Today, an increasing number of states are taxing services for the first time. For snow and ice removal businesses that provide commercial or consumer services, especially those who operate in more than one sales tax jurisdictions, understanding service taxability is becoming increasingly critical.
CHANGING THE SALES TAX LANDSCAPE
Prior to the Supreme Court ruling, states could only tax sales by businesses with a physical presence in the state. The Wayfair case changed that long-standing rule as the court found the respondents “economic and virtual contacts” with South Dakota to be a sufficient basis for a tax collection obligation (nexus).
For economic nexus, a snow removal contractor establishes an obligation to collect and remit sales and use tax by its economic activity in a state. Economic nexus is expected to soon be in effect in 27 states. Unfortunately, determining when economic nexus has been established in a state is, once again, complicated because there is little uniformity between jurisdictions.
Sales tax on services have only become common in recent years and are currently less likely to have specific regulations. Services are generally not taxed unless the service is specifically noted as taxable by the state. For example, in South Dakota, New Mexico, Hawaii and West Virginia, all services are considered taxable unless a specific exemption exists, similar to the sales tax rules for goods.
For snow and ice management businesses that have goods or services that are exempt in a particular state, exempt sales must be properly documented. Because most states structure their sales tax laws differently, the need to document exempt sales will likely impact many more businesses offering services. Although not an easy feat, purveyors of both goods and services will need to register in each state where their operations exceed the sales threshold.
Despite many states being starved for revenue, the economic nexus laws continue to rely on the volume of sales, the number of transactions, or both within the taxing state. Approximately 20 states with economic nexus share South Dakota’s $100,000 in sales, 200 transactions threshold. Remote sellers that have less than $100,000 in sales or fewer than 200 transactions in the state usually don’t have to collect and remit sales or use tax in the state.
While it might appear relatively easy for a snow and ice management business that provides services or sales only in its home state, businesses with customers in multiple economic nexus states face substantial challenges. Most economic nexus states closely follow South Dakota’s example, but several have adopted different thresholds. For example:
- In Alabama, remote sellers must do more than $250,000 in sales in the state and engage in certain activities (e.g. solicitation) to trigger economic nexus.
- In Connecticut, the threshold is at least $250,000 in revenue and 200 or more “retail” sales into the state as well as systematic solicitation in the state.
- In Minnesota, the economic nexus threshold is 10 or more sales totaling $100,000 or 100 or more “retail” sales.
Obviously, determining when economic nexus has been established in a state is complicated by this lack of uniformity. And, once economic nexus has been established, the process for registering to do business varies from state to state.
BECOMING A SALES TAX COLLECTOR
The operators of many ¬snow removal businesses fail to appreciate the middleman duty and legal obligations they face as a trustee or collector for sales and use taxes. Since the business merely acts as a trustee in collecting and remitting the proper amount, it is clear the sales and use taxes do not belong to the business.
Before any snow or ice removal business can collect and remit tax in a state where it has developed economic nexus, it must first obtain a sales tax permit (i.e., a seller’s permit). Finding what each state requires and properly setting up shop in a state takes time. Some businesses have the resources to handle the task from start to finish, others have fuller plates. Fortunately, help for some may be available under the Streamlined Sales and Use Tax Agreement (SSUTA).
STREAMLINED SALES TAXES
As mentioned, sales tax laws are extremely complex. Products — and services — taxed can vary from state to state as can sales tax rates, rules and regulations. Further complicating matters, there are more than 12,000 tax jurisdictions in the U.S.
Few growing businesses are satisfied staying within the confines of state borders and efforts by the states to require out-of-state sellers to collect and remit sales tax have long been contentious. The so-called Streamlined Sales Tax Agreement was born of state efforts to tax remote sales, the complex nature of sales taxes and the emergence of e-commerce.
Unfortunately, the 23-state SSUTA — launched in 2000 to simplify sales tax administration and minimize the burden of complying — has failed to attract a single new member in the seven-month period following the Wayfair ruling. In fact, not a single state has joined since 2014.
However, a snow removal contractor or business can register to collect and remit sales tax in all 23 states that are currently members of the SSUTA’s Registration System, significantly reducing time and effort. There is no cost for sellers collecting only in SSUTA states, and reduced costs for sellers collecting in both SSUTA and non-SSUTA states.
Failing to collect or misappropriating sales and use taxes can put everyone -– owners, officers, directors, shareholders and employees -– at risk. Each of these individuals may be held personally liable for the failure of the snow removal and ice management business to properly collect and remit sales and use taxes if they are considered “responsible” parties.
A responsible party can include not only the individual whose duties involve managing and paying taxes, but also any other person who has the authority or ability to control business payments and decisions. What’s worse, this liability extends beyond the business to each individual’s personal assets, which could be claimed to satisfy the business’s sales tax liability.
USING USE TAXES
As every contractor, owner and manager is — or should be aware — in all sales tax states, long-standing laws already compel buyers who make tax-free purchases to self-remit the taxes due. The self-remit rules are often referred to as “consumer’s use tax.” However, although the consumer use tax rules focus on the purchaser’s duty to self-remit use taxes, in some states, a seller may be obligated to collect “seller’s use taxes” on behalf of their customers.
Seller’s use taxes are charged to buyers based on the sales invoice as with sales tax transactions – with some states requiring collection by sellers. Again, each state has its own complexities, which can cause occasional confusion for sellers.
Although the rate of compliance to self-remit is relatively low, as more and more sellers are required to collect sales — or seller’s use taxes — economic nexus rules may make that non-compliance a moot issue and less of a challenge for many business purchasers.
As economic nexus rules take hold, sellers of all types will be required to collect sales or seller’s use taxes on sales made all over the country. One result will be a reduced consumer’s use tax compliance burden for some buyers.
The Supreme Court’s Wayfair ruling replaced the physical presence requirement for when states can tax remote sales and adopted an economic nexus standard based on the amount of business done in a state. The ruling suggested strongly that the South Dakota law requiring remote sellers that meet thresholds of $100,000 in annual in-state sales or 200 transactions to collect and remit sales tax.
Soon every business may be required to collect sales -– and use -– taxes even if the only connection to the state is a Web page and a customer. In fact, the business may have to collect sales tax even if there is no Web presence. While the rules vary from state to state, actively attending a trade show in a state or having representatives (who may not even be employees) can require collecting sales taxes.
There are 45 states that have state sales tax laws. Every state will, in all likelihood, want to increase revenue by following the precedent set by the Supreme Court with its Wayfair ruling. The bad news is that every snow removal and ice management business owner is now -– or soon will be — responsible for keeping track of the ever-changing sales tax laws in every state where they provide services or have sales to ensure compliance. Obviously, professional assistance will be needed.