When it comes to sales tax, most businesses fit into one of three categories:
- Those whose products/services are not taxable
- Those that are already managing sales tax either internally or by outsourcing
- Those that haven't figured out sales tax and are risking non-compliance
If you fall into the last two categories and are experiencing the headaches of sales tax, it’s time to address the mess.
Maybe you’re unhappy about how your current vendor manages compliance, and ends up leaving it all to you. Maybe you have misconceptions and misinformation about sales tax responsibilities, including your nexus, the taxability of your products and services, and ultimately your risk.
We talk to many prospective clients that will admit they are unhappy with their current sales tax outsource solution, but they are hesitant to make any changes. They get so comfortable with the predictability of the problems and pain that they are familiar with from their current solution that they can’t even believe a better option is available. Even if they believe a better option is possible, they fear a change of service providers will be worse.
What if you know you should be doing something relative to sales tax, but you don’t know what? Or perhaps worse, what if you’ve not looked at sales tax at all, and don’t even know whether you could have an issue? If you’re one of those businesses that has established nexus and you have taxable sales but you’ve yet to take care of it - you need to recognize the reality of sales tax compliance now more than ever because the stakes have gone up.
Recent history and hard facts
The complexity of sales tax has grown immensely in the last two years. With the introduction of economic nexus due to the South Dakota vs Wayfair case, you would think that after two years things would have gotten easier.
Not really – often due to online businesses’ ongoing misconceptions about how Wayfair might impact them. We have to convince companies that nexus does always just mean just a brick-and-mortar physical presence and that many forms of digitally transmitted products and services are taxable. Unfortunately, many of these companies are more comfortable believing their version of reality instead of the facts.
Let’s look at the facts as they stand now:
A physical presence in a state is no longer required to trigger obligations to collect sales tax.
Historically, sales tax nexus was created via a physical connection between an out-of-state business and a taxing jurisdiction which made that business responsible for collecting and remitting sales tax on transactions.
A physical office or an employee based in a state remains a clear-cut example of sales tax nexus. But you might also trigger nexus with sales reps traveling into another state (where they aren’t based) to solicit sales; technicians traveling into another state to perform service calls; an affiliate or agent relationship; or simply maintaining inventory in a warehouse in a given state.
Then there’s Wayfair, which led to the largest change in sales tax in the last 50 years and added economic nexus to the mix. It tied nexus to a certain amount of sales and/or a certain number of transactions in a state or jurisdiction – every state or jurisdiction that has such laws and where you exceed the threshold.
Now if you have physical or economic nexus in a state or jurisdiction you are required to collect and remit sales and use tax, unless otherwise exempt.
The Constitution does not completely protect your company from nexus requirements.
The U.S. Constitution sets the basic parameters for determining nexus. The Due Process Clause of the 14th Amendment mandates a link or minimal connection between a state and the entity it wants to tax; the Commerce Clause authorizes Congress to regulate commerce among the states and prohibits states from enacting laws that might unduly burden or inhibit the free flow of commerce between the states. The Supreme Court has interpreted this to prohibit a state from taxing businesses unless there is a “minimal connection” between the business and the state in which it operates. Most recently in Wayfair, the Court determined that either a physical or economic presence creates that connection between the state and your business.
Personal liability for sales tax non-compliance doesn’t stop with your company but can extend to owners, directors, shareholders, officers and employees.
Responsible parties can also trickle down to the person whose duties involve managing and paying taxes or any other person who has the authority or ability to control business payments and decisions. This liability extends beyond the business to personal assets.
Selling through a marketplace doesn’t mean you don’t have to worry about sales tax.
Selling through “marketplace facilitators” like Amazon, eBay or Etsy creates a unique set of challenges. A marketplace facilitator is a business or organization that contracts with third parties to sell goods and services on its platform. There are a growing number of states that require the marketplace facilitator to collect and remit sales tax on behalf of the third party sellers.
Laws governing marketplace facilitators popped up when states saw that platforms were charging sales tax on the sale of their own or certain third-party sales but not on all sales. This produced a gap in tax collection that revenue-hungry states quickly looked to close (and will probably be hungrier to close in the future as pandemic lock downs continue to wreck tax revenues).
Selling through one of these sites may ease your sales tax obligations – but not if you sell on your own website in a state as well. If you sell on your own platform as well, then you may be required to collect and remit the sales tax independently from the sales tax collected and remitted via the marketplace facilitator. However, depending on the state, you will need to include the total sales revenue via the marketplace facilitator in analyzing whether you have crossed an economic nexus threshold.
States are running out of money. Where do you think they’re going to try to get more?
COVID-19 may seem to be waxing and waning nationwide, but its effects will continue to be felt across the world – and in almost all states’ tax-revenue coffers.
According to The Tax Policy Center, April collections fell 16 percent in 42 states surveyed due to business closures and lockdowns. Year over year, state tax revenues declined in 34 states. With two months remaining in the fiscal year for 46 states, total state tax revenues were down about $57 billion compared with 2019.
The logical answer: Tax more people and companies for more money in the future. Armed with the infrastructure and enforcement tools (think audits) created in the wake of Wayfair, jurisdictions are more likely than ever to enforce sales tax compliance on online businesses.
You can no longer be comfortable with the “predictability” of compliance problems.
Sales tax non-compliance can add significant risk to your business. We can help you comply and stay on top of this ever-changing tax environment. Contact us to learn about the latest developments in sales-tax nexus and what they mean to you and your company.