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Multi-state businesses need to understand their State & Local Tax (SALT) exposures and liabilities. These liabilities generally exist across Sales Tax, Income Tax, and Withholdings Tax but can also include other areas.
‘Nexus’ is typically the trigger for SALT exposures and liabilities, which occurs when there is a sufficient physical or economic connection with the state in question.
However, even in states where businesses haven’t established Nexus, there still may be various SALT reporting requirements.
Businesses categorized as ‘non-collectors’, which are companies that are not obligated to collect Sales Tax from their customers (due to insufficient nexus with the state in question), may still have reporting obligations for ‘Use Tax.’
Use Tax imposes a Sales Tax on taxable purchases that consumers make outside their state of residence for items intended for use, storage, or consumption within their state of residence, and for which no tax was collected by the vendor in the state of purchase.
As demonstrated by the case of South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), the lack of reporting, accruing, and remitting of Use Tax to taxing authorities can be costly to those authorities’ annual revenues. In the Wayfair case, estimators determined that South Dakota annually lost between $48-55 million on taxable purchases, where vendors did not charge Sales Tax and purchasers did not accrue and remit Use Tax. As a result, states are implementing Use Tax reporting requirements and stricter economic Sales Tax Nexus thresholds to address the issue.
There are instances where the state expects a non-Sales Tax Collecting company to notify its customers that they may be required to accrue and remit Use Tax on their own. This notification to customers is referred to as ‘Use Tax reporting’.
States vary in their Use Tax reporting laws, and some states do not have any such reporting laws at all. However, for those states that do, the rules generally include the requirement to:
Failure to comply with a state’s non-Sales Tax collecting Use Tax reporting law can result in costly fees and penalties.
For example, Colorado charges non-Sales Tax collecting retailers a penalty of $5 for each sale to a Colorado purchaser that does not provide a transactional notice to accrue and remit Use Tax. These fees compound over time and can equate to a large expense.
Consumer Use Tax | Retailer Reporting Requirements | Department of Revenue – Taxation. (n.d.). https://tax.colorado.gov/use-tax-retailer-reporting-requirements
South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). (n.d.). Justia Law. https://supreme.justia.com/cases/federal/us/585/17-494/#:~:text=Under%20earlier%20Supreme%20Court%20decisions%2C%20states%20could%20not,estimated%20that%20South%20Dakota%20lost%20%2448-%2458%20million%20annually
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