Quill Overturned by Supreme Court – Physical Presence is Not Necessary to Create Substantial Nexus
In a 5-4 decision, the Supreme Court has ruled in favor of South Dakota in South Dakota v. Wayfair allowing that states can require internet/retail companies to collect and remit sales tax in states where they have no physical presence. The ruling overturns the precedent set in 1992 (Quill v. North Dakota) deeming it outdated and incorrect while acknowledging that “the internet’s prevalence and power have changed the dynamics of the national economy.” The four dissenting justices agreed that the Quill decision was a mistake, but dissented saying that they would have left it up to congress to change the law.
South Dakota’s law requires sellers to collect sales tax if they gross more than $100,000 in state sales or have 200 or more sales transactions with customers in the state. The ruling, while in favor of South Dakota’s rules, does not address any specific lower thresholds for constitutionality of an economic nexus law. Congress or future court cases will determine a lower limit, if one exists.
In addition to South Dakota, 16 other states (including Indiana, Illinois, and Kentucky) have also passed similar laws that are either currently in effect or will be effective before the end of 2018. In total, 31 states tax online sales or have a sale and use tax reporting requirement of some kind.
- States who were losing out on billions of dollars of revenue each year.
- Brick-and-mortar (physical) retailers affected by internet competition.
- Small businesses and internet entrepreneurs faced with complex rules and increased compliance costs.
- Consumers who will likely pay more for online purchases.
With over 10,000 taxing jurisdictions, it is imperative to review the implications for your business and stay on top of other state responses to this decision. Somerset is ready to assist in the following:
- Assessment and application of state and local sales/use tax laws in jurisdictions where selling goods and services – including application of various state revenue and transactional thresholds to your business.
- Assessment and assistance with sales and use tax reporting compliance.
- Identifying technology/data needed to properly source sales.
Please watch for updates and contact your Somerset Advisor with any questions or concerns regarding how this ruling will affect your business.
Sales Tax Treatment of Digital Goods and Services: Changes and Planning Points
As states continue to look for ways to increase revenues, more and more states are looking at digital goods and services for possible sales tax assessments.
In March, Indiana Governor Holcomb signed Senate Bill 257 into law exempting transactions made after June 30, 2018, from sales tax where the end user purchases, rents, leases or licenses the right to remotely access prewritten computer software over the internet, over private or public networks, or through wireless media- more commonly referred to as software as a service (SaaS). This does not change the sales tax treatment of prewritten software transferred in a tangible medium or delivered by “load and leave.” Indiana is only one of four states to exempt SaaS from sales tax.
In contrast, Iowa passed a bill in May that taxes the sale of specified digital products and the sale of codes that later provide access to specified digital products. The change is effective July 1, 2018, and applies whether the purchaser obtains permanent use or less than permanent use and whether obtained as part of a subscription or not.
As with other tax law, sales tax treatment of digital products by states is not uniform and continues to change. For example, one state may only tax certain digital products while another will tax virtually every type of digital product. For some states, taxability might depend on the rights of use or conditions for continued payment associated with the product.
Since each state treats the taxability of digital goods and services differently, it can be difficult to navigate the rules. A few ways to minimize your sales tax liability include:
- Unbundled billing: A bundled transaction is defined as a sale of two or more products where: (1) the products are otherwise distinct and identifiable, and (2) the products are sold as one with no itemized price. The entirety of a bundled transaction is subject to taxation in some jurisdictions so sellers that can unbundle their invoices might reduce the risk of taxation under such laws.
- Precise Product Descriptions: The language used in a contract or invoice to describe a product, product descriptions on a company website and language in the terms and conditions can all play a significant role in its ultimate tax treatment. Vague language should be avoided. A state can focus on the ambiguity of vague language when looking for taxable transactions. Sellers should determine in advance how they want their products to be categorized and tailor their product descriptions to that categorization.
- Exemption Certificates: Many states provide exemptions under certain conditions. Some of these include sales to tax-exempt customers, sales of product to be resold, rebroadcast, or relicensed, and sales to be used in Research & Development. Knowing if these exemptions apply can significantly reduce a sales tax liability.
With the evolution of technology in conjunction with states having such radically different rules regarding the taxability of digital products and services, businesses should perform thorough research about the tax implications of their sales practices. Any seller targeting customers in another state should conduct a state-by-state analysis of its likely tax liability.
For more information or to arrange an analysis of your sales tax compliance, please consult your Somerset Advisor.
Do You Need to Register Your Indiana Business?
You will need to register your business if you:
- Will be selling products or tangible items
- Have employees
- Sell food and beverages
- Rent accommodations for less than 30 days
- Rent motor vehicles
- Sell tires
- Sell fireworks
- Sell prepaid wireless cards
Online resources to register a business can be found at https://INBiz.in.gov
Do You Need to Close Your Indiana Business?
If so, you’ll need to close your business tax accounts with the Indiana Department of Revenue completing a Business Tax Closure Request (BC-100) for each location to be closed.
To verify the business closure, you must include either a notarized BC-100 or one or more of the following:
- Minutes of the final board of directors meeting
- Records of bank accounts closed
- Articles of dissolution
- Notarized statement of dissolution from an officer of the business
- Final utility bills
- Proof of dissolution filed with the Internal Revenue Service
- Books and records
- Other pertinent information
Additional assistance is available from the DOR at 317-233-4015, or your Somerset Advisor can assist you with registering or closing your business.
Sales Tax on Lodging and Room Rentals Delayed
Recent Indiana legislation extended the effective date from July 1, 2018, to July 1, 2019, for the provisions concerning the sales taxation of the renting of rooms, lodgings and accommodations located in an Indiana house, condominium or apartment for which a facilitator accepts payment.
Kentucky Makes Substantial Changes to Tax Code
The Kentucky General Assembly adopted H.B. 366 and H.B. 487 making substantial changes to the state’s tax code. The changes are estimated to increase tax revenue by $396 million for the state’s 2019-2020 biennium. The bill makes numerous changes to income tax and sales and use tax. It also attempts to simplify compliance and administration of Kentucky state taxes.
Sales tax changes include the taxation of mail order and internet sales (effective July 1, 2018) for remote retailers who either make 200 or more sales or sell goods in excess of $100,000. This law is similar to Indiana’s and a growing number of other states that are looking to increase their revenue base out-of-state. Kentucky is also expanding their sales tax base to include taxes on labor/installation of property and services, taxes on ten classifications of services and the taxation of extended warranty services.
For income taxes, Kentucky now has a flat 5% tax rate for both individual and corporate taxes instead of the previous graduated rates. The new tax laws also eliminates most individual tax deductions, eliminates the Kentucky Domestic Production Deduction and keeps Kentucky decoupled from federal 179 and bonus depreciation deductions. Other significant changes are the move to a single factor apportionment formula and a move to market based sourcing of sales/receipts to the state.
If you conduct business in Kentucky, please contact your Somerset Advisor to discuss how these change may affect your business as well as possible tax minimization strategies.
States Continue to Lower Thresholds for Sales Tax Collection and Remittance
Three additional nearby states have now passed laws based on “economic nexus” affecting remote retail sellers creating costly and administrative headaches. Economic nexus is a legal term which refers to a requirement that entities conducting business in a state must collect and pay tax on income derived in that state once legislated thresholds are reached – even though the business may lack a physical presence. Kentucky’s new economic nexus law requires the out-of-state seller to start collecting sales tax if the seller has 200 or more Kentucky transactions in the previous or current calendar year or Kentucky gross receipts exceeds $100,000 for the previous or current calendar year. Their new law is effective for transactions occurring on or after July 1, 2018.
Iowa’s new economic nexus law, effective January 1, 2019, requires collection of sales and use tax if the prior tax year’s sales in Iowa were $100,000 or more or the out-of-state seller had 200 or more Iowa transactions.
Illinois’s new economic nexus law is effective for transactions occurring on or after October 1, 2018. Out-of-state sellers will need to start collecting sales and use tax if the seller has cumulative Illinois gross receipts of $100,000 or more per year or has 200 or more transactions per year.
States that have previously passed laws asserting economic nexus are Indiana, Washington, North Dakota, Wyoming, South Dakota, Minnesota, Tennessee, Mississippi, Alabama, Pennsylvania, Connecticut, Rhode Island, Vermont, and Maine.