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4 Tactics to Help Your E-Commerce Clients with Sales Tax Compliance

2020 was a monumental year for e-Commerce businesses 

The COVID-19 pandemic had detrimental impacts on several companies, prompting many to create or pivot to remote selling. This trend, combined with the increase of online shopping from consumers sheltering-in-place, forged the way for e-Commerce sales to achieve a $174B revenue boost in 2020.

As a result, several companies experienced explosive growth in a short period, leading to new – and sometimes neglected – sales tax requirements.

Check out the full article at the CPA Practice Advisor

 

Chicago Personal Property Lease Transaction Tax: Understanding SaaS in The City of Chicago

What is SaaS?

Getting a grasp on Software as a Service (SaaS) and sales tax is, at times, complicated.  This is true, not only for taxpayers but for some states and localities as well.

SaaS has become a general term for a model where software is hosted or “sits on” a server of a provider and accessed by users in different locations.  This is typically done through a subscription to use the software.  It can take on several other forms, such as Infrastructure as a Service (IaaS) or Platform as a Service (PaaS).

Sales Tax on SaaS in Illinois

As with most software products, states as well as localities, have different interpretations of what SaaS is exactly. Is it a service or is it tangible software? For more information on which states charge sales tax on SaaS, check out our Sales Tax on SaaS Chart.

One state that has very complicated SaaS Laws is Illinois.  Businesses must not only be aware of how their SaaS is being utilized and delivered but also where the users are located.  This information will help determine which tax is applicable.

If the users accessing the SaaS are in the City of Chicago, there’s a tax that many are not aware of exists, the Chicago Personal Property Lease Transaction Tax.

In most cases, Illinois doesn’t tax SaaS or other Cloud products; they consider SaaS a service and not subject to the state sales tax.  However, Chicago has a different approach to these services and products and considers SaaS a lease of personal property.  The tax imposed by the City is not a sales tax, which is why many companies overlook it.

The upside, a taxpayer should only be required to pay one tax, either the State or the City.  Unlike the treatment of SaaS, if the software is electronically delivered and/or housed on the user’s computer, it can be subject tax by the State (unless an exemption is available) but not the City (Chicago does not consider this a lease).

What is the City of Chicago Personal Property Lease Transaction Tax?

Chapter 3-32 of the Municipal Code of Chicago or the Lease Tax, as it was originally called, went into effect in 1974.  It was retitled in 1992 as we know it today, the Chicago Personal Property Lease Transaction Tax.  From the inception of this tax, Chicago has always applied it to leased time for the use of computers.  But as we know, advancements in technology have made it difficult to define exactly what the use of a computer means.  To provide some clarity, Chicago added a new term “nonpossessory computer lease” in 1994, which covers any payments for “access to and use of a provider’s computer and software to input, modify or retrieve data or information.”

The tax is imposed on the customer (the lessee), but the provider (the lessor) is required to collect it if they have sufficient contact with the City (Nexus).  If not, the customer is responsible to self-assess the tax.

How Does the Chicago Lease Tax Apply to SaaS or Cloud-Based Products?

The tax rate for most lease transactions is 9%; however, as of January 1, 2016, the City imposed a lower rate of 5.25% for a nonpossessory computer lease (SaaS or Cloud-Based Products).  This was increased on January 1, 2020, to 7.25%. The lower rate applies when a customer uses the provider’s computer and software to input, modify, or retrieve information supplied by the customer.  If the lease allows the customer to input, modify, or retrieve data supplied by the provider, these are considered Database products and taxed at the 9% rate. This reduced rate and definition clarification was done with the issuance of Ruling #12 of Chapter 3-32.

One key aspect to the tax, and why user location is so important, it is only imposed on the users physically located in Chicago.   Ruling #12 allows a taxpayer to apportion its users located outside of the City so tax will not apply to these users.  This can be done by utilizing the: City of Chicago Department of Finance Affidavit for Apportionment of Use of Nonpossessory Computer Leases.

In addition, the City provides several exemptions. Some examples are, de minimis use of the SaaS, if you are a small new business and re-leases.

When it comes to software in Illinois, you must be sure to be aware of how Illinois and the City of Chicago define the product or service being sold.  The City and State both treat them differently and have tax implications associated.

Understanding Marketplace Facilitator Laws in a Post Wayfair Ruling World

Post Wayfair Ruling Landscape

Are you scratching your head over the new marketplace facilitator laws? If so, we don’t blame you! Due to the post Wayfair rulings, it can be challenging for marketplace sellers to understand the changes and stay compliant with each taxing jurisdiction.

Marketplace Facilitator Laws

What is a Marketplace Facilitator and Seller?

A marketplace facilitator is an online platform that allows consumers to seamlessly purchase goods directly from the facilitator themselves or third-party companies that sell on the platform. In general, the marketplace facilitator is responsible for every aspect of the sale. On certain platforms, the marketplace facilitator may fulfill the order for the third-party, i.e., Amazon FBA. Popular marketplace facilitators include Amazon, Etsy, eBay, and Wayfair.

Marketplace facilitator laws are state regulations on how facilitators will handle collecting and remitting sales tax on behalf of third-party sellers.

More than 40 states now have marketplace facilitator laws to accommodate the changes of this new rule. As expected, each state has enacted different laws when it comes to remote and in-state marketplace selling. In general, marketplace facilitators are responsible for collecting sales tax on behalf of the marketplace seller when their sales exceed $100,000 or 200 transactions. A marketplace seller is a company that sells on the marketplace facilitators platform. A marketplace seller may or may not have sales tax collection responsibilities. For Amazon purchases, a customer may purchase an item directly from Amazon (marketplace facilitator) or a third-party (marketplace seller). The customer is made aware of this during the purchase process.

Types of Marketplace Sellers

1. Remote Marketplace Seller

A remote marketplace seller is an out-of-state state seller who sells exclusively through a marketplace facilitator, i.e., Amazon, Etsy, eBay, etc.

Since collecting sales tax is now the responsibility of the marketplace facilitator, remote marketplace sellers must be mindful of the different requirements mandated by each state to determine whether to register. Here are some examples of various rules:

Arizona and Maryland do not require the seller to register if they sell only using a marketplace.
Nebraska and Connecticut require the seller to register, report all sales, and take a deduction for the marketplace collection of sales.
North Carolina and New York may require the seller to register if they cross the economic threshold as defined by each state.

Already registered?

One concern remote marketplace sellers may have is what to do if they are already registered. In this instance, the remote marketplace seller should contact the state to confirm which course of action is necessary. For example, Virginia allows sellers to login to their online services account and update as “no longer liable for sales tax.” Doing so will close the account.

2. Remote Multichannel Seller

The seller sells through a marketplace and other channels (e.g., the seller’s website, direct sales, store or phone orders), and has no physical presence in the state.

Most states will require the seller to register and collect sales or use tax if:

Some states require sellers to report all sales on the return but may take a deduction for sales collected by a marketplace facilitator.

Our recommendation is to review how each marketplace collects sales tax on behalf of sellers and in which states they are compliant.

3. In-State Multichannel/Marketplace Seller

The seller has a physical presence in the state.

Multichannel Seller

If the seller has a physical presence in the state, and the seller is using multiple channels to sell their products (including a marketplace facilitator), then the seller is required to register and remit the tax, which is not collected by the marketplace facilitator.

Marketplace Seller

If the seller has a physical presence in the state and only uses a marketplace facilitator to sell their products, then the seller is most likely required to register in the state. However, some states offer various ways to file, such as taking the sales as a deduction under “Sales Tax Collected by a Marketplace Provider” or having the filing frequency changed to annual to help assist with the administration of filing. A few states (e.g., Ohio) offer a seller’s use tax account for registering and reporting the marketplace sales separately from the retail sales.

In every case, we recommend contacting a trusted tax advisor at Source Advisors or the taxing jurisdiction before a decision is made regarding your sales and use tax compliance needs.

Top 3 Sales Tax Challenges for Real Estate Companies

The 3 Challenges

When you think about real estate tax issues, in general, sales tax concerns do not rise to the top. However, many states and cities have a complex set of sales tax rules that apply to the real estate industry and companies that are not complying could be drastically underpaying or overpaying sales tax.

Keeping up with the ever-increasing pace of changes of the more than 10,000 sales tax jurisdictions is an arduous task for even the most diligent tax professional. Three areas of concern for tax professionals in the real estate industry are: 

  1. The taxability of rent and Common Area Charges (“CAM”)
  2. The taxability of ancillary services the property offers its tenants
  3. How the real estate owner is handling its own purchases of renovation, repairs, and improvements.
real estate sales tax

Sales Tax on Rent & CAM

In most jurisdictions, rent is not subject to sales tax. However, there are exceptions, especially when it comes to the rental of commercial space. Florida imposes sales & use tax on commercial rents at the same sales rate to which other taxable goods and services are subject. Tax is due on the total amount of rent paid unless there is a specific exemption (i.e. non-profit organization, government agency). This includes payments such as mortgage, ad valorem taxes, or insurance which the tenant makes on behalf of the landlord.

New York City does not impose sales tax but does impose commercial rent tax. The rent is charged to any business that occupies or uses a property for commercial activity in Manhattan, south of 96th Street, for any trade, business, profession, or commercial activity. The tax rate is 6% of the base rent, and the rent paid must be at least $250,000 annually. All taxpayers are granted a 35% base rent reduction, which reduces the effective tax rate to 3.9%. The base rent includes real estate taxes, water charges, and insurance charges but does not include amounts spent by the landlord to improve, repair, or maintain the property.

The term CAM generally represents the charges passed through by the landlord to commercial tenants on a triple-net lease. These charges are generally billed based on the square footage of space leased by each tenant. Building costs that are passed through could include common area utilities, waste removal, porter services, maintenance, and repairs. In general, most states consider CAM charges incidental to the lease and not subject to sales tax, or considered additional rent. Three states have issued specific guidance on CAM charges while most have not directly addressed the charges.

Please note, the purchase of these services by the landlord may be subject to sales tax.

Sales Tax on Ancillary Services

Even in jurisdictions where rents are not taxable, landlords provide other ancillary services that can be subject to sales tax. In New York State, the sale of electricity, rental of bicycle spaces, rentable storage space, some on-site gyms, and some amenity fees can be subject to sales tax.

The taxability laws of electricity vary in New York State for sales & use tax purposes; in addition to the rate varying by jurisdiction, the rate also varies based on whether the electricity is being purchased by a residential tenant or a commercial tenant. A landlord’s sale of electricity to its residential tenants are exempt from the state portion of the tax, as well as the tax imposed within the Metropolitan Commuter Transportation District. However, such sales are subject to the local portion of the sales tax imposed within New York City. The sale of electricity to commercial owners is taxable in all jurisdictions.

The taxability of the gym membership will vary on several facts, including whether or not the facility is open to the general public and whether the material purpose of the club is to organize or promote sports or athletic activities. Membership dues for admission to athletic clubs are taxable in New York State at the full sales tax rate.

Many building owners operate or lease space to operators of parking lots. Certain states and many cities charge sales tax parking services. Building owners should be aware that they may be liable to collect and remit sales tax on these charges. In many cases, the state may not apply a sales tax, but the city would. For example, although California does not have a state sales tax on parking, most of the larger cities such as San Francisco and Los Angeles have a tax.

Sales Tax on Capital Improvements vs Repairs vs Installations

The taxability of services performed on real property will vary depending on whether the service is deemed to be a repair, installation, or a capital improvement. The former two are subject to sales tax in most jurisdictions, and capital improvements are exempt from sales tax if they meet that specific jurisdiction’s criteria of capital improvement. In order to qualify as a capital improvement, most taxing jurisdiction have strict criteria that the service must meet.

For example, in New Jersey, capital improvements are installations of tangible personal property that increases the capital value or useful life of the real property and tangible personal property installed must be permanently attached to the real property. The New York State tax law is similar but has one additional condition that the service must meet. The service performed must result in the tangible personal property becoming part of the real property or permanently affixed to the real property, so that removal would cause material damage to the property or article itself. States such as Connecticut and Texas apply a narrow standard and only items that are considered new construction or expansion of a footprint qualifies as a capital improvement.

Here are taxability determinations for some sample services performed in New York State:

Capital Improvement - Exempt

Repair - Taxable

Replacement of a window

Replacement of a broken glass pane

Original installation of switches

Replacement of switches

Replacement or complete installation of vanities

Replacement of showerheads or faucets

Although not in the business of providing goods and services that are typically assumed to be subject to sale tax, real estate companies should be aware of what their exposure areas are.  As states are increasing the frequency of audits to boost their revenue, real estate companies should at the very least conduct an internal review of their revenue sources and expenditures to determine the extent of their liabilities.