The Top Five Reasons Why Sales Tax Should be a Priority Right Now!

The world changed on June 21, 2018. This is the day the U.S. Supreme Court said they made a mistake back in 1967. They said that they never should have introduced physical presence as a requirement for states to require sales tax collection from out-of-state companies. They said this in the Wayfair case and then went on to overturn the two landmark cases regarding physical presence: Quill and National Bellas Hess. (South Dakota v. Wayfair, Inc., 585 U.S. (2018); National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967; Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992)).

While the change created by this case is monumental in overturning 51 years of precedent, many companies and their advisers have not yet grasped how wide-ranging and potentially devastating the impact of this case is. The impact will be felt not just by eCommerce companies, but by all companies selling into multiple states who are not already collecting tax and/or exemption certificates everywhere.

We believe that companies should always take sales tax seriously, but here are our top five reasons why sales tax should be a priority right now!

Economic Nexus

The states were quick to react to the Supreme Court’s decision, and all the states except Missouri and Florida currently have some sort of economic thresholds. We believe these two states will have something in place by early next year. The most common thresholds are $100,000 or 200 transactions; however, there are differences among the states.

One of the recent trends is a move away from transaction thresholds to just a sales threshold. However, plenty of states are sticking with the transaction thresholds, and 200 transactions is a very small number, especially when you consider that many states include exempt sales in their threshold calculations.

We have seen some companies that were located in a state like Oregon, which doesn't have a sales tax, go from not having to collect sales tax anywhere to having to collect in 43 states plus Washington DC. Most companies we talk to have at least a few states they have to add.

The Supreme Court was concerned that states might try to go back to 1967 and impose economic nexus retroactively. South Dakota was smart and said they were only going to enforce prospectively, which put the court at ease. Most other states followed suit. This meant that at least for economic nexus, there was no potential past liability, and companies could start fresh. However, the states did not mean they were only going to enforce prospectively forever, but only from their effective dates. And the effective dates are starting to age with some being older than a year. Potential liability is building quickly.

An important reminder is that economic nexus does not override any other type of nexus. If you have nexus for any reason, and your sales are under the thresholds, you still have nexus.

For a free chart that contains a list of states, their thresholds, their effective dates, the threshold periods, and what to include in the threshold calculations, click here.

The States Are Coming

The states have been trying to figure out ways to tax sales from out-of-state companies since the 1992 Quill case, and the Supreme Court just opened the door for them to do it. It’s like Christmas in July for many of the states, and we are seeing an increase in people and resources in discovery and enforcement units. Some states, like Utah, have purchased lists of people whom they believe have crossed their thresholds of $100,000 in sales or 200 transactions which became effective on 1/1/2019. A number of our clients have received calls from the state. Luckily, all of our clients are registered in the state.

Other states, like Kentucky and Alabama, have started off with a softer touch, reminding companies of their responsibility to register. We think this is a prelude to much more aggressive future actions.

Then there are states like South Carolina, South Dakota, and Wisconsin, which are questioning start dates when people register and are making companies who can’t prove they did not have nexus on the effective date file back returns and paying the back tax, penalty, and interest out of their own pockets. We have heard that Maine intends to start going backwards and doing this also. Their effective date is 7/1/2018 and they have a threshold of $100,000 or 200 transactions. 

We expect to see all states becoming more aggressive and tougher as the effective dates age. We imagine the states will start making examples of companies to spread some fear in order to encourage voluntary compliance.

While the states will come looking for economic nexus, they will stumble across all types of physical nexus. Some common nexus-creating activities that many companies are not aware of are the use of independent and subcontractors, traveling employees, remote employees, consigned inventory, and owning tangible property in a state just to name a few. There are many more. This is perhaps where some of the greatest liability will be found.

Past Exposure

While the potential exposure for economic nexus grows daily, the states can only go back to their effective date, the earliest which could be is 6/21/2018. However, for other types of nexus, if you have never been registered and have never filed a return, then the states, in theory, can go back to the date your first nexus began, which could be 20 or more years for some companies. In reality, most states only go back seven to ten years depending on the state. I say only tongue in cheek because seven to ten years is an eternity, especially when the state wants you to pay all the back tax, penalty, and interest. Over a period that long, penalty and interest can easily approach or exceed 50%. 

States routinely go back that far, and if they find you, they generally don’t budge on the number of years. Many states also share information, and if they find you, don’t be surprised if you hear from additional states in the coming months.

One way to mitigate this past exposure is by utilizing a voluntary disclosure agreement (VDA). As a reward for stepping forward voluntarily, the state will limit the look-back period to generally three to four years, waiving all liability for periods before that, waiving penalty for the years in the VDA, and some states also waive some or all of the interest. Most VDAs are applied for on an anonymous basis. 

This is a great tool for many companies, but like all tools, it is not ideal for all scenarios. One of the greatest limitations of a VDA is that many states only allow a VDA if you have not been contacted by mail, email, or phone about the taxes in question.

It definitely pays to be proactive.

Taxability

As the states have been updating their nexus statutes, some have also been updating what they tax. Many states have begun taxing digital products and additional services. These are not the only taxability changes that states have made, but they are the most common.

We have spoken to a number of companies who told us they were not worried about nexus in new states because their products and services were not taxable. However, they were working with a mistaken assumption. What was not taxable in the past may be taxable today. 

The worst time to find out your products or services are taxable is when the state has already found you. We suggest staying abreast of taxability changes and periodically doing a review. 

Personal Responsibility

This is one of those topics that almost everyone I discuss it with is skeptical at first. Most can not believe that any potential liability does not stop with their entity. However, in most states, there is personal responsibility. This means that responsible parties which generally consist of owners, officers, directors, and in some circumstances, even managers or mere employees can become jointly and severally liable with other responsible parties as well as the business. In some states, this personal responsibility is limited to tax actually collected. However, that is not always the case. For example, New York says the following:

The responsible person’s personal assets, including a home, car, savings account, etc. could be taken by the Tax Department to satisfy the sales tax liability of their business. . . Personal responsibility can apply even if the owner has an employee or an accountant handle the business’s sales tax matters. Even though the business is a corporation or a limited liability company. . . The liability applies whether or not the tax imposed was collected.

While this may not be fair, it is unfortunately how the states can sometimes pursue you.

Summary

The world of sales tax has dramatically changed almost overnight. Many companies may only have exposure for the recent economic nexus. However, some have physical presence going back years. The states are coming, and once they find a company, the options are limited. Proactive companies have a number of options. Don’t procrastinate. Sales tax liabilities can not only be ruinous to your business, but with personal responsibility, they can also impact you personally. 

By: Michael J. Fleming, CMI

This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.