Wayfair Woes One Year Later

The rise in online shopping has sharply impacted state sales tax revenue. Rather than increasing the tax rate, states are setting parameters to define nexus, which is the requirement for companies doing business in a state to collect and pay tax on sales in that state whether they have a physical presence there or not. Each state defines nexus differently…as if taxes were not complicated enough.

About this time last year, the Supreme Court Ruling on South Dakota v. Wayfair triggered a wave of questions and uncertainty among businesses across the country. With more states passing legislation for economic thresholds and steep penalties at stake, this is no time to stick your head in the sand.

As a company selling products and services across all 50 states, we grappled with how to navigate this complex system of criteria to avoid penalties and stay compliant. Here are a few things we’ve learned along the way:

It’s Complicated

 
We’ll start with the obvious observation. Economic nexus is currently enforced in more than 35 states, each with its own effective date, thresholds, includable sales and other rules. Keeping up with the administrative efforts to correctly charge, collect and report taxes for each sale is both tedious and time-consuming. Businesses selling to multiple states are impacted as each state changes their sales tax regulations.

Government agencies are generally exempt. Not all non-profits and universities are exempt from all sales tax. These new laws have a significant impact on non-profits, which are now forced to shift their operations to remit and collect taxes. For example, non-profit organizations selling tickets to fundraising events will now have to charge sales tax. Depending on the state, professional services may be taxable. Map: Sales Tax on Services by State

Some are Easier Than Others

Some states provide a straightforward way to register. However, there are a few “problem states” including New Jersey, which has very unique sales tax rules that even the purpose-built tax tools struggle to accurately calculate. There are also a few “whistleblower” states, including Pennsylvania, that require a year-end report of total sales to all clients by name. These states impose steep penalties for businesses that do not provide a year-end report. Some registrations require businesses to use registered state agents or require a Certificate of Good Standing from your home office state.

When dealing with “whistleblower” or “problem states,” consider engaging a sales and local tax expert to help. Avalara provides a directory of sales tax experts by state.

Here are Your Options

Option #1 – Register & Go Forward

Evaluate the states where you sell products and services to determine which ones have enacted legislation establishing Economic Nexus for remote sellers. Now that 35+ states are enforcing legislation, and more on the way in 2019 (Texas in October and Oklahoma in November), it’s well past time to take action. Most of the amnesty programs and grace periods have expired. If you haven’t registered, you may need to consult a SALT expert to calculate any potential penalties.

Establish a system for monitoring states as they either pass legislation and/or you surpass the economic thresholds. Use this Economic Nexus State Guide to stay informed of changes.
 
Option #2 – VDA

A voluntary disclosure agreement (VDA) program is available whereby taxpayers can receive certain benefits from proactively disclosing prior period tax liabilities in accordance with a binding agreement. Remote sellers need to evaluate their level of physical presence to warrant nexus. The VDA option limits your risks on prior-year transactions but may require you to collect sales tax from customers.
 
Option #3 – Reporting Only

If you do not have economic nexus or physical presence at this time, but the state has a reporting requirement where you have to report sales above a certain threshold to both the state and your customer. These detailed reports include the buyer, sale date, type of product/service/lease and amount. A word of caution – this option essentially turns sellers into whistleblowers by alerting state sales tax authorities to audit buyers. States with reporting requirements include Oklahoma, Pennsylvania, Colorado, and Washington.

Leverage CaseWare IDEA®

IDEA can be used in many ways to conduct a risk assessment for sales tax. The process requires gathering data from different sources and combining data sets for comparison. Visual connect eliminates the number of vlookups you would need to perform using Excel. Heat maps can be used to quickly identify high-risk states. Plus, you can create IDEAScripts to repeat the process for each state year-over-year. Here are some ways IDEA can help at each phase:

 
Determine Which States to Register

• Monitor sales by state to determine when you have surpassed economic thresholds
• Identify (summarize) sales by product to determine the product mapping required for the sales tax reporting software items (this determines taxability)
• Estimate the potential sales tax liability if you don’t register – this requires an estimation of which customers are taxable, which products are most likely taxable
• Isolate the exempt customers and ensure exemption settings are properly maintained and help identify any missing exemption certificates not on file

 
After Sales Tax Registration

• Use the Compare feature to reconcile the data from the accounting system to the sales tax reporting system and reconcile the differences
• Monitor exempt customers and ensure exemption settings are properly maintained and help identify any missing exemption certificates
• Determine whether your sales fall under the reporting threshold. For most states, you must be under the economic threshold for 12 months before you can unregister. If you think sales will spike the following year, it may be easier to stay registered.

If you find yourself in an audit, IDEA can help pull transactional data over the required time period, create files/schedules for the auditors and balance back to reported data and GL data.

5-Step Process Using IDEA

Step #1 – Assess Sales Levels by State

• Gather ALL DETAILED sales transactions
• Total by amount (validate to P&L)
• Total by volume (both by dollar amount and number of transaction)
• Sort largest to smallest
• Exclude the 5 states that do not charge sales tax:
  • Montana
  • Oregon
  • New Hampshire
  • Delaware
  • Alaska

Step #2 – Identify Taxable Customers

• Exclude customers who have provided tax exemption information
• Categorize remaining customers by industry
• Eliminate non-taxable industries (government, non-profit)
• Summarize by state to determine highest-risk states

Start by looking at states where you sold $100k+

 
Step #3 – Assess Taxability of Products by State

Note: This may require sales tax software or an expert.

• Eliminate non-taxable products from the database
• Re-summarize by state

 
Step #4 – Estimate Potential Sales Tax Liability by State

• Apply the state sales tax rate to the highest-risk states
• Re-summarize by state

 
Step #5 – Estimate Interest and Penalties

• If you plan on using a VDA program, the sales tax data should span 4 years
• Use sales tax software or reference materials to determine how interest and penalties applied in the applicable states
• Calculate the interest and penalties for the applicable years for the applicable states

Use the Right Tools

Before you register with the state(s), select and implement the sale tax and reporting software you plan to use to avoid penalties if you fail to respond on time. When choosing a tax reporting software, check to see if it allows Use Tax reporting for your home state.

Then, test! Test! Test! Try every type of transaction possible, using many different items as you can in as many states as you can. Mapping your products to the proper item classification in the sales tax software and verifying customer addresses are both critical and time-consuming.

Resources

 
Sales Tax Institute offers courses, consulting and resources including quick-reference charts, articles, tools, legislative updates, FAQs and more.

Audimation provides expert consulting services to conduct a sales tax risk assessment, calculate estimated sales tax and establish a workflow to determine which customers and products meet the sales tax requirements. If you don’t want to go it alone, contact [email protected] to engage our experts and get started!

We’re Curious!

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Special thanks to our Controller and IDEA guru Teresa Kilpatrick for sharing her insights and resources to compile this article.