Katherine Cxypoliski of Avalra offered a much needed and often underestimated topic, the impact of global taxation issues on ecommerce and business generally, at the 2nd Annual eCommerce Expo South Florida sponsored by Rand Marketing in Fort Lauderdale, Florida. The presentation focused on sales tax challenges, including why sales tax matters, product taxability, how to automate the process, sales tax compliance challenges, and taxation issues as they relate to zip codes and geolocation.

1. © Avalara
Katherine Cxypoliski
Strategic Alliance Manager
Avalara
1
Sales Tax Challenges for Today
and Tomorrow

2. Making sales tax less taxing.
Agenda
2
• What’s the big picture? – why sales tax matters
• Got Nexus?
• Product Taxability
• The Tax Man: Audit planning, preparation and avoidance
• The problem with services
• Take a load off – How to automate the process

3. Making sales tax less taxing.
Why sales tax matters
When general sales tax and
selective sales tax are
combined, sales tax makes
up 47% of total state
revenue.
Source: US Census Bureau, 2012 Census of Governments: Finance – Survey of State Government Tax Collections at www.census.gov/govs/statetax
Total State Government Tax
Collections by Category
Other taxes 3.9%
Corporation net
income taxes 5.3%
Total license
taxes 6.8%
Total selective
sales taxes
16.6%
General sales
and gross
receipts taxes
30.5%
Property
taxes 1.6%
Individual
income
taxes 35.3%

4. Making sales tax less taxing.
• 150+ million mailing addresses
• 12,000+ jurisdictional rules
• 35,000+ sales / use / rental tax rates
• ~ 30 M product / service exemptions
• 750,000+ buyer / seller exemptions
Sales tax compliance challenges

5. Making sales tax less taxing.
What is Nexus – and why you should
care!
5
 What is nexus
 The right questions to ask
 Nexus rules and Amazon laws apply
to everyone

6. Making sales tax less taxing.
Nexus-creating activities: a growing list
 Multi-state locations
 Maintenance/service/repairs
 Own/lease real property
 Hosted DataCenters
 Field sales/service staff
 Charge Licenses/royalty/fees
 Direct and/or online sales
 Maintains inventory
 Affiliates
 Tradeshows
 Commissions to resellers (1099s)
 Investors/board members
 Marketing/Web advertising
 Drop shipments

7. Making sales tax less taxing.
States finding more sales tax revenue
by broadening definitions of nexus
 Remote sellers can no longer assume that Quill v. North Dakota
means they don’t have to collect sales tax
 Nexus-creating activities (examples):
̶ Independent agents
̶ Remote sales force
̶ Affiliate Nexus
̶ Trade show participation
 “Amazon Laws”
̶ Cyber Monday, 2013: SCOTUS leaves NY click-through affiliate law in place
̶ 11 States have already passed Amazon Laws

8. Making sales tax less taxing.
Nexus Rules and Amazon Laws Apply to
Everyone

9. Making sales tax less taxing.
Jurisdiction Assignment
9
 Close isn’t close enough
 The problem with zip codes

10. Making sales tax less taxing.
Tax Rates are not tied to zip code
 Taxing jurisdictions don’t always follow ZIP Codes!
 Individual counties and municipalities levy sales taxes
in addition to state rates
 Tax rates can vary significantly within a ZIP code
 ZIP codes
̶ Are a blunt instrument for determining sales tax rates and boundaries
̶ Will almost certainly lead to calculation mistakes
̶ Can lull you into a false sense of security

11. Making sales tax less taxing.
Tax Rates are not tied to zip code (cont.)
Don’t rely on zip codes!
Ex. Greenwood
Village, CO has
one ZIP code, but
four different sales
tax rates!
Geolocation technology
determines the exact point of
taxable transaction.

12. Making sales tax less taxing.
Product taxability
12
 Why product taxability is so confusing
 Zip codes/product taxability issues

13. Making sales tax less taxing.
Product taxability issues
 Rules and rates vary between states
 The following industries have varying taxability rules
̶ Software / hardware
̶ Digital goods
̶ Services
̶ Medical device / equipment
̶ Food / beverage
̶ Clothing / apparel
̶ School-related products
̶ Dietary supplements
̶ And many other industries / products

14. Making sales tax less taxing.
Product Taxability is (always) changing
Taxable
Exempt
Taxable
Exempt
Candy with or without flour
can determine if it is taxable
Non-carbonated with
supplement label is taxable
Non-carbonated with
nutritional label is exempt

15. Making sales tax less taxing.
The Tax Man: Audit planning,
preparation, and avoidance
15
 Keeping the auditors’ pockets empty
 Checklist reducing audit risk

16. Making sales tax less taxing.
States finding more sales tax revenue
by hiring auditors
 California announces hiring 100 auditors over the next
three years
 Idaho hires 48 auditors that stay on as full time staff

17. Making sales tax less taxing.
Audit Trails are mandatory (cont.)
How to reduce audit risk
 Do a nexus study
 Stay up-to-date with rate,
rule, and boundary changes
 Report consumers’ use tax
 Be compliant from day one,
especially new businesses
 Automate with technology
 An understanding of your filing
requirements
 Calculations that are rooftop
accurate
 Product taxability coverage
 Detailed sales records
 A process for managing
exemption certificates
You should: Make sure you have:

18. Making sales tax less taxing.
The problem with services
18
 Why they’re auditor red flags
 Know what’s exempt and what isn’t
 Who carries the burden of proof:
consumer or seller?

19. Making sales tax less taxing.
Services are taxable…but not always
Know the difference between
• Tangible Personal Property
• Real Property Services
• Professional Services
Hint! States often define taxable services differently.

20. Making sales tax less taxing.
Bundled Transactions: Defined
• A “Bundled transaction” is a sale of multiple sales tax
objects with a single sales price. The sale may include
both taxable and nontaxable objects.
• The vendor charges a customer one sales price for all
objects sold instead of separately charging for each
individual object.
20CONFIDENTIAL &

21. Making sales tax less taxing.
Take a load off:
How to automate the process
21
 Steps before you automate
 Offloading manual steps
 How automation works

22. Making sales tax less taxing.
 Saves time
 Increases accuracy
 Mitigates risk
 Improves efficiency
 Increases profitability
Automating the Process
No more researching
rates or building and
maintaining tax tables

23. Making sales tax less taxing.
(c) 2015 Tax Technology Group, Inc.
Before you automate. . .
• Estimate Tax “Leakage”
– Sales tax audit assessments
– Interest & penalties
– Time value of money on use tax assessments / overpayments
(don’t include use tax itself)
– Sales & use tax reserves
• Determine Tax Process Costs - Estimate of internal resource hours
spent managing exemption certificates, tax filings, audits, maintaining
taxability matrices & rates, etc.
• Cash flow considerations (impact to AR collections due to customers
delaying invoice payments due to sales tax issues)
Automating the Process

24. Making sales tax less taxing.
What gets automated
 Calculate, report, return, remit
̶ Apply nexus rules
̶ Apply client exemption rules
̶ Derive the correct set of rates, validate the address
̶ Derive (find) the local tax rates
̶ Apply product taxability rules (product exemptions and exceptions)
̶ Apply SITUS (jurisdiction sourcing rules)
 Taxing jurisdictions ≠ zip code boundaries
Automating the Process

25. Making sales tax less taxing.
Sales & Use Tax Automation –
A One Stop Shop Experience
25
Accurately calculate tax
in more than 12,000
taxing jurisdictions
File and remit returns
accurately and on time,
every time
Create, validate and
store exemption/reseller
certificates in the cloud

26. 26
www.avalara.com
877-780-4848