Sales Tax

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.

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

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

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

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 8^th, 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 8^th, 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 8^th, 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.

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.

I was recently working with a company that was getting charged New York sales tax on 100% of the SaaS fees they were charged by their provider.  This would be correct if 100% of their SaaS usage was actually in New York, but it wasn’t.  In discussions with the provider, they said that New York tax was being charged because that was the “ship to” address set up in their billing system.  Everyone at the company agreed that some tax was due to New York because their were a few users in that state–but it was probably less than 10% of what was being charged.  When I inquired as to why New York was chosen as the “ship to” address, the response was pretty basic: “That’s where one of our developers lives!” https://www.salestaxstrategies.com/tax-consulting-services.html

Given the challenges of managing the taxation of SaaS, I suggested that the “ship to” address be changed to a state like Georgia, that does not tax SaaS, and that a use tax accrual process be implemented to pay the tax due in New York and the other states where the company has nexus and which SaaS.  The vendor was happy to oblige and the company is saving about $20,000 a year in tax.

Pay attention to the details on all of these invoice issues and be in communication with your suppliers to understand why they are charging tax.  Tax planning does not need to be difficult or expensive to implement.

Ned Lenhart, CPA
President

The Missouri Legislature passed S.B. 18 recently.  This Bill requires the Missouri Department of Revenue to notify taxpayers when the Department’s taxation position of property or service changes as a result of a certain events.  The bill states that if the taxation of items of property or of services is modified by a decision or order of:  (1) the director of revenue, (2) the administrative hearing commission; or (3) a court of competent jurisdiction and a reasonable person would not have expected the decision or order based solely on prior law, all affected sellers shall be notified by the department of revenue before such modification shall take effect for such sellers.

The failure of the DOR to notify a seller shall relieve such seller of liability from taxes that would be due under the modification until the seller is notified.  The relief only applies to sellers actively selling the type of property or service affected by the decision on the date the decision or order is made.  The Bill requires that the DOR send letters to all affected taxpayers and also that the DOR update its website for the changes.  However, this website change is not deemed to be a formal notice to affected taxpayers.

Upon reading SB 18 I’m struck by several things.  First off, the bill is poorly written.  The sentence structure is confusing and is fraught with noun and verb conflict.  That aside, the bill also provides a loophole so large that I’m not sure the DOR will ever be required to issue any notices.  The bill requires notices when a “reasonable person” would not have expected such a decision.  Missouri law already provides taxpayer relief from what are deemed to be “unexpected” decisions. That provision was imposed in the late 80s when the Missouri Supreme Court said that newspapers were taxable sales of property and not nontaxable sales of services. I remember this vividly because I was the Director of Audits for the Missouri DOR at the time.  What is the “reasonable man” theory when it comes to sales tax and who will make that determination?  This will surely open a new avenue for tax litigation as taxpayers are issued assessments and will argue that they were not notified of the policy change.

As written, the bill appears to only apply to situations when an item or service had been deemed “nontaxable” before the policy change was made to now make the item “taxable”.   At that point, the DOR needs to send letters to all the sellers of a particular item of property or to the providers of a particular service, otherwise the seller has no obligation to begin collecting tax on the item.  My real concern is how will the DOR even know who the sellers of this particular item of property or seller of service are?  The DOR’s database of company information is not robust enough to identify which sellers are selling which items of property.  Further, what if the seller is not registered with the DOR but is currently selling this “nontaxable” item.  If the item was nontaxable prior to the change of policy, the company may have decided that there was no need to even register with the DOR.  Without registering, the DOR has no opportunity to notify them.  Further, even if the seller finds out in some other way that the product or service they sell is now taxable, there is no obligation on their part to begin collecting tax.  Not until they receive a letter from the DOR are they required to begin collecting tax.   The same argument could apply to out-of-state sellers that may have nexus in Missouri but are not registered.

In the case where the Administrative Hearing Commission or a Court modifies the law to now make an item or service taxable, how does this bill impact the taxpayer subject to the litigation.  Are they the only ones affected by the change of law?  I suppose they could plead that their case provided an “unexpected” decision and that they are not liable for the tax.  This may now become a standard item in the pleadings before the Courts and AHC.

I know the frustration of taxpayers being surprised by policy changes by state departments of revenue and often times it does not seem fair.  However, the burden placed on the Missouri DOR under SB 18 seems impossible to meet.  The Bill also seems to open up an entirely new set of litigation issues for attorneys!   A similar bill was vetoed last year, so we will see what Governor Nixon does this time.

Ned Lenhart, CPA
President

Surprise!  The tax reform implemented in Kansas in 2012 has flopped.  In 2012, the state changed the way it taxes the income of farmers and small business owners.  The plan was supposed to stimulate the economy and raise revenue in other areas.  The plan has not worked out all that well. The state is projecting a $406 million revenue shortfall for the next fiscal year!  The governor still wants to phase out income tax as revenue source of the state and move towards a consumption tax.  Unlike income tax, sales tax is also paid by nonresidents that travel through the state and consume products and services while in the state.

Several options exist to solve the problem.  The first option is to repeal the tax cuts imposed in 2012.  That’s not going to happen.  The most likely plan, however, is to increase the sales tax to 6.5% on most items but drop the tax to 6% on food.  The current tax rate is 6.15%.   Kansas is one of the few states that still broadly taxes sales of food for home consumption. Under this plan, the state is proposing to increase the general sales tax by about 6% and decrease the tax on food by about 3%.  Somehow that plan is designed to increase revenue by over $470 million!

Let’s hope Kansas figures this mess out soon.

Ned Lenhart, CPA

During the past week, I’ve been contacted by several companies located throughout the U.S. about their concern with multistate tax matters.  After asking a few pointed questions about their business operations and their current sales and use tax procedures, I’ll offer up a few general comments about their situation.  After an awkward period of silence I hear the common phrase “but that’s not what my CPA told me”!  I try to give my fellow CPAs credit and explain that multistate tax is complicated, or that the rules change frequently, or that maybe they didn’t have all the facts when you asked them the question.  What I’d like to say is “boy, did you get bad advice”!       https://www.salestaxstrategies.com/firm-overview.html

In one situation, the company offers an entertainment or amusement service and advertised their business as an amusement service.  They asked their CPA if that was a taxable service in state X.  The CPA said that because the company was not selling any tangible personal property their charges were not taxable.  A perfectly reasonable and logical answer because state X primarily taxes sales of personal property.  However, the answer was 100% WRONG!  State X also specifically taxes “entertainment and amusement services, and all forms of admission charges”.  The services provided by the company are taxable and sales tax should have been charged on the fees collected for the past 3 years.  By the way, the company is about to begin an audit and was just calling me to confirm that they were OK!!    All the CPA had to do was crack open the state code, or call the DOR, or make some extra effort to find the answer.  It wasn’t hidden.  It wasn’t buried in some set of state regulations.  The answer was in plan sight if they had only looked.  In fact, the company revealed that he called 3 CPAs and got the same wrong answer on 3 separate occasions.   Stunning.

Had another call yesterday from a CPA colleague who called about a new client.  After a few minutes on the phone with the client, I stated what was obvious position any moderately informed CPA would give concerning the company’s nexus in multiple states.  Again, I was met with the statement “but that’s not what our old CPA told us!”  Again, you got bad advice.  The issue was around nexus for sales tax and income tax.  The company has a team of salesmen who travel throughout the U.S. soliciting sales of property for sale.  The company also has a group of technicians that perform repair and installation services in most states in the U.S.  This activity has occurred for the past eight years.  After learning this information, I made the assumption that the company was aware of their vast need for filing sales and income tax returns.  The response I got was, “our old CPA told us we didn’t have to file any tax returns in any state unless we had an employee living there”.  Again, a stunning and completely wrong answer.    If the company had been given the proper advice and had completed some type of risk analysis and concluded that they were only going to file return in certain states, that’s one thing.  That’s the right way to do this.  But to be given such incorrect information has put the company and its owners at a huge financial risk.

The list could go on.  I’m not trying to throw CPAs under the bus. We are busy and the rules are very complicated.  If you are a CPA reading this please understand that the rules around state taxation are complicated and are very different from federal tax rules.  No longer can you rely on your “gut feeling” about these matters.  Most clients don’t care if you don’t personally know that answer.  What they expect is that you have a resource you can call who does know the answer.  For the benefit of your clients and for your own malpractice risk, get the help you need on these “out of the ordinary” situations.

If you ever have a question or an issue, call me.  See my website for contact information.   Plenty of CPAs consider me to be their firm’s sales tax resource.  https://www.salestaxstrategies.com/firm-overview.html

Ned Lenhart, CPA
President