Now more than ever, it’s key that businesses have a plan in place to ensure proper filing. It’s tax planning season, however it’s always sales tax planning season. It is not getting easier and in fact it has become more complicated with ever changing state taxability laws as well as county and local rates. We sat down with State and Local Tax Manager, Chris Gallo to discuss recent state and sales tax updates and trends impacting the marketplace.
Illinois Tax Collection
The state of Illinois recently announced that it is requiring market facilitators and any establishment making sales to not only collect state tax, which is normal from previous years, but to also collect the county and municipal sales tax. It is estimated that this will create 3400 additional registrations to the state for local changing jurisdictions. To account for this change, businesses need to contact the state of Illinois directly. Once contacted, the state will make one changing location adjustment for you. This adjustment will trigger a new tab to be created in the registration portal to submit the return. Here you will also enter all other potential municipality locations that you may be making sales into. This is not a process that technology can do for you, technology can tell you which states and jurisdictions you make sales in, but it can’t register you for those areas. As an advisor, we can take care of the entire process for you.
Sales Tax Returned by Marketplace Facilitators
A common trend that we have seen for a while is where online vendors for marketplaces are collecting the sales tax for sellers and then sending back the sales tax to the business instead of remitting it to the State. For example, I recently had a business reach out asking for guidance on this issue. They were contacted by the state saying that the marketplace which they sell through had been audited, and that they were caught up within the audit too. Their marketplace facilitator told the state they collected the sales tax and sent it back to the respective business for them to remit directly back to the state. The business had no idea, and many businesses within the U.S. are typically unaware of this occurrence too. When you see a deposit from your marketplace facilitator from making a sale, many times you don’t know if there could be sales tax included. With sales tax, you are required to separate the profit from the sales tax, submit the proper return and remit the sales tax. The business that reached out to me owed over $4000 in sales tax, in addition to owing the penalty and the interest. Add an audit from the state on top and you have a real mess. It’s crucial to be aware of sales tax being returned by your marketplace facilitators so that it can be properly handled.
Gross Sales vs. Taxable Sales
How do you accurately file a sales tax return for gross sales versus taxable sales? In most cases, you don’t file returns for just taxable sales. Typically, the proper way to calculate the fileable amount is the following:
Gross Sales – Exempt Sales = Total Taxable Sales
The process varies for filing for home states. To complete a proper home state return, you gross sales and deduct out of state sales. You then file those returns separately to the state where the sales were made. If you plan to include exemptions for resales and manufacturing, be sure to have the exemption certificates you need, and then you can file the proper tax. In each state subsequent, you file the gross sales into that state alone and then you file the tax owed.
2020 Sales Review
What do your 2020 sales look like? Now is a great time to review your sales via a new nexus study. It’s key to do this every year, and even better to do it quarterly or even monthly. It’s crucial that you understand all of the new sales tax rules that may have impacted your business and the thresholds that may have changed in each state. Did you cross any of those new thresholds in 2020? For example, Arizona has three different timings where it’s possible to cross economic thresholds. If you did cross a threshold, you need to register and be collecting and filing properly for that new threshold.
The landscape for tax planning isn’t going to be simplified anytime soon. The updates I mentioned are complicated but can be made less burdensome with the help of a trusted advisor. I encourage you to contact our team at BerganKDV so that we can navigate the challenges of sales tax together. Don’t have an advisor and not sure where to start? Start here.