On June 1, 2016 the South Dakota State Sales and Use Tax will increase to 4.5%. How does this affect you? Well, that depends. Are you a service provider with billing periods that end on any day other than May 31st or a contractor? Which accounting method do you use to report sales taxes (accrual or cash basis)?
Service providers such as electric companies, utility companies or cellphone providers who end the billing period on May 31st can simply start charging the new tax rate on June 1st. If you’re a service provider with a billing period that ends in the month of June, the new tax rate would be applied to the first billing period that begins after June 1st. Since the 4.5% tax rate doesn’t go into effect until June 1, 2016, customers should not be billed that rate for any time periods prior to June 1st regardless of the accounting method used.
Businesses who use the accrual basis accounting method for reporting sales taxes (except service providers and contractors) will collect the 4.5% tax only on invoices created on/after June 1st. If an invoice is created prior to June 1st, the 4.0% tax is to be collected on the sale. Even if the payment is received on/after June 1st, the tax due is 4.0% for that invoice. Remember, accrual basis sales are reported by the invoice/sale date; not the date of payment.
Businesses who use the cash basis accounting method for reporting sales taxes (except service providers and contractors) will collect the 4.0% tax only on payments received prior to June 1st. When an invoice is created prior to June 1st, the 4.5% tax will be applied to the sale if the payment is received on/after June 1st. The cash basis method only reports the sales to the State of SD when the payment is received. This means that regardless of the date of sale, the state will collect the 4.5% sales tax on all sales reported on/after June 1st when the business uses the cash basis accounting method.
Contractors and others in the construction industry have their own exception to the sales and use tax increase. If an award letter is signed and dated prior to June 1st, 2016, then that project and needed materials are subject to the 4.0% tax rate. A copy of the award letter must be presented to the supplier/vendor at the time of purchase or the contractor will be subject to the 4.5% tax rate. The supplier/vendor is not required to send a copy of the letter with the sales and use tax return, but it is strongly recommended that the letter is kept with the other sale records for that period. All bids that are awarded on/after June 1st are subject to the 4.5% sales and use tax rate.
This does mean that some businesses will report sales taxed at 4.0% or 4.5% on the same tax return, which is why the importance of accurate record keeping cannot be stressed enough. If you are wondering how you’re going to survive this change, just breathe easy knowing that the Ketel Thorstenson staff is prepared to handle this.
For more detail or clarification on the tax increase, please contact either Ketel Thorstenson at 605.342.5630 or the SD Dept. of Revenue at 1.800.829.9188.