Uncategorized

As an e-commerce seller, you are responsible for understanding and implementing the correct tax strategies to minimize your tax liability. This blog post will discuss three common tax strategies that sellers can use to reduce their taxable income. Implementing these strategies can help you save money and comply with the law.

1. Understand Your Tax Obligations As An E-commerce Seller

The IRS has particular rules when it comes to taxes and e-commerce. As an online seller, it is your responsibility to understand these rules and comply with them.

One of the most important things to understand is that you are responsible for collecting and remitting sales tax on your transactions. This includes any items that you sell through your website and any third-party platforms like eBay or Amazon.

Collecting and remitting sales tax can be a complex process, so it’s vital to seek professional help if you’re unsure how to handle it. There are many Tax Strategies available for e-commerce sellers, so finding one that works for you is crucial.

Don’t let the complexity of taxes scare you away from selling online – with the correct Tax Strategy in place, you can be sure that you’re compliant and won’t run into any problems down the road.

2. Deduct Expenses Related To Your Business

If you sell products online, you can use a few tax strategies to deduct expenses related to your business. As an e-commerce seller, you can deduct the cost of goods sold (COGS) and other business expenses like shipping, marketing, and website development costs.

To deduct the cost of goods sold (COGS), you’ll need to keep track of all the inventory you purchase for resale and the costs associated with each item. When it comes time to file your taxes, you’ll calculate the COGS for each product and deduct that amount from your total sales.

Other business expenses like shipping, marketing, and website development costs can also be deducted from your total sales. To deduct these expenses, you’ll need to keep track of all the receipts and invoices associated with each expense. When it comes time to file your taxes, you’ll total up all these expenses and deduct them from your total sales.

3. Use The Correct Accounting Method For Your Business

As a business owner, it’s essential to use the correct accounting method to keep track of your finances. Depending on the type of business, there are different methods you can use. Tax strategies also come into play when choosing an accounting method:

E-commerce sellers have a few options when it comes to accounting methods. The most common is the accrual basis, which recognizes revenue when products are shipped to customers. This is the preferred method for businesses that sell physical goods because it provides a more accurate picture of sales and expenses.

Another option for e-commerce sellers is the cash basis, which only recognizes revenue and expenses when exchanging money. This method is more straightforward and may suit low sales volume businesses or for selling digital products.

COVID-19 pandemic seems to play havoc with the economy and taxes. The impact has been huge on state and local tax revenues. The level of impact is no less severe than any other recession. If you go by statistics, you will find that the pandemic has adversely impacted the economy, shrinking state sales tax revenue by about $6 billion. This amounts to 21 percent compared to the revenue during the same period last year. A lockdown situation, with closed businesses, rising coronavirus causalities, and extension of sales tax filing and payment deadlines have all contributed to this quagmire.

The Real Impact on State Tax Revenue

Total state tax revenue shot to the highest level since the 2007-09 recession during the final quarter of 2019. Thanks to the tax collection growth during this period post-recession that each state was able to allocate its funds for the economic shocks inflicted by the pandemic.

As more people are forced to stay home, sales tax revenues have come down drastically due to a lowered consumption rate. That means a drop in taxes and fees imposed on airports, hotels, and highway tolls. Therefore, tax revenue has dropped drastically due to a lowering of fees imposed on the travel and tourism industry. There has been a drastic reduction in the revenue generated from taxes. Further, other sources of state revenue, such as vehicle registration fees, transportation funds, and gas taxes, are declining.

Similar to economic recessions, the pandemic has adversely affected state and local revenues. However, the decline in income tax revenue has not been drastic. The reason is that employment losses are primarily concentrated on low-wage workers, who contribute less to the income tax coffer.

Blame the coronavirus pandemic for triggering a severe state budget crisis. State revenues are falling rapidly while there has been a spike in the costs of commodities as there is no production and many businesses are shut down. Add to this, the rising unemployment rate and the economy is declining rapidly as a result of the COVID-19 pandemic.

Substantial State Tax Revenue Shortfalls for 2020, 2021

The rapidly declining state revenue projections are a reminder of the times we are all set for in the near future due to the pandemic-induced downturn.

States grapple with the financial crisis and are working hard to balance overstressed budgets. The crisis is agitated due to no to low productivity, rising need for healthcare services, and allocation of separate funds to fight against the pandemic.

State and local income tax revenues are expected to drop to 7.5 percent or $37 billion in 2021 as the pandemic has taken a toll on revenues.

When the pandemic struck, states began to balance their budgets by making cuts and tapping reserves. While COVID-19 continues to wreak havoc with life, the stock market has remained unaffected thus far and the job loss among high-wage earners has not been much. This has ensured that revenues have not dropped by as much as were anticipated in some states. But that does not mean there have not been revenue shortfalls for states. With the federal aid for businesses ending, the crisis might deepen further.

States Imposing Cuts; Need Federal Help

State estimates project a drastic drop in revenues for the present fiscal year beginning July 1.

To make matters worse for states with oil-related industries, the coronavirus recession has brought along a decline in economic activity. As a result, tax collections have suffered due to plunging oil prices.

It remains to be seen as to how long states can survive on their budget reserves, including rainy day funds. Sadly, things might become worse financially for state tax revenue if more employees are laid off, public services are cut, and government contracts for businesses are canceled. States might be forced to impose damaging cuts. Georgia, Maryland, and Florida have already started with the cuts on schools, colleges, and behavioral health.

Now states look up to federal policymakers to provide assistance to deal with the ongoing COVID-19 pandemic.

Atlanta tax services; Interstate Tax Strategies, P.C. is your “go-to” tax service provider for multistate sales and use tax.  Though we are located in Atlanta, we provide tax services to companies throughout the U.S. with single state and multistate sales and use tax issues. Atlanta is the home to countless multistate businesses. Sadly, only a small percent of these businesses get the tax services needed to safeguard their company from the risks posed by this complicated area of taxation. Most CPAs don’t offer the comprehensive or strategic tax services offered by Interstate Tax Strategies, P.C.

February 2020
By Ned A. Lenhart, MBA CPA
Interstate Tax Strategies, P.C

Is your business sitting on a state tax time-bomb that could explode at any minute?   Do you even know?  Business owners and investors dream of the day when they sell their business for a high cash-flow or earnings multiple. Successful business exits are life-changing for the owners and are the tangible reward for their dedication in building an enterprise appetizing to someone else. Exit strategies are generally structured as “asset” or “equity” sales. There are tax, legal, and business benefits and pitfalls to both types of exit strategies which require sellers and buyers to carefully evaluate the type of ‘deal’ best suited for the future operations of the organization and for the parties involved.  Regardless which structure is chosen, no seller wants to be surprised about unknown and undisclosed state and local tax (SALT) liabilities that may reduce the business sales price and cost precious time and money to fix.  The time has come for business sellers to take control of this SALT due diligence process.  Identifying and correcting SALT liabilities early can increase the target company’s value and streamline the business exit transaction.   

Stock or equity sales involve the sale of the owner’s interest in the underlying assets and liabilities of the target enterprise.  This normally requires the new business owner to assume most the business liabilities of the target.  To avoid assuming these liabilities, transactions can be structured as an asset sale where all or part of the assets (tangible and intangible) of the entity are acquired and certain specific liabilities are assumed.  General liabilities of the business remain with the surviving business entity and its owners.    

Successor Liability

By structuring the transaction as an asset sale, most advisors believe that all of the known and unknown liabilities of the seller remain with the seller and are not transferred to the asset purchaser.  While this strategy is generally true for most general business liabilities, it is NOT TRUE concerning known and unknown state and local tax (SALT) liabilities.  The legal theory governing the transfer of SALT liabilities from the asset seller to the asset purchaser is known as ‘successor liability’.  Nearly every state considers the business asset purchaser to inherit any known or unknown SALT liabilities of seller unless specific statutory procedures are followed to eliminate the successor liability.  State law does not generally allow the buyer and the seller to contractually limit successor liability or to put dollar limits on how much liability is assumed by the purchaser.    

Buy-Side SALT Due Diligence

To identify and quantify SALT liabilities (primarily sales tax), asset purchasers generally include a specific SALT data request and work plan as part of their tax due diligence process.  Having conducted buy-side sales tax due diligence for 25 years, the process generally includes a detailed review of the target’s multistate business activities, a full understanding of the goods and services sold by the target, scrutiny of current tax returns filed, analysis of exemption certificates, a review of open or planned state tax audits, and a detailed review of current sales tax collection rules and procedures.   Depending on the business being evaluated, SALT due diligence procedures can be completed quickly or may be quite protracted and detailed.  Quite often, buy-side sales SALT due diligence reveals problems, risks, and undisclosed liabilities.  SALT liabilities identified by the purchaser usually means less money going into the pockets of the seller and a slower close.  In some cases, the SALT liability can be so large that the deal is cancelled.  More often, the SALT liabilities identified are not so material that they kill the deal, but they are large enough to require an escrow of funds until the problem is resolved.    

It is surprising how many sellers are unaware that there is any SALT problem at all.  Once the liability is identified and quantified, the purchaser will generally control how and who will resolve the SALT problem.  In many cases, the SALT liability is added to the general escrow amount and held back by the purchaser until the seller resolves the problem.  In more dramatic cases, the purchaser may actually reduce the price they are willing to pay for the assets being acquired.  Either situation can lead to less money going to the seller and a delay in closing the deal and getting paid for the assets they are selling. The normal SALT due-diligence procedures put the seller on the defense and allows the purchaser to dictate the terms of resolving the problem.

Sell-Side SALT Diligence

The time has comefor sellers to become proactive and take control their SALT exposure in advance of selling their business.   There is no excuse for a potential buyer of your business to be the first to tell you that your SALT procedures are inadequate and that your business has a material contingent liability.  Sell-side SALT diligence must be part of a seller’s exit planning process so there are no surprises when the buyer conducts their SALT diligence.  Identifying and resolving SALT issues before buyers starts their review will maximum the price you get for your business and streamline the closing process. 

Business sellers normally work with brokers and business valuation specialist in advance of actually putting their business on the market.  These professionals examine each element of the business and coach the seller on strategies to maximize the value of their business and make it attractive and appetizing to potential investors and purchasers.  Using these valuation, HR, IT, and financial professionals can add significant cash to the pocket of the seller and provide a significant ROI on the cost of these efforts.  At some point in this business assessment process, the sellers must devote intentional effort to proactively determining their SALT liability.  This may include sales tax, payroll tax, property tax, and other SALT liabilities that normally survive an asset sale and absolutely survive an equity sale.   

Sell-side SALT diligence should be started 12 months before any proposed transaction.  I suggest this for several reasons.  First, depending on the sophistication of the seller, it may take some period of time to gather the required information specific to the SALT diligence.  The data needed for this review may not be easy to gather, especially if the review is for multiple years and requires the use of IT resources to obtain. In most cases, there is no statute of limitation for unpaid taxes, so a review of four or more years is quite common. 

Second, if the review identifies significant SALT liabilities and compliance errors, it may take several months to quantify and resolve the specific issues.  One of the primary methods used to resolve historical liabilities is by engaging in a process called “voluntary disclosure”.  This will be discussed in more detail below, but the voluntary disclosure procedure may take three to six months to complete.  

Finally, if new SALT compliance procedures are required, it may take several months to get billing systems integrated into new tax software and for other compliance procedures to be implemented and for A/R and sales personnel to be trained concerning new SALT compliance rule. A proper documentation of these processes must be developed and provided to the purchaser. Finding and fixing SALT errors before a potential buyer may improve the overall profitability of your business and increase the sales price.  

Even if no material deficiencies are identified during the sell-side due SALT diligence, a report showing the processes conducted, the documents reviewed, and the basis for the conclusions reached may provide the buyer with sufficient comfort that the buy-side SALT diligence can be streamlined.  This analysis also shows the potential buyers that the seller was insightful in evaluating these SALT issues which may allow for a better bargaining position by the seller. 

Sell-Side Diligence Procedures

Sell-side due diligence looks a lot like buy-side due diligence.  To coin the old sports adage, ‘the best defense is a good offense’ and that is exactly the case when it comes to seller’s being proactive to identify and resolve SALT issues before buyers start their review.  The goal of buy-side due SALT diligence is to find SALT procedural and compliance mistakes and to portray these errors in the worst possible light. Most diligence work is done for the buyer with the goal of communicating the worst-case scenario to the buyer. The diligence report prepared by the buyer’s team may make assumptions and projections that are not reasonable in an effort to drive the value of the business down or to adjust the sales price lower than it needs to be.  If the seller is not prepared to counter these assertions, they may unknowingly allow the buyer to 

When seller’s initiate their own SALT review as part of the exit planning strategy it allows them to have an advisor who is working just for their interest.  This does not mean that SALT liabilities will be ignored if identified.  Rather, a SALT advisor working for seller can develop strategies for the seller to minimize or even eliminate identified liabilities before the buyer’s team starts their work.  If one of the issues identified by the seller’s SALT advisor involves missing documentation to support untaxed sales, the seller can implement procedures to secure the proper documentation from customers before the buyer’s diligence process starts.  A potential major problem has been averted.   

Because sales tax is industry and transaction specific, it is vital for the seller’s SALT advisor to develop documentation about the sales tax procedures used by the seller, so they are easily communicated to the buyer’s SALT advisor.  SALT due diligence reviews are stressful and time consuming if accurate facts are not properly conveyed to the buyer’s team.  This is especially common with service providers and technology companies where language in the contracts and invoices may be in conflict with what the seller has described their business to be.  For example, if the seller portrays their business as a software-as-a-service (SaaS) enterprise, the buyer may conduct diligence using that SALT rules for SaaS.  If, however, the seller’s SALT advisor believes the seller is providing a web-based service that may not necessarily be treated as SaaS for sales tax purposes, then this must be adequately communicated to the buyer to avoid confusion and the possible calculation of a liability that is not valid. 

Because of some very significant recent changes in the requirements for businesses to be filing sales tax and income tax returns in other states, seller’s may not be fully aware that their compliance obligations have changed.   Having the seller’s SALT advisor evaluate and document the company’s multistate filing obligation in light of these new and evolving standards may assist the buyer in performing their due diligence.  

Finally, because the seller’s SALT advisor will be reviewing most of the same documents as the buyer’s SALT advisor, it can be a time saving effort for these documents to be submitted to the data room when requested by the buyer.  Seller’s that have access to a skilled SALT advisor will be able to defuse or minimize any issues identified by the buyer’s SALT diligence team.  

Voluntary Disclosure Agreements

As mentioned above, one method to resolve a sellers’ SALT liability is through a program called voluntary disclosure.  Most states have procedures whereby unregistered businesses come forward voluntarily to resolve past due taxes. Some states also allow voluntary disclosure agreements for companies that are registered for sales tax.  Most states limit the look back period for which tax is due to three or four years.  In addition to limiting the look back period for which back taxes are owed, the state will abate the penalties due on the tax paid under the voluntary disclosure agreement.  As such, sellers with multiple years of SALT exposure can eliminate their exposure for years prior to the earliest look back period.  Depending on how long the business has operated in that state, the historical savings can be significant.  

Voluntary disclosure is available only when the company seeking an agreement in a specific state has not been contacted by that state concerning the tax liability.  If the seller was contacted previously by the state or is under audit, there is no possibility of completing the voluntary disclosure agreement.  

Conclusion

For decades, SALT due diligence was solely the territory of the business acquirer.    The power held by the buyer in this due diligence process put the sellers on the defense and positioned the buyer to control the quantification of the SALT liability and the tax resolution.  With the advent of seller focused business exit planning consulting services, the time has come for sellers to include SALT diligence as part of their exit planning process. Unknown liabilities can make your business “SALty” and maybe unappetizing to some buyers.  Knowing how “SALTy” your business is before the buyer starts reviewing your SALT documents and tax filings can position the you (the seller) to take control of the liability and to resolve any material issues before the buyer completes their business proposal.  Identifying and tackling SALT liabilities before your business is sold allows you to be in control of the process and may put more money in your pocket at the closing.      

For more information concerning this topic, please contact me at nlenhart@salestaxstrategies.com for a free 30 minute discussion. 

Sales Tax Obligations

Article written by Ned Lenhart at Interstate Tax Strategies.

Most of the business community is now aware that the U. S. Supreme Court, in South Dakota vs. Wayfair, Inc. 138 S. Ct. 2080, (2018) (“Wayfair”), greatly expanded the authority states have to require out-of-state businesses to collect and remit sales tax on taxable sales made into their state.  This opinion was issued on June 21, 2018.  As I outline below, the Wayfairopinion also allows states to impose other sales tax compliance obligations on companies that don’t generally make taxable sales.  The full impact of the Wayfairdecision is still being evaluated by states and taxpayers, but some aspects of the Wayfair decision are clear and all companies need to analyze the impact of this decision in light of their current business practices. 

As of January 1, 2019, 31 states will have implemented some form of ‘economic nexus’ rule. By mid-2019 each of the 46 jurisdictions (45 states and D.C.) that have a sales tax will have some type of economic nexus rule. Under these rules, companies with sales into the taxing state exceeding some state specific threshold (i.e. $100,000, $250,000, or $500,000) are deemed to have nexus in the state even though the company does not have any type of physical presence in the taxing state. 

Much of the attention to date on analyzing Wayfairhas been directed to companies selling at retail to end-users.  In these cases, remote retailers with economic nexus in the taxing state are obligated to collect tax on sales shipped into the taxing state.  My focus of concern in this posting is on the impact Wayfairhas on wholesalers in general and drop-shippers in particular. 

Basic Drop Shipment Sales Tax Rules (Pre-Wayfair)

Drop shipments or third-party shipments are a mainstay in the supply chain fulfillment mechanism for both wholesale and retail sales.  A drop shipment transaction involves at least three separate participants and at least two separate sales.  For example, “Retailer”, located only in Georgia, accepts an electronic order from a customer (“Customer”) where customer requests the product be delivered to its Indiana location.  Retailer does not currently have Customer’s item in stock, so Retailer contacts its supplier (“Supplier”) and instructs Supplier to ship the product directly to Retailer’s customer in Indiana. Supplier is only located in Florida.  Supplier ships via common carrier the product to Indiana from its Florida inventory. Supplier invoices Retailer $500 for the product it sold to Retailer but shipped to Indiana. Retailer invoices Customer $675 for the product it sold to them.  For purposes of this example, we will assume that Customer is the end-user of the product being purchased. 

In this example there are two separate sales.  The first sale occurs when Supplier sells the product to Retailer. Retailer cannot sell the product to Customer until it has first purchased the property from Supplier.  The second sale happens when Retailer sells the product to Customer.  Both sales occur when the property is delivered to Customer’s door step in Indiana.  The sale from Supplier to Retailer is a nontaxable “sale for resale” and the sale from Retailer to Customer is a taxable retail sale.  Because Retailer does not have physical presence in Indiana, Retailer believes it does not need to collect sales tax from the Indiana customer. Further, because Supplier does not have a physical presence in Indiana it also believes it does not need to charge tax on this sale or collect an Indiana resale certificates. The only hope the state of Indiana has for collecting the sales tax on this transaction falls to Customer to pay the use tax directly to the Indiana Department of Revenue.  

Basic Drop Shipment Sales Tax Compliance–Post-Wayfair 

Under the physical presence nexus standards in place for the past 26 years, the tax collection assumptions expressed above by Retailer and Supplier are likely accurate.  However, under the economic nexus rules embraced under the Wayfair doctrine, the sales tax dynamics of this drop shipment transaction have changed.   The state of Indiana is one of the 31 states that has adopted (as of January 1, 2019) rules concerning when companies have created sales tax economic nexus in the state only having sales which exceed a certain minimum dollar threshold in the taxing state.  Indiana’s nexus threshold is $100,000 of sales or 200 separate transactions per year. 

If we change our example a bit by assuming that “Supplier” and “Retailer” each have Indiana sales in excess of the $100,000 economic nexus threshold, the drop shipment transaction profiled above would change in the following respect. 

1. Supplier would require Retailer to provide a resale certificate that is valid in Indiana.  Fortunately, Indiana will accept the Georgia resale certificate (Retailer’s home state) from Retailer.  This will allow the initial sale of property to be exempt from Indiana sales tax as a ‘sale for resale’.  If Supplier does not have a valid resale certificate from Retailer, then Supplier will be obligated to charge sales tax to Retailer on this initial sale.  
2. Because Retailer is selling to an end-user in Indiana and because Retailer has Indiana economic nexus with the state of Indiana, Retailer is be required to register with the Indiana Department of Revenue and collect the 7% sales tax on the sale it makes to Customer. 

If the drop shipment described above were the only one that Retailer and Supplier had, then this scenario is easy to administer.  In reality, this drop shipment scenario happens dozens or hundreds of times a day for both Supplier and Retailer and involves shipments to customers in many different states.  Supplier likely drop ships property for multiple Retailers to multiple states in any given day.  Retailer likely has multiple suppliers shipping products to customers in multiple states in any given day.  As a seller with possible economic nexus in multiples states, Retailer’s sales tax obligations have changed significantly under the Wayfair rule. 

Advanced Drop Shipment and Sales Tax Compliance-Post Wayfair 

For companies like Supplier the impact of Wayfairis subtle but may create significant issues for companies that provide drop shipment services. Most states consider all sales of tangible personal property to be taxable until the seller obtains an exemption certificate from its customer documenting the sale as not taxable. This resale certificate must be valid in the state to which the property is shipped since that is the state where the sale from the Supplier to the Retailer occurs.  In most cases, the certificate provided is a resale exemption certificate.   Failure to have a resale exemption certificate from Retailer that is valid in the destination state causes the seller (Supplier in our example) to be liable for collecting sales tax on the sale.  If tax is not charged and it is determined under audit that Supplier did not have a valid resale certificate, the Supplier will likely be assessed back sales tax and interest on the price charged on the drop shipment sale made to the Retailer.  

In many cases, the destination state will accept the ‘home state resale certificate’ or the ‘home state registration number’.  Indiana, as used in our example is one of these states. So long as the Supplier has the home state resale certificate from Retailer, Supplier is protected and has no obligation to collect tax.  There are 36 jurisdictions that accept this ‘home state’ registration number or some other alternative documentation to support the resale claim. 

The issues become more serious and a bit more complicated for Supplier and Retailer in the 10 jurisdictions that do not accept the home state registration number or resale certificate.  Suppliers making drop shipments to these states must insist on receiving resale certificates valid in the ‘ship to state”.  In most cases, this requires Retailer to register with the ship-to state and obtain a registration number which is used on the state specific resale exemption certificate. (Note: some states permit the use of the Multijurisdictional Resale Certificate, but it must include the registration number issued by the ship-to-state). Jurisdictions that do not generally accept the home-state resale certificate include: California, D.C. Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Tennessee, and Washington.

There may be situations where Supplier exceeds the economic nexus threshold in the ship-to-state, but Retailer has not created economic nexus in the ship-to-state.  Assume that Retailer (from the above example) instructs Supplier to drop ship products to a customer in Washington. Washington has a $100,000 sales threshold economic nexus and Supplier is registered in Washington because its total sales exceed that amount.  Retailer, however, only has $30,000 of sales per-year in Washington and does not meet that economic nexus threshold and therefore is not registered.  Because Washington will not accept the Georgia home-state resale certificate from Retailer, Supplier must charge Retailer sales tax on the wholesale price of the products it drop-ships to Washington.  To avoid being charged this tax, Retailer must register with the Washington Department of Revenue and provide Supplier with a valid resale certificate once the registration is processed (which may take 30 days or more to complete).  Once registered with the Washington Department of Revenue, Retailer will be obligated to collect tax on allsales shipped to customers in Washington even though Retailer does not meet the economic nexus threshold of the state. 

This presents a significant dilemma for small retailers. Under the rules in states that do not accept the home state resale certificate but have economic nexus rules in place, retailers that fall below the thresholds will be required to obtain a sales tax registration in that state to provide a valid resale certificate and avoid being charged sales tax by their supplier.  In some cases, it may be more economical for retailers to simply pay the tax to the supplier rather than to incur the compliance costs related to collecting and remitting the sales tax. Requiring retailers under the economic nexus threshold to secure a Washington registration number so that a valid resale certificate can be issued also appears to violate the benefit of imposing the $100,000 sales level which is supposed to provide a ‘safe harbor’ for small businesses.   

If Supplier has economic nexus with a state that does not accept a home state resale certificate and it does not charge sales tax to their customer, the Supplier will be liable for sales tax due to that state. Once Supplier obtains economic nexus in Washington, or any other state that does not accept home state resale certificates, it is obligated to collect tax on all sales shipped to that state unless the Retailer provides a resale certificates that is valid in the delivery state.  As noted earlier, if the ship-to state does not accept the ‘home state’ resale certificate, retailers must register with the taxing state to obtain a registration number that can legally be used on a resale certificate.  Once registered, tax must be collected on all future sales shipped to customers located in that state; not just those sales that are drop shipped into the state. 

As countless direct and drop shipments are made daily into states that do not accept home state resale certificates by companies having economic nexus, the sales tax risk is significant and real if these shippers do not immediately implement policies to require the correct resale certificate at the time the sale is made.  States like California are vigilant in enforcing this rule on audit and are constantly looking for companies that should be registered for sales tax but are not. 

Conclusion

Retailers and suppliers making drop shipments into states with the economic nexus rules are now required to comply with a wide variety of rules that, heretofore, they have not been required to follow.  Failure to understand the economic nexus rules and to evaluate the obligations your company has for collecting resale certificates or for charging sales tax will create a real and potentially material financial liability for your company.  All wholesalers and retailers MUSTcarefully evaluate the drop shipment relationships they have and adjust their sales tax policies as needed to meet the rules in states that do not accept home state resale certificates.  

Article written by Ned Lenhart at Interstate Tax Strategies.

I recently met with a growing technology company that had received correspondence from a state concerning its failure to register to collect sales tax on taxable sales made to customers in that state.  Correspondence like this is never a good thing.  Rather than dealing promptly with the notice, the company ignored the state’s request to complete and return the nexus questionnaire.  A few months went by and the second notice was received from the state.  This notice had a shorter response date and outlined the consequences if the company did not respond.  The company, again, did not respond.  True to its word, the state issued jeopardy assessments and demand notices to pay.  That’s when I got a call from the company!

When I finally met with the company I was astounded by their explanations about why they didn’t take the notices from the state seriously.  Their belief was that they were too small of a company to be of any concern to the state and that the state was just on a fishing expedition to see who they could force into collecting sales tax. If they didn’t respond, the state would just go away.  Not a great strategy for dealing with any state.

I also learned that the company had always known that they would need to deal with sales tax but that while they were small, they believed the risk of not addressing the issue was not high and any exposure would be limited.  That may have been an appropriate strategy 8 years ago, but at some point, they needed to take serious steps at understanding what needed to be done.  While the business, as a whole, may not have been that large, the state that was sending the requests represented 20% of the company’s sales.  It was also a state that taxes various SaaS and data processing services.   Further, the company had nexus in the state for many years by the presence of employees doing sales and implementation work.

I totally understand that small companies don’t consider sales tax to be a priority and I totally understand that the rules around nexus and product taxability can be confusing. However, at some point, even small business need to assess their situation and determine if ‘doing nothing’ is really the right long-term strategy when it comes to sales tax.  As the company found out, even small companies can have big sales tax problems in one or two states.  If 20% of your sales are not taxed in one state for several years, that adds up to be a lot of taxable sales and a lot of tax exposure. Because the statute of limitations normally applies only when tax returns are filed, there is no legal limitation in most states for how far back states can assess for unpaid tax.   More disturbing was that fact that they were working with a financial consultant who knew that sales tax would have to be dealt with, but only after the company got bigger.

My word of caution to all ‘small businesses’ (however you would define that), is to take sales tax compliance seriously.  That does not necessarily mean that you register in every state, but you must be strategic about understanding where your company has nexus (either physical nexus or economic nexus), what tax rules apply to the goods and services you sell, and whether your customers are taxable or exempt.  It does not take too many years for even a small business to incur significant tax liabilities in state.  Don’t assume that your business is “too small” to have a sales tax obligation or to have some material historical sales tax liability.  The states are serious when it comes to capturing as much sales tax revenue as they can, and they really don’t care how small your business may be.  In many cases, the taxes remitted by a low number of small businesses can exceed the tax collected by one large company.

Finally, if your business is contacted by a state, take the notice seriously.  The states keep very close track of what companies have been contacted and they routinely follow up.  It may not be immediate, but states generally do not just let unanswered correspondence die.  In many cases, the states may know more about your business than you think, so make sure you answer correspondence truthfully.  Be sure to seek professional assistance if you have any questions about what the state is asking.

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.