Universal Service Fund

Telecommunications companies operating in the United States are subject to the Federal Universal Service Fund (USF), a program administered by the Federal Communications Commission (FCC). The USF aims to promote access to telecommunications services for all Americans, regardless of location or economic status. It is funded through contributions from telecommunications service providers—the USF funds four programs – High-Cost Program, Lifeline Program, Schools, and Libraries Program. Telecommunications companies may be subject to contributions to one or more of these programs based on the services they offer and the areas they operate in.

Telecommunications companies are required to contribute to the USF based on a percentage of their interstate and international revenues. This contribution is known as the Universal Service Fund Fee. It is calculated as a percentage of a company’s end-user telecommunications revenues. The rate varies but typically ranges from 15.5% to 33%. FUSF surcharges may be passed through to the final user of the telecommunications services.

Fee Collection and Reporting

All telecommunications companies are required to contribute to the USF fund. Companies providing telecommunications services to retail customers, either to other businesses or residential, must register with the FCC and file the necessary forms. Each quarter, the FCC sets a contribution factor, which is a percentage of interstate and international revenue, that each contributor is required to contribute. Telecommunications companies are responsible for quarterly collecting and submitting USF fees to the FCC.

The fees are typically passed on to consumers as a line-item charge on their telephone or broadband bills. Contributors to the USF fund must file FCC form 499Q quarterly to report and project their quarterly revenue. Additionally, companies must report their annual revenue on FCC form 499A filed by April 1st of every year.

The USF charge is typically applied to most telecommunications services, including wireline and wireless telephone services, broadband internet services, and certain other communication services. Companies that are not generally considered telecommunications providers may still be subject to the FUSF contributions due to the very broad definition of telecommunications services. Many services, such as private-line telecommunications and VoIP services, have multiple reporting and allocation issues and/or methodologies to consider.

Need Help?

At Source Advisors, we help companies understand their FUSF reporting responsibilities and assist in reporting and remitting the fees. If you have any questions or would like to get more information, please get in touch with a Source Advisors professional to answer your questions.

What is Business Personal Property Tax?

Franklin Chow on April 14, 2023

The Business Personal Property Tax

Business Personal Property Tax is a tax assessed on tangible personal property businesses own. This type of property includes equipment, furniture, computers, machinery, and inventory, among other items not permanently attached to a building or land. Local or state government jurisdictions typically impose the tax, and the rate of taxation varies depending on the location and the property’s value. Business owners are usually required to file an annual tax return and pay taxes based on the value of their personal property assets. Failure to pay the required tax may result in penalties and interest charges.

Do I Need to File Business Personal Property Taxes?

Whether you need to file Business Personal Property Tax depends on the state and local laws where your business is located, as well as the value and type of assets that your business owns. In general, if your business owns tangible personal property such as equipment, furniture, machinery, computers, or inventory, you may be required to file a Business Personal Property Tax return and pay taxes on those assets.

However, some states may have exemptions or minimum thresholds for Business Personal Property Tax filing requirements. For example, some states may exempt businesses with a certain level of assets or a certain amount of annual revenue from filing Business Personal Property Tax returns.

Are there any states that do not tax business personal property?

Twelve states currently do not tax business personal property. These states include Delaware, Hawaii, Illinois, Iowa, Minnesota, New Hampshire, New Jersey, New York, North Dakota, Ohio, Pennsylvania, and South Dakota. However, some of these states may have local jurisdictions that impose a personal property tax, or they may have other taxes or fees that apply to businesses.

Are there any exemptions for Business personal property tax?

Yes, there are exemptions for Business Personal Property Tax. The specific exemptions and qualifications for exemption vary depending on the state and local laws where the business is located.

Common exemptions for Business Personal Property Tax include:

Need Help?

Source Advisors has assisted many clients with processing their business personal property renditions and has saved clients thousands of dollars through timely and accurate filings and the use of various exemptions provided through local jurisdictions. Please contact us if you have any concerns regarding business personal property taxes.

Why Do We Have Sales & Use Tax?

Franklin Chow on April 11, 2023

What is Sales & Use Tax?

Sales and Use Tax is a consumption tax, a form of tax that is levied by state or local governments on the sale of goods and services. A wide range of goods, including clothing, electronics, vehicles, food, and entertainment, are typically subject to Sales and Use Tax. Some states also levy Sales tax on services, such as legal services, haircuts, and car repairs. The rules governing what is and is not subject to Sales tax can vary by state. The percentage of a state’s revenue that comes from Sales and Use Tax can vary widely depending on the state. In general, the Sales and Use tax is one of the largest sources of revenue for most states. According to the United States Census Bureau’s Quarterly Summary of State and Local Government Tax Revenue, Sales and Gross receipts taxes accounted for approximately 31.2% of total state government tax revenue in the second quarter of 2021.

The primary reason for implementing Sales tax is to raise revenue for state and local governments. This revenue is necessary to fund essential public services that benefit the entire community. Sales tax is considered a stable revenue source, as it is less volatile than other forms of taxation, such as income tax, which can fluctuate based on economic conditions.

In addition to raising revenue, Sales tax can also be used as a policy tool to influence consumer behavior. For example, states may implement Sales tax exemptions or reductions for specific products or services to encourage the purchase of goods that are considered beneficial to the community, such as energy-efficient appliances or medical supplies. Conversely, states may implement higher Sales tax rates on products that are deemed harmful, such as cigarettes or alcohol.

In the United States, Sales tax is collected by state and local governments, and the rates can vary widely depending on the location. In some states, such as Alaska, Delaware, Montana, New Hampshire, and Oregon, there is no Sales and Use Tax. However, Alaska does have a local Sales Tax. In other states, such as California and New York, Sales tax rates can be as high as 10% or more.

Source Advisors can Help You with Your State and Local Tax Credits

Understanding the Sales and Use tax consequences of your businesses’ activities can be complicated as the rules vary from state to state. If you are operating a business and are unsure of your Sales and Use tax obligations, Source Advisors is here to help.

Lack of Documentation on Sales & Use Tax Audits

Franklin Chow on April 7, 2023

Defending tax audits can be a daunting process for businesses. Defending an audit requires a thorough understanding of the tax laws, regulations, and reporting requirements. Although proper documentation is necessary for all types of tax audits, it is incredibly challenging for Sales & Use Tax audits due to the number of different entities (i.e., customers, vendors, etc.) a company interacts with and the volume of transactions that an audit can incorporate (i.e., all sales and purchases). Further intensifying the need to handle this correctly is the fact that the auditor has the legal authority to see detailed records and supporting documentation for all transactions.

The lack of proper documentation can create significant problems for businesses during sales and use tax audits. Here are some specific issues that can arise:

1. Increased Tax Liability

Sales and Use tax auditors typically use a sampling method to identify transactions for review. If a business cannot provide supporting documentation for these transactions, the auditor may assume that the proper tax amount was not remitted to the State on all transactions during the refund claim period (not just the sampled ones).

2. Penalties and Interest

In addition to increased tax liability, the lack of documentation can also lead to penalties and interest. Auditors may impose penalties for failing to collect and remit sales tax or to maintain proper documentation. Interest charges can also accrue on unpaid taxes, which can add up quickly if the audit covers several years

3. Time and Resource Demands

The lack of proper documentation can also create a time and resource-intensive audit process. Auditors may require businesses to provide additional information, conduct employee interviews, and unnecessarily review financial statements. This can be time-consuming and costly for businesses, particularly if they do not readily have the proper documentation.

When the proper documentation is not available on hand, various options are available to taxpayers. This includes contacting vendors with liability mitigation letters. A liability mitigation letter is a helpful document to understand if vendors has undergone a voluntary disclosure agreement, collected sales tax upfront, or learn more about their product/service and why it may be potentially exempt. By doing so, we can effectively mitigate any potential liabilities.

Source Advisors can Help You with Your State and Local Tax Credits

If you’re a business undergoing a sales tax audit, Source Advisors is here to help. Our team of experienced tax professionals is well-versed in the latest sales tax regulations and has a proven track record of helping businesses successfully navigate the audit process.

New York City Utility Excise Tax

Franklin Chow on March 3, 2023

What is the New York City Utility Excise Tax?

In New York City, the Utility Excise Tax (UXS) is a tax imposed on utility service providers that operate within the city. These providers include electricity, gas, steam, and telecommunications companies. Telecommunications services are defined as the transmission of voice, image, data, information, and paging using wire, cable, fiber optic, laser, microwave, radio wave, satellite, or similar media. This tax is in addition to any federal and state taxes that are imposed on utility service providers.

What Is Taxed?

The tax is calculated as a percentage of the utility service provider’s gross operating income from providing these services to customers within the city. The current tax rate for electric, gas, steam, water, refrigeration, and telecommunications services is 2.35%, and the tax rate for an omnibus operation is 1.17%.

The revenue generated from this tax goes into the city’s general fund and is used to support a variety of public services and programs. Returns are only required semiannually for taxpayers whose utility tax liability is less than $100,000 for the preceding calendar year. When taxpayers first become subject to UXS, they must file monthly returns for every month of the calendar year in which they first become subject to the utility tax. Service providers that do not comply with tax laws and regulations are subject to penalties and interest.

Tax Exemptions

Some tax exemptions exist, for example, for certain residential customers, government entities, and nonprofit organizations. Additionally, the tax may be subject to various deductions and credits, depending on the specific circumstances of the utility provider and customer. Lastly, certain types of income may be excluded from gross operating income, such as income from non-utility sources or income from certain types of customers (i.e. residential customers).

The specific rules for calculating gross operating income can be complex and may be subject to interpretation by the relevant government agency. If you have questions about what is taxable under the New York City Utility Excise Tax, it would be valuable to consult with a tax professional such as Source Advisors.

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Source Advisors can guide you through the New York City Utility Excise Tax calculation and return filing process. Source Advisors has assisted clients in calculating and filing these returns. If you have any questions or would like to get more information, please contact one of our professionals to help assist you in getting started with your utility excise tax filings.

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