State of the Union Sales Tax: 2022: Articles: Resources: CLA (CliftonLarsonAllen)

key ideas

  • Over the past four years, states have passed a number of economic ties laws and dramatically increased the sales tax burden for businesses large and small.
  • The laws of these states can vary across the country, making assessing economic nexus – and maintaining compliance – extremely complicated.
  • Consider these four steps to help your organization keep up with changing sales tax requirements.

Almost four years ago, the United States Supreme Court shook up the sales tax world with its decision in South Dakota v. Wayfair, paving the way for states to pass economic nexus laws and dramatically increasing the sales tax burden for businesses large and small. With this decision, physical presence is no longer required to establish a link with a tax jurisdiction. This means that your organization could have an obligation to collect and remit sales tax simply by having a number of transactions or sales in a state.

The Wayfair decision was based on the South Dakota model which used thresholds of $100,000 in-state sales or 200 separate transactions in a year to establish economic nexus. Although many states have adopted these same provisions, a large number of states deviate from the model, which creates complexity for businesses and brings additional risk to online retailers who can easily cross a threshold without putting the feet in the state.

In addition to differing measurement periods and effective dates across the country, as states continue to change requirements, assessing economic nexus becomes increasingly complicated.

How does your organization comply with sales tax?

Step 1: always start with nexus

The physical presence link, the affiliate link, the click link, and the cookie link (seriously, Massachusetts) are well established and all continue to exist. Post Wayfair, however, a link can be established simply because sales volume in a jurisdiction exceeds a specified threshold, requiring companies to closely monitor these reporting requirements and be prepared to register, collect and to pay the tax.

Sales tax automation tools, such as automated software solutions, provide data to help you determine if you have reached a sales or transaction threshold. However, this data may be in error because it doesn’t dive into the nuances of whether your product is taxable or how a state defines what to include in the amounts. Sometimes the tools don’t even have all the sales to determine if you meet the threshold.

The risk tolerance and size of your organization generally determine whether you should assess the economic nexus on a continuous, monthly, quarterly, or even annual basis. But remember that if you don’t collect sales tax at the time of the sale, it’s difficult to collect sales tax from your customer after the fact. Many companies take an ultra-conservative approach and collect taxes everywhere just to be on the safe side.

As a reminder, sales tax is a trust tax that is payable by the end user; however, sales tax may also be imposed on the seller if not properly collected at the time of sale.

Step 2: Register for sales and use tax

Some states simplify the sales and use tax process, while others are more complicated. Most states ask for general business information, address information, owner and officer information (their social security numbers are required as they may be held personally liable for sales taxes). Other states add fields such as major vendors and banking information.

Before you begin the registration process for multiple states, gather as much information as possible. Once you hit a snag while registering online, you usually can’t proceed until you fill in the missing information, which can be frustrating if there’s another missing item pending on the next screen.

Step 3: Collect the appropriate state and local sales tax

With over 11,000 sales tax jurisdictions in the United States, simply collecting the correct amount of sales tax can be a burden. Small organizations or businesses with few customers can be managed manually, but this is usually not sustainable and can lead to errors.

As another option, upload the rate tables to your enterprise resource planning software to determine the state and local sales tax rate to charge. Note that this does not help determine the taxation of your income streams in each state, as taxation can vary wildly, especially in the area of ​​retail or technology. Due to the complexities of taxing products and services, it is often worthwhile for a business to invest time or resources to build a taxation matrix to determine which products and services are taxed and at what rate.

The full-service option is to purchase a front-end tax engine to map your products and services to predefined categories. The software then determines which line items to tax and which rate to use based on the customer’s location. But mapping can be complicated, and understanding revenue streams and state taxation of each type of income is critical to this process.

Step 4: file the declarations

Your next step may depend on how you chose to proceed in Step 3. If you performed Step 3 manually or used rate tables, you will likely deposit manually or outsource the deposit to a deposit company. professional services. If you have invested in a tax engine, you can file returns manually based on vendor reports, outsource filing to the vendor, or outsource to a third party.

What if you haven’t completed steps 1-4?

Start at the beginning. Knowing where you have a link and filing requirement will help you determine how to proceed. An exposure analysis can help identify if there are significant liabilities for not collecting and remitting tax.

Most states offer a voluntary disclosure or amnesty program to waive penalties for companies that voluntarily come forward and pay overdue taxes, which may include a limited lookback and waiver of penalties. States typically have a three- or four-year statute of limitations, which means audit activity around the economic nexus could increase significantly over the next year. Access to these programs is often limited to companies that have not yet registered with the jurisdiction. Therefore, it is important to assess the exposure in advance to give the company more options to clean up past liabilities.

A few states are extremely aggressive towards businesses applying for new sales tax permits, with states like South Dakota calling to confirm you had no economic connection prior to the date you applied for the permit. Other states may send a letter requesting sales data through 2018 and require late returns if you have exceeded economic nexus thresholds.

Knowing where you stand and what your potential liability is will help determine how to proceed.

How do you pay for sales tax compliance?

Sales tax compliance can be expensive whichever method you choose.

The good news? Some states offer filing rebates to help cover compliance costs and some may cover the full cost of compliance if there is a lot of tax owed each month.

Another avenue to help reduce the cost is to look elsewhere in the sales tax world for refunds. Review purchases and sales. In some states, it might uncover overpayments that can be refunded or used to apply to past returns, although this varies by industry.

Most people think of resale exemption or manufacturing exemptions when it comes to sales tax refunds, but each industry has its own incentives (such as research and development exemptions, motor carrier exemptions interstate or packaging exemptions for retailers).

How can we help you

State tax changes can be overwhelming. CLA’s state and local tax professionals stay current with changing state tax rules and help you understand your sales tax obligations.

From a Wayfair balance sheet to help you understand your sales tax exposure to researching the taxation of your revenue streams and outsourcing your sales tax compliance obligations, we offer the right services. to your needs, allowing you to refocus your time on a value-added activity.

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