Maeda Palius
on
July 15, 2012

California Sales Tax Whitepaper

Sales and Use Tax

You may be hearing about the state government’s severe actions on companies that have not been following their Sales and Use Tax responsibilities.  Since everyone is desperate for money, Sales Tax Compliance and Collection is fast becoming the “low hanging fruit”.  The California Board of Equalization has the power to go back more than three years.  If a taxpayer does not file returns, the statute of limitations is eight years.  If they have reason to believe that the amounts are substantial there is a good chance they will go back eight years.

California Sales Tax

The state of California has now implemented mandatory registration of qualified purchasers.  If you do not hold an active seller’s permit, you must register and file a use tax return when you meet certain conditions.  Many people forget that purchases made on the internet are subject to tax just like any other purchases.  Because California is now increasing its efforts in use tax collection, the non compliant taxpayers will be charged additional penalty and interest.  Payment of the use tax is generally the responsibility of the purchaser.  It is your responsibility to report and pay use tax for purchases you make from out-of-state companies that don’t charge you tax.

California is looking at casual sales.  Are you a service provider (dentist, massage therapist) who is not collecting sales tax on sales of tangible supplements, supplies, etc?  If so, you may be liable for sales tax.  If you are an interior designer and decorator, many charges are subject to sales tax.  Architects who provide after the completion of their contract, any additional copies of the original plans or specifications, any models or renderings of an existing structure are subject to tax.

“Economic Nexus”

The new concept of “economic nexus’ should be a wake-up call to business taxpayers.  Nexus is the connection between a business and a state that allows the state to require compliance with its tax laws.  Many state courts are redefining traditional nexus while they are looking for additional revenue. 

On June 1, 2010, Washington State’s new economic nexus standard went into effect.  Under the new nexus standard, a business is no longer required to have a physical presence in Washington to establish nexus.  Also businesses that charge for providing information services or computer services are subject to business and occupation tax.

States like Connecticut, Oregon, and Wisconsin have recently adopted new tax guidelines.  They are looking at activities such as solicitation and marketing, performing services outside of the state for in state customers to redefine nexus.

This new trend of economic nexus is spreading quickly and many states have already exploited this new concept.

Sourcing of sales of services and intangibles

States increasingly are examining new ways to source business income from sales of “other than tangible personal property,” e.g., sales of services and intangibles. Traditionally, these sales were sourced to the location where the majority of the cost of performance occurred, which usually meant the state where the services were performed. As a result, a business often had to look only to the laws of its home state to determine whether it owed tax on income from such sales.

Many states, however, have grown dissatisfied with the results of the traditional rule and are exploring alternatives. Most of these alternatives involve some sort of “market-based” approach to sourcing sales of services and intangibles.

For example, beginning with the 2011 tax year, California law provides that income from the sale of services is assigned to California to the extent the purchaser of the service received the benefit of the service in California. Similarly, income from the sale of intangibles is assigned to California to the extent the intangible is used in California.

Other states are expected to follow California’s lead. Failure to keep abreast of these changes could result in an unexpected tax liability, interest and penalties.

Nexus and Online Retailers; Recent Actions in New York and Texas

Recent news reports about nexus issues in New York and Texas have caused the California Board of Equalization to receive numerous inquiries about when out-of-state companies are required to collect tax on sales of products shipped into California. 
New York has revised it nexus statutes to require more out-of-state retailers to collect New York sale and use tax.  The law is specific to retailers that have New York affiliates who receive commissions for redirecting customers from their website to out-of-state retailer’s website. Beware if you are selling to these states.

What can I do to take a proactive approach to Sales Tax?

If your company is subject to sales tax, verify you have well documented procedures regarding proper sales tax collection and remittance. If your company is subject to use tax, confirm that you have procedures in place to calculate the use tax due.

Related Posts

  • 2012 Year-End Tax Planning For Businesses

    In recent years, end-of-the-year tax planning for businesses has been complicated by uncertainty over the future availability of many tax incentives. This year is no different. In 2010, Congress extended many business tax incentives for one or two years. Now, those incentives have expired or are scheduled to expire. Whether they will be extended beyond…

  • 2014 Health Insurance Information for Clients

    Beginning in 2014, the “individual mandate” under the Affordable Care Act begins. Not only are all individuals required to have insurance but all people who are required to file a tax return must report their insurance on that return. So we will need quite a bit of additional information to prepare your 2014 return.

  • KEEPING YOUR BUSINESS HEALTHY DURING THE COVID-19 CRISIS

    There is a lot of information circulating about how to protect yourselves and your families from contracting Covid-19. In addition, there is a wealth of information about keeping your business, and more importantly your employees, as financially sound as possible. At the end of the crisis, however long that may be, we all want to…