Navigating the new rules on state-by-state sales tax collection

by Patrick T.R. Charvat

The Supreme Court’s 2018 decision on sales tax collection, sparked by litigation against the online furniture giant Wayfair, has been the talk of accountants’ cocktail parties across the country.

Now that the dust has settled and states have enacted “economic nexus” laws and issued guidance, you may find your business having to collect sales tax and file sales tax returns in more states than ever before.

Whether you have economic nexus and have to collect sales tax depends on whether you have an economic presence. Each state can now define the dollar amount of sales and/or number of transactions that make a business subject to state sales tax laws.

Boyer and Ritter can help you determine whether your business is affected and help you comply. Keep in mind that state requirements differ and failing to file or underpaying can lead to costly penalties.

The first steps to compliance

If your business qualifies as a remote seller, determining what goods and services are subject to sales tax in a particular state is the first step.

Pennsylvania, for example, generally exempts clothing from sales tax, except for formal wear, certain fur products, and sportswear. New York state, however, applies the sales tax exemption to all three of these clothing types in some respect.

Origin vs. destination

Next, determine whether a particular state’s sales tax rate is origin or destination based.

Origin-based sales tax means you must charge the rate from your business’ physical location; destination-based means you must charge the rate where your product is shipped. Most states are destination-based, meaning you need to find out each state’s applicable rate.

It is worth stressing that despite the Wayfair decision, you still only must collect sales tax in states where you have nexus.

State tax, plus local sales tax

A further wrinkle involves local sales tax, collected separately from the state sales tax. In Pennsylvania, Philadelphia County levies an additional 2 percent tax, and Allegheny County, which includes Pittsburgh, adds 1 percent.

New York State contains too many local sales tax additions to be listed here, so suffice it to say, you will need to remember local sales tax considerations when calculating sales tax on a customer.

Know your filing deadlines

Another critical point involves how often you have to file sales tax returns. When submitting your first sales tax return in a new state, check the initial filing frequency required.

Even if you end up with the same filing frequency between states, it is common to end up with different due dates. For 2020, Pennsylvania quarters run on a calendar year basis, with returns due on the 20th of the month following quarter-end. New York’s quarters do not follow the calendar year, however. The first quarter runs from the beginning of December through the end of February, and so on.

Smoothing the sales tax seas

The collection of sales tax and associated record-keeping adds extra effort to the already daunting task of starting a new retail business, but a few tips can ease the process.

About half of the states that require collection of sales tax also provide a vendor discount for timely filing as a reward. Pennsylvania allows collectors to receive up to $300 annually in relief, which is a small bonus that could offset some costs.

The other relief comes in the form of resale certificates, a document filled out by a purchaser that indicates intent to resell purchased goods in the course of their trade or business. In this case, you would not need to collect sales tax on this transaction. You can also use resale certificates for materials incorporated into products you improve and, subsequently, resell. Most states require a sales tax identification number on their resale certificates, meaning registering in each applicable state is vital.

With the help of a sales tax professional, you can adjust your sails to continue to serve your customer seamlessly, while navigating the seas of a post-Wayfair world.

Patrick T.R. Charvat is a CPA and tax senior associate with Boyer & Ritter who has experience working with multistate and local business entities and individuals. Contact Patrick at 717-761-7210 or pcharvat@cpabr.com