Beware: State tax laws could nail your startup
pando.com
pando.com
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/
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.
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?
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.
Similarly, if you're a computer consultant who lives in Iowa and you drive to Illinois to service a customer's mainframe or install a software package on their workstations, or whatever else it is you do, you're engaged in the service business in Illinois. Some software consultants seem not to realize this.
One difference is that it's easier for a small-time consultant to do on-site business in more than 2 or 3 states nowadays, thanks to cheap flights, which would've taken a lot of driving in 1935 to pull off. One solution is to decide that there's so much cross-border commerce going on that the U.S. is basically a national market, and federalize/harmonize the tax and business-regulation laws. That'd simplify compliance for multi-state businesses by removing the legal distinction between doing business within your state vs. across state lines. On the other hand it'd remove some local choice which is fairly popular in the US. So far the piecemeal solution seems to be that the federal government has harmonized a few regulations, e.g. car-safety standards (see https://en.wikipedia.org/wiki/Geier_v._American_Honda_Motor_...), to let a few industries avoid the complexities of balkanized 50-state regulations, but hasn't done anything general.
Now, if that created a nexus for all your business in that state, like sales tax on the entire thing installed---say you work for the Maytag dealer from whom the refrigerator was bought, across state lines---I'd call that a special case, but I'd expect it to come up when checking to see if service was covered.
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...
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.
[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.
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.
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.
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?
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.)
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".
But I know one person who has done his own accounts (small company, 3 people I think, accounts included VAT and payroll) and he didn't seem to think it was too bothersome. The documentation provided by the UK tax authorities is actually generally pretty good. But the punchline to his story was that when he eventually hired an accountant, mainly to save time, it turned out he'd missed a number of opportunities to take advantage of this or that way of reducing tax payments. So it seems like the DIY approach might not get you in hot water, but a lack of relevant training and experience could still prove costly.
Based on this story I signed up for an accountant from day 1 ;)
The UK has the NIH though; maybe in 10 years the Obamacare/Switzerland-Lite model will prove itself superior to the NIH, but it's not there yet.
I don't know of UK taxes specifically, but US taxes are a nightmare compared to every other tax regimes I am familiar with (a couple of European ones).
The 20% VAT you mentioned earlier seems onerous, but when you factor everything, taxes in the US are often as high or higher than other places, and provide significantly less:
e.g. suppose you are living in NYC and earning well. Then you pay %35 federal (or is it %39 yet), + 8% state + 5% city on income, for a total of %48 income taxes. If you are an employee, you have to add SS, employment tax, fica and whatnot on top of that, which easily gets you past the 50% mark. But that doesn't actually include any kind of health coverage, and when you go to university (or your kid does), you're going to pay 5-10 times as much. To an american, it seems reasonable to borrow $200K at age 20 against your future earnings to go to college, even though 40% don't get to the finish line (student loans, so not even dischargable by bankruptcy). It would be considered insanity, if it was even a possibility, everywhere else.
Oh, and you still have the 8.5% tax in NYC. not 20% VAT, but not that far - and the VAT is not as simple as it looks - if you run a business, it often doesn't affect you as much, because in many countries, only the "last mile" pays it.
Finally - US tax law regarding domestic finances might be comparable to the UK one (I would guess not, with the US federal code standing at >70,000 printed pages, and IIRC the UK code standing at <20,000). But if you have another nationality, or a significant investor of yours does, or you have anything resembling a bank account outside the US - then US tax laws become ten times more complex, and you are assumed guilty at any point of the way. (Failed to file your FBAR? Pay 50% of the highest amount in your account. Per year of missed reporting).
If you lived in Austin Texas you'd avoid that 8% state tax and 5% city tax.
Most major (and minor) US cities do not have an income tax. And a few states don't even have an Income tax (Texas, Alaska, Florida, Nevada, South Dakota, Washington and Wyoming). You could probably include Tennesse And New Hampshire in there too as they only require tax on dividends.
The reason why NYC and NY State can get away with charging those tax rates is that there's a sizable contingent of people who can't imagine living (or working) anywhere else other than NYC (it's a hell of a city). When you have a captive tax base like that it's in the state's rational best interest to jack the rates up as high as possible.
My advice: Vote with your feet.
Is this the case?
(I admit that 'ease of compliance' and 'tax code being complicated' are not the same)
I think businesses under a certain revenue threshold, though, are exempt from calculating destination-based VAT, so it doesn't hit small businesses.
For reference, the threshold for Denmark is about 38k Euros, so you (the UK-based bookseller) wouldn't deal with this until your sales _to Denmark_ topped that amount annually.