Managing Sales and Use Taxes in Georgia and Beyond

With the landmark decision by the U.S. Supreme Court on June 21, 2018, the gates to the collection of sales taxes on internet transactions were flung wide open, revealing the promise of significant new revenue for 45 states. This has generated a renewed interest by many businesses in understanding the transaction tax environment which includes the differences between sales and use tax, the management of tax exemptions and the application of tax rates to transactions.

What is the Difference Between Sales Tax and Use Tax?

If you direct this question to most transaction tax professionals, you’ll get a lengthy answer discussing all the different classifications of indirect taxes and how the definition cannot be just nailed down to “sales and use tax.” However, for the sake of simplicity and this article, we can break it down like this:

  • A sales tax is a tax that is imposed by a jurisdiction and collected by a retailer from a consumer for a specified rate of measure applied against a taxable good or service.
  • A use tax is a self-imposed tax on the use or consumption of an item or service in a particular jurisdiction in which no sales tax was originally paid on the transaction in question.

Obviously, there are several more complex components that come into play with these definitions and application to transactions, such as what determines whether a good or service is taxable, and what rate should my business or client use for these transactions? This is where you must defer to a transaction tax professional to help figure out these types of answers. It is not as simple as just using the tax rate at the “Ship-To” destination for a product shipment or the tax rate of a transaction where a service was obtained. These rules can vary from jurisdiction to jurisdiction and should be analyzed by someone who understands the nuances of transaction tax.

What About Exemption Certificates and Exempt Organizations?

We have a number of clients each year that are audited in Georgia and other jurisdictions around the country who ask, “My customer told me they were exempt and handed me this form, so I didn’t charge them tax. So, how come the jurisdictional auditor is telling me it’s not valid and is assessing me tax?”

Most states will allow retailers to take an exemption certificate in “good faith,” if they do not have any knowledge to the contrary that a customer might be using the item in a manner that is not covered by the certificate or the exemption being applied on the transaction.

Exemptions are a dangerous area for many businesses, as some take the terms “good faith” and stretch them a little too far in the acceptance of an exemption certificate. There are multiple items that should be completed on a valid exemption certificate:

  • Is the certificate state issued and not expired (FL, WA, SC, others)?
  • Has the certificate been filled out with the following items?
    • Customer Name
    • Sales Tax ID Number
    • Date 
    • Signature 
    • Type of Exemption Being Applied (Manufacturing, Non-Profit, Resale, etc.)

Some states (such as Georgia) provide a portal through their website to look up a sales tax identification number and check to see if it is valid before accepting an exemption certificate. The important thing is to remember that if you are in doubt of whether a customer has provided you with a valid exemption certificate, you have the right (and, technically the obligation) to charge them tax on the transaction.

What About All of This “Wayfair” Talk and “Remote Sales?”

In brief, the issue in front of the Supreme Court in South Dakota vs. Wayfair was whether states have a right to collect tax on sales made in their state by remote sellers, regardless of whether the seller has a physical presence in the taxing jurisdiction. According to the Court’s opinion, the estimated sales tax revenues being lost each year because of the nexus rule range from $8 to $33 billion. In the previous transaction tax nexus cases of Quill and Bella Hess, the Court had ruled against states’ authority to collect sales tax without substantial nexus under multiple facets, the most significant being the physical presence test levied under the Quill decision. Ultimately the Court decided the physical presence rule of Quill was “unsound and incorrect,” further calling Quill “a judicially created tax shelter for businesses that limit their physical presence in a state but sell their goods and services to the state’s consumers.”

Additionally, the Court stated that “the physical presence rule [Quill] defines has limited States’ ability to seek long term prosperity and has prevented market participants form competing on an even playing field.”

While narrowly overturning Quill (5-4), the Court did so in the broadest possible sense deferring to the baseline nexus interpretation within Complete Auto Transit vs. Brady (1977) which states, “… [a] tax on the privilege of doing business in a State [is] held not to violate the Commerce Clause when it is applied to an interstate activity [regarding a business] with a substantial nexus with the taxing State (emphasis added), is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State."

What’s Next for Businesses?

Businesses have effectively run out of “wait and see” time. Now, they must act quickly and efficiently to understand each state’s sales tax laws (now, and as they are enforced, updated or changed over the coming months). This will include the thresholds at which businesses must comply with each state’s sales tax laws. Not every online seller will be required to comply; there will be thresholds designed to avoid placing “undue burdens” on smaller businesses. They may – and already do – vary among states.

Georgia is a great example of the dynamic changes in the laws regarding remote sellers. They first passed a law requiring reporting or collection of tax for companies with $250,000 or 200 transactions in a state for a year beginning 1/1/2019. Then, Gov. Kemp signed legislation repealing the option to report and requiring collection on 4/28/2019. Furthermore, the updated legislation reflects a reduction of the threshold to $100,000 from $250,000 effective 1/1/2020.

Businesses should continue to develop a strategy and plan to begin registering, collecting and reporting in accordance with state laws where necessary. While understanding just a few states’ sales tax laws can be daunting, the coming months promise to introduce remote sellers to a growing list of states with varying sales tax collection laws. This increases the chance for costly noncompliance.

Finally, companies should evaluate all options for compliance processes and reporting and develop a process to implement these changes as quickly and efficiently as possible without interrupting the normal course of business. It is imperative that businesses engage a well-qualified, knowledgeable sales and use tax team to help them navigate strategy, planning and reporting for this new, complex sales tax landscape. This is where an educated and experienced transaction tax professional can assist in reviewing and implementing these strategies with a business.

Steve Lane, CPA is CFO of Georgia Community Support and Solutions, Inc. and Enable of Georgia, Inc., dba InCommunity. He is also the finance manager for the Atlanta Jewish Film Festival. His experience includes accounting and financial leadership for banking, mortgage, quasi-governmental and not-for-profit entities.

Tim Howe, CPA joined Smith & Howard in 2014 and is a partner in the Accounting & Advisory group and leads the firm’s sales and use tax practice. He has over a decade of tax, technology, and business advisory experience, most recently as the Director of Operational Tax for a large franchise restaurant company in Atlanta.