Sales Tax Changes

By Rob Poterucha, CPA

There have been many changes surrounding sales tax over the past year. Today, Rob Poterucha explains those changes, why they have taken place, and how they will affect you.

Rob Poterucha, CPA | Supervisor

see vlog transcription below:

My name is Rob Poterucha, and I am a Tax Supervisor at McGowen, Hurst, Clark & Smith, a full-service CPA firm with offices in West Des Moines and Winterset, Iowa.

Today’s topic of discussion is sales tax and the changes that have occurred over the past year.

Let’s get a couple of definitions out of the way before we dive into some of the changes. Sales tax is a tax imposed by state and local jurisdictions that the seller adds on to the purchase price of a product or service. For example, if the sales tax rate is 6% and you purchase a product for $1, the total amount you pay is $1.06. There is another concept of taxation that goes along with sales tax called use tax. Use tax is a tax that the purchaser is responsible for remitting if they were not charged sales tax and should have been. For example, if you bought that same item for $1 and were not charged sales tax, you should remit 6 cents to the appropriate government authority. Use tax is far less common than sales tax, but it’s important to understand both concepts of taxation.

There are two important sales tax cases that need to be mentioned. Quill, a case in 1992, disallowed states to impose sales tax on out-of-state retailers if they did not have physical presence in that state. Using these rules, a purchaser in Iowa would not be charged sales tax on a purchase of a gift basket from a retailer in Kansas who has no presence in Iowa. However, 2018 rolls around and states are looking to raise revenues. A case between South Dakota and Wayfair, an online retailer, goes all the way to the Supreme Court. The Supreme Court decided to reverse the Quill decision and allow states to enforce sales tax on out-of-state retailers. Using the same example, the retailer in Kansas would have to charge Iowa sales tax on the purchase from the Iowa customer.

This dramatically changed the way many online retailers do business. Instead of only charging sales tax to customers where they have physical presence, it’s possible they have to charge sales tax in every state that has a sales tax. The good thing about this is many states have put in place certain thresholds that must be met before they charge sales tax. For example, many states have adopted the provision that a company needs $100,000 of sales before charging sales tax.

As part of the Wayfair case, many states have re-visited their sales and use tax laws to make them more current than they may have been. For example, there are many things that are transferred digitally, such as Netflix or online manuals, that are not tangible and were not subject to sales tax. However, many states now tax these items. The rules for each state are different so it is important to understand how your business may be subject to sales and use tax.

Please reach out to your tax professional at McGowen, Hurst, Clark & Smith to learn more about sales and use tax and what your business may have to do to comply with various state laws.