The U.S. Supreme Court’s June 2018 landmark case of South Dakota v. Wayfair, Inc. (Wayfair) has led to increasingly complex rules and left businesses with exposure related to sales and use taxes and interstate sales. As the result of Wayfair, states have initiated responsive legislation and adopted economic presence laws that have left business owners to navigate the state and local taxing authorities, resulting in confusion with respect to responsible parties and nexus standards. Following are three key points to consider so you may gain a better understanding of your business’ obligations and the issues that exist from state to state.
- Sales Tax Provision Complexities from State to State
Various states with sales and use taxes have imposed differing standards from state-to-state; this makes following all applicable rules and regulations difficult. Particularly, for a small business with limited resources, continuously monitoring and assessing changes across 10,814 possible state and local jurisdictions across the country has been nearly impossible.
As the need for businesses to collect and remit taxes across states has grown, they are desperate for relief. With states pushing back on providing a database listing all taxing authorities and rates, and businesses facing mounting expenses to comply with state and local tax rules, something must give.
To that end, businesses are asking Congress to impose more straightforward taxing guidance across states with statewide sales taxes. Stay tuned to see what will unfold over the coming year to help state and local jurisdictions and businesses work together to alleviate this unnecessary burden and come to a mutually beneficial conclusion.
- Nonstatutory Economic Nexus Provisions
As the result of overturning the physical presence standard for sales and use tax nexus, states with sales and use taxes have adopted standards for remote sellers; these are based on a variation of the South Dakota thresholds of $100,000 in sales or 200 separate transactions.
Many disparities exist among each state’s nexus rules for sales and income taxes. Several states have extended the economic nexus standard approved in Wayfair beyond sales tax regimes, adopting economic nexus provisions for corporate income taxes. The question remains, however, whether state revenue departments can impose these standards without explicit statutory authority.
As this continues to unfold for additional states adopting economic nexus standards for sales and income tax purposes, they will need to determine whether to follow suit with states like Kansas, Pennsylvania, and Massachusetts and set their own policies or defer to state lawmakers. It will be important to monitor this situation and the possibility of litigation from remote sellers in this post-Wayfair era.
- Responsible Person Rules
It is important to understand that due to many states’ responsible person rules, businesses and those considered ‘responsible parties’ may be personally held liable for sales tax even when they do not collect it from customers.
Who is determined to be a responsible party? Depending on a state’s laws, responsible parties may include owners, officers, directors, controllers, tax managers, or other employees with tax filing responsibilities, and nonemployee tax return preparers. States with sales and use taxes can demand these parties remit tax liabilities on behalf of the business.
This not only applies to sellers of tangible property but also extends to sales of services and digital products and many within companies are left vulnerable to these rules. Knowing that sales and use tax obligations do not stop at the entity level can be daunting.
What can you do? Identifying each state’s sales and use tax rules is key to understanding the liabilities for your business and related responsible parties; this will allow you to decrease tax liabilities and ensure compliance with evolving regulations for all involved.
On the Horizon
States continue to face budget shortages and cuts due to the current economic climate and disastrous effects of COVID-19. As a result, it is anticipated that rules related to state and local use taxes and interstate sales will increase and become more strictly enforced. KPM tax advisors will continue to monitor this legislation and communicate additional changes. For further clarification or questions, contact us!