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What is the difference between Sales & Use Tax and Value Added Tax?

Sales and Use Taxes vs Value Added Tax

Sales and use taxes in the United States and the value-added tax (VAT) used in most other countries have some similarities and differences.

Similarities:

Differences:

Despite these differences, both sales and use taxes in the United States and VAT in other countries serve the same primary purpose of taxing the value added at each stage of the production and distribution of goods and services.

Businesses need to understand their tax obligations, including the frequency of returns and the potential penalties for not filing returns, in each jurisdiction where they have a taxable presence. Source Advisors can assist businesses with their sales & use compliance obligations.

What is Washington Business & Occupational (B&O) Tax?

Washington Business & Occupation (B&O) Tax is a tax imposed by the state of Washington on the privilege of doing business within the state. It is a tax on gross receipts, regardless of profit, and is based on the type of business activity being conducted. The tax is imposed on companies operating a business in the state, including out-of-state businesses that have a presence in Washington. The revenue generated from the B&O tax helps fund various state programs and services.

washington space needle and skyline

Who is Responsible?

The responsibility for paying the Washington Business & Occupation (B&O) Tax falls on the business or individual conducting the business activity within the state of Washington. The business must register with the Washington Department of Revenue and file regular B&O tax returns to report their gross receipts and pay the tax owed. If a business fails to pay the B&O tax, it may be subject to penalties and interest.

Business & Occupational (B&O) Tax vs. Sales Tax

Washington Business & Occupation (B&O) Tax and sales tax are two different types of taxes imposed by the state of Washington. Sales Tax is a tax on the sale of goods and services, and it is calculated as a percentage of the sale price and is collected by the seller at the time of the sale. The revenue generated from sales tax is used to fund state and local government programs and services. In Washington, the state sales tax rate is 6.5%, with some cities and counties adding additional sales tax. The B&O tax rate varies based on the type of business activity being conducted. Washington B&O Tax and Sales Tax are reported on the same tax return, the Combined Excise Tax Return.

An area of confusion is whether a taxpayer should register and file Washington B&O tax if they are not collecting sales tax. Almost all businesses are subject to B&O tax since it’s a tax on gross income and not just taxable sales. Washington has different classifications for B&O business activities; the four main classifications are Retailing, Wholesaling, Manufacturing, and Services & Other Activities.

Need Help?

Source Advisors can assist taxpayers and business owners with their Washington B&O and Sales & Use Tax filing requirements. We can assist with registering your business and, if necessary, with ongoing filing needs. If you have any questions or want more information, please contact Source Advisors, and we can help you with your indirect tax compliance obligations.

Refund Opportunities on Purchases of SaaS in Specific Industries and Jurisdictions

The Changing Landscape of Sales Tax in the Age of SaaS

The continued changes in the world of software have opened the door to many opportunities for sales tax refunds. The economic benefit of these opportunities can vary depending on one’s industry and location. Generally, a sales tax refund on purchases is driven by the availability of an exemption or if what is purchased is not taxable in the purchased state.

Software as a Service (SaaS) has become an area of confusion because of how most sellers apply sales tax on invoices. SaaS-type services go by many names, including Platform, Desktop, and Information as a Service. One thing that most of these purchases have in common is that the service users no longer need to be in one specific area; they can be located in many different regions of the United States or other countries. That being said, much of the confusion is because sellers usually tax the invoice assuming all the users are located at the “ship to” location.

Industries of Focus

Several industries, financial/banking, insurance, and commercial real estate, purchase a significant amount of these products. One thing these industries have in common is that many employees are located outside the home state but still use the SaaS shipped to the home office.

Jurisdictions of Focus

Two jurisdictions come to mind for a high concentration of these industries, New York City and The City of Chicago. A common factor between these two is the high tax rate associated with doing business. New York City has a sales tax rate of 8.875%, and Chicago imposes not a sales tax but a Personal Property Lease Transaction Tax on what they call Non-Possessory Computer Leases. This rate is even higher at 9.00%—a benefit of being located in these jurisdictions potential for a tax refund on purchases of SaaS.

We’re Here to Help

How to obtain these refunds depends on specific fact patterns and documentation associated with the SaaS purchases. A couple of these are what exactly is being purchased, and where is it used? Once we figure this out, we need to be aware of the refund process in these jurisdictions to obtain the refunds. Source Advisors can guide you through these specifics here. If you have any questions or want more information, do not hesitate to contact a Source Advisors professional. We are ready to assist you with your tax refund claims.

What is the New York State Telecommunications and Utility Services Tax?

The New York State Telecommunications and Utility Service Tax

In New York, there is an excise tax that applies to the provision of certain telecommunications and utility services, called the Telecommunications and Utility Services Tax Return (CT-186-E). This tax is imposed on the gross receipts derived from providing these services to customers within the state. The tax rate varies depending on the type of service provided and the location of the customer, with the highest rate in the New York Metropolitan Commuter Transportation District (MCTD) area at 3.095%. Some examples of taxable telecommunications services include telephone service, telegram service, and teletypewriter exchange service. Some examples of taxable utility services include gas, electricity, steam, water, or refrigeration.

employee retention credit laptop

What Is Taxable?

The telecommunications excise tax is imposed on the gross receipts derived from providing taxable services to customers within the state. Gross receipts generally include all charges, fees, and other amounts billed to customers for the taxable services, including taxes, surcharges, and other fees imposed by the service provider or by state or local governments. However, certain amounts, such as federal excise taxes, are generally excluded from the definition of gross receipts for the purpose of calculating the telecommunications excise tax.

Who Is Responsible?

It is the responsibility of the service provider and / or seller of the service to collect and remit the tax to the State. They are responsible for registering with the state, obtaining a tax permit, and filing tax returns on a regular basis. Service providers that fail to comply with the tax laws and regulations are subject to penalties and interest.

Other Taxes/Fees May Apply

In addition to the telecommunications excise tax, there may be other taxes and fees that apply to the sale of telecommunications services in New York. For example, vendors may be subject to the state and local sales tax, telecommunications utility tax, and other taxes and fees that are imposed on telecommunications services. It’s important for customers to be aware of these additional taxes and fees, as they can have a significant impact on the overall cost of the services.

Need Help?

Source Advisors can assist service providers and sellers in becoming compliant with their New York Telecommunications Tax filing requirements. We can assist taxpayers in determining if their services are taxable, register your business if necessary, and assist with ongoing filing needs. If you have any questions or would like to get more information, please contact Source Advisors and we can help you with your sales tax compliance obligations.

Sales Tax Registration Requirements for Businesses

Sales Tax Registration for Businesses

A business that is selling goods and services within a state must register with the state’s tax department and collect the sales tax from customers and file the return regularly. Businesses that sell goods or services across state lines must be aware of the different sales tax rates and rules in each state and register accordingly.

Nexus threshold for Business Registration

Nexus refers to a connection or link between a business and a state or local government that triggers a requirement for the business to collect and remit sales tax. In the context of sales tax, a business has a nexus with a state or local government if it has a physical presence or economic presence in that jurisdiction. If a business has a nexus in multiple states, it must register and comply with the sales tax laws in each state where it has nexus.

Physical Nexus

The physical presence requirement for sales tax varies from state to state, but some common examples of activities that will establish physical nexus are:

Economic Nexus

The concept of nexus has become more critical in recent years with the rise of e-commerce, as many online businesses may have customers in multiple states even if they do not have a physical presence in those states. In 2018, the U.S. Supreme Court, in the case of South Dakota v. Wayfair Inc., ruled that a business can be required to collect sales tax in a state even if it doesn’t have a physical presence there, as long as it has a certain level of economic activity (“Economic Nexus) in the state. As a result of the Supreme Court ruling, many states have passed laws requiring out-of-state sellers to collect sales tax if they meet a certain threshold for sales or transactions in the state.

Need Help?

Source Advisors can guide you throughout the entire process. From evaluating if you have met the nexus thresholds to start remitting tax for your business to helping you register your business to assist with any filing needs you may need.

What is New York City’s Commercial Rent Tax?

What is New York City’s Commercial Rent Tax?

The Commercial Rent Tax (CRT) is a tax imposed on businesses that rent commercial property in certain areas of New York City. The tax is only imposed on businesses that rent property below 96th street in Manhattan. The tax is based on a percentage of the business’s annual rent paid for the property, and it is typically the responsibility of the tenant to pay the tax. Depending on the amount remitted, the CRT returns are filed on an annual or quarterly basis.

The current tax rate is 6% of the base rent. All taxpayers are given a 35% base rent reduction, which ends up lowering the tax rate to 3.9%. Businesses with rent of less than $250,000 are not subject to tax. New York City provides a tax credit if your annualized base rent before the rent reduction is between $250,000 and $300,000.

Small business owners may be eligible for credit against the CRT. The credit is based on the amount of rent paid, and the income and expenses of the business. To be eligible for the credit, a business must have both less than $5 million in gross income and pay less than $500,000 in rent before the 35% rent reduction.

Commercial Rent Tax Complexities

As mentioned above, the New York City commercial rent tax is imposed on the base rent. The definition of base rent is one of the complexities that companies should be aware of when determining their CRT liability. Base rent also includes any additional charges for services such as electricity, heat, and cleaning. Other charges like Common Area Maintenance (CAM), taxes, and insurance are not included in the base rent. An example of nuance is that the inclusion of electricity in the base rent calculation is dependent on whether the electricity is separately metered or provided by the landlord through submetering. Separately metered utility services are excluded from base rent. This is why it is helpful to consult with a tax professional as it ensures CRT liabilities are not over or understated.

Need Help?

Source Advisors can guide you through the entire commercial rent tax return filing process. Source Advisors has assisted many clients calculate and file these returns. If you have any questions or would like to get more information, do not hesitate to contact a Source Advisors professional to help assist you in getting started with your commercial rent tax filings.

Sales Tax Voluntary Disclosure Agreements

What is a sales tax voluntary Disclosure Agreement (VDA)?

A sales tax voluntary disclosure agreement (VDA) is a program offered by many state governments that allow businesses to come forward and disclose unpaid sales taxes to the state. The agreement is voluntary, meaning that the company must initiate the process and agree to the terms of the VDA to participate. In exchange for the disclosure, the state will typically offer reduced penalties and interest on unpaid taxes and may even provide amnesty from criminal prosecution.

When should a company apply for a VDA?

A business should consider applying for a sales tax voluntary disclosure agreement (VDA) if it has yet to begin collecting and remitting sales taxes to the state as required by law. This could be because the business did not realize it was required to collect the taxes or knowingly did not collect and remit the taxes. Applying for a VDA allows the business to come forward voluntarily and disclose unpaid taxes, potentially avoiding penalties, interest, and even criminal prosecution.

A business should apply for a VDA as soon as possible, as the longer it waits, the greater the potential penalties and interest may be. Additionally, waiting too long may jeopardize the chances of qualifying for the VDA program, as the state may have already initiated an investigation into the business. It is also worth noting that not all states have VDA program, and some have different rules, so it is recommended to consult with a tax professional to understand the specifics of the state you are operating in, and if it is the right move for your business.

How long does it take to process a VDA?

The length of time it takes to process a sales tax voluntary disclosure agreement (VDA) can vary depending on the state where the business is located and the case’s specific circumstances. Some states may have a set process for handling VDAs that can be completed relatively quickly, while others may take longer to review and approve the agreement.

In general, it can take several weeks to several months for a VDA to be processed. The process often includes the business submitting the necessary paperwork and documentation, the state reviewing the information and determining if the business qualifies for the VDA program, and then negotiating the terms of the agreement. Once the agreement is reached, the business will need to pay unpaid taxes, penalties, and interest.

It’s important to note that the process of VDA is not always straightforward and can be complex. Some states have specific rules and conditions that need to be met to qualify for a VDA. Consult with a tax professional to ensure the process goes smoothly and understand your case’s specific timing.

Need Help?

Source Advisors has assisted dozens of clients with processing Voluntary Disclosure Agreements and has saved clients hundreds of thousands of dollars in penalties and interest through timely and accurate Voluntary Disclosure Agreements. Please get in touch with us if you have any concerns regarding unpaid taxes and are considering filing for a VDA.

Sales Tax Refund Claims: What You Need to Know

If you have paid sales tax in error or have paid more sales tax than you owe, you may be able to file a sales tax refund claim with the government agency that handles tax collection in your jurisdiction. Here is what you need to know about the process of claiming a sales tax refund.

Tax recovery

Requirements for Claiming a Sales Tax Refund

To claim a sales tax refund, you may need to provide evidence of the sales tax payment and the reason why you believe you are entitled to a refund. This may include receipts, invoices, or other documents showing the amount of sales tax paid. You may also need to provide documentation supporting your claim for a refund, such as proof that the item you purchased was tax-exempt or that you were entitled to a sales tax exemption.

The process for claiming a sales tax refund can vary depending on the government agency and the laws of your jurisdiction. It is a good idea to carefully review the requirements for claiming a sales tax refund and to gather all necessary documentation before filing your claim.

How to File a Sales Tax Refund Claim

The process for filing a sales tax refund claim will depend on the government agency that handles tax collection in your jurisdiction. In some cases, you may be able to file a claim online through the agency’s website. In other cases, you may need to submit a paper claim form or request a claim form from the agency.

Before filing a claim, make sure you have all of the necessary documentation and information, including proof of the sales tax payment and documentation supporting your claim for a refund. It is also a good idea to keep a copy of your claim form and any supporting documentation for your records.

Timing of Sales Tax Refund Claims

The timeline for processing a sales tax refund claim can vary depending on the government agency and the complexity of your claim. In general, you should allow several weeks or even months for your claim to be processed. If your claim is denied, you may be able to appeal the decision.

We’re Here to Help

Source Advisors can guide you throughout the entire sales tax refund claim process. Source Advisors has assisted many clients obtain significant sales tax refunds. If you have any questions or would like to get more information, do not hesitate to contact a Source Advisors professional to help assist you in getting started with your sales tax refund claim.

What Happens If You Don’t Collect or Remit Sales Tax?

Over the past four years, the sales tax landscape in the United States has changed significantly. The introduction of economic nexus – a connection to a state based on sales revenue or transaction count – altered the requirements for companies to collect and remit sales tax.

Gone are the days when you could sell your products or services outside of your physical boundaries without charging sales tax. Even though every state with sales tax has adopted some form of regulation, there are still those who beg the question – what happens if I don’t collect sales tax? Or, what if I collect but don’t remit the tax to the proper states?

The Implications of not Complying with State Sales Tax Rules

1. You will have to pay the sales tax back with interest.

If you do not collect or remit sales tax and are audited, you will be required to pay back the uncollected or unremitted tax for the audit period with possible penalties and fines. The best-case scenario is to recognize the error before an audit and to voluntarily correct the mistake. A Voluntary Disclosure Agreement may help alleviate possible interest and penalties due. The worst-case scenario? It can financially ruin your business and responsible parties can face criminal charges.

Real life example:

New York window store owner pays back over $125,000 in unremitted sales tax, and over $110,000 in interest

Art Auction House Allegedly Accepted False Paperwork Which Allowed a Customer to Avoid Sales Tax for Years

2. Senior officers are held responsible for sales tax liabilities.

First and foremost, sales tax is a trustee tax. This means that the corporate shield will not protect against sales tax violations. Trustees vary from company to company. Examples include owners, CEOs, CFOs, or COOs.

Real life example:

Possible jail time for a South Carolina mattress store businessman because of $28,000 in unremitted sales tax

3. My company is based outside of the United States – how can a state punish me for not collecting sales tax?

You can kiss that vacation to the U.S. goodbye! While it is much more difficult for international companies to get penalized while abroad, your plans for expansion in the United States or even a simple visit for pleasure can be deterred.

Understanding US Sales Tax as an Online Seller

How to comply with sales tax as an international company

The Moral of the Story

A lot can happen if you don’t collect or remit sales tax. Understand your tax responsibilities by conducting regular Sales Tax Nexus Studies, weigh the consequences of non-compliance, and plan your next steps internally or with a trusted tax adviser.

If you’re unsure about your company’s obligations, contact us today for a free consultation! Or try our Economic Nexus Calculator to get a high-level look at your nexus exposure by state.

Sales Tax Rules and SaaS in Maryland

Maryland Declares SaaS Taxable

The hottest topic in the State & Local Tax community has been the emergence of tax laws surrounding the taxability of “Software as a Service” – or more commonly known as “SaaS.” In March 2021, Maryland’s Office of the Comptroller issued guidance on digital products and streaming tax, declaring that SaaS is taxable. This comes after the enactment of House Bill 932 that extends sales and use tax to digital products, codes, and streaming services.

Defining SaaS

Unlike digitally downloadable or tangible discs, SaaS products are accessed by users via the cloud. Specifically, this new guidance updates the definition of a Maryland retail sale to include the sale of “tangible personal property, a taxable service, a digital code; or a digital product.” Subsequently, sales and use tax applies to a sale of a digital code or product obtained or delivered electronically by an end-user, including subscriptions, access, receipt, and streaming of a digital code or product. Examples include e-newspapers, e-books, music and video streaming services, online video games, and more. Like many other states, Maryland will not apply sales and use tax to the sale of custom computer software, regardless of how the software is transferred or accessed by the end-user.

When to Collect

Businesses with these types of retail sales should first analyze when they established physical or economic nexus in the state. Remote sellers should collect and remit sales and use tax on all taxable sales of digital codes or digital products used in Maryland. This includes a person who sells digital codes or digital products for delivery in Maryland if they meet the state’s economic nexus threshold requirements (exceed $100K in annual sales, or have 200 or more transactions into the state).