6 ms·

Beware: State tax laws could nail your startup

45 points by ableal 13y ago

fredgrott 13y 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?
- dangrossman 13y 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).
  - fidotron 13y 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.
    - dangrossman 13y ago
      I can't imagine how they get away with that if so. The answer to all the relevant questions (where do people go to buy apps? who do they give their credit card to? what merchant actually charges their card? who handles refunds? who holds the copy of the product before it's transferred to the buyer? who delivers the product?) is all Google/Apple, not the developer. This is as if a B&M store like Staples decided Intuit was responsible for tallying its own sales tax whenever the store sold a copy of Quickbooks.
      - fidotron 13y ago
        iirc, and my memory is hazy, it was to do with them reusing Google Checkout. The result was a mismatch between what would make sense were you running an online store of physical items and what you want to run a store of digital goods.
  - rbritton 13y 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.
    - deleted 13y ago
      [deleted]
- gamblor956 13y 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 13y 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.
- tptacek 13y 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 13y 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".
    - tptacek 13y ago
      That's a good point, and while it sounds fuzzy, it actually has roots in a formal difference between the US and most other countries: our system is rooted in common law, which implies that most regulatory questions are punted to the courts. (There's a downside too; it can be trickier to find out what's lawful or not, since you might have to look up court precedents).
  - walshemj 13y 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 13y 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.
- tptacek 13y 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.
Frozenlock 13y 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 13y 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.
  - hga 13y 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.
    - _delirium 13y ago
      Some of them are pretty traditional rules as well, not some kind of new internet-driven surprise. Say that the year is 1935 and you're a Maytag refrigerator repairman based in eastern Iowa. A customer in western Illinois calls you out; you drive over the Mississippi River, service the customer's refrigerator on-site, and then drive back home. You have clearly engaged in a the sale of services in Illinois. You can't really argue this service call legally took place in Iowa, since neither the refrigerator nor the customer nor the physical location of the activity was in Iowa (not even if the customer mails you a check to your Iowa address rather than paying cash in Illinois). If Illinois has regulations on servicing refrigerators, or taxes related to this occupation, you're responsible for following them. If you want to follow only Iowa law, you need to service only refrigerators within Iowa's borders! That follows from the principle that Iowa has no authority to dictate the rules that govern servicing Illinois refrigerators. 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_Company 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.
tzs 13y ago
There are companies who can help with dealing with state sales taxes. E.g., http://www.avalara.com 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.
shiftpgdn 13y 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-and-unwise 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/ http://pando.com/authors/jonathan-barsade/ [2]http://www.exactor.com/ http://www.exactor.com/
- gamblor956 13y 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.
xux 13y ago
If you start a startup in New York, you can forgo business taxes for 10 years.
winstonian 13y ago
Somewhat related: What percentage of founders stop to think about the taxes they'll be paying if they're successful? 38% Federal + 12% California State = 50% Total
coin 13y ago
What is it with text based websites like this disabling pinchzoom?
ableal 13y 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.
- hga 13y 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 13y ago
    The number of cities in St. Louis county is mind-boggling to me.

45 points by ableal 13y 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?

dangrossman 13y 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).
- fidotron 13y 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.
  - dangrossman 13y ago
    I can't imagine how they get away with that if so. The answer to all the relevant questions (where do people go to buy apps? who do they give their credit card to? what merchant actually charges their card? who handles refunds? who holds the copy of the product before it's transferred to the buyer? who delivers the product?) is all Google/Apple, not the developer. This is as if a B&M store like Staples decided Intuit was responsible for tallying its own sales tax whenever the store sold a copy of Quickbooks.
    - fidotron 13y ago
      iirc, and my memory is hazy, it was to do with them reusing Google Checkout. The result was a mismatch between what would make sense were you running an online store of physical items and what you want to run a store of digital goods.
- rbritton 13y 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.
  - deleted 13y ago
    [deleted]
gamblor956 13y 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 13y 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.

tptacek 13y 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 13y 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".
  - tptacek 13y ago
    That's a good point, and while it sounds fuzzy, it actually has roots in a formal difference between the US and most other countries: our system is rooted in common law, which implies that most regulatory questions are punted to the courts. (There's a downside too; it can be trickier to find out what's lawful or not, since you might have to look up court precedents).
- walshemj 13y 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 13y 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.

tptacek 13y 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.

Frozenlock 13y 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 13y 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.
- hga 13y 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.
  - _delirium 13y ago
    Some of them are pretty traditional rules as well, not some kind of new internet-driven surprise. Say that the year is 1935 and you're a Maytag refrigerator repairman based in eastern Iowa. A customer in western Illinois calls you out; you drive over the Mississippi River, service the customer's refrigerator on-site, and then drive back home. You have clearly engaged in a the sale of services in Illinois. You can't really argue this service call legally took place in Iowa, since neither the refrigerator nor the customer nor the physical location of the activity was in Iowa (not even if the customer mails you a check to your Iowa address rather than paying cash in Illinois). If Illinois has regulations on servicing refrigerators, or taxes related to this occupation, you're responsible for following them. If you want to follow only Iowa law, you need to service only refrigerators within Iowa's borders! That follows from the principle that Iowa has no authority to dictate the rules that govern servicing Illinois refrigerators. 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_Company 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.

tzs 13y ago

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

shiftpgdn 13y 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-and-unwise 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/ http://pando.com/authors/jonathan-barsade/ [2]http://www.exactor.com/ http://www.exactor.com/

gamblor956 13y 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.

xux 13y ago

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

winstonian 13y ago

Somewhat related: What percentage of founders stop to think about the taxes they'll be paying if they're successful? 38% Federal + 12% California State = 50% Total

coin 13y ago

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

ableal 13y 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.

hga 13y 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 13y ago
  The number of cities in St. Louis county is mind-boggling to me.