Application of Cloud-Based Software Service Subscription Fees in Illinois

Illustration of Illinois with The Hand of a Person Holding a Screen that Projects a Dollar Sign

The Illinois Department of Revenue recently clarified how sales tax applies to subscription membership fees for cloud-based software services. Generally, sales tax does not apply to cloud-based software that customers access remotely without the ability to download it to their devices. However, if the service provider includes downloadable components like an API, applet, desktop agent, or remote access tool to facilitate access to their network and services, these components are considered taxable as computer software.

Example 1: Cloud-Based Fitness App Subscription

A fitness app provider charges a subscription fee for its cloud-based service, allowing users to access workout plans and tracking tools directly from their web browser. Since users access the app exclusively online and can’t download it to their devices, the subscription fee is not subject to Illinois sales tax. The app qualifies as non-taxable cloud-based software because it doesn’t provide any downloadable components.

Example 2: Data Analytics Software with a Desktop Agent

A data analytics company offers a subscription to its cloud-based platform but requires users to download a desktop agent to sync their data with the platform. In this case, the desktop agent is considered a form of computer software. Because the subscription includes this downloadable component, it is subject to Illinois sales tax—unless the service provider can qualify it as a non-taxable license of computer software.

Additionally, Illinois residents who download software from an out-of-state retailer’s or service provider’s website or server located outside of Illinois are generally not liable for use tax on the download.

Reach out to Thompson Tax today for any questions you may have. We are your Trusted Tax Advisors and are always just a phone call away!

Sales and Use Tax Trends for 2025: What Businesses Need to Know as the Year of the Snake Crawls In

Concept of Snake and Road Signs with Sales and Use Tax Trends for 2025 Text

As we near 2025, the sales and use tax landscape is evolving faster than ever, thanks to changing consumer habits, cutting-edge technology, and determined governments looking to close tax gaps. For businesses, staying on top of these trends is key to avoiding any tax “bites.” Let’s dive into what’s ahead!

Sales and Use Tax Trends for 2025

1. Increased Focus on Sales and Use Tax Audits

Use tax is often overlooked by businesses, but in 2025, tax authorities are stepping up their game to make sure no stone (or sale) goes unturned. Be prepared for stricter enforcement as they aim to close that revenue gap.

  • Keep in mind that post-COVID, state auditors’ overall institutional knowledge has waned due to mass retirement, so audits are becoming more difficult to navigate. Not only are auditors becoming more aggressive but there is a learning curve involved as well, so expect a few surprises!
  • According to the 2023 Eversheds Sutherland SALT Scoreboard, taxpayers only won 44% of significant sales and use tax cases. By mid-2024, that number dipped to 24%. The odds aren’t exactly in your favor, so stay vigilant!

2. Services Taxation Expands (Yes, Again)

The digital world keeps growing, and tax authorities are hustling to keep up. More states are taxing digital goods like e-books and streaming services, along with services like SaaS platforms. So, if you’re in the business of bytes, it’s time to pay extra attention!

3. Digital Goods – The Plot Thickens

If you’re selling digital products, it’s time to brush up on the rules—state by state. The complexity is only increasing, and 2025 will bring new twists:

  • Broader Definitions: States may broaden what they consider taxable digital goods. Some might even classify more cloud-based services as “tangible personal property.” (Yes, even though they aren’t tangible!)
  • Marketplace Facilitator Rules: If you’re using platforms to sell your digital goods across borders, expect more marketplaces to collect and remit taxes on your behalf. Overall, this will be less hassle for your business, but more paperwork to keep track of!

4. Economic Nexus – Know Your State and Local Rules!

Remember the 2018 South Dakota v. Wayfair ruling? It’s been a game-changer for out-of-state sellers, and by 2025, almost every state will have economic nexus laws in place. But the devil is in the details—each state has its own thresholds and requirements, so stay sharp (or get bit)!

  • NOMAD States: There are fifty states, plus the District of Columbia, and only five of them do not collect a state sales tax (aka the NOMAD States: New Hampshire, Oregon, Montana, Alaska, and Delaware)
  • Home Rule States: Watch out for Alabama, Colorado, and Louisiana, where local jurisdictions act independently. These places like to keep things… interesting.

5. Automation: Your Worst Enemy or New Best Friend? 

    *Remember the song ‘In the Year 2525’ (Zagar and Evans)? Technology is taking over!

  • Auditors Have What It Takes to Take What You Have: Auditors are now using AI to process mountains of sales data at warp speed. If you’re in California’s restaurant business, AI is already eyeing your books!
  • On the flip side, AI can help you, too! The use of AI platforms will help your business predict tax obligations, catch errors before they become expensive mistakes, and even suggest improvements to streamline compliance.
    • Seamless Integration: The latest tax automation tools will focus on seamless integration with enterprise resource planning (ERP) systems, e-commerce platforms, and payment processors. This will make it easier for businesses to track and manage sales and use tax across different jurisdictions without manual intervention.
    • Blockchain for Tax Compliance: Though still in its infancy, blockchain technology could play a role in future tax reporting. Some experts predict that blockchain could be used to create an immutable record of transactions, making tax audits more transparent and efficient. In 2025, we may see early-stage pilot programs or regulatory discussions about its use in tax compliance.

Thompson Tax’s Top 10 Sales & Use Tax Concerns for 2025: Snake Edition 

1. Do You Really Know Your Audit Data? (Eastern Brown Snake)

Just like the fast and elusive Eastern Brown Snake, missed audit data can sneak up on you. Stay sharp, or this one might strike when you least expect it!

2. Reconcile Your Sales and Use Tax Returns (Pit Viper)

Pit Vipers are known for their accuracy in targeting their prey. Be just as precise when reconciling your tax returns with financial statements and your Federal Tax return—accuracy is key!

3. Use Tax Accrual Procedure (King Cobra)

Whether your process is manual or automated, be as vigilant as the King Cobra. Having a clear and consistent use tax accrual procedure will help you avoid dangerous missteps.

4. Know Your Nexus and Marketplace Rules (Water Moccasin)

Nexus rules can be murky, like a Water Moccasin hiding in the shallows. Stay informed on both state and local requirements, or you might find yourself in deep water.

5. Taxability of Your Products & Services (Coral Snake)

The Coral Snake’s vibrant colors are a warning—just like unclear taxability can be a red flag. Ensure you fully understand what’s taxable, or you could be treading into dangerous territory.

6. Exemption Certificate Rules and Policies (Black Mamba)

Like the swift Black Mamba, exemption certificates can be a fast-moving target. Make sure you have strong policies for collecting and storing these documents, or risk getting caught off guard.

7. AI & Compliance (Sea Snake)

AI is making waves, much like the Sea Snake in its habitat. Stay ahead of the tide by ensuring your systems are equipped for the latest tech-driven compliance challenges.

8. Overpaying Sales Tax to Vendors (Bushmaster)

Bushmasters are elusive and hard to spot, much like hidden overpayments. Don’t let overpaid sales tax to vendors sneak past you—review your records and reclaim those dollars!

9. Measuring Value to Your Organization (Rattlesnake)

Like the Rattlesnake’s unmistakable warning, the value your tax strategy brings to your organization should be loud and clear. Make sure your efforts are impactful and measurable.

10. Are You Having Fun Yet? (Copperhead)

The Copperhead might not be the most aggressive snake, but it still packs a punch. Inject some fun into the process, stay alert, and make sure tax compliance doesn’t catch you off guard.

The Takeaway: Know Your Nexus and Your Numbers!

In 2025, it’s mission-critical to understand your state and local nexus rules, the taxability of your products and services, and to keep immaculate records. When the tax auditor is within striking distance, you’ll want to confidently navigate the conversation with a complete understanding of your books and data to avoid being bit.

Thompson Tax is here to help you handle your current and upcoming sales and use tax challenges with expert guidance tailored to your needs. Let us be your trusted Sales and Use Tax Advisors – we can help you tame the snake! Contact us today!

As The Holiday Season Approaches, Thompson Tax Is Proud to Support Those in Need

Assortment of Donations for Local Food Bank

Thompson Tax is proud to support local charities that make a meaningful difference in our community, and as the holidays approach, we invite you to join us in these efforts. By working together, we can have a greater impact on the lives of those in need, strengthening the bonds within our community and fostering a spirit of giving. Whether through donations, volunteering, or spreading awareness, every contribution helps. We encourage you to get involved and be part of something bigger. Together, we can make a lasting difference!

Sacramento Food Bank & Family Services 

Food Depository in Chicago | Greater Chicago Food Depository (chicagosfoodbank.org)

 

Massachusetts Sales and Use Tax Amnesty Period: What You Need to Know

Blackboard with The Phrase Massachusetts Tax Amnesty Written on It and a Limited Time Stamp

The Massachusetts Sales and Use Tax Amnesty Period is a special initiative introduced by the Massachusetts Department of Revenue (DOR) to encourage businesses to resolve overdue taxes. Running for a limited time only between November 1, 2024, through December 31, 2024, the program offers businesses an opportunity to settle outstanding tax liabilities while providing significant relief from penalties and interest.

Key Benefits of the Amnesty Program:

  1. Waiver of Penalties: Normally, late tax payments accumulate significant penalties. Under the amnesty program, most of these penalties are waived, offering businesses the chance to settle their tax obligations at a much lower cost.
  2. Protection from Legal Action: Businesses that participate in the program will not face prosecution or further legal action for the taxes they disclose and pay during the amnesty period.

Why Should Your Business Participate?

For businesses with overdue sales or use taxes, participating in the amnesty program is a smart financial move. Here’s why:

  1. Avoid Hefty Penalties: Once the amnesty period ends, the state will resume its standard enforcement actions, which could include steep penalties and interest on unpaid taxes. By settling during the amnesty period, you can significantly reduce these penalties and avoid future collection efforts.
  2. Enhance Your Financial Health: Unresolved tax debts can burden your business’ finances. Clearing these liabilities will improve cash flow, enabling you to focus on growth rather than dealing with back taxes.
  3. Ensure Future Compliance: Participating in the program also helps you reset your tax compliance. This reduces the risk of future audits or legal complications and sets your business on a clear path for maintaining tax obligations.

Who Qualifies for the Amnesty Program?

To qualify for the Massachusetts Sales and Use Tax Amnesty Program, businesses must:

  • Be an eligible taxpayer;
  • Submit an amnesty request via MassTaxConnect beginning November 1, 2024;
  • Pay all taxes and interest included in the amnesty request;
  • File any required returns by December 30, 2024.

How to Participate in the Amnesty Period

Follow these steps to make the most of the Sales and Use Tax Amnesty Period:

1. Evaluate Your Tax Liability

Before the amnesty period begins, review your records to determine if your business has any unpaid sales or use taxes. Consult your accountant or tax advisor if necessary to get a clear understanding of your obligations.

2. Prepare Your Documentation

Gather relevant documentation, such as past tax returns, receipts from out-of-state purchases, and sales records. This will ensure you have an accurate picture of what is owed and can make the process smoother.

3. Monitor Official Updates

Stay informed by monitoring announcements from the Massachusetts Department of Revenue for further details about the amnesty period, including any updates on the process and exact instructions for applying.

4. Submit Your Application and Payment

Once the amnesty window opens on November 1, 2024, submit your application through MassTaxConnect and pay any outstanding tax amounts. Payment must be made within the amnesty period to qualify for the penalty waivers.

5. Maintain Compliance

After you’ve settled your past debts, ensure that your business continues to meet its sales and use tax obligations going forward. Staying compliant will help you avoid further penalties or legal issues.

Don’t Miss This Opportunity

The Massachusetts Sales and Use Tax Amnesty Period is a rare chance to settle outstanding liabilities without facing the full brunt of penalties and interest. Don’t wait until it’s too late—start preparing now to take full advantage of this limited-time program.

Thompson Tax is here to help. Contact us today for expert advice on managing your sales and use tax obligations and let us help you navigate the amnesty process smoothly.

Understanding Maine’s New Sales and Use Tax Rules for Leases and Rentals: A Guide for Lessors

Two People Shaking Hands Over Contract Documents

Maine Revenue Services recently released General Information Bulletin No. 114 to provide guidance regarding significant changes to the state’s sales and use tax rules as they apply to leases and rentals. These updates, which will take effect on January 1, 2025, reshape how lessors are required to handle sales tax on leases of tangible personal property.

For businesses and individuals involved in leasing and renting, understanding these new rules is essential to remain compliant with Maine’s tax regulations.

What Are the Current Rules?

Until the end of 2024, lessors (those leasing tangible personal property) must pay sales tax upfront when they purchase property that will be leased or rented out. The tax is calculated based on the full value of the property. This means that even if the property is rented over several years, the tax liability is borne by the lessor at the time of purchase.

This approach simplifies tax collection but creates a significant upfront cost for lessors, as they are paying taxes before they’ve even begun to collect lease or rental income.

Key Changes Effective January 1, 2025

Starting on January 1, 2025, lessors in Maine will be able to purchase tangible personal property exempt from sales tax, provided they present a resale certificate. Here’s how it will work:

1. No Sales Tax on Initial Purchase: Lessors will no longer be required to pay sales tax when they purchase tangible personal property to lease or rent out. Instead, they will use a resale certificate to purchase the property exempt from sales tax.

2. Sales Tax on Lease Payments: Instead of paying the tax upfront, lessors will be responsible for collecting sales tax on each lease or rental payment they receive from their customers. This change aligns Maine’s rules more closely with how most other states handle sales tax on leases and rentals of tangible personal property.

3. Sourcing Rules for Taxation: The guidance also addresses sourcing rules, which determine how and where taxes are applied. The location of the leased or rented property, and potentially the location of the lessee, will play a role in determining where the tax is sourced.

What Does This Mean for Lessors?

For lessors, this legislative change offers some relief from the initial financial burden of paying sales tax when purchasing taxable property. However, it introduces ongoing responsibilities for collecting and remitting sales tax on each individual payment received from lessees.

It also means that lessors will need to keep meticulous records of their leases and rental payments to ensure they are properly collecting and remitting the correct amount of sales tax.

Lessors will also need to be familiar with Maine’s sourcing rules, which dictate how taxes are applied. This can be particularly important for businesses with operations or customers in multiple locations, as the sourcing rules may impact how sales taxes are reported.

Refund Opportunity for Tax Previously Paid by Lessors

An important provision in the guidance discusses a limited refund period for lessors who have already paid sales tax on property purchased before the new rules take effect. If a lessor paid sales tax under the old rules but starts collecting lease or rental payments on that same property, they may be eligible to apply for a refund. There will be a limited window to apply for this refund, so lessors should be proactive in reviewing their tax filings and rental agreements to determine if they qualify.

Preparing for the Changes

To ensure compliance with these new tax rules, lessors should take the following steps before January 2025:

1. Review Existing Contracts and Transactions: Analyze your current leases and rental agreements to determine how the new tax rules will impact your business operations.

2. Obtain a Resale Certificate: If you don’t already have one, apply for a resale certificate with Maine Revenue Services. This document will allow you to make sales tax exempt purchases of tangible personal property for leasing purposes.

3. Update Accounting and Tax Systems: Ensure that your accounting systems can track and calculate sales tax on lease and rental payments moving forward.

4. Consult a Tax Professional: Given the complexity of these changes, consulting with tax professionals familiar with Maine’s tax laws can help you navigate the transition and ensure compliance.

Contact Thompson Tax today for all your sales and use tax needs. We are always just a phone call away.

New York Clarifies Limitations on Amending Sales and Use Tax Returns: Key Insights for Businesses

Illustration of New York with the Statue of Liberty in the Centre

The New York Department of Taxation and Finance has recently issued guidance clarifying the rules around amending Sales and Use Tax returns. This guidance stems from previously enacted legislation and brings Sales and Use Tax returns under similar limitations as other tax filings. Understanding these updates is crucial for businesses required to collect tax under Tax Law Article 28 (Sales and Compensating Use Taxes), especially as they take effect for filing periods beginning on or after December 1, 2024. Here’s a breakdown of the new rules and what they mean for your business.

Amending Sales and Use Tax Returns

Under the new guidance, businesses required to collect Sales and Use Tax can amend previously filed returns, but there are important limitations to be aware of: 

1. Conditions for Amending Returns:

  • A business can amend a previously filed return only if the amendment does not reduce or eliminate a past-due tax liability related to that specific filing period.
  • Past-due tax liability refers to any tax debt that has become final and unchangeable, where the taxpayer has no further right to administrative or judicial review.
  • However, if the business self-reported past-due tax liability, they may amend the return to reduce or eliminate this liability within 180 days of the original due date.

2. Overpayments and Refunds:

  • If no past-due tax liability exists, and the amended return results in an overpayment, the business can claim a credit or request a refund.
  • This claim must be made within three years from the original tax due date or within two years from the date the tax was paid—whichever is later.

3. Department’s Right to Assess:

  • The New York Department of Taxation and Finance retains the right to assess additional tax, penalties, and interest, including recovering a previously paid refund based on changes or corrections made on an amended return.
  • This assessment can be made within three years after filing the amended return.

Filing a Return After Receiving a Notice of Determination 

The guidance also addresses situations where a business fails to file a return, and the Department issues a notice of determination of tax due:

  • If a notice of determination is issued because a return was not filed, the business has 180 days from the mailing date of the notice to file the missing return.
  • Important Note: Filing a late return after receiving a notice of determination does not impact any penalties or interest that have accrued due to the original failure to file on time.

New Penalties for Filing False Returns 

Starting April 20, 2024, the Department will impose stricter penalties for filing false Sales and Use Tax returns:

  • Any person who willfully files a return containing false information with the intent to reduce or eliminate tax liability will face a penalty of up to $1,000 per return.
  • This penalty is in addition to any other penalties that may apply under the law.

Key Takeaways for Businesses

These updates underscore the importance of accuracy and timeliness in filing Sales and Use Tax returns. Here are some critical points for businesses to keep in mind:

  • Review and Amend Promptly: If you discover an error in a previously filed return, review it carefully and consider amending it within the allowed time frames.
  • Act Quickly on Notices: If you receive a notice of determination, don’t delay—file any missing returns within the 180-day window to avoid further complications.
  • Avoid False Reporting: Ensure all information on your returns is accurate and truthful to avoid substantial penalties.

As New York continues to refine its tax regulations, businesses must remain vigilant to keep pace with the evolving landscape. As these changes take effect, companies should review their tax processes and consult with tax professionals to ensure they are fully prepared for the new requirements. 

Contact Thompson Tax today for all of your sales and use tax needs. We are your Trusted Tax Advisors.

Navigating Illinois Sales and Use Tax: Current and 2025 Direct Pay Requirements

Direct Pay Phrase on Orange Background

The landscape of sales and use tax compliance is constantly evolving, particularly for businesses operating in Illinois. The state’s Direct Pay Permit (DPP) program offers a way to streamline tax reporting and payment, so staying updated on current and forthcoming changes is essential.

Understanding the Illinois Direct Pay Permit

The Direct Pay Permit (DPP) allows qualifying businesses to pay use tax directly to the Illinois Department of Revenue (IDOR) rather than at the point of purchase. This program is especially beneficial for companies dealing with complex transactions, large-scale purchasing, or situations where determining the taxability of purchases can be challenging.

Current Requirements for the Direct Pay Permit

As of 2024, businesses seeking to participate in Illinois’ DPP program must meet several critical criteria:

 

1. Eligibility Criteria:

  • Complex Tax Situations: Businesses must demonstrate that they frequently encounter complex situations where determining sales tax liability is problematic. This often applies to companies involved in manufacturing, construction, or those with multi-state operations.
  • Significant Purchases: A business must have substantial annual taxable purchases to qualify. While the exact threshold can vary, companies must demonstrate a certain volume of transactions that justify using a DPP.

2. Application Process:

  • The process to obtain a DPP involves submitting a detailed application to the IDOR, outlining the business’s tax situation, and providing supporting documentation. The department reviews each application on a case-by-case basis to determine eligibility.

3. Reporting and Compliance:

  • Once granted a DPP, businesses are responsible for remitting use tax directly to the IDOR. This includes regular reporting of taxable purchases, adhering to strict record-keeping practices, and ensuring timely payment of taxes.

4. Permissible Purchases:

  • Not all purchases can be made under a DPP. Businesses must be aware of the categories of goods and services eligible for direct pay, as certain transactions may still require payment of sales tax at the point of sale.

5. Ongoing Requirements:

  • Compliance doesn’t end with receiving a DPP. Businesses must continually monitor their tax situation, as the IDOR may review or audit DPP holders to ensure they are correctly managing their tax liabilities.

Anticipated Changes in 2025

Looking ahead to 2025, the IDOR is expected to implement several changes to the Direct Pay Permit requirements, reflecting a broader trend toward tightening tax compliance and enhancing revenue collection.

1. Requirement to Conduct an Annual Review:

  • DPP holders will be required to conduct an annual review of their purchase activities for the 12-month period ending December 31 of the prior calendar year. This review must be completed by March 31, 2025, to ensure that purchases were sourced correctly and that the appropriate tax rates were applied. The initial review under these new rules is due by March 31, 2025, and will cover the calendar year ending December 31, 2024.
  • If the review uncovers any errors in sourcing or tax rates, the permit holder must file an amended return by April 20 of the same year to correct these discrepancies. Failure to conduct the purchase review may result in a $6,000 penalty. However, this penalty can be avoided if at least 95% of the transactions for the reviewed period were correctly sourced and taxed or if the permit holder exercised ordinary business care and diligence.

2. Revised Eligibility Thresholds:

  • The IDOR may increase the thresholds for qualifying purchases or introduce new criteria that focus on the business’s operational complexity. This could mean that only larger businesses or those with more intricate tax situations will be eligible for a DPP.

3. Enhanced Application Scrutiny:

  • The application process is likely to become more rigorous, with additional documentation being required to justify the need for a DPP. Businesses may need to provide more detailed financial records, transaction histories, and explanations of their tax challenges.

4. Stricter Compliance Measures:

  • Reporting requirements are expected to become more stringent, with the possibility of more frequent audits or reviews by the IDOR. Businesses may need to enhance their internal controls and tax reporting systems to ensure full compliance.

5. Potential for Narrowed Scope:

  • The IDOR may revise the types of purchases that can be made under a DPP, potentially narrowing the scope to focus on specific industries or transaction types. Businesses must stay informed about these changes to avoid inadvertently violating the terms of their DPP.

6. Increased Educational Resources:

  • To help businesses adapt to these changes, the IDOR is expected to roll out more educational resources, including updated guidelines, webinars, and FAQs. Staying engaged with these resources will be crucial for businesses to navigate the evolving landscape.

Preparing for 2025: What Businesses Should Do Now

To prepare for the upcoming changes, businesses currently using or considering a Direct Pay Permit should take proactive steps:

  • Review Current Practices: Assess your current use of the DPP, ensuring that all procedures align with IDOR requirements. Identify any areas where compliance could be improved.
  • Stay Informed: Follow IDOR announcements regarding changes to the DPP program and regularly check for updates on eligibility, reporting, and permissible purchases.
  • Consult with Tax Professionals: Consider working with tax professionals, such as Thompson Tax, who specialize in Illinois sales and use tax. We can provide guidance on how to best prepare for the 2025 changes and ensure ongoing compliance.

Stay Informed!

The Direct Pay Permit is a valuable tool for businesses facing complex sales and use tax challenges in Illinois. However, with significant changes on the horizon in 2025, staying informed and prepared is essential. By understanding the current requirements and anticipating the future landscape, businesses can continue to benefit from the DPP while avoiding potential pitfalls.

Reach out to Thompson Tax today for further updates. We are your one-stop sales and use tax shop!

Mergers and Acquisitions: The Importance of Sales and Use Tax Due Diligence

Paper with The Word Due Diligence and a Magnifying Glass on a Desk

In the intricate world of Mergers and Acquisitions (M&A), due diligence is a crucial process to ensure the transaction is smooth, transparent, and free of hidden liabilities. While financial health, legal status, and operational efficiencies often take center stage, sales and use tax due diligence is a critical component that should not be overlooked. Neglecting this aspect can lead to significant financial, legal, and operational consequences post-acquisition. Here’s why sales and use tax due diligence is essential in any M&A activity.

Understanding Sales and Use Tax

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and services. Use tax, on the other hand, applies to goods and services purchased outside a taxing jurisdiction but used within it. Both taxes are pivotal sources of revenue for state and local governments and can vary significantly across jurisdictions.

The Importance of Sales and Use Tax Due Diligence

1. Identifying Hidden Liabilities

One of the primary reasons for conducting thorough sales and use tax due diligence is to uncover any potential tax liabilities. A target company might have unpaid sales or use taxes, incorrect tax filings, or past underpayments that could become the responsibility of the acquiring company. Identifying these liabilities upfront allows the buyer to either renegotiate the purchase price or ensure appropriate indemnifications are in place.

2. Ensuring Compliance and Avoiding Penalties

Tax compliance is complex, especially for companies operating in multiple states or countries. Each jurisdiction has its own set of rules and regulations regarding sales and use taxes. During due diligence, assessing the target company’s compliance with these regulations is paramount to avoid future penalties, interest, or possible legal actions. Non-compliance discovered after the acquisition can result in significant financial burdens and reputational damage.

3. Accurate Financial Reporting

If not properly accounted for, sales and use tax liabilities can distort the target company’s financial statements. This can mislead the acquiring company about the true financial health of the target. Due diligence helps ensure that all tax liabilities are accurately reflected in the financial reports, providing a clear and honest picture of the company’s financial status.

4. Strategic Tax Planning

Understanding the target company’s sales and use tax landscape can offer opportunities for strategic tax planning post-acquisition. Identifying areas of potential tax savings, better compliance strategies, or efficient tax structures can provide financial benefits to the newly formed entity. Effective tax planning can enhance the overall value of the merger or acquisition.

5. Facilitating Smooth Integration

Post-acquisition, integrating the operations of the two companies can be challenging. Sales and use tax compliance needs to be seamlessly integrated into the new entity’s tax practices. By addressing tax issues during the due diligence phase, the acquiring company can develop a comprehensive integration plan that ensures compliance from day one, avoiding disruptions to business operations.

Key Steps in Sales and Use Tax Due Diligence

Conducting thorough sales and use tax due diligence involves several key steps:

  • Document Review: Examine all relevant tax documents, including past tax returns, audit reports, and correspondence with tax authorities.
  • Tax Nexus Analysis: Determine the jurisdictions where the target company has established sales and use tax nexus, which obligates it to collect and remit sales and use taxes.
  • Compliance Check: Assess the target company’s compliance with sales and use tax regulations in all applicable jurisdictions.
  • Audit History: Review past tax audits to identify potential issues or recurring problems.
  • Liability Assessment: Calculate any potential tax liabilities that the acquiring company might inherit, including penalties and interest.
  • Integration Planning: Develop a plan for integrating the target company’s tax practices into the acquiring company’s operations.

Let Thompson Tax Help

Sales and use tax due diligence is an essential component of a successful transaction. From identifying hidden liabilities to ensuring compliance and facilitating smooth integration, it is an essential step in the overall process. By giving this aspect the attention it deserves, companies can protect themselves from unexpected financial burdens, enhance strategic tax planning, and ensure a smoother post-acquisition transition. Engaging experienced tax professionals who can provide guidance and support throughout the process is essential.

Contact Thompson Tax today for all of your sales and use tax needs. Let us be your Trusted Tax Advisor.

The Importance of Determining the Taxability of Your Products or Services

Concept of Tax Advisor Leaning On The Word Tax

Tax compliance significantly affects your business’s financial health and customer relationships. Understanding the taxability of your products or services is essential for smooth business operations. Here’s why accurately determining the taxability of your offerings is vital to your business’s success.

Legal Compliance and Avoidance of Penalties

  • Adhering to Regulations: Each state and country has specific tax laws that dictate which products and services are taxable. Failure to comply with these laws can result in significant penalties, fines, and interest on unpaid taxes. By determining the taxability of your offerings, you ensure that your business complies with all applicable tax regulations.
  • Avoiding Legal Disputes: Incorrectly charging or failing to charge sales tax can lead to legal disputes with tax authorities. These disputes can be time-consuming and costly and have the potential to harm your business’s reputation and operations. Properly determining taxability helps avoid these legal complications.

Financial Health and Cash Flow Management

  • Accurate Pricing: Understanding the taxability of your products or services allows you to set accurate prices that include the appropriate tax amounts. This ensures that your pricing strategy is transparent and aligns with your financial goals.
  • Preventing Unplanned Expenses: If you fail to collect the correct sales tax amount from customers, your business may have to cover the shortfall. This can lead to unexpected expenses and a negative impact on your cash flow. Proper taxability determination helps you collect the right amount upfront, avoiding financial surprises.

Customer Relations and Trust 

  • Transparency with Customers: Customers expect pricing transparency, including applicable taxes. Accurately determining and displaying tax amounts builds trust with your customers, as they can see that your business is honest and compliant with tax laws.
  • Avoiding Customer Disputes: Incorrectly charging sales tax can lead to customer dissatisfaction and disputes. Customers may challenge incorrect tax charges, leading to refunds, additional administrative work, and potential loss of business. Proper taxability determination helps maintain positive customer relationships. 

Competitive Advantage 

  • Enhanced Reputation: Businesses that demonstrate a strong understanding of tax compliance are viewed as reliable and professional. This can enhance your reputation in the marketplace, attracting more customers and partners who value compliance and transparency.
  • Market Expansion: Understanding taxability is crucial when expanding into new markets. Different states and countries have varying tax laws; being well-versed in these regulations allows your business to expand confidently and compliantly.

Efficient Business Operations 

  • Streamlined Accounting Processes: Knowing the taxability of your products or services simplifies your accounting processes. It allows for accurate record-keeping and easier reconciliation of tax amounts collected and remitted, leading to more efficient financial management.
  • Leveraging Technology: Many businesses use tax compliance software to automate tax calculations and ensure accuracy. These tools require accurate taxability information to function correctly, highlighting the importance of determining taxability for seamless integration with technology solutions. 

Steps to Determine Taxability 

  • Research Tax Laws: Research the tax laws in the jurisdictions where you operate. This includes understanding the definitions of taxable goods and services and any applicable exemptions.
  • Consult Tax Professionals: Engage tax professionals or consultants who specialize in sales tax compliance. They can provide valuable insights and help navigate the complexities of tax laws.
  • Implement Tax Compliance Software: Invest in tax compliance software that can automate the process of determining taxability and calculating the appropriate tax amounts. These tools are especially useful for businesses operating in multiple jurisdictions.
  • Regularly Review and Update: Tax laws are subject to change, so it’s essential to regularly review and update your understanding of taxability. Stay informed about legislative changes and adjust your practices accordingly. 

Let Thompson Tax Help with All Your Sales and Use Tax Needs

Determining the taxability of your products or services is not just a regulatory requirement but a strategic business practice. It ensures legal compliance, financial stability, and positive customer relations. Investing time and resources into understanding taxability can safeguard your business against legal and financial risks while fostering trust and transparency with your customers. In an ever-evolving tax landscape, staying informed and proactive is key to maintaining a successful and compliant business.

Contact Thompson Tax today to see how we can help you master the taxation side of your business. We are a one-stop shop for all your sales and use tax needs and are always just a phone call away.

Understanding Physical and Economic Sales and Use Tax Nexus

Concept of Chain Links

In the evolving landscape of state taxation, companies must navigate the complexities of sales and use tax nexus. With the surge of e-commerce and remote work, a comprehensive understanding of both economic and physical nexus becomes a powerful tool to ensure compliance and streamlined business operations.

What Is Nexus?

In the context of state taxation, Nexus refers to the connection or link between a business and a state that justifies the state’s authority to impose tax obligations on the business. Traditionally, this connection was based on a physical presence, but the advent of digital commerce has led to the adoption of economic nexus standards by many states.

Physical Sales and Use Tax Nexus

Physical nexus is established when a business has a tangible presence in a state. This can include:

  • Office Locations: Having an office or any other place of business in the state.
  • Employees: Employing workers who reside or work in the state.
  • Inventory and Warehousing: Storing inventory or goods in a warehouse located in the state.
  • Property: Owning or leasing property in the state, including real estate and tangible personal property.
  • Sales Representatives: Having sales representatives, agents, or contractors operating in the state.

Physical presence has traditionally been the primary criterion for establishing nexus, ensuring that businesses with a substantial and tangible connection to a state contribute to its tax base.

Economic Sales and Use Tax Nexus

In the digital age, economic nexus has emerged as a pivotal concept in state taxation. It is based on the economic activity a business conducts within a state, regardless of physical presence. This concept gained prominence following the landmark 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which upheld the state’s right to impose sales tax obligations on out-of-state sellers based on economic thresholds, marking a significant shift in state taxation practices.

Economic nexus criteria typically include:

  • Sales Revenue Thresholds: Many states set a minimum sales revenue threshold, such as $100,000 in sales within the state during a calendar year.
  • Transaction Volume Thresholds: Some states also consider the number of transactions in tandem with a sales revenue threshold, and some consider them separately, for example, 200 or more separate transactions in the state within a year.

These criteria ensure that even businesses without a physical footprint in a state contribute to the state’s tax revenues if they generate significant economic activity.

How Companies Meet Nexus Obligations

1. Understanding State-Specific Regulations: 

Each state has its own set of rules and thresholds for establishing nexus. Companies must stay informed about the regulations in each state where they conduct business. This involves regular review and monitoring of state tax laws.

2. Utilizing Technology and Software: 

Many companies invest in tax compliance software that can track sales, calculate taxes, and ensure compliance with various state requirements. These tools can help automate the process and reduce the risk of errors.

3. Regular Audits and Reviews:

Conducting periodic internal audits and reviews of sales activities can help identify potential nexus obligations. This proactive approach allows businesses to address compliance issues before they escalate.

4. Hiring Tax Professionals:

Engaging tax professionals or consultants who specialize in state tax compliance can provide valuable insights and guidance. These experts can help navigate the complexities of nexus and ensure adherence to state tax laws.

5. Economic Nexus Planning: 

Strategic planning can help manage and mitigate tax liabilities for businesses approaching economic thresholds in various states. This might include analyzing sales patterns, diversifying sales channels, or adjusting business operations.

Challenges and Considerations

  • Complexity and Variability: The lack of uniformity in state tax laws adds to the complexity of compliance. Each state has different thresholds, definitions, and filing requirements, making it challenging for businesses operating in multiple states.
  • Administrative Burden: Managing nexus obligations can be resource-intensive, requiring dedicated staff or external consultants to handle compliance tasks.
  • Legal and Financial Risks: Non-compliance with nexus obligations can result in penalties, interest, and potential legal disputes. Companies must weigh the costs of compliance against the risks of non-compliance.

Let Thompson Tax Help!

As states continue to refine and expand their nexus standards, businesses must remain vigilant and proactive in managing their sales and use tax obligations. By understanding the nuances of physical and economic nexus, utilizing technology, and seeking expert advice, companies can navigate this complex landscape and ensure compliance while optimizing their tax strategies.

In the dynamic world of state taxation, staying informed and adaptable is key to meeting nexus requirements and maintaining smooth business operations. 

Contact Thompson Tax today for all of your sales and use tax needs, and stay in the know!

‘Tis the Season for Sales Tax Holidays – Preview Upcoming Dates for the Remainder of 2024

Concept of Upcoming Sales Tax Holidays for 2024

As the second half of 2024 begins, we would like to remind you about the upcoming sales tax holidays across the U.S. 

Happy Shopping! 

  • Alabama
    • Annual back-to-school sales tax holiday, July 19-21
  • Arkansas
    • Annual sales tax holiday (clothing, certain electronic devices, and school supplies, including art supplies and instructional materials), August 3–4, 2024
  • Connecticut
    • Clothing and footwear less than $100, August 18–24, 2024
  • Florida
    • Freedom Month sales tax holiday (certain outdoor activity supplies), July 1–31, and (admission to certain events) July 1-Dec 31, 2024
    • Back-to-school sales tax holiday, July 29–August 11, 2024
    • Disaster preparedness sales tax holiday, August 24–September 6, 2024
    • Tool time sales tax holiday, September 1–7, 2024 
  • Iowa
    • Clothing and footwear, August 2–3, 2024
  • Louisiana
    • Annual Second Amendment sales tax holiday, September 6–8, 2024
  • Maryland 
    • Annual tax-free week (clothing and footwear priced $100 or less; first $40 of qualifying backpacks or bookbags), August 11–17, 2024
  • Massachusetts
    • Annual sales tax holiday (most tangible personal property priced at $2500.00 or less), August 10–11, 2024
  • Mississippi 
    • Annual Second Amendment sales tax holiday, August 30–September 1, 2024
  • Missouri 
    • Annual back-to-school sales tax holiday, August 2–4, 2024
  • Nevada
    • Active-duty Nevada National Guard sales tax holiday, October 25–27, 2024
  • New Mexico
    • Annual back-to-school sales tax holiday, August 2–4, 2024
    • Small business Saturday gross receipts tax holiday, November 30, 2024
  • Ohio 
    • Annual sales tax holiday (most tangible personal property less than $500.00), July 30–August 8, 2024
  • Oklahoma
    •  Sales tax holiday (clothing and footwear less than $100), August 2–4, 2024
  • Puerto Rico 
    • Annual back-to-school sales tax holiday, July 19–20, 2024
  • South Carolina 
    • Annual sales tax holiday (clothing and footwear, school supplies, select bed and bath items, and some misc. products *No price restrictions), August 2–4, 2024
  • Tennessee 
    • Annual sales tax holiday (apparel priced $100 or less, school and art supplies priced $100 or less, computers, laptops, and tablets priced $1500.00 or less), July 26–28, 2024
  • Texas 
    • Annual sales tax holiday (clothing, footwear, cloth, and disposable masks, certain school supplies, and backpacks priced under $100.00), August 9–11, 2024
  • Virginia 
    • Annual sales tax holiday clothing, footwear, EnergyStar and WaterSense Products, portable generators, gas-powered chain saws, specified emergency preparedness items, and school supplies) *Price restrictions, August 2–4, 2024
  • West Virginia 
    • Annual sales tax holiday (clothing and footwear, school instructional materials and supplies, computers, sports equipment) *Price restrictions / *Certain products do not qualify,August 2–5, 2024

This list is not exhaustive; please contact Thompson Tax today for more details. We are always just a phone call away.

Virginia Offers One-Time Safe Harbor for Contractor Sales and Use Tax Remittance

Sunset View of a Port with Boats

Virginia has introduced a new policy allowing a one-time safe harbor for contractors who have omitted or inaccurately remitted retail sales and use taxes. Starting from July 1, 2024, the Department of Taxation can use a contractor’s erroneously collected retail sales tax payments to offset a use tax assessment related to the transaction. 

How to Qualify

To qualify for this safe harbor, the contractor must demonstrate that the property for which sales tax was incorrectly collected and remitted is the same property used in realty and is subject to a use tax assessment.

Next Steps

After receiving this relief, the contractor must either pay sales tax to its vendors or remit the use tax directly to the Department for its purchases of tangible personal property used in its real property contracts. This relief is a one-time opportunity designed to help contractors in response to industry confusion. This new policy is aimed at providing a temporary reprieve for contractors who may have inadvertently erred in their tax remittances, offering them a chance to rectify the situation and ensure compliance with tax regulations moving forward.

For more information, reach out to Thompson Tax today. We are your Trusted Tax Advisors.

Live Webinar: August 13th – The Inside Scoop of Sales and Use Tax Audits

Concept of Webinar Equipment with Key Agenda Points

Join Dan Thompson, CPA, CMI, on August 13th to gain a better understanding of the intricacies of navigating a Sales and Use Tax audit from start to finish.

States rely on sales and use tax audits to ensure compliance among registered taxpayers. With the rise of remote sellers post-Wayfair, states are auditing more than ever to ensure applicable businesses are registered and are complying with sales and use tax collection rules and regulations.

It is now more important than ever to understand the entire process, from selection through appeals, and how to expertly navigate a sales and use tax audit. This webinar will give you the inside scoop on how to identify the important factors involved in state sales and use tax audits and how to communicate and work with taxing jurisdictions. 

Please join us! 

If interested, please contact Lori prior to registering at [email protected] for a 50% off discount code.

The Inside Scoop of Sales and Use Tax Audits – Live Webinar | Lorman Education Services

California Sales and Use Tax Prepayment Is Due on June 24th

Concept of California Palm Trees with Sales and Use Tax Prepayment Info

As a business owner in California, it is important to be aware of the upcoming deadline for the 135% sales and use tax prepayment, which is due on June 24th. This prepayment is meant to help the state manage its cash flow and ensure that its tax revenue is received in a timely manner.

Why Is It Important to Stay Updated with Tax Deadlines?

Staying informed about tax deadlines and requirements is essential to running a business. By meeting the obligations set forth by the state, companies can avoid unnecessary complications and maintain good standing with the tax authorities.

Next Steps

Eligible businesses should make the necessary arrangements and submit the prepayment on time to avoid penalties and interest. You can refer to the instructions provided by the California Department of Tax and Fee Administration (CDTFA) or consult with a tax professional, such as Thompson Tax, for guidance on calculating the prepayment amount.

Reach out to us today! We are your Trusted Tax Advisors and are always just a phone call away.

Colorado Retail Delivery Fee to Increase; Minnesota’s to Take Effect on July 1st

Toy Truck With The Words Retail Delivery Fee Placed On a Laptop and Surrounded by Three Small Carton Boxes

Colorado’s Retail Delivery Fee (RDF), which took effect on July 1st, 2022, will increase again on July 1st, 2024, from $0.28 to $0.29. The fee is imposed on retail sales of tangible personal property delivered to Colorado customers by motor vehicle. It applies only if an item in the order is subject to tax.

Exemptions

If your small business had retail sales of $500,000 or less during the previous calendar year, you are eligible for an exemption from the Retail Delivery Fee on retail deliveries made during the following year.

For more information on updates to the RDF in Colorado or the new $0.50 RDF taking effect on July 1st in Minnesota, please get in touch with Thompson Tax today. We are your one-stop shop for all your sales and use tax needs and are always just a phone call away.

Sales Tax Audits: What to Expect and How to Prepare

Magnifying Glass and Desk Name Plate with the Word Audit

Sales tax audits are standard for businesses and can be a source of stress and anxiety for many business owners. However, with proper knowledge and preparation, you can confidently navigate a sales tax audit.

What to Expect During a Sales Tax Audit

A sales tax audit examines a company’s financial records to ensure it has properly collected, reported, and remitted sales tax to the appropriate tax authorities. Auditors typically review sales records, purchase invoices, exemption certificates, and other financial documents to verify the accuracy of the business’s sales tax filings.

Auditors may also interview key personnel to better understand the company’s sales tax processes and procedures. Additionally, auditors may perform on-site inspections of the company’s facilities to verify the accuracy of the reported sales and ensure compliance with sales tax laws and regulations.

How to Prepare for a Sales Tax Audit

Preparation is vital when it comes to a sales tax audit. Here are some tips to help you prepare for an upcoming audit.

1. Maintain Accurate Records

Keep detailed records of all sales and purchases, including invoices, receipts, and exemption certificates. Having organized and accurate records will make the audit process much smoother.

2. Review Your Sales Tax Processes

Review your sales tax processes and procedures to ensure compliance with all applicable sales tax laws and regulations. If you identify any areas of concern, address them before the audit.

3. Understand The Audit Process

Familiarize yourself with the audit process and know your rights and responsibilities as a taxpayer. Understand the scope of the audit and what documents and information the auditors will be reviewing.

4. Cooperate with The Auditors

Be cooperative and transparent during the audit process. Provide the auditors with the requested documents and information promptly and be prepared to answer any questions they may have.

5. Seek Professional Assistance

A sales and use tax professional can provide the support and guidance you need to navigate the audit process effectively.

Let Thompson Tax Help

While a sales tax audit can be daunting, being prepared and knowing what to expect can help alleviate some of the stress. Remember, preparation is vital. By maintaining accurate records, reviewing your sales tax processes, understanding the audit process, cooperating with the auditors, and seeking professional assistance, you can confidently navigate a sales tax audit.

Contact Thompson Tax today and let us guide you confidently through the audit process. We are your Trusted Tax Advisors.

Sales and Use Tax Considerations for Service-Based Businesses

Close Up of a Laptop Keyboard with the Word Services

When it comes to sales and use tax, service-based businesses often grapple with a myriad of unique considerations that set them apart from product-based businesses. The intricacies of sales and use tax for service-based businesses are not to be underestimated, as they play a pivotal role in compliance and financial planning. Below are some key points that underscore the complexity service-based businesses face when it comes to sales and use tax.

Sales and Use Tax Complexities Service-Based Businesses Face

1. Nexus

Service-based businesses need to be aware of the concept of nexus, which refers to a business’s connection to a state that requires it to collect and remit sales tax. Nexus for service-based businesses can be established through various means, such as having employees or property in a state or reaching a certain level of economic activity within the state.

2. Taxability of Services

Unlike tangible goods, services are often treated differently when it comes to sales and use tax. Some states tax services, while others do not. Service-based businesses need to be aware of the taxability of their specific services in each state where they operate.

3. Exemptions

Like product-based businesses, service-based businesses may be eligible for certain sales and use tax exemptions. For example, some states offer exemptions for specific types of services, such as healthcare or education-related services. Service-based businesses must understand the exemptions available to them and ensure they are correctly applied. It is also imperative to keep the proper documentation on hand for audit purposes.

4. Bundled Services

Service-based businesses that offer bundled services or packages must carefully consider the tax implications of bundling different services together. In some cases, the taxability of a bundled service may differ from the taxability of an individual service when offered separately.

5. Sourcing Rules

Service-based businesses operating in multiple states need to understand the sourcing rules for services, which determine the state where the service is considered to be provided for sales tax purposes. Sourcing rules can vary by state and may be based on factors such as where the service is received or where the benefit of the service is realized.

Non-compliance with sales and use tax regulations can pose significant risks for service-based businesses. The unique compliance challenges they face, such as tracking the taxability of diverse services across multiple states and determining the appropriate tax rates and rules for each service, underscore the importance of staying on top of these obligations.

Navigate the Challenges with Thompson Tax

Service-based businesses can navigate these complexities with confidence if they have a comprehensive understanding of the sales and use tax implications specific to their industry. By staying informed about the taxability of services, exemptions, and compliance requirements across different states, they can avoid potential penalties and ensure financial stability. Seeking professional guidance from tax experts can be a game-changer in this regard. 

Contact Thompson Tax today. We are your Trusted Tax Advisor and are ready to assist with all your sales and use tax needs.

Check Out Our Upcoming Sales and Use Tax Webinars: May 24th & June 5th

Concept of Webinar with Icons and a Person Holding a Laptop Device

Interested in navigating the complex area of Multistate Sales and Use taxation post-Wayfair?  Please join Dan Thompson for two exciting CalCPA Webinars featuring many exciting facets of Multistate Sales and Use Taxation, including California-specific content. 

If you are just starting your career and want an overview of Sales and Use Tax, or you want to learn how to address your company or client’s taxability of products and services, these webinars cater to all interested in learning about taxes. There are many opportunities to join throughout the year, and they offer up to 4-hours of CPE. For more information, please see CalCPA’s event page here.

Meet Daniel Thompson

What Is Streamlined Sales Tax and How Can it Help My Business?

Map of the U.S. Showing the Streamlined Sales Tax Full and Associate Member States

Streamlined Sales Tax (SST) is an initiative that aims to simplify and standardize the collection and remittance of sales tax across different states. It was first implemented in 2005 and has since been adopted by 24 states. The initiative aims to make it easier for businesses to comply with sales tax laws, reduce administrative costs, and create a level playing field for retailers across different states.

What Are the Benefits of Streamlined Sales Tax?

One of the main benefits of SST is uniform definition of products and services across the states. Additionally, SST provides businesses access to free tax administration software, which can help automate tax calculations, filings, and remittances.

Current List of Full Member Participating States

Arkansas Kansas Nebraska North Dakota South Dakota West Virginia
Georgia Kentucky Nevada Ohio Utah Wisconsin
Indiana Michigan New Jersey Oklahoma Vermont Wyoming
Iowa Minnesota North Carolina Rhode Island Washington Tennessee*

*Associate Member State 

For more information about registering for the SST program, contact us today. We are your Trusted Tax Advisor.

Franchise Tax Refund Opportunity for Tennessee Business Owners!

Franchise Tax Refund Opportunity for Tennessee Business Owners

Recently, Tennessee passed a new law repealing its franchise tax for in-state businesses. The franchise tax was levied against companies for the privilege of doing business in the state and was based on the higher amount of either a business’s net worth or the value of its property in Tennessee.

This repeal brings significant financial relief to Tennessee business owners. What’s even more exciting is that the repeal includes refunds for periods dating back to 2020. Tennessee has allocated a substantial amount (over $1 billion) to refund businesses that paid the franchise tax during the 2020 through 2023 tax periods.

Act now to seize the largest refund opportunity in Tennessee’s history! With one less tax to worry about, this is the perfect time for business owners to explore new avenues for business growth.

Curious if you’re eligible for the refund? Don’t delay! The refund window is only open from May 15, 2024, through November 30th, 2024. Reach out to Thompson Tax today to check your eligibility. It’s time to put your money back where it belongs – with your business!

Sales and Use Tax 101 – You Don’t Know What You Don’t Know

Sales and Use Tax 101

Sales and use tax compliance can be daunting. Regulations vary by state and jurisdiction making them difficult to navigate, and to make matters even more complex, the rules are ever-changing. 

For many people, the concept of sales tax is just a charge you see on your receipt. Expanding your knowledge base to understand the compliance side of sales tax is far from your idea of fun, however, it’s an essential aspect of conducting business.

The following is a basic outline of compliance, Sales and Use Tax 101, if you will, because, let’s face it, ‘You don’t know what you don’t know.’

What is Sales Tax?

Sales tax is a tax imposed on the sale of goods and services, which is generally calculated as a percentage of the sale price. It is generally collected by the seller at the time of purchase and remitted to the state or local government. 

Sales tax is a jurisdictional tax, which means that each state or jurisdiction has its own set of sales tax rates and rules. The amount of sales tax collected is based on the sales tax rate in the jurisdiction where the sale was made, or where the customer is located.

There are four types of Sales Tax: Sellers Privilege, Consumer Levy, Gross Receipts, and Transaction Tax, and each type is imposed differently, whether on the Seller or Purchaser or on the transaction itself.

What is Use Tax?

Use tax is a tax imposed on the use or consumption of goods and services in a state or local jurisdiction where sales tax was not paid. This tax is typically paid by the consumer directly to the state or local government. Keep in mind, businesses are consumers, too, and may owe use tax on purchases intended for use by the business itself.

Registration and Remittance Requirements

You must register in each state where your company has either physical or economic nexus. Sales and use tax nexus refers to the minimal connection between a business and a state that requires the business to collect and remit sales tax on sales made within that state. Nexus is established when a business has a physical presence in a state, such as a store, office, or warehouse. Nexus can also be established through other means, such as having employees or independent contractors working in the state, making regular deliveries or installations, or engaging in other activities that create a substantial connection with the state. Understanding sales and use tax nexus is important for businesses to ensure compliance with state and local tax laws to avoid potential penalties.

What If My Business Did Not Register When We Had Nexus?

Don’t worry, there are solutions available to help you get back on track. However, it’s important not to wait too long. Once a state contacts you, you may miss out on some of the less costly opportunities available to help you get into compliance.

Once registered, you must prepare a tax calendar and file sales and use tax returns according to the filing frequency assigned to your business.

Taxability of Products and Services

The taxability of products and services varies based on the state and the type of product being sold or service being provided. Generally, tangible personal property is subject to sales tax in most states, but exemptions and exclusions exist. For example, some states exempt certain items, such as food and clothing, from sales tax. Understanding the taxability of products is important for businesses to accurately collect and remit sales tax to the appropriate state agencies. Failing to apply sales tax to products or services properly can result in penalties, interest, and other consequences; therefore, businesses must stay current on state tax laws and regulations to ensure compliance.

Exemption and Resale Certificates

The state issues exemption certificates which allow businesses to claim an exemption from sales tax for specific items or transactions. Depending on the state, an exemption certificate may also be used for purchases made by non-profit organizations or for particular types of equipment or machinery used in production.

A resale certificate allows a business to purchase goods that will be resold without paying sales tax.

Businesses must ensure they are eligible for the exemption they are claiming and should keep accurate records of exemption certificates, resale certificates, and purchases to avoid potential issues with tax authorities. 

Audits

There’s a saying in the tax world, ‘It’s not if you’re going to get audited; it’s when!’ Remember, though, that not all audits end with assessments. Being prepared is an essential step in avoiding a negative outcome. Make sure to keep all documentation (e.g., copies of returns, workpapers, purchase and expense support, exemption certificates) organized and easily accessible and, most importantly, remain compliant.

And More!

Sales and use tax compliance can be complicated, but it is an important aspect of doing business. Companies should familiarize themselves with the rules and regulations in each state where they conduct business in order to avoid penalties and ensure compliance with the law.

Reach out to Thompson Tax today! Let us help you navigate your sales and use tax compliance journey so that you can focus on growing your business. We are Your Trusted Tax Advisor.

California’s AB 2829 Digital Advertising Tax Proposal

California’s Digital Advertising Tax Proposal

California has proposed a new digital advertising tax (AB 2829) that has been met with mixed reactions from businesses and consumers alike. If passed, the tax would be levied on large-scale California businesses that generate over $100,000,000.00 in annual global revenue from digital advertising services and would take effect on January 1, 2025.

Some have hailed the proposal as a way to generate much-needed revenue for the state’s budget, which was hit hard by the COVID-19 pandemic and has not yet fully recovered. Supporters of the tax also argue that it would help level the playing field between brick-and-mortar businesses and digital retailers, which have avoided many of the taxes and regulations that traditional companies face.

Opponents of the tax disagree and argue that the new tax would be harmful to both businesses and consumers alike. Opponents argue that it would make it more difficult for businesses to compete in an already challenging economic environment and that the tax would be difficult to enforce as it raises constitutional concerns surrounding the Due Process and Commerce Clauses. Opponents also argue that although there is an anti-passthrough provision disallowing the tax from being charged to the consumer as a separate fee, surcharge, or line item, businesses would instead pass the cost along to consumers under the guise of higher prices.

This recent California proposal has generated significant debate and controversy, with solid arguments on both sides. What are your thoughts?

Nexus Update: Transaction Counts Eliminated in Indiana and Wyoming

Nexus Update for Indiana and Wyoming

In recent news, both Indiana and Wyoming have eliminated the use of transaction counts (200) as a factor in determining sales and use tax nexus for remote sellers. This is a significant change that will affect many businesses operating in these states.

What Is Sales and Use Tax Nexus?

For those who may not be familiar, sales and use tax nexus refers to the connection between a business and a state that allows the state to require the business to collect and remit sales tax on transactions made within that state. In the past, many states, including Indiana and Wyoming, used transaction counts as a means of determining if a remote seller had established nexus within their borders.

Recent Changes

However, this method of determination has come under scrutiny in recent years, with many arguing that it places an unfair burden on small businesses that may only make a few sales within a state. In response to these concerns, both Indiana and Wyoming have now eliminated transaction counts as a factor in determining sales and use tax nexus for remote sellers.  

This is good news for many businesses, as it means they will only be required to collect and remit sales tax if they meet other criteria, such as having a physical presence within the state or exceeding a specific dollar amount of sales, currently $100,000.00 in both Indiana and Wyoming.  

*Please note that Indiana’s updated nexus threshold is retroactive to January 1, 2024, and Wyoming’s does not take effect until July 1, 2024.  

Let Thompson Tax Help

Although the recent change has made the nexus process less burdensome, the process still has its challenges. Businesses operating in different states still need to be mindful of each state’s sales tax laws to ensure that they collect and remit the correct amount of tax for each transaction.

Do you have Nexus questions? Contact Thompson Tax today to see how we can help. We have your sales and use tax needs covered from A to Z.

Let us be your Trusted Tax Advisor.

The Importance of Maintaining Business License Compliance

Business License Compliance

As a business owner, it is essential to remain compliant with state and local laws to ensure smooth operations. One of the most important requirements is obtaining your business license and permits and then registering for sales and use tax in each state, locale, or jurisdiction where you have met nexus. Many business owners tend to forget, however, that reviewing and updating these credentials regularly is just as important as obtaining them.

Conducting an annual business license and registration review will ensure compliance with the laws of each state where you conduct business. It can help you avoid costly penalties and fines and will identify areas where your business may be at risk of non-compliance.   

An annual review will help you identify any changes or updates that should be made to your license(s) and permits(s) and will ensure that you are aware of any new requirements that may have been added since your last review. This is particularly important if you have expanded your business operations to include new products or services, as you may need to obtain additional licenses or permits to ensure that you are operating within the law.

At Thompson Tax, we understand that maintaining these requirements can be overwhelming, and we are here to help. Contact us today to learn more.

California’s Recent Ruling Regarding Bundled Cell Phone Purchases

Cell Phone with the Words Special Report Bundle Deals on the Screen

In a recent court case, the California Court of Appeal for the Third Appellate District ruled that purchasing “discounted” cell phones bundled with wireless services requires paying sales tax based on the cell phone’s full price.  

The case in question, Bekkerman-v-CDTFA, was initiated by consumers who purchased discounted cell phones bundled with wireless services yet were charged tax on the full price of the phones. The consumers argued that the discounted price of the phones should have been used to calculate the sales tax owed.

During the hearing, the court specifically analyzed Regulation 1585. The regulation defines a “bundled transaction” as the retail sale of a wireless telecommunication device that contractually requires the retailer’s customer to activate or contract with a wireless telecommunications service for periods greater than one month as a condition of that sale.  

Based upon this definition, the court sided with the CDTFA, holding that the phone’s full price should be used when calculating the sales tax owed. The court reasoned that retailers were effectively selling the phones at a discount to induce consumers to purchase wireless service and that the full price of the phones was, therefore, part of the consideration for the purchase of the wireless service.  

This ruling was a significant win for the State and has important implications for California retailers. Retailers must be mindful of the taxation requirements of bundled sales, whether involving cell phones or any other type of products and services, and should seek guidance from a tax professional to ensure compliance with state and local tax laws. 

Thompson Tax specializes in sales and use tax across many industries. Contact us today for all of your multistate and local sales and use tax needs. We are your Trusted Tax Advisor.

The Benefits of Conducting a Reverse Sales and Use Tax Audit

Concept of Person Hand with Phrase Internal Audit and a Bag with the Dollar Symbol

As companies expand, they become more complex and require more resources to manage.  Due to ever-changing tax codes and regulations, sales and use tax compliance can be particularly challenging, and identifying inaccuracies in this area can be difficult. By conducting a reverse audit, you can potentially spot reporting errors and may even reap some financial rewards if the errors are in your favor. 

How Can a Reverse Audit Help You?

1. Identify Prospective Overpayments

A sales and use tax reverse audit is an excellent way to identify overpayments, which can occur due to incorrect classification of goods and services, incorrect tax rates, or failure to take advantage of available exemptions. By conducting a reverse audit, businesses can recover the money they are owed, significantly improving their financial position.

2. Mitigate Risk

Non-compliance with sales and use tax laws can result in significant fines, penalties, and damage to a company’s reputation. A sales and use tax reverse audit can help businesses identify areas of non-compliance and take steps to correct them before they become a problem. By proactively addressing these issues, companies can mitigate risks and protect their reputation.

3. Improve Processes

A sales and use tax reverse audit can also help businesses improve their processes by identifying areas where errors have occurred. By taking steps to prevent these errors from happening again, companies can improve efficiency, reduce costs, and increase profitability.

4. Increase Cash Flow

Conducting a sales and use tax reverse audit can increase a business’s cash flow by identifying prospective overpayments and recovering money owed. This increased cash flow can then be reinvested into the business, used to pay down debt, or returned to shareholders, significantly improving the business’s financial health.

Thompson Tax Can Help!

Reach out to Thompson Tax today to see how we can help with all of your sales and use tax needs. We are always just a phone call away.

New Minnesota Delivery Fee Goes Into Effect on July 1st

Shopping Cart with Several Boxes

Beginning July 1, 2024, any business involved in the retail delivery of tangible personal property (TPP) and clothing that is subject to sales tax will be required to pay a “retail delivery fee” of $0.50 that will be used to fund road improvements within the state of Minnesota. The fee will be charged once per transaction and applies to pre-tax sales of $100.00 or more. It does not apply to in-store transactions picked up at retail locations or via curbside delivery.

While the fee may seem insignificant, there are many details to consider, such as who is responsible for collecting the fee, what exclusions and exemptions may apply, should the fee be listed as a separate line item on an invoice, and compliance issues such as registration and remittance.

Although there are many moving parts, Thompson Tax can quickly help you navigate the new law’s requirements. Contact us today for all of your sales and use tax needs. We are your Trusted Tax Advisor.

Get Ahead of Penalties and Interest with a Voluntary Disclosure

Concept of Person Handing Out Money to Someone

As a business owner, it is important to be aware of your state’s sales and use tax laws.  However, with so many different rules and regulations to keep track of, it is easy to make mistakes and fall behind on your tax obligations. If you find yourself in this situation, it may be time to consider a sales and use tax voluntary disclosure.

What Are Voluntary Disclosure Programs?

Voluntary disclosure programs, offered by many states, allow businesses to come forward and report any unpaid sales or use taxes without fear of penalties or prosecution. Essentially, it is a way to get back in compliance before penalty, interest, and prospective legal issues have a chance to snowball.

There are several benefits to participating in a voluntary disclosure program. First and foremost, it allows you to avoid any penalties on uncollected taxes and can even provide a reduced interest rate on unpaid taxes. Depending on the length of time you have been out of compliance, these penalties can be significant.

Of course, participating in a voluntary disclosure program does require some effort on your part. You will need to gather all relevant financial documentation and work with a tax professional to ensure that you are accurately reporting your unpaid taxes.

If you are a business owner who has fallen behind on your sales and use tax obligations, do not wait until it is too late to address the issue. Contact Thompson Tax today. By taking proactive steps to get back in compliance, you can protect your business and avoid prospective legal issues down the road.

The Impact of Sales and Use Tax on Mergers and Acquisitions

Business Partners Shaking Hands

Mergers and acquisitions (M&A) involve complex transactions that require careful planning and execution. One aspect that is often overlooked is the impact of sales and use tax on the transaction. Failure to properly account for sales and use tax can have a significant impact on the deal, including increased costs, potential legal issues, and decreased profitability.

One of the main reasons why sales and use tax can be a challenge in M&A due diligence is that it varies by state. Each state has its own rules and regulations regarding sales and use tax, and these rules can change frequently. This means that companies involved in M&A transactions need to be aware of the specific sales and use tax laws in each state where they operate or plan to operate.

When performing a due diligence review, it is important to address the target company’s sales and use tax exposure by reviewing nexus, previously filed tax returns, payment history, and any audits or assessments. This will help identify any potential liabilities, such as underpayment or non-payment of sales and use taxes.

It is also important to assess the target company’s sales and use tax compliance processes, including the accuracy of tax calculations, the appropriate use of exemptions and credits, and the maintenance of proper documentation.

Another important consideration in a due diligence review is the potential impact of sales and use tax on the transaction itself. In some cases, the buyer may be responsible for any unpaid sales and use tax liabilities of the target company. This can significantly increase the cost of the transaction and impact the profitability of the deal.

To mitigate the risks associated with sales and use tax in M&A due diligence, it is important to engage experienced tax professionals who can provide guidance and support throughout the process. This includes understanding the specific sales and use tax laws in each state, identifying potential liabilities, and developing strategies to mitigate those risks. That is where we can help. Reach out to Thompson Tax today for all of your sales and use tax needs. Let us be your Trusted Tax Advisor.

Sales and Use Tax Issues Faced by The Direct Mail Industry

Pile of Mail

Direct mailers often face numerous challenges when it comes to taxation. With varying tax laws across different regions, keeping up with the changes and ensuring compliance can be overwhelming.

1. Determine The Correct Sales Tax to Charge 

One of the primary taxation issues for direct mailers is determining the correct sales tax to charge. Sales tax laws vary from state to state and even within different areas of the same state, making it difficult to keep track of the applicable tax rates. For example, if you send mail to customers in multiple states, you may need to charge different sales tax rates for each state. Additionally, some products or services may be exempt from sales tax in certain states, further complicating the matter.

2. Identify The Correct Tax Classification

Another issue that direct mailers may face is determining the correct tax classification for their products or services. Depending on the type of product or service offered, it may fall under different tax classifications, each with its own set of regulations. For example, some states may classify advertising services as taxable, while others may consider them exempt.

3. Be Aware of Tax Implications When Using Third-Party Vendors

Direct mailers should also be aware of the tax implications of using third-party vendors. If you use a third-party vendor to provide services such as printing, mailing, or list management, you may be responsible for collecting and remitting sales tax on those services. However, the tax laws surrounding these services can be complex, and it’s important to consult with a tax professional to ensure compliance.

4. Keep Accurate Tax Transaction Records 

Direct mailers should keep accurate records of all tax-related transactions. This includes keeping track of sales tax collected and any exemptions or deductions claimed. In the event of an audit, having detailed records can help demonstrate compliance and avoid any penalties.

Thompson Tax Can Help!

Although tax compliance can be a significant challenge for direct mailers, understanding the various taxation issues they may face and taking appropriate measures to ensure compliance, direct mailers can avoid complications and focus on growing their business. It’s always recommended to seek the advice of a tax professional to ensure compliance with all applicable tax laws. Contact Thompson Tax today for all your sales and use tax needs and let us be your Trusted Tax Advisor.