Similar to other industries, the world of fashion and apparel (whether on the creative, wholesale, or retail side) is riddled with numerous state and local tax (SALT) footfalls and sometimes, opportunities. Given that states are constantly changing their tax laws, it’s virtually impossible for most companies to stay in total compliance. The purpose of this article is to highlight certain SALT trends to help fashion and apparel companies avoid current and future SALT exposure.
The starting point in determining a business’s SALT responsibilities is to conclude where such business has “nexus.” Nexus means the minimum connection between a business and taxing jurisdiction that constitutionally allows the taxing jurisdiction to subject the business to its tax laws. The problem businesses face is that despite U.S. Supreme Court (USSC) cases that provide guidance in this area, states have been aggressively interpreting these decisions and, not surprisingly, have tried to expand their ability to tax out-of-states businesses.
In 1992, the USSC ruled that for a company to have sales tax nexus such business needed to have “more than a de minimis physical presence” in a state before the state could require the company to collect and remit sales tax. There are three problems with the USSC’s ruling. First, the Court did not define “de minimis,” second the states are broadly defining “physical presence,” and lastly the Court’s 1992 decision did not include a discussion on nexus with respect to other taxes (i.e., income, franchise, gross receipts, etc.).
In general, when a business has a physical presence (i.e., an office, manufacturing, employee, etc.) in a given state it is easy to decide nexus regardless of the type of tax. However, many states now consider the presence of an independent contractor and/or the presence of an affiliated company enough to create nexus for state tax purposes. In fact, a handful of states (and growing) have even adopted both sales tax and income tax nexus standards based on revenue above a specified amount from in-state customers.
After it is determined a business has nexus (i.e., a tax filing and/or sales tax collection responsibility), the next step is typically to determine whether a business’s sales are subject to sales tax. In general, if a business sells products/clothing to another business, such a sale would not be subject to sales tax assuming the buyer is going to resell the goods. It’s important for the seller to obtain a resale exemption certificate from the buyer.
If the buyer is not reselling the clothing (and the seller has nexus in the state where buyer takes possession of the clothing) than the seller needs to determine whether it is required to collect sales tax and how much. Unfortunately the answer to this question is complicated given each state has their own rules and tax rates. In some states clothing is totally exempt; in other states clothing over a certain dollar threshold is taxable (i.e., New York $110). In addition, in certain states clothing may or may not include items like shoes, belts, hats, and other clothing accessories.
The complicated part of the above discussion is that many of the concepts outlined may change or even not exist in 12 months (though unlikely). However, with different and changing rules by state and local governments, comes opportunity for careful planning, structuring, and sometimes even cost-savings if such conversations are had in a timely fashion. Accordingly, it’s important to review a company’s state tax posture on a regular basis to ensure the business is in compliance and taking advantage of all potential state tax opportunities.
David Seiden is a leading authority on state and local tax (SALT) matters. He is a partner based in Citrin Cooperman’s New York City office, where he leads the firm’s SALT Practice.
David Seiden CPA, Partner
Citrin Cooperman
212-225-9505
dseiden@citrincooperman.com
citripcooperman.com
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