Part 2: Most Helpful FAQ at Sales Tax and More
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…
To ensure sales tax compliance, one of the best decisions a company can make is to consult a professional tax expert. This is because sales tax requirements can differ for each seller and each state—what applies in one state may not hold for another.
So, whether you’re a retail store seller, an online seller, an interstate seller, or even an international seller, it’s important to find a sales tax expert that can help you comply with all sales tax requirements. Luckily, the team from Sales Tax and More is here to answer all your burning questions regarding sales tax registration, compliance, and more.
In this second part of the frequently asked questions episode of the Sales Tax and More Podcast, Michael J. Fleming and Ellie Moffat share their expertise about registering for sales tax. They answer client questions about the states that don't require registration, the taxability of freight, and whether or not an individual tax identification number (ITIN) or U.S. bank account is needed to register and pay sales tax in the United States. Stay tuned.
Here’s a glimpse of what you’ll learn:
Are there states with no sales tax?
Do I need to register with the Secretary of State when registering for sales tax?
Do I need a registered agent when registering for sales tax?
Why would I be registered for retailer use tax, seller use tax, or vendor use tax instead of sales tax?
Does registration for sales tax create income tax nexus?
Is freight taxable?
Are foreign sellers subject to U.S. sales tax collection?
Do I need a U.S. entity, a U.S. bank account, or an ITIN number to do business or pay sales tax in the United States?
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
NOMAD - No More Alaska Introduces Economic Nexus For Sales Tax by Michael J. Fleming
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now here is your host, Michael Fleming.
[0:26] Mike: Hi, I'm Mike Fleming, 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. Today, my co-host, Ellie and I are going to be going over some frequently asked questions. This is the second of a two part series on frequently asked questions. In our last episode, we went over six frequently asked questions. Today we're going to cover eight more. But before we do, I want to introduce you to my co-host, Ellie Moffat.
[0:59] Ellie: Hey, everyone. Great to have you here and my favorite topic is sales tax, Mike. And hopefully, you did listen to our last episode of frequently asked questions. We have eight more great questions for you today. And before we get started here, I'm going to do a quick introduction for Sales Tax and More. So Sales Tax and More is a full service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling any of your state tax or related needs. So we do a lot of sales tax returns, sales tax registration, sales tax audits, consulting, research, and like our name states more. So if you have questions about our services, please reach out and ask. We will give you plenty of ways to do so. And I'm going to jump right in here. So okay, Mike, the first question we have here: Are their states with no sales tax? Chances are if you're listening, you know of at least a couple of states that do not have sales tax. There are five of them that do not have a state-level sales tax. They are New Hampshire, Oregon, Montana, Alaska, and Delaware. The acronym used to remember these dates is NOMAD. However, you may have seen some of our material out there. Nomad no more. That is because earlier this year, Alaska did make some changes to their tax laws, they implemented an economic threshold. And once you pass that you do have to collect local-level taxes. So we've addressed these changes with the head of the Municipal League, and head of the Alaska Municipal League, we've had him on a couple of times to talk about those changes. We also have a blog post out there that really details and lays this out. But Nomad no more is a thing, Alaska's made it really easy to register and collect, there's one entity to file with. So I'll leave it there. Hopefully, you can understand and we can keep going.
[3:05] Mike: Yeah, without that A in there, Nomad doesn't work anymore. So we'll have to come up with a new acronym. That denotes those states. While we're on that, though, I do want to point out that each one of those states, the four states that are left, New Hampshire, Oregon, Montana, and Delaware, they all have some sort of tax that resembles a sales tax for an example in New Hampshire, you know, they do tax car rentals. You know, restaurant meals, hotel, lodgings. Montana, in some of the resort areas, actually does charge sales tax. So when we say that there's no sales tax, it's no state-level general sales tax. So, for example, in Delaware, there's a use tax on leased property. So if you're leasing into the state of Delaware, you own property in that state. So you do have nexus and you are responsible. The lessor is responsible for collecting this tax from the lessee. So there is a use tax. Most people don't understand this. They think that Delaware, no sales or use taxes, that's not true. There is a use tax, but it's limited to the rental property, whether it be equipment or whatever, and it is responsible to be the lessor responsible for the collection of that tax. So there are taxes and all of these states. There's just no general-level sales tax. All right, so very good, Ellie, thank you for sharing that information with us. And let's go on to the next question. Do I need to register with the Secretary of State when registering for sales tax? Yeah. Ellie, how about it depends answer
[5:00] Ellie: First one for this episode.
[5:03] Mike: So we joke about ‘it depends’ which is one of the most common answers in sales tax. And in this instance, it's going to depend on the state. And it's going to depend on what your activities are in this state. Right now we see a lot of people registering for sales tax, because of this economic nexus, this link or connection with states that quote is caused just by having sales into the state, or just by having a number of transactions in the state and no other connections. So if you just have an economic nexus with a state, no, there's absolutely no reason to register with the Secretary of State. Now, a lot of states will make it look like it if you're out there trying to do a registration on your own. Don't be fooled, because the state sometimes, you know, makes it a little bit tricky to figure out how to register without getting registered with the Secretary of State. But if you're only registering for an economic nexus, there is not a state out there, that is going to require registration with the Secretary of State, if you're doing this, you've made a mistake. So now, that's for if you have this economic nexus this, you know, and not a physical connection, on some physical nexus connections, depending on what your activity is, there may be a requirement to get registered with the Secretary of State, not all activities require that maybe you've got you know, a sales rep working from their in-home office, in general, that is not going to require a registration with the Secretary of State. If you got a brick-and-mortar location, and that's generally going to require a register registration with the Secretary of State and some types of employees working remotely will also require registration with the Secretary of State. So it really depends on what your activity is, and what state we're talking about. But in general, if you're just getting registered, and these are the most common types of registrations. Now, if you're just getting registered because of an economic nexus, no need to get registered with the Secretary of State. And if you are, and by the way, there's a lot of software companies who tell you it doesn't make a difference. If you're registering for a sales or use tax, but there is because, on a remote use tax or seller's use tax, you generally don't have to get registered with the Secretary of State, whereas on a true sales tax, then you are you know, I think that's one of our upcoming questions. So I'm not going to get too deep into it now. But don't make the mistake of getting registered with the Secretary of State if you don't have to. It's just a whole extra set of costs and responsibilities that you don't want to take on.
[7:59] Ellie: All right. Yeah, Mike, we are going to address that question in a little bit. So hopefully, we can give you guys a little bit more information. So the next question we have here is: Do I need a Registered Agent when registering for sales tax? The answer is not generally, we're not going to say it depends. We'll say not generally, it's a little more descriptive here. But Registered Agents are generally associated with registering with the Secretary of State. And if you are not registering with the Secretary of State, there's no need for a Registered Agent. So that's my quick short answer to this one, Mike.
[8:39] Mike: That's great. And I do want to say one thing, not all states have a secretary of state, New Jersey is one of those states. So we should say the secretary of state or its equivalent, so same concept. Alright, so now here's the question that I started answering before. Why would I be registered for retail use tax or seller's use tax or a vendor's use tax rather than a sales tax? Well, let's give you the historical answer first. You know, back in the 1930s 40s 50s, states truly believed that you could not tax interstate commerce directly. And therefore, in order to prevent companies from coming in and setting up right on the border, maybe they were like, you know, 100 yards away from this other store. One was collecting tax and one was not. So they came up with this idea that you know since they couldn't tax the transaction, they could tax their people in a state if they were buying something for the storage use or consumption in the state. So we're not taxing the transaction anymore. We're taxing storage, use, or consumption, and that protected in-state businesses. Because the out of state business, if they had this link or connection we call nexus, they were still responsible for collecting this compensating use tax. So if you're totally within, you know, the boundaries of a state, in other words, intrastate, if a never crosses a state line, even today, that's technically a sales tax, if it ever crosses the state line, technically, it's a use tax, now in 1977, we had complete auto transit. And the US Supreme Court said that, yes, you can actually tax interstate commerce directly, so long as it meets a four-prong test. And in 1977, we started having a blurring of the lines. So some states, you know, don't talk about a seller's use tax, or vendors use tax, and more states like Pennsylvania, they just know, when you register, you're gonna sell for sales use or hotel occupancy tax. In states like that, they talk about a consumer use tax as if it's a separate tax, it's not, it's just, you know, if, if the seller doesn't have nexus, then the purchasers are supposed to self assess and remitted directly to the state. But there are still some states out there, you know, Oklahoma is a big one. They make a distinction between a vendor's use tax and a sales tax. Now, when you're registering for the sales tax, they assume that's intrastate. So you have some sort of connection with the state, that's a physical presence, that requires you to register with the Secretary of State, which is a $350 fee, and the Department of Revenue charges your $25. And you need to get a Registered Agent. And then every year, you have to file an annual report. So lots and lots of extra fees. Whereas if you sign up for the vendors use tax, which is a remote seller, you know, that's who's gonna sign up for that you don't have any other connection, you're just signing up, as you know, someone outside the state who's going to collect and remit the use tax, you don't have to worry. And by the way, the sales tax usually makes you subject to the income tax. So now, here you are, you don't have to worry about the income tax, you don't have to worry about the $25, that gets paid to the Department of Revenue, you don't have to worry about the $350, again, paid to the Secretary of State, you don't have to renew this every year, just life's a whole lot simpler. Now, what I started to say before, for some reason, some companies out there companies like tax jar, they may have fixed this, but for years, they could not for whatever reason, follow use tax return. And you know, most of the people, they're doing business with remote sellers, and they were just telling people to go out and go get registered for sales tax. There's no big difference here. Are you kidding me? There's a huge difference here, you know, the type of tax that you're registering for is very, very important, you know, you know, on one hand, it's going to be a lot cheaper, very easy process for you and no strings attached. On the other hand, there's a lot of things that you just don't want to do. So wherever you can register as a remote seller, or for the vendors use tax or for the sellers use tax. That's usually a much easier route to take. Don't get talked into registering for the wrong type of tax.
[13:41] Ellie: All right, Mike, I'm gonna jump right into the next question here. So does registration for sales tax create income tax nexus? No, registering for sales tax does not create nexus for income tax, you either have or do not have income tax nexus based on your activities. However, it can put you on the state's radar. So my answer is no. But a quick little warning in here. It can, like I just said put you on the state's radar.
[14:12] Mike: I wish I thought for sure you're gonna tell me it depends. But you're avoiding the ‘it depends’ answer.
[14:19] Ellie: I am. Yeah. I'm just gonna give everyone a solid no on this one.
[14:23] Mike: All right. The next question is freight taxable? And, you know, this one here? It depends on who you ask. I mean, there are some software companies out there, you know, there are two tiers of software companies, there's, you know, an Avalara or Vertex which are the top tier and then there's the second tier and companies like a Tax Jar and for years Tax Jar, said freight was either taxable or it's not where is you know, companies like Avalara or Vertex, they had 28 different, you know, codes that you could use, 30 different codes you can use something in those numbers. So you can tell how granular this can get. Let's use California and you know, for years Tax Jar was telling, you know, California sellers that sales that freight was not taxable. Only California freight is not taxable, if it's separately stated number one. And number two, there are some other things. But these are the two big ones. Number two, it's a direct pass-through of costs. Now, Amazon bundles shipping and handling with — excuse me bundles handling with shipping. Handling is always taxable in California. So shipping is not separately stated. Now you can back some things out if you can do a percentage, but you don't know what that percentage is. And Avalara, excuse me, Amazon, never let you do that. So all in, you certainly didn't know that you will not that you knew you know that there was some sort of markup in there for our for Amazon. So it was not a direct pass-through-of cost. So the answer for all of these Amazon sellers is that the taxing, the shipping should have been taxable. Not No, it's not taxable. So there's a lot that goes into this, you know, this is not as easy as people believe it to be, when in doubt, tax if you're, you know, the typical business out there. But you got to read the fine print, you know, if you've read the top-level there, yes, yes, California says shipping is not taxable unless, and then it gives you all the criteria. So in some states, it's always going to be taxable, and others are always going to be taxable. If the item being sold is taxable, that's going to play a big factor in this. If what you're selling is taxable, then the shipping is going to be taxable in a lot of states, if what you're selling is not taxable. Shipping is not going to be taxable, there one's not going to be taxable and the others not. So that's important to remember, in some states, you have to look at whether the shipping is mandatory or not. So, you know, in a state like Illinois, if you give someone the option, you know, of coming by and picking it up at your location, then that is not taxable. However, if you don't give them that option, then it's mandatory, and mandatory shipping charges generally become a part of the sales price. And therefore it's taxable. So that's the reason why shipping is often taxable, is because, in many instances, it becomes a part of the sales price. And if what you're selling is taxable, then the shipping is generally going to be taxable. There are a handful of states out there like Arizona where shipping is not going to be taxable under most circumstances. But those are the exception rather than the rule. So, again, this is going to be very state-specific. And you can't just read the top line answer you have gotta dig down and see if it actually fits your scenario. Handling is almost universally going to be taxable in the vast majority of states out there.
[18:40] Ellie: Yeah, Mike, I'm gonna go to this next question. And I'm gonna avoid another. It depends here. So are foreign sellers subject to US sales tax collection, and my answer is, yes. Foreign sellers have all the same tax, same requirements as US sellers. So yes, foreign sellers are subject to US tax collection.
[19:04] Mike: Yeah, you're so right. You know, when it comes to sales tax, there are no separate rules, you know, if you're selling in the United States, you're subject to the different rules or the different states don't matter where you are located. Your sales are in the United States. Now income tax, a whole nother question. You know, if there's a tax treaty, then, you know, everyone thinks that you know, foreign companies don't have to pay income tax. Well, not all states have, excuse me, not all countries have tax treaties, number one, but number two, states are sovereign and they are not parties to the tax treaties. The tax treaties are between countries. So there are actually 13 states minimum depending on how you look at this where you actually could be required to file an income tax return. So not as cut and dry as many people out there will tell you. So sales tax, yes. Same exact requirements as us sellers income tax, different story altogether. However, in some states, you still have to fill out forms and or pay state income taxes.
[20:21] Ellie: Yeah. And Mike, we get questions about this all the time. There are always people emailing and there's a lot of confusion. And luckily, the answer is relatively straightforward.
[20:32] Mike: So, yeah, this is one where it doesn't depend I mean, yes, for sellers, you know, responsible. There's nothing special. It's the same exact rules for foreign sellers as for US sellers. All right, now leads sort of into this next question: Do I need a US entity or Us Bank Account or an ITIN number to do business or pay sales tax in the United States? And there's so much confusion here, because so many companies out there, by the way, nowadays, everybody's a sales tax expert, all you need to prove your sales tax expert is to say you are a sales tax expert. So a lot of very unqualified people out there say that their sales tax experts, be careful of who you're going to for your sales tax advice. But when it comes to entities, the people are telling you, oh, no, you need a US entity, their business is usually forming US entities. Now, we can form a US entity for you or your clients also. But you don't need one, sometimes it keeps it a lot more simple. If you're doing business with your foreign entity. And we have lots of foreign clients who decide not to use a US entity. So there could be other reasons besides sales tax, while you may want to open up a US entity, but you're not required to use a US entity. Now, these same people are telling you to open up a US entity and tell you they can get your Us Bank Account. And you may want a US bank account, but you definitely don't need a US bank account. Now, you may not be able to pay a state directly when you collect the tax. But there are companies out there like us who when we're filing your sales tax returns, you send us the money and we pay the state on your behalf. So we have a lot of foreign clients who, you know, just don't want to go through the hassles of opening up a US entity or opening up a US bank account. It's not that easy. It's that you know, they're paying sales tax doing business very successfully here in the United States. So if you do want to open up a US entity, then that is something we can help with. But by no means is it necessary to collect or pay taxes. You may want it open for another reason, but you don't need it for sales tax.
[22:57] Ellie: All right. Well, thank you so much, everyone, for joining us. If you know someone that these questions could benefit from, please share it around. We get these questions really all of the time. And if you need other sales tax services, we offer a lot of solutions and services, you can just reach out to me directly at emoffat@salestaxandmore.com or visit our website, salestaxandmore.com. And in addition to our services, we offer a series of free webinars. We have paid resources, we have free resources. We have a lot of information out there for you. So Mike, thank you so much. All right.
[23:43] Mike: So, before I wrap up here, I do want to talk about ITIN numbers because that's something I forgot to answer. I asked myself in the question but did an answer and no you do not need an individual tax identification number that's what ITIN stands for. As an entity, you're generally going to need a FEIN number even if you're a foreign entity that's you know also the EIN number some people call it the FEIN federal employer identification number or employer identification number, but you do not need the individual tax identification number we do registrations all the time for foreign entities without that. This has been a new format for us. The previous episode in this episode where we know answers frequently asked questions. Please give us your feedback and did you find this helpful? Do you want us to sprinkle these in from time to time and also let us know what other types of interviews you want to hear? Who should we be interviewing? What topics do you want to know more about? And as always, we thank you for joining us on this episode of the Sales Tax and More Podcast and hope to see you on the next one. Thank you and have a great day.
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