• Service: Tax, Global Indirect Tax
  • Type: Business and industry issue
  • Date: 6/24/2013

US – Indirect tax compliance is more than just sales tax 

GITB June 2013 - US
Indirect tax compliance in the US is not limited to filing and remitting monthly regular sales and use tax returns. Businesses across all industries must comply with a variety of taxes, fees, licenses and regulations at the federal, state, and local level.

Companies doing business in the US are generally required to collect state sales or use tax on the sale or lease of goods or taxable services to consumers. Each of the 45 states that impose a sales tax requires businesses to register with the state to have the ability to remit tax to the state. Failure to do so can result in significant penalties.

Each state has its own rules regarding business registration and licensing. Even if the state does not require a business to register, local jurisdictions typically require a business operated under a name different to the owner’s name, such as a trade name, to register. The volume of local jurisdictions that require licenses is significant and rules are inconsistent between localities within the same state. To further complicate compliance, many rules at the local level are not published in an easily accessible manner.

Many local governments require retailers operating within its boundaries to obtain business licenses for each physical business location. Additionally, some jurisdictions require businesses not operating brick-and-mortar retail locations to register; in other words, having nexus (due to salespeople or delivery trucks in the jurisdiction, for example) could mean having to register.

Obtaining a business license or registering a business imposes significant administrative and economic burdens, compounded by the fact that both must be renewed at some specific interval. Business owners can also expect to face federal, state, and local issues involving environmental regulations, employment taxes and regulations, zoning ordinances and building codes.

Registration and license requirements often vary by industry. For example, telecommunications companies face a host of taxes and fees. The Federal Universal Service Fund is imposed at the rate of 16.1 percent of a telecommunication provider’s interstate end-user revenues. All 50 states have implemented a state version of this fund on intrastate end-user revenues, which can be as high as 8.5 percent.

A number of states have enacted a telecommunications excise tax on the gross charges for originating or receiving telecommunications within the state. Several states have empowered municipalities to charge a municipal telecommunications tax. For example, as of 1 January 2013, at least 10 Illinois municipalities increased their municipal telecommunications tax rates. With over 7,500 taxing jurisdictions in the US, tracking each empowered municipality’s taxes and rates changes is a significant challenge for already over-burdened tax departments.

Finally, state and local governments have required telecommunication providers to collect “E911” fees to recover the costs related to building and operating enhanced 911 services. While most states require wireless carriers to collect E911 fees from customers, there is a growing trend to impose an E911 charge on prepaid phone services at the point of a retail sale. Today, 23 states have adopted this prepaid charge; five states implemented the charge effective 1 January 2013.

Businesses, most notably retail and telecommunications, are subject to a seemingly endless array of taxes, surcharges and regulatory requirements that complicate compliance. Often these fees and rate increases get lost in the shuffle of resource-strapped tax departments. Businesses should be aware of registration, license, and fee filing requirements, as non-compliance can result in significant penalties, and even closure of a business location. There are technology tools available to help businesses keep track of registration and renewal requirements, as well as telecommunications fee filings.

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Leah Durner

+1 202 533 5542

Global Indirect Tax Brief: June 2013

GITB: June 2013
Articles in this edition highlight the increasing importance of indirect tax as one of the most important sources of revenue for governments.