Local Jurisdictions and the Problems They Can Create
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat talk about local jurisdictions and the problems they can create when collecting and remitting tax.
Here’s a glimpse of what you’ll learn:
What do local jurisdiction rates consist of?
Are local jurisdictions a problem in every state?
What are some of the worst states when it comes to sales tax?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More, your go to resource for all things state tax related. Now, here is your host, Michael Fleming.
Hi, Mike Fleming here, founder of Sales Tax and More. And today's co host of the Sales Tax and More podcast, where we talk about everyone's favorite topic, which is of course, sales tax. Now, today we're going to be talking about some of the local jurisdictions and the problems that they can create when either collecting or remitting sales tax.
But before we do, let me introduce you to my co host Ellie Moffat. Hey, everyone. As always, great to be here talking about, like we said, everyone's favorite topic, sales tax,
[00:01:00] and I'm going to do a quick introduction for our company, Sales Tax and More. We are a full service consulting and solutions firm.
We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. So we do a lot of sales tax returns, sales tax registrations, consultations, research and like our name states more so as always please reach out to us if you'd like to work with us. We'd love to work with you as well.
So Mike What do local jurisdictional rates consist of? Well, Ellie, I am so glad you asked. They can consist of city rates, county rates, school districts, other types of districts, enterprise zones, and then there are special taxes that, they can consist of also. When you're looking at an invoice, it's generally lumped together with the state rates and you're just charged one tax rate. They
[00:02:00] don't get broken out like, in Canada, where they could show the federal rates different than the provincial rates. But here it's all shown as one rate and, how you get to that rate is going to be different on a state by state basis. So there, you know, local jurisdictions can have different rates.
It'd be nice if, the states did everything uniformly and, there was just one rate, but there are like 13, 500, you know, that's a number that I generally use. It's in the ballpark of what people estimate. But 13, 500 different taxing jurisdictions in the country. Now, when I say taxing jurisdictions, that's, jurisdictions that, have their own rates, their own add ons to the state rate.
But in some jurisdictions, there can actually be different taxability rules.
[00:03:00] So that generally happens in states that we've referred to as the home rule states like your Alaska, your Alabama, your Arizona, Colorado, Louisiana, but it can also be states like New York and Illinois where this can also be an issue.
So are local jurisdictions a problem in every state? I know there's a lot of states being thrown out there right now. Are they a problem in every state? No, some states make it very easy. As a matter of fact, some states don't have a sales tax like Delaware, Montana, New Hampshire, and Oregon. Now that's very misleading because they don't have a general sales tax.
They often have taxes that look and feel like a sales tax. They're just not called a sales tax. For example, in Delaware, they actually have a use tax. And if you are leasing tangible personal property into the state of
[00:04:00] Delaware, you now have a nexus in Delaware and you have a responsibility to collect tax, on those lease payments, from the lessor.
And remitted to the state of Delaware. So that's a common mistake that companies that are leasing tangible personal property throughout the United States, they often miss Delaware because everyone just assumes Delaware is one of the nomad states. Nomad are the states with no sales taxes. It's the first letter of each one of these states, New Hampshire, Oregon, Montana, Alaska and Delaware.
Now we have a lot of, information out there that say Nomad no more because Alaska, even though they don't have a state rate, they do have an economic nexus and they have a lot of local jurisdictions and the Alaska Municipal League. The AML has gotten together with a number of these jurisdictions and they said, we want
[00:05:00] you to administer our taxes. So if you have $100, 000 worth of sales or 200 transactions in the state of Alaska, there are a lot of local jurisdictions where you need to be collecting and remitting the tax. But in general, no general sales taxes in Delaware, Montana, New Hampshire, and Oregon. Now, there are nine states that basically only have a state rate.
So, collecting the rates in these states, and filing returns in these states is actually fairly easy. Now, when I say basically, There's not any, city or county rates. There may be special taxes or, enterprise zone, you know, different areas where you don't have to charge taxes or have a lower tax rate, but in general, the states of Connecticut, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Jersey, and Rhode Island, just have a state rate.
[00:06:00] Nothing like being put on the spot for information you talk about all the time, and then , suddenly it's harder to remember. For, I too for a second was like, wait a second. The nomad states, we, talk about these so much. So, Mike, what are some of the worst states?
Oh, that's such a loaded question. Worst how? Worst for crime, worst for pollution. When it comes to sales tax, I would think that Illinois right now is at the top of the list, though. And for a couple of reasons. Illinois, number one, Chicago and Cook County, have their own tax rates, but they also have their own tax rules, and what may be exempt in the state of Illinois is often taxable in the city of Chicago and or Cook County, so you've got to worry about that. I know a number of years back, I was working with a number of clients who were working with Avalara,
[00:07:00] and they were leasing companies, and, the state of Illinois does not treat a lease as a purchase, and it's not taxable, where the state of Chicago does, so, this was very early on in Avalara's, beginnings, and, they didn't have how to do this, so we had to create a special rule, and get it into, Avalara for how, tax could be charged on leases into the schitty, into the city of, of Cook County.
City of Chicago. Boy, am I, this is a rough one today. Into the city of Chicago. We'll edit that bit out. All right so, that's the one problem. Okay. We've got different taxability in Chicago and Cook County.
The second problem, and more importantly, is the sourcing and sourcing means, you know,
[00:08:00] where, which jurisdictions rate do you use? So there's three different ways that the state of Illinois does this, and the first is if you are a in the state of Illinois, and you are making deliveries from the state of Illinois, you use the retail occupation tax and origin based.
So you only have to worry about one rate. And this is deliveries to Illinois, deliveries outside is a whole nother story, but deliveries from Illinois to Illinois, you only have to worry about, where you're, those sales are origin, originating, and when you're filing return, you only have to worry about the one jurisdiction.
However, if you're a remote seller, if you have no connection to the state of Illinois at all, then, you have to sign up for the retailers occupation tax,
[00:09:00] same, same tax, only now you need to use destination based sourcing. And there are almost 4, 000 different jurisdictions based on destination. So now you get a worry instead of just one rate.
You got to worry about almost 4, 000 rates, and when you're doing the returns, it's an absolute nightmare. Now this may be fixed, because I've been saying for years that I believe this is unconstitutional. Well, someone finally sued them, and I think that they will lose, but the fix is easy. So, until, they actually change this, I strongly suggest you keep collecting in all of the, 4, 000 or so local jurisdictions and making sure that you get that remitted correctly when you do the returns.
So, there's a 3rd way and this is for companies that have a physical presence like a salesperson there. But.
[00:10:00] Don't actually ship, from the state of Illinois. And in that case, you sign up for what's called the retailers use tax, and you don't have to worry about local rates whatsoever. So here's a little cheat.
We suggest to our clients, especially if you're filing the returns yourself, and you don't want to have to deal with these 4, 000 different jurisdictions. Create some nexus, send a salesperson in there, hire an independent contractor. and now you can skip, collecting, the local jurisdictions and hopefully this works its way through the courts fairly quickly and we get some sort of solution that's a lot better than the one that we have now.
But I would say by far, Illinois is the worst jurisdiction at this point. New York, this is a state that a lot of people make a mistake in. And one of the reasons for the mistakes here are with people who sell clothing, because New York has a great clothing
[00:11:00] exemption. And for any items that are less than $110, that's $110 each, not the amount of the invoice, but the actual item, pair of pants.
Even though it says pair pair of socks. It's still one item. So if it's less than $110, then no tax, but that's only no tax at the state level. All of the jurisdictions had the option to impose a tax on clothing. So, for people who are selling clothing, they, they just hear the state exemption and they don't do anything about collecting on the locals until, they start, getting audited, you know, two, three, four, five years down the road.
So New York is a, is a real problem and New York City can have different rules than New York state also. Then we have the home rule. You know, these are where the state allows the local
[00:12:00] jurisdictions to self administer and, they actually do the collection themselves, and do the auditing, whereas in a state like Illinois, even though Chicago and Cook County may be different, Illinois still collects the taxes, same thing in New York, you're not remitting to all of these different jurisdictions.
You just have to be aware of the different rules. But in Louisiana and, Alabama and Colorado, and to a lesser degree Alaska, and Arizona.
These are what are called the home rule jurisdictions. And not only may they have different rates, they may have different taxability and, you may have to file the return with a whole, with the local jurisdiction rather than with the state.
Now, since Wayfair, the states have been moving towards making it easier. Some states are closer than others, but some states are actually going
[00:13:00] backwards. And it looks like they're moving away from something that they had made easier to begin with. Louisiana is perhaps the worst of these home rule cities and Excuse me, home rule states and they have parishes and these parishes can be pretty aggressive when auditing and you know, nothing scares you more.
Then getting a letter from the sheriff and saying, Hey, we're auditing you for sales tax, or, Hey, you've got a judgment for sales tax because in these smaller parishes, you know, they don't have a very formal department. You know, someone's pulling double duty. I often joke around and say, Hey, the person who's auditing you doubles as the librarian.
And it's not quite that bad, but you, it is the sheriff in a lot of these parishes. So, That can be pretty scary and, you know, when you're dealing with a state, the theory is, you know, you're dealing with professionals
[00:14:00] and there's certain things you can expect and, and not expect when you're dealing with the Sheriff's Department.
Sometimes I don't think the same expectations are there. They're not as well versed in the taxes. And they play a little bit more hardball. In my experience, so Louisiana is the worst of what I consider the home rule, states, Colorado, they have what's called the such system and they're moving in the right direction, but they're just not there yet.
You have to get registered still in a lot of these local jurisdictions. Now, in theory, you can file through, the Colorado SUTS system. But what Colorado is promising is that one registration will take account of registrations in all of these local jurisdictions, and it'll make the filing a lot easier.
So now, although you can go through this SUTS portal, you still have to,
[00:15:00] almost fill out, you know, a short information on each one of these jurisdictions. So it's still very labor intensive, not as bad as Illinois. But, almost. So, Alabama, is another one, Missouri, Alaska, you have to worry about which ones are being administered by the Alaskan Municipal League, and which ones you may have to remit directly to the local jurisdiction.
My thought process is, if you're not a member of the Alaska Municipal League, then that broad based, Economic nexus, the $100,000 and 200 transactions. I don't see how they can enforce that, but that's just my opinion. I am not a lawyer, but, I don't think you have to worry about those as much. I think that you have to have nexus the old fashioned way in those jurisdictions that are not participating with the Alaska Municipal League. Now, if your sales are material in Alaska and you're over
[00:16:00] those thresholds, I do think that you should, be registered in collecting the tax in the jurisdictions that are administered by the, the Alaska Municipal League. And it's most of the jurisdictions at this point, the vast majority, of the jurisdictions in Alaska.
And in Alaska, You, have, you know, municipalities and instead of parishes, you have boroughs. So, I grew up in the borough of Queens, New York. I always, was wondering what, why do they call it a borough? And now we, now that I'm in sales tax as an adult, Alaska is one of the other places that we see them using the term borough.
So just a little bit Side note there, Missouri is one that I want to talk about because they have a lot of local jurisdictions and, you know, if you have a client that gets registered and they filed incorrectly or something along those lines. You are
[00:17:00] going to get a Manila envelope with about 600 pages.
I may be exaggerating there, but it is probably a one inch to one and a half inch thick ream of paper coming in the mail, detailing all of the local jurisdictions and everything that was done wrong there. So, you know, Ellie, I could go on and on. But we'd be here for days, talking about these local jurisdictions.
And I know everybody is here because they just love sales tax so much, but I think we need to distribute this information in a tribs and dribs. I think if we do information overload, I could burn everybody out and their love of sales tax may actually go away. So let's save some for. For our next episode, but for now, we, we just want everyone to be aware that there are differences in the
[00:18:00] local jurisdictions. Some states make it easy, like the nine I mentioned, but some states you got to worry about different taxability. You definitely have to worry about different rates, and you just need to be aware. You have to have a good source to go to get this information. And, with that. Ellie you have anything to wrap up with yeah, just your local sales tax heroes preserving your love of sales tax during our weekly podcasts and I do want to just put it out there.
We do have many solutions and services. So if you check out our website. You can access those free resources that we have. You can see the services that we offer. You can email me directly at E Moffat, E M O F F A T at sales tax and more. com. You can also visit our website, sales tax and more. com. And don't forget to like, and subscribe to our podcast.
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[00:19:00] And thank you so much for joining us. We really appreciate you. Thank you everyone. Hope to see you on the next episode of the Sales Tax and More podcast. bye-bye.