Self-employed clients are innovative, entrepreneurial and like taking a lot of risk, but probably aren’t paying much attention to their back-office operations, including the somewhat complicated issue of sales tax.
That’s why they have you, of course. It’s part of your job to educate them on how to improve their processes, discussing how you can not only shorten the time it takes to prep and file their tax return, but also meet ongoing state and federal compliance. The last thing anyone wants is to endure a state sales tax audit.
Whether you’re familiar with sales tax reporting and compliance or may need to improve your knowledge, here are 4 Q&A’s that you’ll want your self-employed clients to know about.
Do clients report sales tax as self-employment income?
No, self-employment income does not include any sales tax that was remitted to the state, and taxpayers cannot claim a deduction for the sales tax collected and submitted. However, the taxpayer is required to include, as income, any portion of sales tax the state allowed them to keep.
What are the sales tax requirements by state?
Most states maintain this information through their government website. For example, the information for Texas can be found at the State Comptroller of Public Accounts’ website. For any other state, a simple Google search is the best way to find a state’s information. But, if you’re practicing in a particular state, you should already be aware of these rules.
According to the Sales Tax Institute, there are 45 states, plus the District of Columbia, that currently impose a general sales tax. The five states without general sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon. However, Alaska permits local sales taxes, while Delaware imposes a rental and service tax. Most of the states also impose different excise, meal or lodging taxes, even though they don’t impose a general sales and use tax. Most states also impose a variety of local sales taxes, including county, city and transit taxes.
What are the sales tax rules for “products” vs. “services?”
While self-employed clients who provide a service are mostly exempt from sales tax, most products are taxable. If your business owner sells a product or service that is subject to sales tax, he or she must register with the state’s tax department, and taxable and nontaxable sales must be tracked and included on the company’s sales tax return.
Should self-employed clients worry about nexus?
Absolutely. Nexus laws are complex and each state handles the issue differently. The best advice is to review the laws in each new state where business was conducted. For example, did your client deliver and install a product in a state other than his or her own?
Similarly, since there is the issue of “presence” in a state, your client should also be aware of use tax. For example, if your client does not have a physical presence in another state but sells items over the Internet or by catalog in that state, he or she can be subject to a state’s use tax and sometimes not to a state sales tax.
To further complicate the issue, a presence in another state does not necessarily mean the client has a retail presence in that state; however, if there is an office, warehouse or employee working in that state, the state revenue department may consider this as a presence for tax purposes.
Avalara has a short video that explains sales vs. use tax. If your client has established nexus, check the state’s sales tax laws so that he or she can accurately calculate, file and remit the appropriate sales tax liability. Here’s another good resource for Internet sales tax issues.
Remember, your self-employed clients need your help when it comes to all-things accounting and tax, especially sales tax compliance. Learn all you can about their nexus and their presence. In the long run, if they ignore the issue, they could be subject to a sales tax audit.
Marshal Kushniruk is Executive Vice President of Global Business Development at Avalara, a leading provider of cloud-based software delivering compliance solutions related to VAT, sales tax and other transactional taxes. Contact him at firstname.lastname@example.org.
See inside October 2015
It’s Time for a 4th Quarter Income Tax Tuneup
With summer vacation over and school back in session, it’s time to help those extreme tax procrastinators get their returns filed. But what about the rest of your clients − the “good” ones whose taxes you completed way back in April?