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Postings here will focus mainly on Advanced Accounting software updates, tips, and related topics. They will also include general comments relating to troubleshooting PC/Windows/network problems and may also include reference to our other software products and projects including any of our various utilities, or to the TAS Premier programming language. We considered setting up separate blogs for different topics so that users/others could subscribe to topics mostly aligned with their interests, but decided that it would be better to keep things simple since some topics cross over into others. We would nonetheless welcome your feedback/input in this regard. Our web site URL is www.addsuminc.com. Call us at 800-648-6258 or 801-277-9240. We also maintain www.advancedaccounting.us so that older Business Tools users in particular have a greater chance to find us.

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Friday, November 30, 2018

Colorado and South Dakota sales tax changes likely mean higher costs for all

The Colorado Department of Revenue earlier this month announced changes that would be going into effect December 1, 2018 (but has now provided a grace period through March 31, 2019 for retailers to implement those changes).   South Dakota has implemented new changes as of November 1, 2018 as a result of a recent Supreme Court decision (see more below) relating to sales tax collection by remote sellers.

South Dakota does not have a state income tax, unlike Colorado, and so relies quite heavily on sales tax revenue.   South Dakota, unlike Colorado, has been one of the 24 member streamlined sales tax states.  There are however some 45 states that have state sales taxes.  The current exceptions are Alaska (although some cities/municipalities have their own separate sales tax)Delaware, Montana, New Hampshire, and Oregon.

In the discussion that follows, "in state" is meant to refer to a business that has a physical presence or nexus in that state; "out of state" is meant to indicate a business that conducts business in the state but that does not have a physical presence.

It should be noted that goods shipped regardless of origin to a Colorado or South Dakota reseller remain exempt from sales tax, i.e. nothing has changed in that regard.

Some brief background

In Quill Corp. vs. North Dakota the Supreme Court in 1992 affirmed the longstanding rule that a state could not collect sales taxes from an out of state company that did not have a physical presence in that state.  And that approach has generally continued to be the rule ever since, although some states have made other agreements for sales tax handling  under voluntary agreements.  However just this year in a closely decided Supreme Court case involving this time South Dakota (see links with respect to the Supreme Court decision as reported by various sources at the end of this blog), the position of the court was flipped, and the floodgate has therefore opened for states to attempt to collect sales tax on "retail" sales made by out of state companies without a physical presence (nexus) in their state.

The potential nightmare for businesses

South Dakota had destination based sales tax rules for in-state retailers but Colorado has not.  The recent Supreme Court case emboldened Colorado to implement changes for out of state retailers at the same time as its making changes for in-state retailers.  So Colorado is also now switching to a point of destination concept for sales tax collection like many other states have, and also implementing rules for out of state retailers at the same time. Over 30 states have now changed to destination based sales taxes.

Colorado has historically been known to have notoriously complicated sales tax rules and regulations. The problem for Colorado businesses who either deliver or ship products to a Colorado address however is the sheer number of taxable jurisdictions (almost 700 of them compared to just over 100 for South Dakota).  The tax cannot be calculated based on the county of destination since there are many more tax jurisdictions than counties (even in the much simpler case of South Dakota, it has 40 more taxable districts than their 66 counties).  Zip codes are also largely useless in basing sales tax rates as well.

Sales tax compliance is already heavily burdening business of all sizes and has a significant cost.  Colorado already has one of the more complicated sales tax reporting forms of any state. The new requirement forces businesses to establish sales tax "locations" against which taxable sales and related information will now have to be reported.  

The important exception

Colorado has adopted the same rule as South Dakota for businesses without a physical presence.  Out of state or "remote sellers" that have less than  $100,000 in gross sales in the state AND fewer than 200  transactions, are excused from the requirement.  All others however will now have to follow essentially the same procedure as in-state retailers and procure and pay a small fee for a sales tax license in either state (plus also a small advance deposit in Colorado) and will have to compute sales tax based on the delivery address, charge it to the customer, and account for and remit/report the tax.  

Sellers of lower priced retail goods involving a higher volume of shipments could easily have a problem with the 200 transaction limit in either state.

What about shipping?

Different rules apply to shipping and delivery costs in these two states.  Sales tax applies to freight as a general rule in South Dakota for both in state and out of state businesses.  In Colorado it is a bit trickier.  If the delivery charge is separately itemized, it is exempt from sales tax if the purchaser (i.e. retail customer) could pick up the item at a location within the state (regardless of how inconvenient that might be).   If they can't, then freight/delivery/handling charges are subject to sales tax in Colorado.  This then targets "online shippers" i.e. out of state sellers.

These rules have not changed, but in light of the new rules that impact out of state businesses, they do come into play potentially in a new way.

Good news for local businesses?

Just about everyone is in favor of helping local businesses.  But the devil is in the details and the resulting overall impacts.  

The new changes may help some in-state businesses who compete against out-of-state "retailers" (i.e. companies that ship to retail customers) but the administrative and compliance burdens being placed on some of those same companies with a physical presence within Colorado and South Dakota potentially offsets those benefits. Further Colorado and South Dakota businesses shipping to states outside of Colorado will now have to deal with this same issue in reverse.  For some, the administrative hassle of shipping outside their local area may be a disincentive to do business there, leaving consumers with fewer available resources and less competition.   Some out of state sellers may have products that aren't otherwise readily available locally.

Business are already unpaid tax collectors for federal, state and local governments.  They do their best to meet the myriad requirements constantly being imposed on them and in the process have increased staff and technology costs to try to meet requirements such as those now being imposed by Colorado and South Dakota.  

Good news for consumers?

The pursuit of sales tax revenue from out of state companies leads to the perception that these business aren't paying their fair share. Yet these aren't taxes paid ultimately by business but in fact represent a tax increase on local residents.  It is the local residents of Colorado and South Dakota that are now being levied in essence a tax increase on certain interstate sales   Ingrained buying habits may not lead to any change in the near future in terms of how products are purchased.  The net result is that this is a tax increase and because of requirements being imposed on both in-state and out-state companies, product cost themselves may have to be increased to cover the additional overhead that businesses will incur.

Our preliminary conclusion

We think it may be a mistake to so quickly applaud the recent court decision as some have.  And we do not think that states should immediately start to implement draconian changes at this point with respect to out of state sellers. There could for example be congressional action as a result of the recent Supreme Court case based on the concept similar to taxation without representation, i.e. undue regulation without representation.  

Changes needed to be made, yes.   But was this in the end an efficient, better, streamlined approach?  Probably not.  Will these changes benefit local residents?  No, at least not in the short term.  Will these changes benefit businesses?  It could ultimately benefit some local businesses, however, some of the other changes and complex tax calculations and related reporting requirements will make doing business both for local and out of state "retailers" more costly and that means higher costs for consumers, and it could lead to higher prices even in the distribution/wholesale chain.

We constantly hear about tax simplification and reduction and instead we tend to experience simply the replacement of the old with a new equally convoluted system. 

At the very minimum, if a state imposes complex requirements as is now the case with Colorado, and to a lesser degree South Dakota, that state should provide completely free and simple means for businesses to determine what an applicable sales tax rate should be.  This means that the government agency itself must provide that service, or pay a third party to provide that service and make it available to anyone that does business in that state.   Business should not be forced to not only operate as unpaid tax collectors, meet filing requirements which are in many cases quite onerous, and be subjected to penalties and audits and ALSO be forced into paying for annual or monthly subscriptions to third parties in order to most efficiently and quickly lookup sales tax rates.   Free options with daily or similar limitations are also not acceptable.  

Rather than complicate already complex and in reality quite ugly sales tax collection requirements and systems in what is really a disguised tax increase, states would be better off looking at more uniform and equitable ways to raise revenues from their residents using the simplest possible approaches and in a much more transparent manner.   Sales taxes as currently implemented simply don't work fairly nor efficiently in today's world.

States should not look at themselves as separate countries which seems to be the trend.  We need much more consistent and uniform rules that apply to a country made up of states that should be much more united in their approaches to everything including taxation especially when it involves interstate and related commerce, and the fact that U.S. citizens travel and move quite frequently around the country.


Meanwhile for Advanced Accounting users

In the meantime, what are the options for Advanced Accounting software users?

Nothing changes for your customers that are resellers (unless in the case of Colorado they want non-taxable sales reported based on their six digit location code).  Resellers not normally subject to tax should continue to have their tax flag unchecked in AR-A View Customer Information.  Potential retail customers should continue to be flagged as being subject to tax.  One problematic issue is the tax authority. Ideally the tax authority should match the state's tax jurisdiction and its overall tax.  For businesses that deliver/ship to few locations (which is probably unlikely for most), then create new AR-L-A tax authorities with the appropriate total rate (don't worry about splitting that into districts) and linked to the appropriate vendor code and GL liability.  For customers with potentially many different jurisdictions and rates plus the fact that many customer will not necessarily be repeat customers an/or to efficiently handle new customer orders, a different approach may be needed.   Currently we have in progress several different tools to automatically obtain the sales tax rate based on the delivery address.  This will also have to be linked in a different or alternative way to the appropriate taxable jurisdiction.  It may also be necessary in some cases to allow the user to enter a manual tax rate (normally that is never the case) after the appropriate rate is determined manually on an interim basis.   Users are encouraged to contact us to discuss available options to streamline sales tax handling.





Some South Dakota Supreme Court references:

New York Times:

https://www.nytimes.com/2018/06/21/us/politics/supreme-court-sales-taxes-internet-merchants.html

Forbes:


https://www.forbes.com/sites/greatspeculations/2018/06/26/dissecting-supreme-courts-internet-sales-tax-decision/#2270d3e13fbe


NPR:

https://www.npr.org/2018/06/23/622795402/what-the-supreme-courts-tax-decision-means-for-south-dakota


Avalara:

https://www.avalara.com/us/en/blog/2018/supreme-court-rulesthatsouthdakotacantaxsalesbyoutofstatesellers.html

TaxJar:

https://blog.taxjar.com/sales-tax-expert-weighs-south-dakota-supreme-court-ruling/

 

Colorado Dept of Revenue Sales Tax Basics and links:


https://www.colorado.gov/pacific/tax/sales-tax-basics



South Dakota sales tax references:


Tax guide:
https://dor.sd.gov/Taxes/Business_Taxes/Publications/PDFs/STGuide.pdf

Remote seller bulletin:

https://dor.sd.gov/Taxes/Business_Taxes/Publications/PDFs/Tax%20Facts/Remote%20Seller%20Bulletin.pdf



Sales tax on shipping/delivery charges

Colorado:

https://blog.taxjar.com/shipping-taxable-in-colorado/

https://www.avalara.com/trustfile/en/guides/state/colorado/shipping-handling.html


South Dakota:

https://dor.sd.gov/taxes/business_taxes/publications/PDFs/Tax%20Facts/Delivery%20Charges.pdf