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Ned Lenhart

Jul 26
0

South Dakota vs Wayfair | Summary Bulletin

By | Quill, Sales Tax, Tax Strategy | No Comments
From Ned Lenhart, CPA, Interstate Tax Strategies, P.C.

Overview

On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota vs. Wayfair, Inc. In this opinion, the Supreme Court stated that the physical nexus requirement established in 1992 in the case of North Dakota vs Quill was not valid. The Quill decision prevented states from requiring remote sellers from collecting sales tax in their states unless the seller had some physical connection with the state.  In most cases, this meant that the seller needed to have salesmen or other employees working in the state, own inventory in the state, or perform services in the state. Some states even adopted statutes that the presence of in electronic ‘cookie’ that resides on the customer’s computer would be enough to create nexus.  In the Wayfairdecision, the Court said that the physical nexus requirement in Quill was no longer a valid basis for preventing a state from legally forcing a remote seller from collecting sales tax in that state on taxable sales made to customers located in that state. The Court endorsed the South Dakota economic nexus rule (but did not necessarily mandate this rule be used) that requires sellers with $100,000 of annual sales or 200 separate transactions be held responsible for collecting and remitting sales tax on taxable sales sent into South Dakota. The Court indicated that states must have a statute in place that balances the cost of compliance against the valid interest the state is attempting to regulate.  As such, the Court indicated that the South Dakota rule, on its face, appears to meet this balancing test.

What Became of the Physical Presence Test?

Over the past 26 years, states have adopted a variety of rules on what constitutes a physical presence in their state for purposes of meeting the Quilltest.  Most of these have been found to be constitutional and have been used by the states to require remote sellers to collect tax. From my reading of the Wayfairopinion, these rules are still valid.  As such, states may require remote sellers with any type of physical nexus to register to collect tax and, for sellers without a physical connection, the states may also adopt various economic nexus rules such as the one adopted by South Dakota.  Even though the Court held that the physical requirement under Quillwas not valid, it did not say that physical presence in the state would   prevent a state from requiring compliance. States now have two options for requiring compliance; the physical standard and the economic standard.

States with Economic nexus rules

The following states have rules like the South Dakota rule; there are state specific nuances, however.   Alabama, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, New Jersey, Ohio, Pennsylvania, Rhode Island, Tennessee, Vermont, Washington, and Wyoming.  More states will be added in the coming months as they adopt legislation.

What Are the Key Points in the Summary Bulletin of South Dakota vs Wayfair?

The summary bulletin of South Dakota vs Wayfair highlights the key points that auditors understanding South Dakota Wayfair need to know. These include the impact of the decision on economic nexus, the threshold for sales tax collection, and the need for businesses to comply with state tax laws.

What to do now?

The actions to take now are unique to each company.   I recommend companies reexamine where they have a physical presence of any kind.  If physical presence does not exist, then examine states where revenue is at least $100,000 per-year.  If sales exceed $100,000, determine if the customers you sell to are taxable and if the products and services you sell are taxable in the state. For exempt customers, begin collecting exemption certificates for all exempt sales. If your company has over $100,000 of taxable sales in any of the 21 states listed above, you should consider any historical exposure you may have since the economic nexus standards were adopted and the possibility of registering for prospective registration.
Apr 17
0

Sales Tax in a Post-Quill World – What Every Company Must Know!

By | Quill, Sales Tax | No Comments

On April 17, 2018 the U. S. Supreme Court heard oral arguments in the case of South Dakota vs Wayfair, Inc, Overstock.com, Inc., and Newegg, Inc. This is Case Number 17-494.   This case is a direct challenge by the State of South Dakota to the 1992 U.S. Supreme Court case of North Dakota vs Quill, 504 U.S. 298.   The 1992 case of Quill created what tax practitioners call the ‘substantial physical presence’ nexus standard as it applies to sales and use tax. As normally used, the Quill nexus test requires that the out-of-state retailer have some substantial physical presence in the taxing state before the taxing state can legally exert jurisdiction over the taxpayer and require the taxpayer to collect and remit the sales tax due on taxable purchases made by consumers in the taxing state. Since 1992, the type of contacts that meet this physical presence test have varied, but normally included employees entering the state, independent sales representatives working in the state, the ownership of property in the state, the rental of property in the state, the storage of inventory in the state, and the performance of services in the state. Recently, though, some states have proposed that electronic “cookies” stored on a customer’s computer would also create nexus.

In the Quill decision, the Court noted that Congress could enact laws to codify or overturn the Quill decision since their opinion turned on the interpretation of the Constitutional Commerce Clause for which Congress has the final say. For 26 years, Congress made no effort to resolve this issue. Having waited long enough, several states adopted statutes based on “economic nexus” rather than physical nexus. Under the economic nexus theory, out-of-state sellers with, for example, $100,000 of sales into the taxing state, are deemed to have nexus in the state even though they had no physical contact with the taxing state. This effort is directed at the growing e-commerce market place and other remote sellers that are not currently collecting tax on taxable sales.

South Dakota implemented one of these economic nexus statutes with an effective date of January 1, 2016.   In February or March of 2016, South Dakota issued assessments for uncollected sales tax to the remote sellers Wayfair, Overstock.com, and NewEgg. Each remote seller met the $100,000 of annual sales threshold under the South Dakota economic nexus law. The taxpayers immediately challenged the legality of the South Dakota statute and won their cases at the trial court and South Dakota Supreme Court. This was exactly as the state of South Dakota had planned and had hoped for.   Seems odd, but the South Dakota Revenue Department knew its only hope of overturning Quill was to lose its cases at the state level and then appeal these to the Supreme Court and hope the Court accepted their appeal. To the surprise of few, the U.S. Supreme Court accepted the State of South Dakota’s challenge to this case. So far, things are working out just as the state wanted.

There are several possible outcomes the Court to provide once it hears the case.

  1. Uphold Quill as it was written in 1992 and require that the out-of-state taxpayers have a physical connection with the taxing state before being required to register,
  2. Modify Quill to require physical connection for some type of taxes but eliminate the requirement for other types of taxes,
  3. Abandon Quill completely and adopt the economic nexus theory requiring minimal sales level in the taxing state before registration is required,
  4. Abandon Quill completely and not adopt the economic nexus rules, or
  5. Punt back to Congress, or
  6. Some combination of the above or something completely different.

Regardless the Court’s decision, there will be long-term chaos in the remote seller community. If the states prevail in any way, I would fully expect them to pounce on their newly found authority to tax all out-of-state business under whatever authority the Court gives them. I’m afraid that many states would attempt to collect taxes retroactively. If the states do not win or do not win as big as they want, they will become even more aggressive in identify out-of-state sellers that should be collecting tax. They will also continue to implement new policies as to what constitutes nexus under the Quill case. The states hate Quill and will do whatever they can to get rid of that rule.

All the commentaries I have read on this topic involve e-commerce companies selling property to individual and business consumers. In this scenario, the property is ordered online, the order is either merchant or third-party fulfilled from inventory, and then the order is sent to the purchaser via common carrier. However, if the Quill physical nexus requirement is abandoned or modified and no physical nexus requirement in the taxing state is needed before a state can force an out-of-state seller to collect their sales tax, the full impact will be much more expansive than is being discussed. An abandonment of the Quill nexus standard could greatly impact the sales tax collection obligations of the software and wholesale/distributor sectors.

Software sales

data processingThe days of sending software to customers on a CD are nearly gone. Most software is now delivered electronically or downloaded from a website portal. Many software companies operate in a purely virtual world. Sales calls are done via web-conference or Skype and implementation and training are done remotely. Many software purchases are made by end-users with no contact at all with a salesman. Consumers order the software and receive an e-mail link to download and install the software. Most software companies likely have nexus in the state where they are headquartered and where they have employees remotely working. Twenty-years ago, very few states taxed downloaded software. Today, about 25 states tax non-custom downloaded software. Many also tax data processing services, electronic information services, and Software-as-a-Service (SaaS) when the benefit of the service is received in their state. So, what would a world without Quill mean for these remote software sellers?

Without the physical nexus requirement of Quill, these software sellers and data processing companies would be forced into the same sales tax collection model as other sellers of tangible personal property.    This means that the software sellers would be required to collect tax on the software delivered to customers in states where those services are taxed. Without the physical nexus requirement of Quill, if the software is received in the taxing state and that state taxes downloaded software, the remote seller will be required to collect tax on the sale. This could also impact the taxation of technical support and software renewal agreements. The challenge with taxing electronic transmissions is that there is no traditional ‘shipping address’ that can be used to identify the location of the user at the time of the sale. It is likely that the shopping cart feature of these online software companies would need to be modified to identify the purchaser’s location. This might default to the zip-code of the credit card used for billing or some other element of the address to determine if the software is being used in a taxable state and to apply the correct tax rate.

The challenge with taxing remote data processing or SaaS charges is that the state where the product is used may differ from the state to which it is billed. The data processing or SaaS service may be used in a state that taxes the service, (i.e. Texas or New York), but billed to the corporate headquarters in a state that does not tax the service (i.e. Georgia or Florida). Some data processing or SaaS providers can track the location of the user of the SaaS or remote data processing service by using features built into the product. To know the point of usage at the time the billing is prepared and when tax is applied could be a challenge and a sales tax audit nightmare.

Sales taxes are normally sourced to the state where the service is consumed. Absent a clear indication on that location, the billing address is normally used. If the default billing state taxes these services, then 100% of the service is taxed even though only a small percent may have actually been used in that state. If the service is consumed in a state that taxes that service but no tax is charged, the retailer may have a liability for uncollected tax.

If Quill is overturned in whole or in part, sellers of software and providers of data processing, information services, and SaaS may be forced into new territories with regards to sales tax.

Exemption certificates

distribution centerOne of the general rules of sales tax is that all sales of personal property are deemed taxable unless the seller has a valid exemption certificate from the purchaser. The most common exemption certificate used by purchasers to avoid tax is the ‘resale’ exemption certificate. This includes the Multijurisdictional Resale Certificate published by the Multistate Tax Commission and the state specific forms provided by most of the other states. Wholesalers, like the software companies discussed above, can operate nationally by having presence in only a few states. Strategically located warehouses and arrangements with common carriers allow large and small wholesalers to quickly accept and fulfill orders from customers throughout the U.S.

The wholesalers I have as clients generally have most of the resale certificates from customers in the ‘ship to’ states where the wholesaler has nexus. This may only be a few states, though. In most cases, nexus is created by the presence of a salesman or the presence of property in the ship-to state. Without the physical presence test under Quill, wholesalers may be forced to request resale exemption certificates from customers in all states regardless of the wholesaler’s physical presence in that state. Failure to obtain the resale certificate could, upon audit, subject the wholesaler to a tax liability due to a missing resale certificates. This is one of the most common areas of exposure for wholesalers.

The problem could be even more extreme for wholesalers involved with third-party-drop shipment sales. Many e-commerce sellers never take passion of the property they sell. Rather, when an order arrives to the e-commerce retailer, that retailer immediately places an order with its distributor and requests that the distributor ship the property directly to the customer. This type of drop-shipment sale includes two separate sales that occur simultaneously at the point the property is delivered to the customer. First is a sale-for- resale from the supplier to the e-commerce retailer and the second sale is a retail sale from the e-commerce company to the final customer. Without the physical nexus requirement under Quill, the suppliers will be required to charge the e-commerce company sales tax on any drop-shipment sale that is not supported by a resale certificate valid in the ship-to state.

Thankfully, most states will currently accept a resale certificate from the e-commerce company’s ‘home state’. However, the additional burden of paperwork collection by the distributor and the need for them to monitor the type certificates required in the ship-to state could be overwhelming and crippling for distributors that may be supporting shipments and drop-shipments to thousands of customers. The failure of wholesalers to have the proper exemption documentation could pose significant nationwide audit risk. Without the Quill physical nexus requirement, distributors, suppliers, and wholesalers that sell property to other retailers on a nationwide basis could be unduly exposed to a tax liability simply because they have failed to obtain a resale certificate from customers located in states where the seller does not a physical presence.

Conclusion

Although the primary focus of the South Dakota case is on e-commerce retailers, there will be significant collateral impact on many different business segments if the Quill physical nexus standard is abandoned or significantly modified. I’ve noted that the software, data processing, and wholesale segments would be impacted directly, but there are most likely other business segments that have been sheltered from sales tax collection by invoking the Quill physical nexus doctrine. It would be folly for businesses that are not traditional e-commerce retailers to assume that a change to the Quill physical nexus rule would not affect them.   Every business will be affected in some way.

By Ned A. Lenhart, MBA CPA
President
Interstate Tax Strategies
https://www.salestaxstrategies.com

 

Jan 07
0

Can State Force Online Retailers To Collect Sales Tax?

By | Tax Strategy | No Comments

The US Supreme Court is being asked to review its 1992 sales tax ruling that allows retailers without any physical connection with a state to avoid collecting sales tax in that state.  Remote sellers enjoy an exception, as “physical presence” is the only criteria to collect and deposit sales tax in a state. South Dakota has become one of the first states to mount a challenge to this exclusivity of brick-mortar presence for sales tax collection through a legislative action. The final ruling is sure to have a bearing on Wayfair, Overstock, NewEgg, and other big online retailers that lead the challenge to the legislation.

The Background of Debate on Sales Tax Remittance by Online Retailers

In 2016, the South Dakota Senate passed the Bill 106 that made economic nexus as a prerequisite for sales and use tax remittance.  With effective from May 1 of that year, the law mandates a remote seller to collect and pay 4.5% sales and use tax if its gross sales revenue is more than $100,000 or has at least 200 sales transactions in the state.

The law brought into the ambit of sales tax most out-of-state and major e-commerce retailers that electronically deliver products and services to the state residents. Online furniture retailer Wayfair challenged the law arguing this as a violation of the 1992 judgment in Quill Corp vs North Dakota. At that time, the federal court laid down physical presence in a state as the only condition for sales tax collection in that state.

However, a 2015 ruling by Justice Anthony Kennedy in the DMA case underlined a willingness on the part of the highest federal court to review its decision that predates the e-commerce era. South Dakota saw this an opportunity to force a revision by the US Supreme court and boost its tax collection from the burgeoning internet commerce. The state Congress passed the law knowing that it contradicted the ruling of the court that defined physical presence, not economic nexus as the very basis of sales tax remittance to the state.

As expected the law was overruled by the South Dakota Supreme Court paving the way for the state government to approach the US Supreme Court. The decision is expected in early January 2018.

What States Say on Sales Tax Remittance by Online Retailers

South Dakota’s petition has support from 35 states that reel under increasing budgetary deficits and eager to cash in on e-commerce’s popularity to augment the state revenue. The Quill judgment dates back to an era when online retail was in its infancy. However, after a quarter century, sales tax revenue from the internet trade is too big to be ignored now by governments at all levels.

In 2018, the states are expected to lose $34 billion in sales and use tax unless the federal Supreme Court rules in their favor. The sales tax revenue from e-commerce is expected to exceed $50 billion in 2022.

The petition also highlights the discrimination faced by bricks-and-mortar sellers. With exemption granted to online retailers from tax collection and payments, bricks-and-mortar sellers are at a disadvantage. It is supported by the National Retail Federation, the nationwide representative body of physical retailers, and the Multistate Tax Commission.

Meanwhile, Wyoming has also adopted a bill eliminating the physical presence clause as the sole basis to collect and pass on sales and use taxes.

The Online Retailers’ Point on Sales Tax Remittance

Wayfair seeks a national legislation passed by the Congress to resolve the issue. It fears that state-level laws may lead to problems affecting the operation of online retailers.

NetChoice wants protection for e-commerce and online businesses “from overbearing tax compliance burdens” in states where such firms have no physical presence.

The Way Ahead

It has been more than 25 years since the Quil ruling. The e-commerce sector has grown big enough to become an important part of the national economy. With depleting coffers, governments have to cut spending on public services. When they are looking to increase their tax base, it is hard to ignore billions of dollars missed due to exemptions.

Simultaneously, it is essential to protect the national character of e-commerce. While the Internet brings in an excellent prospect for the future of trade and commerce, it is in the national interest to protect retailers from unnecessary compliance burdens.

Major online retailers, such as Amazon, have already started to collect and pass on sales tax to states. If the tax ambiance is made fair, simple, and convenient, remote sellers would have no qualms to comply. The need is to redefine the physical presence clause and make a national system making tax collection and payment easier for such retailers.

There are three bills under consideration in the Congress to regulate and control interstate commerce and facilitate sales tax remittance by retailers who have no physical presence in a state.

May 04
0

Federal Remote Seller Legislation-Here we go Again!

By | Sales Tax, Uncategorized | No Comments

It was just a matter of time before the U.S. Congress would take up the initiative of giving states the ability to compel remote sellers, with the force of state law, to collect sales tax on all sales that originate in one state but are delivered to another state unless such sales are exempt from tax in the destination state.  The current House Bill is H.R. 2193 and is named ‘Remote Transactions Parity Act of 2017.  This bill is virtually identical to the previous two versions that were introduced in 2013 and 2015.  The Senate has also reintroduced a bill that is likely similar to S. 698 that was introduced in 2015. 

These bills have many similarities but also significant differences.  Both measures leverage the efforts made by the Streamlined Sales Tax Project (SSTP) that were put into place in 2002.  The entire purpose of the SSTP was to demonstrate to Congress that the states were serious about streamlining the sales tax compliance process for out-of-state businesses.  There are about 25 full and affiliate members of the SSTP.  Some states that once belonged to the SSTP have dropped their membership because many of the SSTP provisions are unworkable.

Both measures are clear in their goal of giving states that conform to the SSTP provisions the ability to compel remote sellers to collect and remit sales tax on sales made to taxable customers in the taxing state.  Both measures specify that the laws, if passed, would not preempt or limit any power that the states may currently have for collecting from remote sellers so long as those powers are valid under state or federal law.

The biggest difference in the bills is found in the ‘small business exemption’ that each measure provides.   The House Bill provides a three year phase in of the bill for remote sellers that do not sell as part of an ‘electronic marketplace’.  In year 1, sellers with less than $10 million of sales are exempt from sales tax on remote sales, (unless they otherwise have a physical presence in the state). In year 2, sellers with less than $5 million of sales are exempt from sales tax on remote sales (unless they otherwise have a physical presence in the state). In year 3, sellers with less than $1 million of sales are exempt from sales tax on remote sales (unless they otherwise have a physical presence in the state).  In year 4 and beyond, there is no exemption for any business-regardless of the size-from being required to collect sales tax on taxable sales.  I believe this phase in approach is unfair to the new businesses that enter the remote sales market at any time after ‘year 3’.  The phased in approach clearly favors experienced businesses that have some time to implement the sale tax processes.

Sellers that are part of an ‘electronic marketplace’ (Amazon, e-Bay, Etsy, etc.) are not given any protection from having to collect sales tax regardless of the size of the business.  Sellers that are part of an ‘electronic marketplace’ must collect on the first dollar of sales made to states that adopt the SSTP.  The electronic marketplace is defined as a digital marketing platform where products are offered for sale by more than one remote seller and buyers may purchase such products or services through a common system of financial transaction processing. 

The Senate measure does not have a phased in small business exemption. Rather, it has a permanent $1 million small business exemption.  The Senate measure does not have a provision regarding the ‘electronic marketplace’.  As such, remote sellers that sell through Amazon FBA would only need to collect tax in states where they have nexus. Amazon FBA sellers with over $ 1 million in sales would be required to collect tax in all states where they have sales.    

Like many other pieces of federal legislation, this issue is as politically charged and the lobbying efforts are intense on the part of the main street retailers and the state governors (in favor of passage) and the Direct Marketing Association (in opposition) of passage. This is not a new issue. Legislation like this has been introduced from time to time for the past 30 years.  With Amazon collecting tax in all of the states, proponents could use that fact as a success story to convince Congress that the tax challenges that once existed are no longer there.  Amazon may even attempt to ‘level the playing field’ and could be a huge proponent of the bill since it is now incurring the cost of compliance and may want to force other retailers to begin collecting. In the past, Senator Mitch McConnell has opposed to this legislation, which meant that the Senate bill might not pass.

Despite these past challenges, the news that the state revenue gap is growing and that the states are taking preemptive steps to force the Supreme Court to reverse its 1992 decision requiring a physical connection in the state by the retailer before the state can force the retailer to collect tax.  Congress may take another ‘wait and see’ approach or it might force this action to a vote.  Only time will tell.

Feb 01
0

5 Key Decisions Startups Must Make About Sales Tax

By | Sales Tax, Uncategorized | No Comments

As I reflect on the type of sales tax consulting projects I’ve completed over the past 30 years, most of them fall into what I would call the “clean-up a mess” category. That is, I was hired to fix tax problems, resolve material tax liabilities, protest audit tax assessments, and to file refund claims for overpaid tax. In working with these companies, I’d eventually hear the statement, “if only someone had told us we needed to collect tax (or whatever), we would have done it”.   Whether that is true or not, the statement certainly highlights my belief that many companies get into serious sales tax trouble by not doing some type of foundational sale tax analysis during their startup phase. For this purposes, I’m treating the startup phase to be the first three years of business. In this blog entry and in others to follow, I want to highlight some of the essential steps every startup should take to minimize the long term sales tax risk to their business. In too many cases, by the time I’ve been hired to assist the company, the damage done has been so material that business survival is in question.   Following are five foundational points that startups need to understand.https://www.salestaxstrategies.com

  1. Know exactly what your business does.  Sales tax rules are not generic to all business categories. The sales tax obligations of a service business are different than the sales tax obligations of a wholesaler. Before you can begin to identify what sales tax obligations your business has, you must identify the specific business activity that you will conduct and how the revenue from that activity is generated. In some cases, it may be clear. You are an attorney and you are opening a law firm. In other cases, it may not be so clear. For example, your business develops and sells software on a subscription basis with various support agreements. You also charge for consulting, training, and technical support and you have customers across the U.S. Sales tax is a transaction tax and each sales transaction your business conducts requires some type of sales tax decision. This decision is required for each state where you are doing business.
  2. Pay attention to your invoices. Sales tax is governed by state law and each state has unique rules that govern how the sales tax is applied. Fortunately, the rules are relatively similar but here are significant nuances that must be identified. One rule generally applied to each of the 46 jurisdictions that have sales tax, is that the language on the customer’s invoice will be the primary (but not exclusive) source to determine which sales tax rules apply. For sales of personal property, the rules are pretty clear. If you sell office furniture and your invoices indicate that you sold six chairs then the presumption is that tax is due on the invoice price unless specific laws dictate otherwise. If you deliver the chairs, then separately stating the delivery charge on the invoice may be important because many states do not tax delivery if separately stated. However, if you combine the sale of six chairs, their delivery, and assembly for a single price, most states would consider the total invoice price to be taxable even though you may be providing certain nontaxable services. The format used for invoices can make a significant difference in the sales tax obligation of your company. Pay attention to the invoice language and get professional help to make sure your invoices are clear and properly reflect the sale tax rules of your state.
  3. Many states tax services. One of the most common statements I have heard over the years is, “we perform services so there is no sales tax issue”. Says who? Services are widely taxed by most states. This normally does not apply to personal services such as legal, medical, accounting and such, but services such as admissions to entertainment, temporary accommodations, data processing, staffing, security, installation, construction, repair, and other services can be taxed in many states. If your business provides services on a multi-state basis, don’t assume the rules are identical in each state. Check it out to be sure and make sure your invoices are clear about the type of service you provide.
  4. Know if you are a multistate business. As a startup, your focus may be on only the state where your office is located. Over time, though, you may get ambitious and start to solicit customers in other states or start some sort of online business that is selling property to customers across the country. As a business, the states assume you are either knowledgeable about the tax obligations of your company or that you can find out what those obligations are. This can be critical when it comes to doing business across state lines. When your business meets certain criteria in another state, it is said to have ‘nexus’ with that state. When your company has nexus in another state, your sales tax obligations are similar if not identical to those in your home state. If you start traveling into other states to meet with customers, delivery property into the state on your own trucks, perform services in the other state, or any other activity that takes you into another state, you may be creating nexus for your business. The same rules apply if you use independent contractors to solicit sales for you or perform services on behalf of your company. Knowing where your company has nexus is vital to managing your multistate sales tax obligations.
  5. Get and retain exemption certificates: There is nothing more frustrating then to work with wholesalers or retailers that have made sales of property without charging tax and who don’t have all the resale or other exemption certificates needed to support these nontaxable sales. Without valid exemption certificates to support the nontaxable sales, these are deemed to be taxable sales. Under audit, nontaxable sales without support of resale certificates will be treated as taxable sales and the business will be assessed tax. This is inexcusable! Getting and retaining resale certificates at the time of the sale is the easiest thing a wholesaler or retailer can do to protect themselves. If a customer goes out of business you have no opportunity to get any missing resale certificates. Failing to have valid resale certificates has been the demise of many solid businesses when these businesses were audited. Learn and follow the rules of your state with regard to exemption certificates.

Conclusion

The stress of starting a business is intense. There seem to be an unending number of decisions that need to be made and money you spend to get started can be extreme. Of all the decisions you need to make, I’m hoping that asking about sales tax is somewhere on the top 25 of those questions. Unlike income tax which is computed at the end of the year, sales tax is determined on each purchase and sales transaction your business makes. You can’t wait until the end of the calendar year to determine what your sales tax obligations are. The five points outlined above are the very basic points you need to pay attention to. The list can grow dramatically depending on your specific business and the number of states you work in. Get professional help on this issue. DO NOT attempt self-serve yourself when it comes to sales tax. This is a legal issue with significant implications if you misunderstand your obligations. You should review this on an annual basis.

Ned Lenhart, CPA President

Jan 18
0

How Clients Communicate with CPAs about sales tax is changing

By | Sales Tax, Uncategorized | No Comments

Every client that I assist with sales tax issues has another accounting professional they use for reporting and tax. In most cases, these professionals are well staffed CPA firms with a wide range of tax and accounting capabilities. When I start interviewing the client they tell me that since their CPA firm has never expressed any interest in assisting them with sales tax, they just assumed that they either didn’t do that type of work or didn’t think the company had any needs in that area. That’s music to my ears and I certainly appreciate the opportunity to work with your clients.
Over the past 20 years of talking with clients and with the CPAs, several common threads have emerged that shed light on the relationship that many companies have with their CPA or accounting professionals. I want to mention and discuss three things I’ve learned about clients and their CPAs. https://www.salestaxstrategies.com/firm-overview/

1. Clients generally contact their CPA about sales tax only when there is a problem.
When it comes to communication between a client and their CPA about sales tax, the phrase “no new is good news” seems to be appropriate. Months or years can go by with little conversation about sales tax, then, out of the blue, comes an audit, a notice, a nexus questionnaire, a major customer complaint, or an offer to buy the business, and then sales tax can to be a crisis (in some cases it really is a crisis!). Dealing with sales tax in a pressure situation such as an audit or M&A deal is not the best way to handle these things. In most cases, there is a short time span in which to respond, people are focused on many other issues, and information critical to managing the situation may be hard to find. When I get called in situations like this, I feel a bit like the bomb disposal guy who gets handed something with a short fuse that is ticking loudly. The first goal is to see what type of bomb it is and then determine how best to defuse it.
In many situations, this type of communication strategy may be what the client and their CPA have planned. For clients that operate in a single state this may be the appropriate strategy. However, for companies that operate in a multistate manner this strategy may lead to exposures and liabilities that could have been avoided had there been a more regular line of communications. With the changing nexus and taxability rules CPAs should have some regular line of communication with the clients. Further, clients must also be a bit more proactive in communicating with their CPAs about changes in business practices that might have tax consequences. This would include adding new offices, changing the way products and services are sold, changes in customer types, and the use of third-party relationships to help the business.
In most cases, sales tax problems can be eliminated or minimized if identified and addressed as early as possible. Don’t wait until there is a crisis to be in communications with your CPA. If you don’t believe your CPA can handle these questions, please contact me at nlenhart@salestaxstrategies.com

2. Clients search the Internet to get answers to their sales tax questions.
The Internet is a wonderful and powerful tool for individuals and businesses to use to get and share information. There is no shortage of accurate and questionable information on just about every topic; including sales tax. I’ve spent my share of time putting sales tax information on the web through my blog, website, and guest blogging on other sites. I try to be as careful as possible with the information I post but even I’ve made a mistake a time or two. In talking with many companies, a common phrases I hear goes like this, “I’ve spent the past two weeks searching the web for sales tax information and am very confused”. Worse yet, they will say, “I found a website or blog that said that sales tax is not anything I have to worry about, but wanted to check to be sure”.
When it comes to sales tax, the Internet is full of valid and invalid information. There is no professional certification required before you can post a message or blog to any website and there is no alarm that alerts users to what information is valid and invalid. Further, because sales tax is factually sensitive, applying Internet results based on general search terms to situations that are very fact specific, the results may be misleading or disastrous.
If you, as a CPA, are not perceived as a capable and approachable resource for your clients to contact about sales tax questions, then your clients may be getting technical help from Internet “experts”. However, when something goes wrong, it will be your mess to help them clean up.

3. Clients are calling Departments of Revenue to get help.
I routinely get calls from companies that start with the phrase “I called the _______ Department of Revenue and they said I should be charging tax on _______”. My shock at these statements is that the company was expecting the Department of Revenue to be their tax consultant and to provide them with accurate and company specific information. Rarely does this happen. While Departments of Revenue do their best to provide good information, their job is mostly to collect and process as much tax revenue as possible. They are not tax consultants and there is no assurance that the person who provided the information has any real expertise at all. If you or your clients use Department of Revenue websites or call centers as your primary source of multistate sales tax information, I would caution you that this might be a dangerous practice to continue.
Conclusion

This blog is directed to CPAs and to companies looking for sales tax advice. The points are equally valid. If you are a company with a CPA or other tax advisor, you need to have an open and systematic dialog with them to increase the chance that they will provide you with the most accurate information. Don’t rely on the Internet for solid advice. Sales tax is fact sensitive and the answers are often complex and will vary by state.
If you are a CPA, you need to know that your clients are seeking information from any and all sources that they can. This may be include qualified and unqualified Internet sites, state departments of revenue, and other sources that don’t include you. However, if something goes wrong you may be the first person they call and you may be quickly blamed for their problems.
I work with CPAs to help them assist their clients. My practice allows CPAs to provide top quality sales tax consulting services to companies without having any investment in resources. Please contact me at your convenience if you have client questions or are just looking for a resource for sales and use tax advisory services. Please check out www.salestaxstrategies.com
Ned A. Lenhart, CPA
President

Oct 24
0

Sales Tax Due Diligence: What it’s Revealing

By | Sales Tax, Uncategorized | No Comments

The private equity community is busy finding and completing strategic investments for their portfolios. As part of their analysis process, a wide variety of reviews and due diligence is completed. During 2016, I’ve been asked to participate in the tax due diligence on several transactions and I have seen a lot of careless sales tax practices that are leading to hold-backs and escrows. Here are just some of the issues that I’ve encountered and some commentary on the situation.

Nexus in more states than thought: Nexus is the term used to describe the situation when a company has a physical connection with a state that would require it to take some action with respect to sales and use tax. These actions may include collecting tax on taxable sales or collecting exemption certificates to support nontaxable transactions. In the due diligence I completed, the target company had sales tax nexus in far more states then they believed. The failure of the target company to understand where it had nexus lead to the under collection of tax and the failure to obtain valid exemption certificates. In one situation, the exposure was over $500,000. Not only did the company have sales tax nexus, but it had income tax nexus and had also underpaid corporate income tax. Reviewing where your company has nexus is an ongoing process and one that must be carefully completed. Failure to know where your company has a sales tax collection or reporting obligation can create audit exposure and significant expense if detected.

Tax Collected but not remitted: On more than one occasion the due diligence revealed situations where sales tax had been collected from customers but had not been remitted. When talking with the companies, we learned that they had implemented a sales tax automation system which was set to collect tax in more states then the company actually was required to. Once the tax was collected, the company had no idea what to do since they were not registered in that state. In one case, tax had been collected for more than 3 years! If your company has collected but not remitted sales tax, you have few options. Your company either needs to return the collected tax to the customer or register and remit the tax to the state. I’ve completed several voluntary disclosure agreements with states to remit tax collected. This is a very good option to resolve this issue.

Incorrect tax rules leading to under collected tax:: The leading issue identified during my due diligence reviews was the application of incorrect tax rules to the sales transactions conducted by the business. In these situations, the company had made a reasonable effort to determine in which states it had nexus and had made some effort to collect and remit tax. However, the rules used to collect tax were incorrect. Tax was being collected on non-taxable sales and tax was not being collected on taxable transactions. The misapplication of sales tax to services was rampant. Failing to tax “bundled” transactions and failure to tax delivery charges (when taxable) were common. When reviewing materials from technology companies, I noted significant liabilities related to the taxation of SaaS and data processing services.

Missing exemption certificates: In general, all sales of personal property are taxable unless the seller has a valid exemption certificate to support not charging tax in states where the seller has nexus. In many due diligence reviews, missing exemption certificates created the most liability. The most complicated issue involved drop-shipments of property into states that do not accept the ‘home state’ resale certificate. The absence of an exemption certificate or the acceptance of the wrong resale certificate both create the same problem; the sale is taxable. As a drop-shipper of property into states where your company has nexus, your company has a very challenging responsibility to avoid liability.

Reliance on outdated advice:One due diligence project involved the review of a report prepared for the target 10 years prior to the sale transaction. The report was correct at the time it was written, but due to changes in the law and changes to the business, the report became outdated within just a few years. However, the target continued to rely on this report and failed to understand the obligations it had for collecting tax and exemption certificates in the states covered by the report and a host of states not included in the report. The target relied for years, to its detriment, on a report that was obsolete 24 months after it was issued. If your company is relying on reports and opinions issued in the past, get these reports updated. Changes in business activities and in the law can dramatically affect the validity of these reports.

Failure to understand successor liability: One concept that can create significant confusion is called ‘successor liability’. In each state but 4, the purchaser of the assets of a business inherits the sales and use tax liability of the seller unless the purchaser follows state specific procedures to shield itself from this liability. The most common response I get when I bring up successor liability, is that the sales contract requires the seller to remain liable for these liabilities. In short, these contractual obligations of the seller are meaningless when evaluated against the successor liability law. State law, and not the sales contract, will determine who is liable for tax after the deal closes. From a purchaser’s stand point, the entire reason for completing due diligence is to identify issues that can be addressed before the deal closes. When it comes to sales tax, the purchaser of the assets inherits all the sales tax problems that the seller and the only time to address these issues with the seller is before closing. Don’t rely on the sales contract to protect you from your successor liability. Under audit, the state will come against the purchaser for these taxes.

Conclusion
For many businesses, the only exit strategy they have is to be purchased by a private equity firm. Companies spend years positioning themselves for this transaction. Then, someone like me shows up and starts asking questions about something as mundane and unexciting as sales tax and the report I present sends a chill down the seller’s back. They immediately start blaming their CPA and attorney for not brining these matters to their attention. They frantically start trying to find flaws with my work or find ways to get the rules to not apply to their business; few succeed. The time to identify these sales tax issues is before the buyer comes to your business. Paying a small price annually to have these issues reviewed can save significant fees in the future. Identifying and fixing these issues before the buyer comes forward can ensure you get top dollar for your business.

Ned Lenhart, CPA
President
Interstate Tax Strategies

Jul 27
0

Sales Tax Audits-Taxpayers Beware!

By | Tax Audit | No Comments

Sales tax audits are an effective way for the states to collect underpaid sales and use tax.  I’ve been involved in helping clients manage audits for over 30 years and I’ve seen a wide range of audits and auditors.  Most audits are pretty straightforward and are handled efficiently.  The business has the correct records for the auditor to review, the auditor is prompt and capable, the taxpayer errors are not that controversial, and we can complete them in short order.   Over the past few years, I’ve seen this pattern take a dangerous turn as the states are becoming more desperate for revenue and are having a hard time hiring and training auditors.

https://www.salestaxstrategies.com/sales-tax-audit-defense/

For the past year, I’ve been working on audits from most state in the Southeast.   Based on my exposure (albeit limited to these specific audits) I’m seeing several troubling changes occurring.  These changes may not be obvious to most businesses that are being audited, but failing to understand these audit trends may cost taxpayers huge amounts of tax, penalties, and interest.  The following are a few of the trends I’m seeing.

1. Improper (or creative) sampling methods, 2. Undertrained auditors,3. Unsupported legal positions,
4. Unwillingness of auditors to consider non-standard audit procedures, and 5.  Auditors not really understanding the nature of the business, its customers, and data.

Without taxpayers knowing that these things may be happening “right before their eyes”, there is no way to properly challenge the audit.   Taxpayers need to make sure that the auditors understand their business, their customers, and their data.  I’ve seen auditors quote statutes and regulations with gusto as fully supporting their audit position.  In some cases, the taxpayer just agreed with the rules that the auditor was using.  This is a huge mistake.  Don’t accept anything the auditor says without asking for the exact provision and then reviewing it yourself.  You may be surprised to find that the auditor cherry picked the provisions that works to their favor and eliminated provisions that benefit the taxpayer.

The state is not your friend and has no interest in providing you with guidance to mitigate your situation.  Get help if you need it.  The deck is stacked against small business taxpayers that may never have been audited before and may be putting some level of trust in the auditor.  This trust is often misplaced. 

If you get an audit notice get help before the auditor arrives.  You may be completely blind to mistakes you are making and you may want someone other than the auditor to point these out ahead of time.  This is even more true if you are being audited by a state that is not your ‘home’ state.  

Jun 15
0

The Sales Tax Nexus Train Wreck has Begun!

By | Sales Tax, Uncategorized | No Comments

June, 2016 marks the beginning of what could be a slow train wreck and dismantling of the current sales tax nexus standards established under North Dakota vs. Quill set by the U.S. Supreme Court in 1992.   The train wreck I’m referring to involves the movement of HR 2775 in the U.S. Congress and the initiation of a law suit challenging the new Alabama law on economic nexus.

Federal Legislation

In June of 2015, Congressman Jason Chaffetz introduced HR 2775 which is referred to as the “Remote Transactions Parity Act of 2015” or “RTPA”.  The RTPA joins the Market Place Fairness Act  “MFA”  that has also been introduced in Congress.  The RTPA has significant support from the Governor’s Association and many state Departments of Revenue.  For the most part, the RTPA allows Streamlined Sales Tax Program (SSTP) states to implement the RTPA 6 months after the bill is passed and signed into law.  States that are not SSTP members are required to adopt the SSTP provisions before they can participate in the law.  There are about 20 state currently listed as full SSTP members.

The RTPA allows states to enforce their sales tax laws on any “remote seller” that does not meet the “Small Remote Seller Phase-In” exemption.  This is a 3 year exemption effective for calendar years effective after the bill is signed.  Year 1 after the bill is signed the exemption applies to businesses with annual receipts of $10,000,000, Year 2 the exemption applies to businesses with sales of $3,000,000 or less, and Year 3 the exemption applies to businesses with sales of $1,000,000 or less.   These thresholds apply only to sales that are made directly from the company’s website.  Because businesses are entering the e-commerce space on a daily basis, it seems quite unfair to offer an exemption to existing remote sellers but not new ones.

However, if the business participates in a “electronic marketplace” then the sales thresholds noted above do not apply.  An example of an ‘electronic marketplace” would be e-Bay and probably the Amazon FBA program. As such, if the RTPA is signed, an individual located in Georgia selling $100 of property on e-Bay to a customer in Ohio, would be required to register and collected Ohio sales tax on the transaction.  The RTPA also provides a huge incentive for software companies to be deemed “certified providers” and to offer some sort of free technology for remote sellers to use.

If either the RTPA or the MFA are passed and signed into law, there would be some process (albeit chaotic) for implementing the law and businesses would have some sense of timing there would be some uniformity.

Alabama

Effective January 1, 2016, the state of Alabama implemented a very aggressive economic nexus theory that deems any company with more than $250,000 of remote sales into the state to have nexus.  No physical presence is needed.  Some businesses registered but many did not.  One business that did not register was Newegg technology company.  Newegg is a remote seller of computers, games, monitors, and software.  Making good on her promise to assess tax on any businesses that should have registered, Alabama Revenue Commissioner Magee filed an assessment against Newegg for $186,000 of tax for the months of January and February.  On June 8th, Newegg filed an appeal of that assessment.  In response to this law suit, Magee said “I’m really excited.  Let’s see if we can get something up to the Supreme Court sooner rather than later”.

The law suit claims that the Alabama statute and rule is ‘without force or effect’ claiming it collides with the commerce clause of the U.S. Constitution and is contrary to many existing court cases that are specific to this issue.

Train Wreck in Progress

Congress has been dealing with this nexus issue for almost 30 years and has made no progress at all.  However, the e-commerce landscape is changing very rapidly and the revenue needs of state and local governments are also growing.  The timing may be right for some legislative solution during the next year or so.   As outlined in the action being taken by Alabama, the states are not waiting for Congress to act.  They are looking for a fight and they now have one.

I’m speculating that the Alabama court case will move more quickly than the Congressional act.  The speed with which the Alabama case could move through the state and federal courts is unknown.  It could be a year or more before the case is ripe for review by the Supreme Court. There is also no assurance that the Court would even hear the case. (I’m guessing they would, though.)

If the Supreme Court upholds the Alabama economic theory or, even worse, just nullifies the Quill decision on reasons unrelated to the Alabama law, then each state with a sales tax would be free to adopt whatever rules it wants for the collection of sales tax by remote sellers.  There would be no requirement for uniformity and no “small business” exemption.  There could even be retroactive tax assessments by states if they believe any decision from the Court could be effective for prior tax years.

A Court ruling in favor of the states makes any federal legislation meaningless. Worse, if Congress acts at the same time the courts are reviewing the Alabama case (or other cases), then there is the potential for a huge legal conflict between what law applies and when the laws are effective.

For remote sellers and other multistate businesses, the chaos and confusion is frustrating.  20 years ago, you had the ‘brick and mortar’ stores complaining that the web stores were not collecting tax.  Now, with more webstores charging tax, you have one group of e-commerce companies complaining that their e-commerce competitors are not charging tax but should be.  The dynamics have certainly changed.

Stay tuned as these events playout.  If you are a multistate business, you will be impacted by either the federal legislation or any court decision that may be issued on this matter.

June 2016 marks the beginning of what could be a slow train wreck and dismantling of the current sales tax nexus standards established under North Dakota vs. Quill set by the U.S. Supreme Court in 1992.   The train wreck I’m referring to involves the movement of HR 2775 in the U.S. Congress and the initiation of a law suit challenging the new Alabama law on economic nexus.

Federal Legislation

In June of 2015, Congressman Jason Chaffetz introduced HR 2775 which is referred to as the “Remote Transactions Parity Act of 2015” or “RTPA”.  The RTPA joins the Market Place Fairness Act  “MFA”  that has also been introduced in Congress.  The RTPA has significant support from the Governor’s Association and many state Departments of Revenue.  For the most part, the RTPA allows Streamlined Sales Tax Program (SSTP) states to implement the RTPA 6 months after the bill is passed and signed into law.  States that are not SSTP members are required to adopt the SSTP provisions before they can participate in the law.  There are about 20 state currently listed as full SSTP members.

The RTPA allows states to enforce their sales tax laws on any “remote seller” that does not meet the “Small Remote Seller Phase-In” exemption.  This is a 3 year exemption effective for calendar years effective after the bill is signed.  Year 1 after the bill is signed the exemption applies to businesses with annual receipts of $10,000,000, Year 2 the exemption applies to businesses with sales of $3,000,000 or less, and Year 3 the exemption applies to businesses with sales of $1,000,000 or less.   These thresholds apply only to sales that are made directly from the company’s website.  Because businesses are entering the e-commerce space on a daily basis, it seems quite unfair to offer an exemption to existing remote sellers but not new ones.

However, if the business participates in a “electronic marketplace” then the sales thresholds noted above do not apply.  An example of an ‘electronic marketplace” would be e-Bay and probably the Amazon FBA program. As such, if the RTPA is signed, an individual located in Georgia selling $100 of property on e-Bay to a customer in Ohio, would be required to register and collected Ohio sales tax on the transaction.  The RTPA also provides a huge incentive for software companies to be deemed “certified providers” and to offer some sort of free technology for remote sellers to use.

If either the RTPA or the MFA are passed and signed into law, there would be some process (albeit chaotic) for implementing the law and businesses would have some sense of timing there would be some uniformity.

Alabama

Effective January 1, 2016, the state of Alabama implemented a very aggressive economic nexus theory that deems any company with more than $250,000 of remote sales into the state to have nexus.  No physical presence is needed.  Some businesses registered but many did not.  One business that did not register was Newegg technology company.  Newegg is a remote seller of computers, games, monitors, and software.  Making good on her promise to assess tax on any businesses that should have registered, Alabama Revenue Commissioner Magee filed an assessment against Newegg for $186,000 of tax for the months of January and February.  On June 8th, Newegg filed an appeal of that assessment.  In response to this law suit, Magee said “I’m really excited.  Let’s see if we can get something up to the Supreme Court sooner rather than later”.

The law suit claims that the Alabama statute and rule is ‘without force or effect’ claiming it collides with the commerce clause of the U.S. Constitution and is contrary to many existing court cases that are specific to this issue.

Train Wreck in Progress

Congress has been dealing with this nexus issue for almost 30 years and has made no progress at all.  However, the e-commerce landscape is changing very rapidly and the revenue needs of state and local governments are also growing.  The timing may be right for some legislative solution during the next year or so.   As outlined in the action being taken by Alabama, the states are not waiting for Congress to act.  They are looking for a fight and they now have one.

I’m speculating that the Alabama court case will move more quickly than the Congressional act.  The speed with which the Alabama case could move through the state and federal courts is unknown.  It could be a year or more before the case is ripe for review by the Supreme Court. There is also no assurance that the Court would even hear the case. (I’m guessing they would, though.)

If the Supreme Court upholds the Alabama economic theory or, even worse, just nullifies the Quill decision on reasons unrelated to the Alabama law, then each state with a sales tax would be free to adopt whatever rules it wants for the collection of sales tax by remote sellers.  There would be no requirement for uniformity and no “small business” exemption.  There could even be retroactive tax assessments by states if they believe any decision from the Court could be effective for prior tax years.

A Court ruling in favor of the states makes any federal legislation meaningless. Worse, if Congress acts at the same time the courts are reviewing the Alabama case (or other cases), then there is the potential for a huge legal conflict between what law applies and when the laws are effective.

For remote sellers and other multistate businesses, the chaos and confusion is frustrating.  20 years ago, you had the ‘brick and mortar’ stores complaining that the web stores were not collecting tax.  Now, with more webstores charging tax, you have one group of e-commerce companies complaining that their e-commerce competitors are not charging tax but should be.  The dynamics have certainly changed.

Stay tuned as these events playout.  If you are a multistate business, you will be impacted by either the federal legislation or any court decision that may be issued on this matter.

June 2016 marks the beginning of what could be a slow train wreck and dismantling of the current sales tax nexus standards established under North Dakota vs. Quill set by the U.S. Supreme Court in 1992.   The train wreck I’m referring to involves the movement of HR 2775 in the U.S. Congress and the initiation of a law suit challenging the new Alabama law on economic nexus.

Federal Legislation

In June of 2015, Congressman Jason Chaffetz introduced HR 2775 which is referred to as the “Remote Transactions Parity Act of 2015” or “RTPA”.  The RTPA joins the Market Place Fairness Act  “MFA”  that has also been introduced in Congress.  The RTPA has significant support from the Governor’s Association and many state Departments of Revenue.  For the most part, the RTPA allows Streamlined Sales Tax Program (SSTP) states to implement the RTPA 6 months after the bill is passed and signed into law.  States that are not SSTP members are required to adopt the SSTP provisions before they can participate in the law.  There are about 20 state currently listed as full SSTP members.

The RTPA allows states to enforce their sales tax laws on any “remote seller” that does not meet the “Small Remote Seller Phase-In” exemption.  This is a 3 year exemption effective for calendar years effective after the bill is signed.  Year 1 after the bill is signed the exemption applies to businesses with annual receipts of $10,000,000, Year 2 the exemption applies to businesses with sales of $3,000,000 or less, and Year 3 the exemption applies to businesses with sales of $1,000,000 or less.   These thresholds apply only to sales that are made directly from the company’s website.  Because businesses are entering the e-commerce space on a daily basis, it seems quite unfair to offer an exemption to existing remote sellers but not new ones.

However, if the business participates in a “electronic marketplace” then the sales thresholds noted above do not apply.  An example of an ‘electronic marketplace” would be e-Bay and probably the Amazon FBA program. As such, if the RTPA is signed, an individual located in Georgia selling $100 of property on e-Bay to a customer in Ohio, would be required to register and collected Ohio sales tax on the transaction.  The RTPA also provides a huge incentive for software companies to be deemed “certified providers” and to offer some sort of free technology for remote sellers to use.

If either the RTPA or the MFA are passed and signed into law, there would be some process (albeit chaotic) for implementing the law and businesses would have some sense of timing there would be some uniformity.

Alabama

Effective January 1, 2016, the state of Alabama implemented a very aggressive economic nexus theory that deems any company with more than $250,000 of remote sales into the state to have nexus.  No physical presence is needed.  Some businesses registered but many did not.  One business that did not register was Newegg technology company.  Newegg is a remote seller of computers, games, monitors, and software.  Making good on her promise to assess tax on any businesses that should have registered, Alabama Revenue Commissioner Magee filed an assessment against Newegg for $186,000 of tax for the months of January and February.  On June 8th, Newegg filed an appeal of that assessment.  In response to this law suit, Magee said “I’m really excited.  Let’s see if we can get something up to the Supreme Court sooner rather than later”.

The law suit claims that the Alabama statute and rule is ‘without force or effect’ claiming it collides with the commerce clause of the U.S. Constitution and is contrary to many existing court cases that are specific to this issue.

Train Wreck in Progress

Congress has been dealing with this nexus issue for almost 30 years and has made no progress at all.  However, the e-commerce landscape is changing very rapidly and the revenue needs of state and local governments are also growing.  The timing may be right for some legislative solution during the next year or so.   As outlined in the action being taken by Alabama, the states are not waiting for Congress to act.  They are looking for a fight and they now have one.

I’m speculating that the Alabama court case will move more quickly than the Congressional act.  The speed with which the Alabama case could move through the state and federal courts is unknown.  It could be a year or more before the case is ripe for review by the Supreme Court. There is also no assurance that the Court would even hear the case. (I’m guessing they would, though.)

If the Supreme Court upholds the Alabama economic theory or, even worse, just nullifies the Quill decision on reasons unrelated to the Alabama law, then each state with a sales tax would be free to adopt whatever rules it wants for the collection of sales tax by remote sellers.  There would be no requirement for uniformity and no “small business” exemption.  There could even be retroactive tax assessments by states if they believe any decision from the Court could be effective for prior tax years.

A Court ruling in favor of the states makes any federal legislation meaningless. Worse, if Congress acts at the same time the courts are reviewing the Alabama case (or other cases), then there is the potential for a huge legal conflict between what law applies and when the laws are effective.

For remote sellers and other multistate businesses, the chaos and confusion is frustrating.  20 years ago, you had the ‘brick and mortar’ stores complaining that the web stores were not collecting tax.  Now, with more webstores charging tax, you have one group of e-commerce companies complaining that their e-commerce competitors are not charging tax but should be.  The dynamics have certainly changed.

Stay tuned as these events playout.  If you are a multistate business, you will be impacted by either the federal legislation or any court decision that may be issued on this matter.

Feb 25
0

Clarity on Florida Drop Shipments!

By | Sales Tax, Uncategorized | No Comments

In order to claim a ‘resale’ exemption in the state of Florida, purchasers must normally only use a resale certificate issued by the Florida Department of Revenue.  These generally expire annually and are automatically renewed for all businesses registered with the Department.  As more companies use ‘drop shipments’ as a way to fulfill orders the issue of what exemption certificates are valid in the ‘ship to’ state becomes an important question. In TAA 15A-020 the Florida Department of Revenue clarifies a very important point as to how it would treat drop-shipments and what type of documentation it would require to exempt the Florida sale from being taxed by the original shipper.  https://salestaxstrategies.com/third-party-drop-shipment-analysis/

Let’s take a quick review of the Florida drop-shipment situation.  Drop-shipment’s involve at least 3 different parties.  These are the final customer, the vendor, and the shipper. Drop-shipments also involve at least 2 different states.  In the ruling, the final customer was located in Florida, the vendor (who is selling to the final customer) is located outside of Florida and the shipper is also headquartered outside of Florida but it sends salesmen into Florida and is registered for Florida sales tax. The shipper sends his invoice to the vendor outside of Florida.

The sale from the shipper to the vendor is a “sale for resale” that occurs in Florida.  The sale from the vendor to the final customer is a retail sale that may be taxable or may be exempt depending on the property.  Because the shipper has nexus in Florida and is registered with the Florida DOR, it asked the question as to whether it would be required to collect Florida sales tax on the sale to the vendor because it had nexus in Florida.

Florida law Section 212.05 states that if the shipper and the vendor are both located outside of Florida and the goods are outside of Florida when purchased, the sale between the shipper and the vendor is outside of Florida jurisdiction.  In the past I have had client situations similar to this and could not find clarification to what was meant by the phrase “located outside Florida.” Even though the shipper has nexus with Florida through the presence of salesmen in the state, this ruling concludes that does not mean that the shipper is located in Florida and must collected tax .  It does not even require that the shipper collect a Florida resale certificate from the vendor.

If either the shipper is located in Florida at the time of the sale, then Florida sales tax would need to be collected from the vendor or a valid Florida resale certificate would need to be obtained.  Florida requires that the vendor register with the DOR to issue a valid resale certificate.

Ned Lenhart, CPA
President Interstate Tax Strategies.