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There’s Some SALT on Your Clothes

August 29, 2017

David Seiden is a leading authority on state and local tax (SALT) matters. He is a partner at Citrin Cooperman where he leads the firm's SALT Practice. He can be reached by phone at (212) 225-4447 or via e-mail at
Jaime Reichardt is a director in Citrin Cooperman's SALT practice. He can be reached by phone at 215.545.4800 or via e-mail at

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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 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 specifically related to sales and use tax to help fashion and apparel companies avoid current and future exposures.

Sales tax is considered a trust fund tax in that sellers collect the tax from and on behalf of the purchaser and remit it to the state where due. While the tax is technically imposed on the purchaser, the seller is liable for the tax as well if it has “nexus” with the state in question. If the seller does not have nexus and the product or service is taxable, the purchaser is charged with self-reporting the use tax due to the state. Use tax is considered a compensating tax in this way because absent use tax, purchasers would be able to make tax-free purchases of taxable items if purchased from a retailer or seller with no nexus.  

To fully appreciate a business’s sales and use tax reporting responsibility, the term nexus needs to be understood. Nexus is the starting point in determining a business’s sales and use tax reporting and remittance responsibilities. Nexus means the minimum connection between a business and taxing jurisdiction which 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 impose tax reporting and remittance requirements on out-of-states businesses. Another trend in some states has been the adoption of mandatory information reports to be filed of sales made in state by out-of-state sellers.  

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 two significant problems with the USSC’s ruling. First, the Court did not define “de minimis” and second, the states are broadly defining “physical presence”.

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. However, many states now consider the presence of an independent contractor and/or the presence of an affiliated company enough to meet the physical presence nexus test. Even the use of similar trademarks and names as well as internet advertising could give rise to nexus for an out-of-state business. 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.

Once a nexus determination is made, 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 proper resale exemption certificate from the buyer.  Resale certificate rules can be tricky based on the state where required and can often change based on whether drop shipments are involved or whether the seller is licensed or registered in the state in question for tax purposes. 

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 most challenging part of complying with all the various state and local sales tax rules is that everything discussed above may not be true in a year or even in six months from now (though unlikely). States are constantly changing their laws (virtually never in a taxpayer’s favor) and the federal government is now talking about passing legislation that would create some form of uniformity. As previously noted, sales tax is a trust fund tax which could result in personal liability to a company’s owners. Therefore it’s critical a business stay on top of the constant changing landscape of sales and use tax. 

Citrin Cooperman's dedicated SALT professionals stay abreast of the rules and regulations to help you successfully navigate your tax liabilities. Whatever level of activity you pursue in U.S. domestic markets, our skilled professionals can develop a multistate tax-planning program tailored to your company’s specific requirements.