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July 2019

How Small Businesses can Deal with Paying Sales Tax Across America

More and more, Americans are spending their time on the internet and small businesses are finding that if they want to connect with the customers, they have to be on the internet as well.

A 2019 study by the website Big Commerce found that not only are Americans turning to the internet for information, they’re also turning there to shop. The study found that only 9.6 percent of Gen Z (born between 1997 and the present) have purchased something in a physical store. The numbers are only slightly higher for Millennials at 31.4 percent, Gen X at 27.5 percent and Baby Boomers at 31.9 percent.

In other words, the internet is where the shoppers are.

But selling on the internet causes problems and a lot of paperwork for small businesses, in part because of a 2018 ruling by the U.S. Supreme Court.

South Dakota v. Wayfair

In 2018, the Supreme Court ruled that states can collect sales tax from a company even if the company doesn’t have a physical presence in the state. That’s different than the previous law which said that a state could only collect sales tax from a company with a physical presence (i.e. an office, manufacturing site, etc.) within the state.

This new ruling has determined that if there is an economic nexus within a specific state, then the state is within its rights to collect sales tax from the company. The word nexus is very important. States are now looking at exactly how much business a company is doing within their borders. If a company’s sales reach a certain threshold, then the company is considered to have a “presence” other than a physical one within the state.

For example, if a company makes $100,000 in sales in Arkansas in 2019, it has an economic nexus within the state. Arkansas also has a provision that considers any company that makes 200 sales or more within the state, to have an economic nexus within the state. In both instances, even though the company has no physical location in Arkansas, it must still pay the state’s sales tax.

Many major corporations were prepared for the fallout from the Supreme Court’s decision. While it may lead to a little extra paperwork for Wayfair, the truth is a company of that size can handle it.

The real problem is the smaller, mom and pop shops that now must navigate their way through each and every state to figure out if they owe sales tax and if so, how much.

How Congress is Dealing with the Fall Out of South Dakota v. Wayfair

Right now, several bills are working their way through Congress to try and help out small businesses.

H.R. 379 would negate the Supreme Court ruling and make it so states could not collect sales tax from a company that does not have a physical presence in the state unless the state has a law that requires sales tax to be collected on e-commerce sales.

H.R. 6724 introduced in 2018, would do something similar.

H.R. 1933 aims to ease the burden on small businesses by preventing states from collecting any sales tax from sales that took place before the Supreme Court ruling. It would also hold small businesses that do less than $10 million in online sales annually exempt from paying state sales taxes.

A bill introduced in 2018, H.R. 6824, would do something similar to H.R. 1933.

Sales Tax by State for 2019 (Updated July 2019)

Until things change, small businesses will be required to pay sales tax in each state that it has an economic nexus, in other words, a presence in. Below is a chart that looks at what each state’s sales tax is and what the state’s economic nexus is.

State Sales Tax Rate

(From Tax Foundation)

Annual Economic Nexus

(From Sales Tax Institute)

Alabama 4% $250,000
Alaska 0% n/a
Arizona 5.6% $200,000
Arkansas 6.5% $100,000 or 200 or more separate transactions
California 7.25% $500,000
Colorado 2.9% $100,000
Connecticut 6.35% $250,000 and 200 transactions
Delaware 0% n/a
Florida 6% $100,000 or 200 or more separate transactions
Georgia 4% $250,000 or 200 or more sales
Hawaii 4% $100,000 or 200 or more separate transactions
Idaho 6% $100,000
Illinois 6.25% $100,000 or 200 or more separate transactions
Indiana 7% $100,000 or 200 or more separate transactions
Iowa 6% $100,000
Kansas 6.5% $100,000 (effective 10/1/19)
Kentucky 6% $100,000 or 200 or more separate transactions
Louisiana 4.45% $100,000 or 200 or more separate transactions
Maine 5.5% $100,000 or 200 or more separate transactions
Maryland 6% $100,000 or 200 or more separate transactions
Massachusetts 6.25% $500,000 and 100 or more transactions
Michigan 6% $100,000 or 200 or more separate transactions
Minnesota 6.88% $100,000 or 200 or more retail sales
Mississippi 7% $250,000
Missouri 4.23% $100,000 or 200 or more separate transactions (effective 10/1/19)
Montana 0% n/a
Nebraska 5.5% $100,000 or 200 or more separate transactions
Nevada 6.85% $100,000 or 200 or more separate transactions
New Hampshire 0% n/a
New Jersey 6.63% $100,000 or 200 or more separate transactions
New Mexico 5.13% $100,000
New York 4% $500,000 in sales of tangible personal property and more than 100 sales
North Carolina 4.75% $100,000 or 200 or more separate transactions
North Dakota 5% $100,000
Ohio 5.75% $500,000
Oklahoma 4.5% $100,000 in aggregate sales of TPP
Oregon 0% n/a
Pennsylvania 6% $100,000
Rhode Island 7% $100,000 or 200 or more separate transactions
South Carolina 6% $100,000
South Dakota 4.5% $100,000 or 200 or more separate transactions
Tennessee 7% $500,000
Texas 6.25% $500,000 (effective 10/1/19)
Utah 5.95% $100,000 or 200 or more separate transactions
Vermont 6% $100,000 or 200 or more separate transactions
Virginia 5.3% $100,000 or 200 or more separate transactions
Washington 6.5% $100,000
Washington, D.C. 6% $100,000 or 200 separate retail sales
West Virginia 6% $100,000 or 200 or more separate transactions
Wisconsin 5% $100,000 or 200 or more separate transactions
Wyoming 4% $100,000 or 200 or more separate transactions

 

This chart is a look at where things stand currently, however, states and businesses are still getting used to these new rules and you can bet that they will change over the next few years.

It will be essential for any small business owner that makes sales online to keep tabs on what each state they do business in is doing.

The Upside of the Wayfair Supreme Court Decision

If there is one silver lining in all of this, it’s that it is possible this will force states to come to a collective agreement on how they tax e-commerce.

South Dakota is part of the Streamlined Sales and Use Tax Agreement put forth by the Streamlined Sales Tax Governing Board. The board was formed in 2000 to help “…simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance.”

According to the Streamlined Sales Tax Governing Board’s website it deals with the following:

  1. State level administration of sales and use tax collections.
  2. Uniformity in the state and local tax bases.
  3. Uniformity of major tax base definitions.
  4. Central, electronic registration system for all member states.
  5. Simplification of state and local tax rates.
  6. Uniform sourcing rules for all taxable transactions.
  7. Simplified administration of exemptions.
  8. Simplified tax returns.
  9. Simplification of tax remittances.
  10. Protection of consumer privacy.

As of July 2019, 24 states have adopted the policies of the Streamlined Sales Tax Governing Board and it’s possible that more will soon.

The Best and Worst States when it Comes to Taxes

There are a lot of factors to consider when you begin to establish your business and one factor that is often overlooked is the effect state taxes will have on your business’s bottom line. Sometimes businesses forget that in addition to those federal taxes, they also have to pay state taxes and often local city business taxes as well. All of that can make a big dent on a business’s bottom line.

The Tax Foundation, a non-profit that specializes in tax policy took a look at all 50 states and ranked them in five different categories: corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax. Based on those rankings, it came up for an overall ranking for each state. You can see the full list here, but to make it a little easier, take a look at the top and bottom three on the list.

The Top 3

Wyoming

The state of Wyoming has the lowest corporate and individual income taxes in the United States. Its sales tax (just 4% in 2019) is also in the top 10, which makes it a very agreeable place for businesses to set up shop.

Alaska

Alaska is top in America when it comes to individual income tax and 25th for corporate tax. The state has no sales tax, but it allows cities to tax purchases up to 7%, which dropped the state down a few pegs in the rankings.

There are downsides to opening a business in Alaska. The cost of living in Alaska is high and the quality of life can be poor considering for part of the year it’s pretty dark outside.

South Dakota

South Dakota has the best corporate tax rate in the country and is tied with Wyoming for the best individual tax rate. But the state’s sales tax rate is 4.5% which is what knocked South Dakota down to third on the list.

Bottom 3

New York

New York’s low ranking has a lot to do with property taxes and the individual state income tax, which are 47th and 48th respectively. The one place the state does excel is how it treats its corporations. According to Nolo, the default corporate tax rate is 6.5%, but emerging technology companies get a 1% break and qualified manufacturers pay no corporate tax at all.

New York includes New York City and that’s another roadblock for businesses. Companies that want to open up in The Big Apple will have to contend with another set of taxes as well. According to Smart Asset, New York City also collects its own individual income tax on top of what the state and federal government collect.

California

Second to last on the list is California, in large part because of how much it charges in corporate and individual taxes. California is 49th on the list in individual tax, behind only New Jersey, which just so happens to be the lowest ranking state on the Tax Foundation’s list.

There is an upside to California, U.S. News ranks the Golden State as the top spot to start a business because “The state boasts the most venture capital investment and the highest patent creation rate of any state.”

New Jersey

The Garden State falls to the bottom of the list because it has high taxes in almost every category. The state has the highest individual tax in the United States and ranks 47th in corporate tax. There’s also a state sales tax that ranks 45th on the list at 6.625%.

Things to Know About Paid Family/Medical Leave Tax Credits

A few years ago, the IRS made some changes to the tax credit employers receive for giving employees paid family or medical leave. The IRS code section 45S will be in effect until the end of this year, though it’s possible that Congress could decide to extend it beyond December 31, 2019.

For employers, it means that offering that added benefit to your employees comes with a tax perk.

What must I do to claim the credit?

The first thing you need is a written policy for your employees. This policy must include at least two weeks of paid family or medical leave annually for all full-time employees. The leave will be prorated for part-time employees.

This policy must have an effective date. You can only deduct the paid leave wages that were paid out following the effective date of your policy. It is possible to make a retroactive effective date as long as it falls inside the taxable year that the policy was adopted. For example, if the policy was adopted on July 1, 2018, the effective date can be January 1, 2018 and still work.

The paid leave must equal at least 50% of the wages that the employee normally makes.

Who can qualify for the credit?

Anyone who has worked for you for at least one year and received less than $72,000 in paid leave can qualify for the credit.

What kind of leave can qualify?

There are restrictions on what kind of leave qualifies for paid family or medical leave. The leave must fall into one of the following categories:

  • Birth of the employee’s child and to care for that child;
  • The adoption or fostering of a child;
  • Caring for a spouse, child or parent with a serious health condition;
  • An employee dealing with a spouse, child or parent being called to active duty in the Armed Forces;
  • Care for a service member that is related to the employee.

If the leave that you cover does not fall into one of these categories, then that leave does not qualify for the paid family or medical leave tax credit.

How can I determine how much of a credit I receive?

The IRS calculates the credit by taking a percentage of the wage that’s paid to the employee while the employee is on leave. There’s a cap of 12 weeks per year on the pay.

If an employee receives 50% of their pay, the employer will receive 12.5% of that in tax credit. For every percentage point the pay goes up, the credit is increased by 0.25%.

Does this credit affect my other business tax credits?

Yes. You can’t double dip and take wage tax deductions or credits and then also take paid leave credit.

These are just some of the basic rules that help you establish a paid family and medical leave policy within your company. There are other, more intricate rules and it’s important that you talk to your tax adviser before you start enacting a paid family and medical leave policy in your company.

If you have any further questions, you can also reach out to us here at The Tax Credit Group. We have a team of professionals that can help you with all of your needs.

Tax Relief for When Disaster Strikes

The start of summer also marks the beginning of hurricane season for the south and eastern parts of the United States and the start of wildfire season in western parts of the United States. While no one ever wishes that disaster strikes, there’s always the possibility.

For those who have had the misfortune of dealing with a major disaster or are worried that you might one day, the IRS does have solutions. Despite popular belief, the IRS does not have it out for anyone. In fact the IRS is in the habit of helping people and businesses dealing with a major disaster.

How Do I Know if I Qualify?

The first thing you need to establish is whether or not the disaster you experienced was large and impactful enough for it to be declared a natural disaster by the Federal Emergency Management Agency (FEMA). This is important because the IRS only recognizes incidents that were declared emergencies by FEMA.

For a list of the qualifying events, you can visit the IRS here.

Have I Met All Tax Deadlines Following the Disaster?

If FEMA has declared your event an emergency, then the IRS extends several deadlines for business owners including payroll taxes, quarterly estimates and even filing your return. Note that this is an extension, which means while they may not be due now, those taxes will eventually be due.

Make sure you plan and prepare for that bill so you’re not surprised when the deadline finally arrives.

How Can I Get Tax Relief Quickly Following a Disaster?

One of the key things the IRS does to try and help disaster victims immediately is to allow them to amend their tax returns from the previous year. This is important because it means the taxpayer can receive a disaster-related tax refund without waiting.

In addition to allowing these amended returns, the IRS also expedites the processing of the returns to make sure refunds are handed out as quickly as possible. For details on amended returns visit the IRS website here.

When you amend your return, it’s important that you look at the casualty loss deduction and itemize your return if necessary.

According to the IRS, “A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn’t include normal wear and tear or progressive deterioration.” (For full details, visit the IRS website here.)

Make sure that any deductions you take are calculated after you receive an insurance reimbursement or take the potential reimbursement out of the amount you’re deducting. The IRS doesn’t let you double dip by getting a tax deduction for a loss and getting a payout from insurance.

What if I Don’t Live in the Disaster Area, but I’m Still Affected?

The IRS tries to cover all of its bases when it’s dealing with taxes so there are no loopholes for people. That’s why the agency actually has a policy to deal with people that are affected by the disaster even if they do not live in the disaster area. Affected parties include people whose tax preparers operate in the disaster area and people involved in business partnerships or corporations that operate in disaster areas.

For full details, you can visit the IRS website here.

Extra Relief for Major Disasters

The IRS also understands that some disasters are more devastating than others and therefore have a bigger financial impact on businesses, that’s why extra tax relief can be added on in some situations.

For example, in 2017 businesses in parts of Florida and Texas affected by the hurricanes received up to $2,400 in deduction per employee.

It’s important that you talk to your tax professional about any deductions that may be available to you or your business following a major disaster. The advice offered in this article is not based on your specific situation and therefore may or may not be the best advice for you. If you need help making sure you get the best tax benefit for your situation, you can always contact us here at The Tax Credit Group.

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