Expanding Sales Tax Bases Call for Care and Preparation

The expansion of state sales taxes is a trend that has been developing for a number of years. Businesses need to be vigilant regarding the rules they may now be subject to so they do not put themselves at risk of noncompliance. 

As states around the country enacted budget and tax legislation this past summer, one common theme seems to have emerged: expansion of the sales tax base. While sales tax expansion seems to have many causes – a tradeoff for income tax reductions (Ohio), a need to address a budget shortfall (Maryland), or an adjustment to the growing digital economy (Louisiana) – it is a trend that had been developing for a number of years. It is also one that appears will continue.  

We have seen various states (including Pennsylvania) issue varying forms of guidance that expand the sales tax base by establishing the taxability of digital services. The expansion of the taxable base has not been limited to just services, though. Over half of the states have issued guidance that when tariffs are charged to a customer on an invoice, and the goods purchased are subject to sales tax in their jurisdiction, the tariff costs are considered part of the purchase price, and therefore also subject to sales tax.  

This comes as businesses are still settling into the nexus shift created by the U.S. Supreme Court decision in South Dakota v. Wayfair, which knocked down the previous “physical presence” nexus rule for state sales taxes and set the table for economic nexus thresholds. So, in an environment of increasing rates, prices, and tariffs, exceeding economic nexus thresholds in a particular jurisdiction ($100,000 in total sales in most states) keeps becoming a smaller hurdle to clear for sellers.  

For the sellers, there is now a larger administrative burden on them to understand how a particular state taxes, or does not tax, sales of their goods and services. Considerations that a seller should take into account to ensure proper sales tax compliance include the following:  

• To which state should sales be sourced? This isn’t always easy. Sales of goods can have differing rules from sales of services.  
• Bundling taxable and nontaxable services versus separately stating the charge. In most states, bundling will cause the full charge to become taxable. 
• Determine exemptions from a tax in a particular state, and establish a process to gather and maintain the certificates in multiple states. 
• Figure out how to tax sales to customers when goods are shipped to multiple points (i.e., direct mail advertising) or for services if a customer claims multiple points of use (i.e., software and SaaS). 

Mark A. Balistrieri, CPA, is director, state and local tax, with Schneider Downs & Co. Inc. in Pittsburgh. He can be reached at mbalistrieri@schneiderdowns.com. 

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