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What's to Come in "Sales Tax Policy – Tales & Trends"

author photo of Annette Nellen

Welcome to “Sales Tax Policy – Tales & Trends.” This blog will look at existing sales tax rules, various state and federal proposals, as well as rulings, primarily from a policy perspective.  Tax policy considers appropriate design of tax laws. I'll make observations where existing laws or legislative proposals do or do not meet principles of good tax policy, such as simplicity, equity, transparency and neutrality. I'll also point out areas where sales and use tax rules are out of date with 21st century ways of living and doing business.

In addition, I'll comment on selected rulings from state tax agencies and state and federal courts that raise interesting nexus or tax base issues or that perhaps indicate a need for legislative action.

There is plenty of material for discussing trends and tales for many aspects of sales tax. For example, just in the past few months, we've seen the following "tales" dealing with nexus:

  • The New York State Department of Taxation and Finance issue a ruling (TSB-A-12(1)C) on a new payment processing service aimed at enabling "unbanked" or "under-banked" customers to purchase online even though they do not have a credit card.  The Department ruled that the service was not subject to sales tax. Also, the in-state store helping with the payment process does not cause the service provider or merchant to be considered vendors for sales tax collection purposes. The ruling is a good example of a state responding timely to a new way of doing business. It also points out that many of today's sales tax rules do not clearly address new ways of doing business leaving taxpayers with uncertainty and the need to perhaps seek a ruling.
  • A Pennsylvania Department of Revenue ruling (SUT-12-001) is a reminder of the tax confusion often created by cloud computing activities that don't neatly fit within today's rules that were mostly written in the 20th century. The PA ruling held that sale and use of software is not subject to sales tax if the end user is located outside of PA, even though the server is in PA.
  • Another 21st century business approach is affiliate advertising. An Illinois court found that state's affiliate nexus law unconstitutional. The lack of a rebuttable presumption in the Illinois statute and its limitation to web-based transactions likely means that this ruling won't have much bearing in other states that enacted affiliate nexus (so-called "Amazon" tax rules) similar to the New York provision enacted in 2008. For more on this issue and case, I have a short article in the 6/14/12 AICPA Tax Insider.
  • State appeals courts in Connecticut and Tennessee reached conclusions that Scholastic Books had nexus in the state due to the presence and actions of school teachers that enable orders to be made in the state.  The rulings are reversals of lower court decisions. The cases are a reminder that nexus determinations are not always easy and the physical presence standard continues to be interpreted and clarified 20 years after the Quill decision was issued by the US Supreme Court.

That's just a sampling of some recent nexus "tales."  I will delve into some of them further in future posts. I will also explore sales tax topics of broadening the base such as to include personal services, narrowing the base, rate changes, and administrative matters.

I welcome your comments and participation. Thank you.

Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

4 Responses to What's to Come in "Sales Tax Policy – Tales & Trends"

  • Posted by Author photo of Annette NellenAnnette Nellen on July 14, 2012 4:19am:

    Jim, Thanks for the comment. Yes, there are a few more challenges with a tax on services compared to a tax on tangible personal property that is easier to track. The issue of going across the border to get a hair cut won't be widespread. While the state can say the shampoo you also bought and brought back to the state is subject to use tax, that seems harder for the hair cut service. But, most people are not going to leave the state to get personal services.
    I don't think the gum example is the same as the medical services issue. The gum, regardless of quantity should be subject to tax. For medical, I think an issue would arise if there are carve-outs from a general exemption that anything provided by a doctor or that needs a prescription is exempt. A state might likely try to say that elective procedures are taxable.
    I think these are all difficult problems to solve, but not impossible ones.
    And 4 important things to do when a state starts taxing services:
    1) Don't make businesses pay the tax.
    2) Lower the rate
    3) Transition in the change in terms of which services are taxable so the state can help the services businesses become compliance.
    4) Provide a refundable income tax credit to help offset some of the start-up costs service businesses will have to get ready to charge and collect sales tax.
    What do you think?

  • Posted by Jim on July 14, 2012 3:19am:

    There are a couple of problems with your plan that we discovered in Florida when there was a move to pass a service tax.
    1. Any state tax on services penalizes businesses on the state border where the consumer could easily make a short trip across state lines. This is a smaller version of the much bigger problem of how does a service business with an internet based product compete with companies in low sales tax states?
    2. Adding exemptions for medical procedures starts you down the road of no return to more exemptions. In Florida, a pack of gum at the checkout counter is subject to sales tax. Purchase six packs of gum bundled together and its exempt food.

  • Posted by John on June 22, 2012 8:56am:

    Hi, Annette. We met at a seminar you gave many years ago at the Hayes Mansion in San Jose when Streamlined was just getting attention in California. I am sure you don't remember me.
    Broadening the tax base to include services seems like the most sensible and broad-based option, It does, however, have one big problem. It runs smack into the two most powerful lobbies in any state -- doctors and lawyers. Many state have tried a piecemal approach trying to surround and isolate those two powerhouses. A bill was introduced this year in the Legislature to try to do something like that, but it got gutted.

    • Posted by Author photo of Annette NellenAnnette Nellen on June 22, 2012 1:21pm:

      Hi John,
      Yes - I remember you. Thanks for the comment.
      To avoid pyramiding of the sales tax, we should just tax services used by individual consumers. Also, we probably need to exempt medical other than perhaps elective procedures. Lawyers should not have any trouble knowing the purpose of their work - for a business or personal. So that should work well.
      CPAs have also been opposed. But again, they should be able to easily tell what work was done for personal versus business. And they have been doing so for deduction purposes for years.
      I support simplified reporting. For example, let small businesses report less frequently. Or for any business that takes a client's credit card, allow a simple web-based system where the client's credit card can be charged at the same time for the sales tax.
      I'll have more on this later.
      Thanks.

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