9 steps to figuring out what you have to collect and who you have to pay
The Supreme Court’s decision in South Dakota v. Wayfair (Wayfair) expanded the ability of states to require out-of-state retailers to collect and remit sales taxes on transactions in jurisdictions where the seller has no physical presence. In short, the court held that a state law requiring out-of-state sellers to collect and remit taxes based on an “economic nexus” with the state did not automatically violate the U.S. Constitution’s Commerce Clause.
The opinion remanded the case for further action without specifically ruling on the constitutionality of the South Dakota law. However, the justices highlighted several features of the law that they felt would keep it from imposing an undue burden on interstate commerce, including:
- A safe harbor threshold that limited the application of the law to sellers with more than just “limited business” in the state. In South Dakota’s case, the law does not require the seller to collect and remit taxes if it has less than $100,000 or 200 transactions in the state during the previous or current calendar year.
- A prohibition against retroactive enforcement.
- One state-level administration of all sales taxes within the state, and
- Access to sales tax administration software provided by the state.
Many states already had economic nexus statutes on the books before the Wayfair decision, and a host of others have worked to enact similar laws since the Supreme Court’s ruling. The terms of these laws can vary significantly from South Dakota’s. Because the factors listed by the court are only guidelines on what the justices believe would pass Constitutional muster, there is still considerable uncertainty over what requirements might be found unconstitutional if challenged.
A Nine Step Action Plan for Remote Sellers
With so many details still up in the air on this topic, many businesses are struggling to figure out how to comply with current requirements and adapt quickly to new rules as they are enacted. The following nine steps can help any business that sells products or services into multiple states meet current state tax obligations and manage changes effectively.
- Determine where, what, and to whom you sell.
- The reason for the “where” determination is fairly obvious, but keep in mind you should be tracking not just the destination state, but also local jurisdictions that may have additional sales tax requirements.
- Your system needs to know “what” you are selling in each jurisdiction because sales tax rates can vary from product to product, or may not be subject to tax at all.
- You need to track your customer information in order to know if a buyer qualifies for a sales tax exemption.
- Determine your activities that create physical and economic nexus. Remember, the Wayfair decision didn’t do away with previous sales tax laws based on physical nexus. Your system needs to allow for the possibility that either standard could trigger a collection requirement in a jurisdiction.
- Review the most recent 12-month period and prior year sales in each state. The first item in this list is designed to give you a current snapshot of your activities that may trigger economic nexus. A look back at recent periods is also required to make sure that you haven’t missed an obligation based on previous transactions.
- Determine the taxability of your products and services in each state. Once you know what you sell and where you sell it, you need to understand how each jurisdiction taxes your product.
- Monitor economic nexus. You need some type of system in place to track both the dollar volume of sales and number of transactions in each state where you sell. Even though sales tax collection obligations may not attach until you cross a threshold, you need to monitor the data from the start in order to know when your activity triggers economic nexus.
- Monitor changes in state sales and use tax laws. Many states are scrambling to enact or modify laws to align themselves with South Dakota’s requirements. Work closely with your tax advisor and any sales tax software provider to make sure you are aware of any changes in requirements that affect your obligations.
- Determine whether reporting requirements apply. Penalties for failure to comply with sales tax collection requirements can be significant. You need to know what rules apply before you bill your customer because the state will look to collect the amount from you even if you failed to collect it from the buyer.
- Review your marketing, selling, billing, and tax collection and payment practices. You need to look at the whole process from soup to nuts in order to confirm that you’re giving your buyers the correct information about what taxes apply and that you’re collecting and remitting them to the proper authorities.
- Evaluate your sales tax exemption certification process. Your business may not have paid close attention to exemptions in the past when you had no physical nexus in a jurisdiction. With more states looking to collect taxes based on economic nexus, you will need to be more vigilant in monitoring customers that claim an exemption. That includes tracking when exemption certificates you have on file may expire.
Talk to the Freed Maxick SALT Team
It may seem like a daunting challenge at the start, but careful planning and implementation of a Wayfair-compliant sales tax system can give your business the ability to monitor and adapt to changes more effectively for years to come.
Our state and local tax services team can help you with a review of your situation and a discussion of how best to comply with each state’s requirements. Call us at 716.847.2651 to discuss your situation or request a situation review here.
After the Wayfair Sales Tax Case:
- What Remote Sellers Need to Know About Use Tax Notice and Reporting Requirements
The latest Freed Maxick State and Local Tax Update contains a number of must-read items from around the country.
Illinois economic development: Legislation has reinstated and modified the EDGE credit program until June 30, 2022. The Economic Development for a Growing Economy Tax Credit Act (EDGE credit) may be claimed by new or existing businesses that create or retain jobs in Illinois. It is available to any individual, corporation, partnership or other business entity with an Illinois income tax liability and that is engaged in interstate or intrastate commerce. The business purpose can be for manufacturing, processing, assembling, warehousing, or a variety of specific other processes or services. There is a requirement of a minimum of $2.5 million of capital improvements placed in service in Illinois for businesses with more than 100 employees, while companies with 100 or fewer employees have no capital investment requirement. See the Update for a list of further conditions.
Rhode Island tax amnesty: The state’s budget bill, signed by Gov. Gina Raimondo, included a provision for the establishment of a tax amnesty program for all taxpayers owing tax. From Dec. 1, 2017 to Feb. 15, 2018, all late-filing penalties will be waived and participants will only be required to pay 75% of the interest accrued on late filings. The state will not pursue criminal or civil prosecution against any taxpayer under this program, assuming the taxpayer has either paid or entered into an installment payment agreement to pay all taxes and interest due.
Virginia amnesty: The state allows eligible taxpayers relief for delinquent returns filed from Sept. 13 through Nov. 14 this year. Taxpayers will have to pay the tax due and one-half of the interest. At the end of the amnesty, taxpayers with unpaid taxes that were eligible for relief and did not participate in the program will be subject to an additional 20% penalty.
Hurricane filing-deadline relief: In wake of the recent hurricanes such as Harvey and Irma that struck the southeastern U.S., many states are providing tax relief for taxpayers residing in areas designated as disaster areas by the federal government. In general, most states are extending deadlines to Jan. 31, 2018, for tax returns that had original or extended due dates between Sept. 4, 2017 and Jan. 31. Florida and Virginia have later extension deadlines of Feb. 15 and March 2, respectively. Some states provide additional specifications for taxpayers seeking relief. See Update for more details.
Other news: The Oklahoma Tax Commission has adopted changes to sales and use tax rules; the South Dakota State Supreme Court rejects the internet tax law; the Multistate Tax Commission has extended the deadline for the voluntary disclosure initiative for online marketplace sellers; Illinois legislation was passed that authorizes the state’s Department of Revenue to exchange personal income tax return information with the State Treasurer’s office; and drastic changes are made to the Illinois unclaimed property law.View full article
Freed Maxick will be starting a new State and Local Tax newsletter this month. Here are a few highlights of what you can expect in our first issue.
We’re proud to announce that Freed Maxick will be sharing a new State and Local Tax newsletter, “SALT Updates.” Our team of professionals who focus on tax issues at the state and local level will provide summaries of significant developments in the field from around the country. The update will provide information sorted by the type of tax involved as well as the states affected.
Here’s a look at a few of the topics that will be covered in our first update:Income & Franchise Taxes
- A new law in California will strip the State Board of Equalization of its powers and create 2 new agencies: The “Department of Tax and Fee Administration” and the “Office of Tax Appeals.”
- New York’s power of attorney form, Form POA-1, has been condensed to one page and now requires only the taxpayer’s signature.
- Also in New York, the state’s Supreme Court held that the suspension of a taxpayer’s driver’s license for unpaid personal income taxes is constitutional.
- If you have any familiarity with this type of tax, you won’t be surprised to learn that the bulk of the discussion in our first issue focuses on new laws requiring out-of-state sellers to collect sales tax or report sales. We note 5 states with new laws in effect on this topic.
- Another common sales & use topic is a remote seller’s economic nexus. This month, we discuss court challenges to nexus laws in Wyoming and Indiana.
- In keeping with the economic nexus theme, a new Washington law will extend nexus for the state’s business and occupation tax to retail sellers who meet certain criteria.
The topics and the states covered will vary from issue to issue as developments warrant, but we hope that you’ll find that this new Freed Maxick alert service delivers value in every alert. You can read the entire alert here. You can also follow us on Twitter or LinkedIn to receive announcements when new alerts are posted, or subscribe to receive notices by e-mail.View full article
Oklahoma has currently enacted a tax amnesty program for the period beginning September 1, 2017 and ending November 30, 2017. Taxpayers should take this opportunity to voluntarily file delinquent tax returns and avoid potentially high penalties, interest, and other possible collection fees.
What Oklahoma Taxes are Eligible for Tax Amnesty?
There are a wide variety of taxes eligible for Oklahoma’s amnesty program, including:
- Mixed beverage tax
- Gasoline and diesel tax
- Gross production and petroleum excise tax
- Sales tax
- Use tax
- Income tax for periods ending prior to January 1, 2016
- Withholding tax
Who is Eligible (and not Eligible) for the 2017 Oklahoma Voluntary Disclosure Initiative?
Individuals, businesses, and other entities with Oklahoma tax delinquencies are generally eligible to participate in the program.
The following taxpayers do not qualify for the program:
- Taxpayers with delinquent taxes other than those listed in the section above.
- Taxpayers that have already been contacted by the Oklahoma Tax Commission regarding potential delinquency.
- Taxpayers that have collected sales and use tax or payroll taxes from others, but have not remitted them to the state.
- Taxpayers that have participated in a voluntary disclosure program for that tax in the past three years.
What Are the Benefits of Voluntary Disclosure?
For taxpayers that take advantage of the limited window of opportunity for voluntary disclosure, Oklahoma will waive all the penalties, interest, and other fees for any taxpayer who participates in the program. It’s important to note, however, that the period that additional taxes can be assessed is limited to three years for annual returns and thirty-six months for all other filings.
For taxpayers that have collected taxes from others but not reported the taxes, a modified voluntary disclosure agreement is available where penalties are waived. Interest may still be charged and the time period includes all periods in which taxes were collected and not remitted to the state.
How to Participate in the 2017 Oklahoma Voluntary Disclosure Initiative
To participate, taxpayers must file all delinquent tax returns and make the required payments (or enter into an accepted payment program) within the disclosure period. Taxpayers should also be aware that for one year following the initiative period, they must continue to pay and remit applicable taxes, otherwise the penalties, interest, and other fees will not be waived.
Get Assistance for Voluntary Compliance
If you are a delinquent Oklahoma taxpayer, you should consider getting assistance from experienced tax professionals that can help you navigate through the program, and ensure that you are in full compliance with program requirements.
We can help.
Freed Maxick’s State and Local Tax (SALT) team is among the nation’s leaders when it comes to assisting taxpayers with voluntary disclosure and compliance.View full article
More Use Tax Compliance Requirements, More Headaches on the Horizon.
In Quill Corp v. North Dakota, the Supreme Court established that for states to have the authority to require an out-of-state business to collect sales tax, that business must have a physical presence within the state.
Several states, including Indiana, Maine, Massachusetts, North Dakota, Ohio, South Dakota, Tennessee, and Wyoming, are directly challenging this standard and have passed laws that require out-of-state vendors to collect sales tax without physical presence. These states argue that if a remote vendor makes over 100 (MA) or 200 (IN, ME, ND, OH, SD, WY) separate transactions to customers in the state or sell over $100,000 (IN, ME, ND, OH, SD, WY) or $500,000 (MA, TN) annually into the state then nexus is established for sales tax purposes.
Your company may be facing new sales tax compliance or reporting requirements in five, and possibly up to 10 states where you are selling products or services, but don’t have a physical presence.
New State Use Tax Reporting Requirements on the Books Effective July 1, 2017
Four states are introducing new use tax reporting requirements, effective July 1, 2017, for remote vendors in place of passing laws that contradict the physical presence standard.
These reporting requirements call for out-of-state businesses to either alert their customers of their responsibility to remit use tax or to report directly to the state customer information so that the states can ensure the proper remittance of use tax.
A brief summary of the states that have enacted new reporting requirements is listed below:
Alabama – Effective July 1, 2017: Legislation was passed that allows the Alabama Department of Revenue to now have the authority to require non-collecting vendors to notify Alabama customers of use tax obligations.
Colorado – Effective July 1, 2017: Non-collecting sellers with annual Colorado sales over $100,000 are required to report to the Colorado Department of Revenue customer information each year. Sellers must also report customers with purchases over $500 each year of their obligation to pay use tax.
Louisiana – Effective July 1, 2017: Out-of-state vendors with sales greater than $50,000 annually must inform Louisiana customers at the time of the transaction that the sale is subject to use tax. Vendors must also provide an annual statement to their customers by January 31st each year indicating the total purchases for the year. An annual report must be sent to the Louisiana Department of Revenue by March 1st in addition to the customer notification.
Oklahoma – Effective February 1, 2017: Out-of-state sellers must notify Oklahoma purchasers of their total purchases for the year by February 1st each year.
Vermont – Effective July 1, 2017: Vendors with over $100,000 in Vermont sales in the previous calendar year must provide a notice to their Vermont customers with purchases over $500 indicating that use tax may be due. A copy must also be filed with the Vermont Department of Taxes by January 31st each year. Failure to comply could result in a $10 penalty per notice failed to be filed.
Legislation has also been introduced in Hawaii, Nebraska, Pennsylvania, Washington and Wisconsin with similar reporting requirements.
Concerned About Sales and Use Tax?
With states looking for new sources of revenue, the burden of complying with out of state sales tax remittance or reporting requirements is becoming increasingly complex. It’s likely that over the new few years, we’ll see additional legislation, regulation and court cases that could affect your business.
It’s possible to automate your sales tax compliance needs, and we suggest that your investigations start with downloading our free report to this end. Simply click here.
Talk to us. The State and Local Tax experts at Freed Maxick can help you navigate these tricky waters in a manner that ensures compliance and the lowest possible tax burdens.
Call Jeannette M. Marchant, CPA Tax Manager, at 716.847.2651, or click here to start a connection.View full article
Related companies often use intercompany master service agreements in order to allocate common costs of doing business among the related entities. Depending on the size and nature of the business conducted, these service agreements can be extensive and include several services that are used throughout the related companies.
Something that business owners may not consider when drafting these agreements is the possibility that sales tax may need to be collected on the services provided. To complicate matters, each state has different laws that dictate whether services provided are subject to sales tax. Therefore each state that the related companies are located in should be considered in any sales tax analysis of intercompany service fees.
Sales Tax in New York
In New York State, sales of services are generally exempt from sales tax. However, services related to tangible personal property, software, and real property can be subject to sales tax and should be reviewed carefully if such services are included in an intercompany services agreement.
For example, if a service agreement includes repair and maintenance or installation services to computers, equipment, vehicles, or other tangible property, those services are subject to sales tax. License fees for access to software applications, unless specifically customized for the purchaser, are also subject to sales tax in New York State.
Avoid Costly Errors in Classification
If services related to real and tangible personal property are included in a service agreement, it is crucial to segregate these services on the invoice to the purchaser. It’s very likely that the majority of the services performed under an agreement are nontaxable due to the fact that in general most administrative services are exempt from sales tax. However, in most states, bundling both taxable and nontaxable services under a general label of “management fee” will make the entire transaction subject to sales tax. Consequently, for companies with large management fee income, an error in classification could be very costly.
If your business utilizes intercompany service agreements and has not performed a sales tax analysis, you should discuss the possible audit risks that you may face and steps to ensure proper tax filing compliance with a professional.
Freed Maxick's SALT team can assist with analysis of your service agreement to determine taxable versus nontaxable sales and review invoices for proper segregation of services to make certain that nontaxable sales do not become subject to sales tax. Contact us to get started.View full article