Case Study: Planning for Sales and Use Tax

GC NICHE: Tax Planning and Preparation

GC TEAM MEMBER(S) INVOLVED: Linda Bossard, EA

TYPE OF INDUSTRY: General Business

DATE PROJECT COMPLETED: March 2018

SITUATION:

We were working with a client who owned an online boutique that sold products across the United States. They didn’t charge their customers sales tax and as the business grew, they knew they needed professional guidance in this area. They contacted us to review their books and help them understand if they should be paying sales tax on this revenue. If so, how much? We knew that the answers to these questions varied from state to state and would be dependent upon the amount of revenue earned in or the total number of transactions completed in each state.

CHALLENGES:

  • Familiarize ourselves with each state’s sales and use tax economic nexus rules.
  • Organize all of the client's sales by state.
  • Determine whether or not the client had reached the sales threshold in any of these states.
  • Determine the sales and use tax rates in those states.

CONSIDERATIONS & TACTICS:

  • Consider the fact that each state has a different threshold at which the payment sales and use taxes is required. Some states base this threshold on the amount of revenue generated and some on the number of transactions completed.
  • Review the client’s books and provide them with clear and accurate information on applicable sales and use tax rates.

STEP-BY-STEP PROCESS:

  1. Review the client’s books and sales records.
  2. Compare them to the sales and use tax economic nexus rules for each state in which the client sold products.
  3. Determine the sales in each state in which the client met the revenue or transaction threshold, necessitating a tax payment.
  4. Calculate the client’s tax payment to each state to ensure that they are in compliance with regulations.
  5. Prepare financial statements and tax forms.

FINAL RECOMMENDATION AND OUTCOME:

We recommended to the client that we review their books to determine if they met the revenue or transaction thresholds for the states in which they were selling and shipping products. The client was actually substantially over the threshold in a few of these states. We were then able to properly prepare their financial statements and tax documents to reflect the revenue generated and sales and use taxes that must be paid.

OTHER CONSIDERATIONS OR PERSPECTIVES:

If you are planning to start a new business—especially an online business—we recommend that you consider all of the policies and regulations in your state of residence as well as in the states in which you will be doing business.

When working through this case study we also found it important to take perspective and inferences from the recent Wayfair decision. The California Department of Tax and Fee Administration released a guide on Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision which discusses the use tax requirements for retailers outside of California who are selling into California. In brief, these retailers would need to follow the new collection requirements if:

  • Sales into California exceed $100,000, or
  • There were 200 or more separate sales transactions into California.

For more information from BDO on the business impacts of the Wayfair case, please click here. If your business need help with understanding sales and use you can count on our team to get you ready to go by contacting Linda Bossard at LBossard@gccpas.net.

200 West Roseburg Avenue
Modesto, CA 95350

(209) 527-4220 (phone)
(209) 527-4247 (fax)

https://www.grimbleby-coleman.com/resources/articles/204

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