The SALT Shaker – August 2017
August 23, 2017
A monthly pinch of SALT. The HK SALT Shaker is a monthly update on state and local tax laws and regulations. For questions regarding these updates or Sales & Local Tax (SALT), please contact us using our online contact form.
Legislature Overrides Governor’s Veto – Passes Income Tax Increase and Budget
The Colorado Department of Revenue has issued an emergency regulation in order to clarify how a retailer that does not collect Colorado sales tax must comply with notice and reporting requirements that became effective July 1, 2017. Every non-collecting retailer with total gross sales into Colorado of $100,00 or more in a calendar year must:
- Provide a Transactional Notice to all Colorado purchasers at the time of purchase;
- Provide an Annual Purchase Summary to all Colorado purchasers by January 31 of each year; and
- Provide an Annual Customer Information Report to the Department by March 1 of each year.
The Transactional Notice is required with every Colorado reportable purchase that is not exempt from Colorado sales and use tax. The Transactional Notice must contain the following information:
- The retailer does not collect Colorado sales or use tax;
- The purchase is not exempt from Colorado sales or use tax merely because it is made over the Internet or by other remote means; and
- The State of Colorado requires purchasers to (1) file a sales or use tax return reporting all purchases that are taxable in Colorado and for which no tax was collected by the retailer and, (2) pay tax on those purchases.
The regulation also provides: details on the required placement of the Transactional Notice for both online purchases and all other purchases not made online; additional information that may be, but is not required to be, on the Transactional Notice; and penalties for failure to properly provide a Transactional Notice.
Annual Purchase Summary
A non-collecting retailer is required to send and Annual Purchase Summary to all Colorado purchasers whose total Colorado reportable purchases for the prior calendar year are $500 or more. The summary must be sent by January 31 of each year and must contain the following information:
- The total amount paid by the Colorado purchaser, including any taxable shipping charges or other fees charged to the customer, during the prior calendar year. However, if the retailer is certain the charges and fees are not subject to tax in Colorado, those charges and fees may be excluded;
- The State of Colorado requires the purchaser to file a sales or use tax return and pay tax on all taxable purchases for which no tax was collected by the retailer;
- The retailer is required by law to provide the Colorado Department of Revenue with the total dollar amount of purchases made by the purchaser during the prior calendar year, but no information about the purchase other than the dollar amount of the purchase(s) will be provided to the Department;
- If available, the dates of each reportable purchase;
- If available, the amounts of each reportable purchase, including any taxable shipping charges or other fees charged to the customer. However, if the retailer is certain that the charges and fees are not subject to Colorado tax, those charges and fees may be excluded;
- If available, a description of the type of item(s) purchased (e.g. books, food, consumer electronics, etc.); and
- If known by the retailer, whether the purchase is subject to or exempt from Colorado sales and use tax.
The regulation also provides details on penalties for failure to properly provide an Annual Purchase Summary.
Annual Customer Information Report
Any retailer who is required to provide at least one Annual Purchase Summary to a Colorado purchaser must, by March 1 of each year, file an Annual Customer Information Report with the Department containing the following information:
- The name of each Colorado purchaser;
- The billing address, notice address, and shipping address of each Colorado purchaser; and
- The total dollar amount of Colorado reportable purchases.
If all of a retailer’s sales are below the $500 threshold, then the retailer is not required to send the Annual Customer Information Report to the Department. However, if any of the retailer’s sales are above the $500 threshold, the retailer is required to submit the Annual Customer Information Report to the Department with all of the Colorado reportable purchases, including those purchases that were under the $500 threshold.
If the retailer made more than $100,000 worth of total gross sales in Colorado during the prior calendar year, then they are required to send the Annual Customer Information Report to the Department electronically. By November 1st of each year, the Department will publish instructions on its website regarding how to properly file the electronic report.
The regulation also provides details on penalties for failure to properly file an Annual Customer Information Report.
Take Away: Following the lead of many other states wishing to increase tax collections from out of state businesses, Colorado has put in place regulations to identify sales made to its populace. Anyone doing business in Colorado should be aware of these reporting requirements to achieve compliance.
Illinois Discusses Taxability of Licensed Computer Software
The Illinois Department of Revenue issued a general information letter discussing the applicability of sales tax to an out-of-state business that sold downloadable software on the Internet and by telephone. The company also provided support services, sold an annual downloadable update, and provided separately billed custom programming services.
Additionally, the company charged for training and installations but it had no employees in Illinois, nor did it use any tangible products like CDs for these purposes. The Department clarified that, generally, an out-of-state retailer that makes sales via telephone and the Internet does not have sufficient nexus with Illinois and, therefore, is not required to collect Illinois sales tax. However, the retailer’s Illinois customers would still incur use tax liability on the purchase of the goods and have a duty to self-assess and remit their use tax liability directly to the state.
Further, the department stated that a license of software would not be considered a taxable retail sale if: (1) it was evidenced by a written agreement signed by the licensor and the customer; (2) it restricted a customer’s duplication and use of the software; (3) it prohibited the customer from licensing, sublicensing or transferring the software to a third party (except to a related party) without the permission and continued control of the licensor; (4) the licensor had a policy of providing another copy at minimal or no charge if the customer loses or damages the software, or permitting the licensee to make and keep an archival copy, and such policy is either stated in the license agreement, supported by the licensor’s books and records, or supported by a notarized statement made under penalties of perjury by the licensor; and (5) the customer destroyed or returned all copies of the software to the licensor at the end of the license period.
Take Away: Although Illinois exempts licenses of computer software, there are very specific requirements to be met to receive exempt treatment, as described above. Businesses should review their existing licensing agreements in Illinois for proper tax treatment.
Washington Expands Nexus for Sales/Use and B&O Tax Purposes
Sales & Use Tax Nexus
Starting January 1, 2018, remote sellers, referrers and marketplace facilitators that meet the economic nexus threshold or have a physical presence in Washington must elect to either: (1) collect and remit Washington’s retail sales or use tax on taxable sales into the state; or (2) comply with notice and reporting requirements. Until January 1, 2020, these requirements do not apply to retail sales of digital products and digital codes, other than: (a) specified digital products and digital games; and (b) digital codes used to redeem specified digital products and digital games, by a marketplace seller through a marketplace facilitator or directly resulting from a referral.
The election requirements apply to remote sellers and marketplace facilitators who, in the current or immediately preceding calendar year, have gross receipts from retail sales sourced to this state of at least $10,000. For referrers, the threshold amount, for the current or immediately preceding calendar year, is the business’s gross income from the referrer’s referral services apportioned to Washington and from retail sales sourced to the state of at least $267,000.
An election to collect tax is binding on the remote seller, referrer and marketplace facilitator until January 1 of the calendar year that is at least 12 consecutive months after the remote seller, referrer and marketplace facilitator began collecting sales and use tax under the election.
An election to collect or to comply with the notice requirement may be changed by providing the written notice to the Washington Department of Revenue. Changing an election from complying with the notice requirement to collecting tax can be made at any time by collecting and remitting tax on taxable retail sales sourced to the state.
Failure to elect to collect or to comply with the notice requirement will be presumed to have made an election to comply with the notice requirements.
For purposes of these provisions, a marketplace facilitator or referrer is deemed to be an agent of a marketplace seller making sales through the marketplace facilitator’s marketplace or directly resulting from a referral.
The new law defines key terms, provides for relief from liability (in full or in part) for failure to collect the correct amount of tax, provides exceptions for when a marketplace seller is not required to collect and remit tax, and establishes notice and reporting requirements as well as return due dates.
The Department will assess a penalty (that could exceed $100,000) on remote retailers, referrers and marketplace facilitators that fail to comply with these new requirements. The Department may waive penalties under certain circumstances.
Business & Occupation Tax (B&O) Nexus
Effective July 1, 2017, the law updates the B&O tax economic nexus provisions and expands them to include retailers. As originally enacted, and amended in 2015, the economic nexus provisions applied only to B&O taxes imposed on apportionable activities as defined in RCW 82.04.460 (e.g., generally businesses that sell services and other business activities, but not businesses that sell tangible personal property) and wholesalers. Under the revised provision, the economic nexus standard is expanded to apply to selling activity taxable under RCW 82.04.250(1) (e.g., retailers, except those taxed under other provisions of the B&O law). Retailers will be deemed to have substantial nexus if they have $267,000 of receipts from this state or 25% of their total receipts in this state.
The law also changes the period used to determine whether the substantial nexus threshold is met to “the current or immediately preceding calendar year” (from, “the immediately preceding tax year”), and updates the threshold amounts (i.e., the original $50,000 property/payroll and $250,000 receipts threshold adjusted annually based on changes to the consumer price index) to reflect the current threshold as follows:
- $53,000 of property in this state
- $53,000 of payroll in the state
- $267,000 of receipts from the state or
- 25% of the person’s total property, total payroll, or total receipts in the state
Persons establishes nexus during the calendar year based solely on their property, payroll or receipts are subject to B&O tax for the current calendar year only on the business activity occurring on and after the date nexus is established. This provision, however, does not apply to certain persons that had substantial nexus with the state in the immediately preceding calendar year or the current calendar year.
Take Away: These nexus standard updates by Washington are consistent with other states’ recent efforts to apply an economic nexus standard to their jurisdiction, in order to subject more businesses to tax. If you are doing business with Washington customers, please note these new requirements.