I gave a SALT (state and local tax) update at Frazier & Deeter Atlanta CPE day this week and spoke about sales tax problems (opportunities) that companies are facing. I entitled it, "A Problem is A Terrible Thing to Waste."
I deal with problems every day - work, clients, home, etc. But how do you look at problems? Are the problems really opportunities?
From a sales tax standpoint, problems (opportunities) are created by business changes and tax law changes (and the lack of uniformity among the states, and clarity among existing laws).
Sales tax can be more painful than income tax. How you ask? Because a company's obligation to collect can become their obligation to pay (out of their own pocket). Something that a company was supposed to collect from somone else will become their expense if they can't prove the customer already paid it or obtain some type of exemption certificate from the customer.
Economic nexus (Wayfair US Supreme Court Case in 2018) changed the sales tax world dramatically. Caused companies that were filing sales tax returns in 2 states to start filing in 30 states. Playing the "wait and see game" has truly come to an end.
In decisions in Texas, the Comproller asserts that a company licensing software to customers in Texas has a physical presence in Texas. The Comptroller contends that computer software programs are the equivalent of physical property in the state. Thus, the lease, license or rental of software means the seller owns property in the state that is being used by a customer.
Sales sourcing is a mess if you don't sell tangible property. Companies generally use the shipping address; however, when you sell services or digital goods, SaaS, etc. you don't have a "ship to" address. You have a "billing address." Unfortunately, companies who source sales according to the billing address are likely sourcing sales incorrectly. This could create a problem (opportunity). Sales of services, digitial goods and SaaS are generally sourced to where the service is received, or the digital goods and SaaS are used. Consequently, if a buyer has users in multiple states, the sale should be sourced to multiple states, not one.
When selling digital goods, services and/or SaaS, the question becomes "what is the customer actually buying"? What is the "true-object" or "primary purpose" of the transaction? The problem (opportunity) with these transactions is that they are usually bundled together. Thus, if one item is taxable, the whole transaction may be taxable. However, if you can prove that the true-object is the nontaxable item, then the whole transaction may be nontaxable. Tennessee has several rulings that reflect this analysis.
Is AI (artificial intelligence) taxable? No one is looking at this. No one is talking about this. This will sneak up on the states similar to when SaaS took over tangible sales of software. AI could be a nontaxable service, information service, data processing, SaaS, custom software, or something else. Chicago has said they are taxing ChatGPT.
Marketplace facilitators are facing an attack from Texas. Texas is asserting that everything is data processing (taxable). This includes the commission/revenue share or "marketplace provider commissions (MPC) or fees.
Procurement companies are still a great idea for sales tax deferral, cash flow benefits and paying sales tax (use tax) to the correct state, but accurate implementation is key. Transactions between entities must be legit and papered. There must be substance and actual transactions between the entities.