Beware: State tax laws could nail your startup

http://pando.com/2014/02/15/beware-state-tax-laws-could-nail-your-startup/

by ableal • 12 years ago

45 47 12 years ago

fredgrott• 12 years ago

a question about US states sales taxes.

IN a sale of virtual software whereas the client is downloading from an app store...why is there no nexus formed by the owner of the app store but just the independent dev selling the software? For example, why is the only nexus formed my state of Indiana(ie my location) and not Google's app store location?

dangrossman2• 12 years ago

The location of the developer should be irrelevant and have no bearing on where the app stores collect taxes. The developer is not a party to the transactions between Apple/Google and the device owners buying apps. Apple/Google do collect and remit sales tax from customers in states they have nexus in that have a tax on digital goods (almost half of them).

fidotron2• 12 years ago

Not quite, or it might have changed, but when the Play Store started there was a good deal of confusion about who the merchant of sale was. This is one of the excuses they used to have for why developers got such a frightening amount of information about anyone buying stuff from them.

rbritton• 12 years ago

I don't have a source, but I remember reading that Apple's App Store revenue is classified as a commission to developers. As part of their 30% cut they have to deal with all of the sales tax.

gamblor9563• 12 years ago

Traditionally, in state and international tax jurisdiction situations, the taxable jurisdiction of a sale is the jurisdiction in which the client/customer sits. However, jurisdiction may also extend to the jurisdiction of the seller (or even to a third jurisdiction) if the sale was negotiated and executed/agreed to outside of the customer's jurisdiction.

So in a nutshell...you shouldn't have nexus just because you sell on Google Play...but if you're really worried about it you should consultant with a lawyer or an accountant (because for some reason accountants can opine on tax law).

Why is there no nexus formed by the owner of the app store but just the independent dev selling the software? For example, why is the only nexus formed my state of Indiana(ie my location) and not Google's app store location?

That's not the case, whatever Google claims. Google is trying to claim to be just a service provider for your sale (i.e., just facilitating the transaction) but the store TOS, its policies, and Google's actions demonstrate that Google is acting more like a retail store than a sales service provider. Legally, and especially in the tax world, this makes a tremendous difference. (This ridiculous stance is also why Google Play's international market availability (in terms of countries) is so much smaller than the Apple or Microsoft store. Google knows its claims won't fly in most countries, so it has to stay out of those countries to avoid very significant fines and penalties.)

bnolsen• 12 years ago

the US system is ruthlessly hostile towards small business. politicians seem to talk about "small business" but do nothing, only use it as a political tool only.

tptacek7• 12 years ago

Where by "ruthlessly hostile towards" you mean "unusually hospitable to", for instance by providing contract liability limitation that you can get over the Internet for less than 100 bucks, at-will employment in virtually every state, special income tax breaks for small business owners, a very straightforward bankruptcy mechanism, contract enforceability that is accessible enough for small accredited investors to fund companies with boilerplate documents, and so on?

edj• 12 years ago

On top of all that, most companies start out violating all sorts of laws and get away with it here in the US.

Example: a friend of mine makes artisanal chocolates. When he started out he didn't have a licensed kitchen, any kind of food/health license, or sales tax collection. Nobody cared. Why? Because he got compliant before his company grew enough to be on anyone's radar.

Here in the US you can launch first and worry about legal compliance later.*

*Not for all industries or all definitions of "later".

walshemj3• 12 years ago

Having to deal with Federal, 52 states and local taxes certainty looks insane from outside compare the UK all a business needs to handle tax is deal with VAT (sales tax) NI (SS tax) and Income tax.

bigd• 12 years ago

A valid Taxes specialist, Doctor and Attorney, are the first thing to find when you move to a new town. It should be the same for startups, as is even more important. I cannot believe this common sense get overlooked.

tptacek7• 12 years ago

It is a little crazy to run a startup without having an accountant, if only because your personal taxes are going to get complicated, and you're now solely responsible for dealing with them.

tzs• 12 years ago

There are companies who can help with dealing with state sales taxes. E.g., http://www.avalara.com [1]

[1] I'm just offering this as an example, not as a recommendation, as I've not used them. I know of them because they are local and there were a story about them in a local business newspaper.

Frozenlock• 12 years ago

From an outsider point of view, this looks insane.

If one of your costumers is in another jurisdiction, you have to comply with its rules?

Shouldn't the jurisdiction impose its rules on its inhabitants, rather than everyone else?

alexeisadeski3• 12 years ago

The US doesn't work that way... We pay US federal taxes even if we live and earn money solely in Abu Dhabi. So of course the rest of the tax code will be insane as well.

hga4• 12 years ago

I don't think it's quite that bad.

The key here, that the CEO utterly failed in, was creating a nexus in 35 states. That doesn't sound like an example of the I assume special cases listed. But IANAAccountant, am not subject to any of this craziness, so don't take my guess for much of anything, but I'll bet this was a relatively white line mistake.

shiftpgdn2• 12 years ago

That IS the way it is as far as sales tax code is concerned. The article is completely wrong:

http://taxfoundation.org/article/amazon-tax-unconstitutional... http://netchoice.org/library/sales-tax-collection-myth-vs-re... http://salestaxguy.blogspot.com/2010/06/golden-rule-there-is... http://law2.umkc.edu/faculty/projects/ftrials/conlaw/interst...

gamblor9563• 12 years ago

Stop citing outdated articles. Sales tax law has changed in the 4-5 years since these articles were written.

Several states already do levy sales taxes on online stores selling to their residents, and lawsuits challenging those taxes were dropped or settled because it became clear that they would either lose or instigate the passage of a federal law allowing states to tax internet commerce.

shiftpgdn2• 12 years ago

This article is utter horse shit and I hope nobody believes it. If you start a business in Texas you only pay sales taxes to customers in Texas. The same applies for any of the other 49 states of the union. Interstate taxes like described in this article are unconstitutional and have been held up in court: http://taxfoundation.org/article/amazon-tax-unconstitutional...

Edit: This piece of trash article was written by a sack of shit with a stake in getting start-ups to spend money trying to be tax complaint. [1][2] Pandodaily would be wise to remove this article and revoke the authors posting privileges.

[1]http://pando.com/authors/jonathan-barsade/ [2]http://www.exactor.com/

gamblor9563• 12 years ago

This article is utter horse shit and I hope nobody believes it.

This article is not utter HS. It's an important warning to startups not to ignore one of the most basic principles of law in the US legal system (local regulation and taxation).

By the way, the Tax Foundation article is 4.5 years old. The legal landscape has changed significantly since then.

Most importantly, Amazon settled these cases after it became clear that the weight of jurisprudence was tilting toward overturning Quill (the catalog-sales case which created the substantial nexus doctrine for state sales taxes). Primarily, the major factors in the Quill decision--the impossibility of tracking the multitude of state and local taxes and the miniscule size of the catalog market--are no longer relevant today. Computer software and services make tracking state and local taxes effectively painless, and internet retailers like Amazon routinely outsell their brick & mortar counterparts.

This piece of trash article was written by a sack of shit with a stake in getting start-ups to spend money trying to be tax complaint. [1][2] Pandodaily would be wise to remove this article and revoke the authors posting privileges.

Watch your mouth. This is not reddit. And in the US, we have a federal system by design. Originally, all taxes were levied at the state and local levels--as these jurisdictions are the most affected by businesses operating withing their jurisdictions and thus have the right to regulate and tax such activity.

If you start a business in Texas you only pay sales taxes to customers in Texas.

Get your facts straight. No business pays sales taxes to customers. Customers owe sales taxes, which the business collects from the customer and remits on their behalf.

rdtsc• 12 years ago

Will the state of Texas cover your legal fees if another state, say Nevada, is taking your to court or is asking for sales back-tax + penalty + interest?

xux• 12 years ago

If you start a startup in New York, you can forgo business taxes for 10 years.

coin• 12 years ago

What is it with text based websites like this disabling pinchzoom?

ableal• 12 years ago

I was a bit startled by this snippet: "in Colorado State, for instance, a single zip code can contain five different tax jurisdictions and rates ranging from 2.25 percent to 8 percent"

I understand that U.S. sales tax is the result of state and city rates, but that one, probably extreme, case is still curious. I also understand that, in the absence of "nexus", it falls to the buyer the theoretical obligation of self-collecting tax.

Just for information, in the E.U. VAT is charged at national rates with some regional exceptions - for instance, insular territories may have more favourable rates. Sellers such as Amazon charge buyers according to the VAT for the delivery location. For instance: the UK has no tax on books, Portugal has 6%, amazon.co.uk duly collects 6% VAT on books shipped to Portugal.

hga4• 12 years ago

That's not at all unique. I live in a Missouri zip code with at least 3, maybe 4: most of it is in one city with a base rate added to the state's, I live in a part that's not in any city, and the city has districts with additional sales taxes where that money goes for improvements to the district, or to pay back ones that were made. The plot of land on which the building I reside in has some small strips that are in another smaller city; I don't think they have their own sales tax, but they could. We also have the option of being hooked to the first city's sewer system (which for historical reasons now boils down to changing two valves and informing the city); that's not associated with any special tax, but I know other places use taxing for that, although probably few if any use sales taxes.

So it's much less an extreme case than you think, and trying to force every Internet retailer to pay the right sales tax would be an absolute nightmare, pretty much requiring them to pay a hefty sum to a 3rd party that has to spend a lot of money to keep track of the multitude of differences. It would be freaking difficult for such a company to get my rate correct.

And of course the state has two or three base rates, at least, perhaps 0 for some stuff, and two rates on food and perhaps essentials of certain sorts and another for everything else. That makes a variation of about a factor of 2, then the city and its special districts are under 2% as I recall.

wj• 12 years ago

The number of cities in St. Louis county is mind-boggling to me.

Beware: State tax laws could nail your startup

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