What sales tax trends should businesses keep an eye out for in 2022? As a business owner, you need to be aware of issues that might impact your bottom line, and sales tax is one that is often in flux. Here’s SSF’s rundown of sales tax trends in 2022 to watch out for.
South Dakota V. Wayfair
Wayfair is always a topic of conversation when it comes to sales tax these days. Don’t let yourself be caught off guard as a remote seller. As of January 1, 2023 all 45 states (and Puerto Rico) that impose a sales tax have enacted economic nexus rules. Additionally, while Alaska does not have a tax at the state level, there is a threshold for the local municipalities that impose a sales tax. The threshold is typically $100k or 200 individual transactions. This impacts many businesses, as previously only physical presence created nexus, but with the prevalence of e-commerce a new method to assert nexus has been created.
Some states require more transactions, dollars and transactions, or some other method. For instance, in New York the threshold is $500k. In Connecticut, it is $100k AND 200 transactions. But, as a general rule, if you are meeting that $100k threshold in another state, it is likely you will have a sales tax burden if you are selling taxable goods and services.
Wholesale Businesses and Sales Tax
If the majority of your business in a particular state is wholesale, you might still be impacted. For the most part, states base the transaction threshold on gross sales. So, even if you are below the threshold in retail sales, if you meet the threshold when including wholesale accounts, you will likely have a sales tax burden.
Simplified Sales Tax Programs
There are some programs for specific states to simplify the sales tax process. These states have many cities with their own sales tax rates which complicates things for businesses. Some of the programs include:
- Alabama Simplified Sellers Use Tax
- Colorado Sales & Use Tax System (SUTS)
- Louisiana Remote Sellers Filing Portal
Programs like Shopify don’t necessarily have all the nuances of home rule sales tax states worked into their platforms. These special programs can help business owners remit all of the sales tax collected without needing to register for multiple local sales tax remittance programs.
Remote Employee Nexus
In the past few years remote employee nexus has become a larger issue. In most states, a remote employee won’t automatically establish nexus unless they are in the sales or service functions, but as is the case with sales tax – every state is different! In Washington for example, even if your remote employees don’t have anything to do with the sales or service process in the state, those employees create nexus. Contract workers can create nexus as well, this is called agency nexus. If you have independent salespeople, or service people, they will likely create nexus even if they aren’t your employees.
California Manufacturing and R&D Partial Exemption
This partial exemption on purchases of machinery and equipment related to the manufacturing process or research and development has been extended through 2030. It equates to about 4% off of your sales and use tax. To qualify, buyers must be in certain types of businesses including manufacturing (NAICS 31, 32, and 33) and R&D in the physical, engineering, life sciences, and biotechnology fields. Property must also be qualified tangible personal property and used in a qualified manner.
Washington imposes a gross receipts tax on those doing business in the state called the Business and Occupation tax (B&O). Additionally, companies doing business in Washington need to be aware of local B&O tax as nearly 50 cities in the state impose their own B&O tax. Those providing services will need to use sales and payroll data to determine apportionment for local liability. Cities in Washington are becoming more aggressive in collecting these taxes and uncovering noncompliance.
Recovering Missed Exemptions
Sales and use tax can be recovered. In California, the statute of limitations is 3 years from the time the tax was due. To capture a sales tax refund, you would need to reach out to your supplier, who would then request a refund from the state and provide you with a refund. To capture a use tax refund, you should place a request directly with the state.
What do I do if I Might Have Nexus?
If you are unaware if you have nexus, a nexus study can help uncover that. A nexus study will determine where you have nexus, where you might have nexus soon, and any problem areas to watch out for. These studies should be done periodically if your business is just getting off the ground or you have had a recent explosion in sales. Get in touch with our State and Local Tax team to get started.