Question

Trina’s Trinkets Inc. (Trina’s) is a corporation incorporated and headquartered in Orem, Utah. Trina’s sells more than 3,600 different types of small trinkets and gifts, primarily to the end consumer, but also to wholesalers.  

Trina’s has operated in Utah for the past 15 years. The company made a strategic decision to target expansion of its sales into specific geographic regions outside of Utah as well. This helps encourage word-of-mouth advertising, which reduces the costs of general advertising expenses. To that end, Trina’s is now selling in several nearby states, including Arizona, Idaho, Montana, Washington and Wyoming. Trina’s plans to expand further throughout the western United States in the coming years.

The founder, Trina, comes from rural Utah and has worked to increase opportunities in rural areas by building her manufacturing and warehousing facilities in the city of Ephraim in Sanpete County, Utah. Since Trina’s established its operations in Ephraim, both the city and county have grown significantly and the area is now considered urban.  

Trina’s uses catalogs, phone calls and sales calls to make sales, but does not yet sell online. Trina’s ships all goods from Ephraim, Utah, using a third-party carrier (e.g., UPS, FedEx).^[1]Trina’s only sells non-food items and does not offer services.

To handle customer inquiries, Trina’s opened a small call center in rural Riverton, Wyoming, three years ago. The call center employs eight people who help take orders, solve customer issues and take care of phone solicitations from small businesses. Trina chose Wyoming for the call center because she has extended family in the area and wanted to provide work opportunities for them.

In 2017, Trina’s began a pilot program in which salespeople are sent to several states to try and increase sales at larger businesses that buy Trina’s products and then resell them. To date, Trina’s has sent salespeople to Utah, Montana and Washington. This pilot program appears to be successful. In the coming years, Trina’s hopes to expand the program to all of the states in which she currently sells products and then she plans to reach several new markets.

Margins are slim for this business, ranging from 5% to 15% of sales before state sales taxes are determined. The industry is extremely competitive and Trina’s faces competition from many online companies that are not required to pay state sales tax. Because of the high competition (which is different than most companies), Trina’s does not feel that it can increase prices to collect sales tax, and instead sales taxes come out of the margins.

Given the tight margins and relatively high costs to manufacture in the United States, Trina is considering moving some of her manufacturing to Mexico and then purchasing warehouse space in Arizona. She has also considered trying to sell her products through Amazon.com. She continues to consider how her operations can positively impact rural areas.

Trina’s has struggled to compute sales taxes correctly for each jurisdiction. Trina’s hired you, a tax advisor, to answer a variety of sales-tax-related questions and create a system (or tool) to compute sales taxes for the business. Additionally, Trina is interested to know how the potential operational changes she is considering would affect her sales tax collection obligations.

For purposes of this case, you can ignore sales tax issues related to the shipping costs.

• Provide the most important operational and tax policy issues related to collecting state sales taxes.
  • This should not be specific to Trina’s specific circumstances or a particular state, rather it should discuss the important principles and considerations that should be considered when analyzing the state sales tax collection process for any business.
  • 1. US Constitution-Due Process Clause and the Commerce Clause
  • 2. Nexus
  • 3. Origin v. destination state classification

Answer 1

Potential operational changes affect her sales tax collections

Potential operational changes regarding sales in outside states, is helpful in increase sales revenue and popularity of products. So, procedure of collection of taxes make a quite complex due to increase in sales revenue and online sales on amazon.com decided by Trina. So complexity in preparation of accounts will also arise during expansion of business. Company should follow different states taxation rules in case of state sales taxation and sales taxes collected from customers. Knowledge of Sales tax rates is also necessary. Trina is also decided to shift some of manufacturing units into Mexico and Arizona. So, different state sales tax laws are imposed on company. State sales tax is less in case of manufacturing units at Ephraim in Sanpete County, Utah. Company can charge taxes from customers according to different for different products.

Operational and tax policy issues related to collecting state sales taxes

1. Non- internet Sales business at starting - Business of Trina’s Trinket industry is non – internet sales business at starting. So, company should pay sales tax according to state sales taxation laws. There is no need for pay internet sales tax in case of non- internet sales.

2. Sales tax of online sales- Trina started online sales at Amazon.com due to high competitions in industry and see positive impact on ruler areas. It not easy to monitor increase in case of online sales. So, Trina has also struggled for compute online sales.

3. Correct sales are not easy to monitor – Trina’s company is starting sales other than Utah. There are various regions for sales are Arizona, Idaho, Montana, Washington and Wyoming. Trina’s plans to expand further business in western United States for coming years. But when sales area become large, this is not to monitor the correct sales for tax purposes.

4. Issues with state of physical existence of units- Sales tax is charged according to sales rules of the state at which company is physically located. Trina’s Trinket company located and operated from Utah. So, it necessary pay sales tax according to state laws of state Utah even selling outside. But the issue is that other locations related with physical existence that means manufacturing and warehousing facilities in the city of Ephraim in Sanpete County, Utah. So, sales tax also levied on manufacturing and warehouses used for manufacturing and stored products. To overcome that issue, Company decided to shift some their manufacturing units to Mexico and then purchasing warehouse space in Arizona. State sales tax rate at New Mexico is 5.125% and sales tax rate at Arizone is 5.6%. Sales tax rate at Sanpete country is 0.25%, Ephraim is 1% and Utah is 4.7 Combined sales tax rate for Ephraim in Sanpete and Utah is 6.5%. So, shifted its some manufacturing unit in Mexico and Arizone to overcome this issue.

5. Sales Tax Rates- Sales tax rates are made by policy makers. There is also a difference between sales taxes of different states and countries. In this case study there is also a difference between state and countries sales tax. So, that’s way Trina’s company shifts manufacturing units to Mexico and Arizone from Utah.

principles and considerations that should be considered when analyzing the state sales tax collection process for Business

1.Sales on basis of item- There different rates of tax based of different products and services. These taxes are charged when these are sold to customers. So, it is not difficult to collect tax from customers. Company try to increase sales tax will attached with selling price.

2. state sales tax- You can collect taxes on the behave of sales in a particular state, according to tax rates of that state

3. Sales tax with different states- If a company sell products in different state. It is necessary to register for each state and company should have knowledge about all taxable items and services with their tax rates.

4.Knowledge about sales tax rates- Sales tax rates are different for different products. Authorities should knowledge about state taxes and sales tax collected from customers. Online sales tax is also added into products price. So, counting sales is necessary for determine for collection of sales taxes from buyers.

5. Prepare Records for Sales taxes- Accountants of should prepare records of items with their relevant taxes for determine total of taxes. Reports regarding taxes collected should be send to state sales tax authorities.

6. Prepare reports with proofs in case of exemption from tax – Non-profit organisations, government industries, industries work for social welfare at greater extent and retailers related with resale products are exempted from taxation in state sales. But it necessary to prepare reports with relevant proofs in case of state sales tax exemption. These reports should be presented towards state sales tax authority.

7. Paid Company’s state Sales tax- It is necessary to determine total sales done by organization in current year because state sales taxation is charged on behalf of sales revenue. Company pays sales tax to state after collection of sales taxes from customers. Company can charge more sales tax to customers than it pays to state sales tax.

Ans. 1. -US Constitution-Due Process Clause and the Commerce Clause

Due Process Clause- Due Process Clause is related with a criteria to have a relationship within a person or company and a state. Like connection regarding property and taxation, deprived of person's life and liberty by state. Supreme Court prohibits taxation under state, if there is no minimum relation between person and state. Trina’s Trinkets Inc. (Trina’s) is a corporation is operated in Orem, Utah from past 15 years. Trina starts selling products outside Utah, in nearby states including Arizona, Idaho, Montana, Washington and Wyoming. Trina's industry come under State taxation(at Utah) due process clause because its headquarter is in Orem, Utah, even though company sells products outside Utah.

Commerce Clause - United States Constitution make orders regarding starting commerce between the states for taxation purposes. Commerce Clause prohibits states to impose taxation on companies or person if there in no minimum relationship with person and state.

in the above case there is a valid relationship between State Utah and Trina's Trinket Company so it is under due process clause taxation.

Ans. 2. Nexus

Both categories like due process clause and commerce clause in nexus should be true for taxation. According to nexus company is liable to pay state tax in state it exist even the sales in another state. Trina’s Trinkets Inc. (Trina’s) is a corporation is situated in Orem, Utah and sales in Arizona, Idaho, Montana, Washington and Wyoming. According to nexus, company should pay tax in Orem, Utah under state taxation even though selling products in other states.

Ans.3. Origin v. destination state classification

Origin Based State - Origin Based state is the seller is state from which business or company is situated. Trina’s Trinkets Inc. is incorporated and its headquarter is in Orem, Utah.So, Utah is its Origin Based State.

Destination based States - States with which Trina's industry starts selling with buyers,that means Destination states are buyers states. Arizona, Idaho, Montana, Washington and Wyoming are buyers states.