Using a Taxability Matrix to Simplify Business Sales Tax Compliance from One State and Locality to the Next by Christian J. Burgos, CMI, JD, LLM
Sales tax compliance can be a monumental task for a business with activities in multiple states, each with their own tax rates and sales tax reporting thresholds. However, navigating through these complexities and maintaining compliance is possible with the right tools.
States are increasingly looking for new ways to fill their tax gaps by establishing that an out-of-state seller has a physical or economic connection to their jurisdictions, which may trigger an in-state sales tax reporting and collection requirement. Even when a business understands all the variations in these nexus-creating activities, the time and resources needed to maintain compliance and track all the different tax reporting and collecting requirements across various states and localities can become overwhelming. That’s where a taxability matrix can help.
What is a Taxability Matrix?
A taxability matrix is a high-level chart that lists all your business’s products and services and identifies when sales of those offerings are taxable in a particular state or locality. It provides a visual reference for tracking your state and local tax liabilities at different rates in every jurisdiction where you operate. Similarly, it gives you an understanding of where sales may be exempt from taxation.
To understand how this works, consider that clothing sales generally are subject to tax in 37 states. In Massachusetts and New York, sales tax applies on sales of clothing exceeding specific price thresholds, whereas New Jersey, Minnesota and Pennsylvania generally provide a full statutory exemption from sales tax. However, the tax laws are not that simple. For example, while sales tax is generally not required on clothing sales in Pennsylvania, the state does require tax on sales of formal clothing (i.e., tuxedos, bridal gowns, and prom dresses), holiday costumes, safety gear, and clothing used for sporting activities.
It is also important to remember that just because a state exempts tax on the sales of certain goods and services, it does not mean you are free of any sales tax liabilities in that state. For example, the state of Illinois does not levy sales tax on software-as-a-service (SaaS) subscriptions, but the city of Chicago imposes a personal property lease transaction tax on such sales. This means you are liable for collecting and remitting tax on sales to customers within the city limits. Similarly, consider that New Jersey generally does not consider sales of cloud-based SaaS subscription software services as taxable, but it does tax sales of electronically delivered software that customers hold and run on their private networks and servers rather than accessing it from the cloud.
While most businesses tend to focus on the problems that can arise from under-collecting taxes and the resulting penalties that can cause financial hits, you should also consider your legal responsibilities to collect the correct amount of taxes from your customers. Overcharging sales tax can expose you and your business to legal liabilities as well.
Taxability matrices can be tailored to fit your business’s needs and goals, including all the data points required to help you maintain a broad and varied range of sales tax reporting and collection compliance across multiple states and localities. For example, some states are considered “home rule” jurisdictions that allow local cities, counties and municipalities to remove themselves from the state tax-collection system and require taxpayers with a nexus in their local districts to file returns directly with those localities. With this information contained in the taxability matrix, you can reduce your risk of an audit or the assessment of penalties for noncompliance.
While there is a wide array of off-the-shelf software solutions that can help automate your state and local tax compliance functions, none provides the professional assessment and tax-efficiency planning recommendations you can receive from a team of state and local tax accountants. These professionals have experience working with state tax agencies and interpreting tax laws against recent court cases and other administrative and regulatory guidance that may conflict with existing legislation.
About the Author: Christian J. Burgos, CMI, JD, LLM, is a director of Tax Services with Berkowitz Pollack Brant, where he helps domestic and international clients navigate the complexities of state and local tax (SALT) compliance across the country. He can be reached at the CPA firm’s New York, NY, office at info@bpbcpa.com or (646) 213-7600.
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