When it comes to sales tax, there is no such thing as “fly over country.”
If you have business operations in the Midwest or make sales into Midwestern states, you must stay on top of sales tax changes that impact your business or you risk falling out of compliance. You can’t blame ignorance of law changes should an audit come down.
To catch you up and cut down your research time, we’ve compiled some of the essential Midwestern sales tax updates for 2020 that you need to know.
The Midwest has two of the three hold out states for enacting economic nexus legislation. Neither Kansas nor Missouri has passed *official* legislation to bring in sales tax revenue from remote out-of-state sellers following the Wayfair decision.
In 2019, the Kansas Department of Revenue came out with a controversial “no-threshold” policy position stating that any remote seller making sales into the state must register and collect tax. The Department is currently enforcing this position despite pushback.
The legislature made several attempts to pass legislation, but the bills were vetoed by the governor because they were tied to other provisions she disagreed with. Proposed remote seller bills included a $100,000 economic nexus threshold.
Kansas held a special session this summer that included consideration of marketplace nexus legislation, but the bill died in committee. We’ll see what the 2020 fall session brings in the Sunflower State!
Missouri legislators started pre-filing remote seller sales tax bills at the end of 2018 in response to the Wayfair decision but have yet to push any legislation through.
The most recent bills would establish an economic nexus threshold of $100,000 and require remote sellers and marketplace facilitators to collect tax if they exceed the threshold in the previous or current calendar year. The bills also require the Department of Revenue to create a mapping feature on its website that displays jurisdictions and their corresponding sales and use tax rates.
There is a slight chance Missouri will join the economic nexus club this year. Rumors have circulated that the Missouri governor will call a second special session later this year that would focus on tax policies that address the financial impact of the COVID-19 pandemic on the state. Wayfair legislation may make it to the table of discussion given the tremendous opportunity as a new revenue collection stream.
Three midwestern states have marketplace nexus legislation that became effective January 1 of 2020: Illinois, Michigan, and Wisconsin. Marketplace nexus legislation prescribes that larger marketplace facilitators take on the tax collection burden of their smaller sellers if they exceed economic nexus thresholds into a state. This simplifies collection as tax is collected from one entity instead of potentially thousands of smaller sellers.
In Illinois, marketplace facilitators that exceed either $100,000 or 200 or more separate transactions of retail sales (which includes taxable and exempt sales but excludes sales for resale) to Illinois customers in the preceding 12-month period must register to collect and remit tax on behalf of their marketplace sellers.
Michigan and Wisconsin also set economic thresholds for marketplace facilitators at $100,000 or 200 sales but include gross sales. Michigan’s evaluation must be done for the previous calendar year and Wisconsin’s for the previous or current calendar year.
Both Michigan and Wisconsin require individual sellers to include any sales made on a marketplace towards their threshold calculation. However, in Wisconsin, 100% marketplace sellers are not required to register. In Illinois, marketplace sellers should exclude their marketplace sales from their threshold calculation.
If you are a marketplace facilitator or marketplace seller, you need to be doing a regular evaluation of your sales into these states to see if you exceed the threshold and have a registration and collection requirement. Illinois even states that a marketplace facilitator should determine on a quarterly basis – ending on the last day of March, June, September, and December – whether they exceed one of the economic thresholds in the preceding 12-month period.
Effective July 1, 2020, charges for internet access services are no longer subject to South Dakota state and municipal sales tax or Wisconsin sales and use tax. These changes correlate with legislation enacted in 2016 that permanently extended the Internet Tax Freedom Act. The legislation established an end date of June 30, 2020 for seven states that imposed a tax on internet access at the time.
Internet access charges are often bundled with other services. If an internet service provider can identify and separate the charges related to internet access, the internet changes will remain exempt. A retailer should separately state the taxable and exempt items on an invoice or billing statement in order to only charge tax on the taxable items. Otherwise, bundled transactions will continue to be taxable.
The Wisconsin Department of Revenue notes that if a retailer sells internet access services and taxable products for one non-itemized price and the taxable products are greater than 10% of the retailer’s total purchase price or sales price of the bundled products, the sale is a bundled transaction.
These changes highlight the importance of itemizing or separating taxable from non-taxable charges on your invoice for tax purposes. If you charge one lump sum, you require your customer to pay more tax than they would if non-taxable services are separately stated.
Iowa enacted legislation this summer that narrows the limitations on how people qualify for the state’s manufacturing sales tax exemption, effective August 19, 2020. The original language of the manufacturing exemption excludes people “not commonly understood” to be manufacturers and engage in one of these activities: construction contracting, repairing tangible personal property or real property, providing health care, farming (including cultivating agricultural products and raising livestock), or transporting for hire.
Iowa’s new legislation amends this provision to exclude people who are “primarily engaged” in one of the five previously listed activities. “Primarily engaged” means the person generates more than 50% of gross revenue from operating its business from or spends 50% of their time engaging in any combination of those activities for a 12 month period after initially engaging in one of the activities.
This helpful example from the legislation about a company that repairs TPP as part of its business put the legislation into practice:
Company A makes widgets and repairs widgets damaged during use by its customers. Company A generates 70 percent of its revenue making widgets, and its employees spend 80 percent of their time making widgets. The remainder of its revenue and time are attributed to widget repair. Company A is not primarily engaged in “repairing tangible personal property or real property” or any of the other enumerated activities from Iowa Code because only 30 percent of its revenue and 20 percent of employee time are attributed to widget repair.
This company would still qualify for the Iowa manufacturing exemption.
Next up is the leasing industry! This spring, the Chicago Department of Finance revised the city’s application of the lease for re-lease exemption to include certain software and cloud products. The revision will apply effective July 1, 2020.
The Illinois sales for resale exemption statutes state that value-added resellers who acquire software for relicensing or transfer to consumers after modification/adaptation of the software may acquire the software as a sale for resale if they present their suppliers with valid exemption certificates. The Chicago Department will generally follow this rule.
For example, if a company pays for Infrastructure as a Service (IaaS) and makes the software it develops available on the hosted infrastructure as a web app with a subscription, the lease for re-lease exemption may apply to the extent the company incorporates products that are leased to the company by the IaaS provider. Previously, the Chicago Department stated that an exemption would not be available in that scenario.
These are just a taste of the critical updates that could have a significant impact on your Midwest operations when it comes to sales tax. Even taken alone, the fact that Kansas and Missouri are Wayfair legislation holdouts means you should keep your eyes peeled for sales tax updates coming out of the United States’ heartland.