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Should being charging dealers sales tax  
June 11,  2021
Should being charging dealers sales tax
          Recently started collecting from dealers sales tax on services on behalf of states in which the dealer doesn’t have a seller’s permit. For small dealers (number of customers per state in the double-digits) the relative time investment involved in compliance in each state is enormous.  Until now we have not charged sales tax on service. 
          We now have 2 options: Invest the time and comply (very small gross numbers, not worth it); or absorb the cost of taxes collected by
          My question is about a 3rd option: is it legal or is there a statute preventing dealers from charging customers a surcharge (not a sales tax) per state to offset this cost (and defining it in the Terms & Conditions)? 
          The Standard Form Agreements, the All in One, permits you to increase your charge for any pass-through.  An increase from would be such a charge.  Sales tax is probably another matter, especially if you are responsible for collecting sales tax from your subscribers, and don’t.  Whether you decide to charge or absorb the cost because you have too few subscribers in a particular state is your business decision. 
          As far as tax advice, I don’t give it, but Mitch Reitman does and you should be using Mitch as your accountant and tax advisor; here is his response:
               Great question.  The answer is that if the service, in this case Alarm.Com, is taxable in the state, you, the alarm company, are responsible for collecting and remitting the tax from your customer.  My take on this is that Alarm.Com is (and rightly so) covering itself in these states.  Sales tax is actually a Sales and Use Tax in that it typically taxes the end user for the price of the good or service.  In this case Alarm.Com is not the end user, but, in most states, if it cannot ensure that the tax isn’t being collected from the end user (i.e. your company has no Sales and Use Tax Permit), it must consider its customer to be the end user and must collect tax from its customer.
          Let’s look at the question in three parts. 

  1.     Recently started collecting from dealers,  sales  tax on services on behalf of states in which the dealer doesn’t have a seller’s permit. For small dealers (number of customers per state in the double-digits) the relative time investment involved in compliance in each state is enormous. Until now we have not charged sales tax on service. 

 Answer: Tax laws are tax laws.  While many states make allowances for de-minimis sales if the seller does not have a physical presence in the state if you have more than the threshold in sales, or a physical presence, you must collect and remit sales and use tax, and file the necessary returns in that state.  The fact that you are a “small dealer” doesn’t get you any relief.  The other issue is that unless the alarm system utilizing Alarm.Com installed itself, you most probably installed it, or paid someone to do it on behalf of your company.  This would give you a presence in the state.  If you have a license in that state, the license in itself would give you a presence in that state.

2.      We now have 2 options: Invest the time and comply (very small gross numbers, not worth it); or absorb the cost of taxes collected by 

Answer Yes, you are going to have to invest the time to comply.  Paying the tax to Alarm.Com gets them off the hook, but not you.  Your company is responsible for collecting and remitting the tax, not Alarm.Com.  If you are passing the service through then you will probably survive an audit based on the fact that the tax was paid, but you will get a slap on the wrist from the state and a bill from your accountant, who, unlike us, probably doesn’t spend $8,000 a year on a 50 state tax reference service because they don’t have clients in 50 states.  You will also land on a “follow up list” at that state auditor’s office.  Don’t think that they won’t come to visit you, every state has offices around the country to audit large corporations that are based in your state, it’s not going to be hard for one of their auditors to pay you a visit.  If you are marking the service up, then you have opened up a whole new can of worms.  In this case the state is most probably going to hold you responsible for the taxes that you didn’t collect and remit.  Good luck trying to collect for three years of sales and use tax from your customers.  If the underlying monitoring is taxable, get ready for a tax bill for that as well.  If you are lucky the state may credit you for the tax that you paid to Alarm.Com, but don’t count on it. Do you have to absorb the cost of taxes?  The good news is no, you can collect and remit them from your customers, and have a well written contract like, a Kirschenbaum contract, that allows you to pass through taxes to the customer, you can do just that.

3.      Is it legal or is there a statute preventing dealers form charging customers a surcharge (not a sale tax) per state to offset this cost (and defining the Terms & Conditions)?

Answer:  It may not be legal to charge a “surcharge” but, if the state taxes the service, it is mandatory that the service provider charge and remit the sales and use tax.  While this is always the case when you have a presence in the state, it was not necessarily so if you didn’t… until recently.  There is a recent Supreme Court Case, South Dakota vs. Wayfair (the Wayfair decision).  You may be familiar with, it is a mail order company that sells ready to assemble furniture, towels, and things for your home, on the internet.  Wayfair, as did many internet sellers, relied on a 1967 Supreme Court ruling that the Commerce Clause and the Due Process Clause prohibit states from taxing remote sellers without a physical presence within a state.  In 1992, the Court affirmed its earlier ruling in Quill v. North Dakota.  In Quil it reiterated its earlier position but it based its decision only on the Commerce Clause, and invited Congress – which has the power under the Constitution to regulate interstate commerce – to intervene and write the rules for how and under what circumstances states can tax remote sellers (don’t hold your breath).  Of course in 1992 the internet was just a way for nerds to communicate.  Fast forward a quarter of a century and internet sales are a $500 billion industry.  The State of South Dakota required Wayfair to collect and remit sales taxes despite the fact that Wayfair had no physical presence in the State.  It is important to note that the items that Wayfair was selling were already taxable in South Dakota, the issue was that Wayfair wasn’t collecting the tax from its customers.  The Supreme Court ruled in favor of South Dakota stating that the physical presence rule creates “cross-border distortions” because it discourages out-of-state sellers from having an in-state physical presence and encourages customers to buy from out-of-state vendors. 

          So in summary, if the Alarm.Com service is taxable in a state, you have to charge the customer and remit the tax. Alarm.Com is well within its rights to charge you the tax, but this gets them off the hook, not you.   No, you can’t call it a “surcharge” but you can call it a “tax.”  Yes, there is a statute, but, more importantly, there is case law (and it is Supreme Court Case Law, the kind that you don’t want to mess with) that not only allows you to charge the tax, it requires you to charge the tax.  But to close on a bit of good news, if you have a well written contract, like a Kirschenbaum Contract, you are allowed to.

Mitch Reitman
Reitman Consulting Group
Fort Worth, TX

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