The Usage and Management of Tax Exemption Certificates

Franklin Chow on February 16, 2023

What is a Tax Exemption Certificate?

Tax exemption certificates are documents issued by taxing authorities, usually the states, that grant businesses exemption from certain taxes. These documents are issued as a certificate and must be presented to the taxing authority to claim the exemption. Tax exemption certificates are typically issued to businesses registered as tax-exempt entities. However, in some cases, for-profit businesses qualify to use tax exemption certificates based on what is being purchased and its intended use.

Types of Tax Exemption Certificates

There are several types of Tax Exemption certificates including but not limited to:

How Are Tax Exemption Certificates Used?

Tax exemption certificates are used to purchase goods or services from vendors without paying tax. Resale certificates allow resellers to avoid paying taxes on their sale since the purchaser will pay the taxes when the goods or services are resold. Exempt use certificates are typically used when the purchaser intends to use the purchased items in a way that is exempt from tax. For example, a manufacturing company may provide an exempt use certificate when buying materials incorporated into its products. Tax exemption certificates vary by state and typically must be completed and filed with the seller before the purchase is made to be valid.

The Issues

The difficulty with tax exemption certificates is with the storage and maintenance of the certificates. Each taxing authority maintains its rules and regulations governing the certificates they issue. These rules can include various conditions, such as:

Tax exemption certificates must be stored securely to prevent fraud and data theft.
They need to be regularly updated or replaced due to changes in laws or regulations.
The business’ storage system may not be able to accommodate large volumes of certificates.
The storage system must be regularly audited to confirm the validity of the certificates.
Tax exemption certificates may have expiration dates that must be monitored.

Source Advisors is Here to Help!

At Source Advisors, we understand our businesses’ needs, especially regarding the necessity, storage, and management of tax exemption certificates. We offer a comprehensive application, TaxCertHub, which is a valuable tool to help businesses acquire, maintain, and address all their concerns regarding tax exemption certificates. With the use of TaxCertHub, businesses can be sure that their tax exemption certificates are in good hands and are being managed effectively, allowing them to focus on other essential aspects of their business. To find out more about TaxCertHub and other products and services we offer, contact a Source Advisors tax specialist today.

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

Franklin Chow on February 10, 2023

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:

Both sales and use taxes and VAT are indirect taxes, meaning that they are levied on the sale of goods and services rather than on the income of the seller or buyer.
Both taxes aim to tax the value added at each stage of the production and distribution chain. This means that only the value added by the seller at each stage is taxed, and the seller can recover the tax paid on inputs by charging it to the buyer.
Both taxes are typically levied at a percentage of the sale price of goods and services.

Differences:

Coverage: VAT is used in most countries around the world and covers a wide range of goods and services. In contrast, sales and use taxes in the United States are imposed at the state and local level, and the coverage of goods and services subject to tax can vary significantly from jurisdiction to jurisdiction.
Administration: VAT is typically administered by the national government, while sales and use taxes in the United States are administered by each state and local jurisdiction. This can result in significant variations in the rules and procedures for complying with the tax and can create additional compliance costs for businesses operating in multiple jurisdictions.
Registration: In most countries with VAT, businesses must register for VAT and file regular VAT returns, while in the United States, businesses may be required to register for sales and use taxes in each jurisdiction where they have a taxable presence.
Rates: VAT rates in most countries tend to be uniform across the country and are set by the national government, while sales and use tax rates in the United States can vary significantly from jurisdiction to jurisdiction and can change frequently.

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?

Franklin Chow on February 3, 2023

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.

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.

Who is Responsible?

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

Franklin Chow on January 31, 2023

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.

Jurisdictions of Focus

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

Franklin Chow on January 27, 2023

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.

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.

What Is Taxable?

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

Franklin Chow on January 24, 2023

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?

Franklin Chow on January 20, 2023

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

Franklin Chow on January 18, 2023

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

Franklin Chow on January 10, 2023

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.

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.

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

Franklin Chow on March 23, 2022

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.

Our Latest Insights

What is a Tax Exemption Certificate?

Types of Tax Exemption Certificates

How Are Tax Exemption Certificates Used?

The Issues

Source Advisors is Here to Help!

Sales and Use Taxes vs Value Added Tax

Similarities:

Differences:

Who is Responsible?

Who is Responsible?

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

Need Help?

The Changing Landscape of Sales Tax in the Age of SaaS

Industries of Focus

Jurisdictions of Focus

Jurisdictions of Focus

We’re Here to Help

The New York State Telecommunications and Utility Service Tax

What Is Taxable?

What Is Taxable?

Who Is Responsible?

Other Taxes/Fees May Apply

Need Help?

Sales Tax Registration for Businesses

Nexus threshold for Business Registration

Physical Nexus

Economic Nexus

Need Help?

What is New York City’s Commercial Rent Tax?

Commercial Rent Tax Complexities

Need Help?

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

When should a company apply for a VDA?

How long does it take to process a VDA?

Need Help?

Requirements for Claiming a Sales Tax Refund

How to File a Sales Tax Refund Claim

Timing of Sales Tax Refund Claims

We’re Here to Help

The Implications of not Complying with State Sales Tax Rules

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

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

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

The Moral of the Story