With states still hungry for revenue, the Internet changing the way retailers do business, and sales tax issues of growing concern to accountants and their business clients, Accounting Today convened a virtual roundtable of experts to discuss the most important trends in the area.
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Our panel includes: Cory Barwick, lead corporate tax expert at CCH, a Wolters Kluwer business; Tom Corrie, JD, LLM, director of state and local tax at Top 100 Firm Friedman LLP; Steven Roll, assistant managing editor of state tax at Bloomberg BNA; Rory Rawlings, founder of sales tax solution provider Avalara; and Bernadette Sablan, senior tax manager at Thomson Reuters.
What would you say are the biggest issues in the sales and use tax arena?
Barwick: The three biggest issues are remote seller nexus; increased efforts by states to enforce compliance (for instance, through audits, nexus questionnaires, and filing frequency modifications); and the issue of use tax (i.e., purchasers remitting tax to the jurisdictions on transactions where they did not remit any to the vendor).
Corrie: I think the concept of what constitutes taxable property is a big issue. Moreover, the location of delivery and transfer of possession has become cloudy. Traditionally, tangible personal property was easy to identify, as was the time and place that the product was transferred to the consumer. However, with the advent of technology and different modes of delivering intangible products to consumers (e.g., e-books, downloaded music and computer programs), the water has become quite a bit more murky.
In addition, identifying when a nexus-creating event has taken place is becoming more difficult. As states struggle in today's economy with the "physical presence" standard set forth in Quill, they are continuously trying to expand the parameters of what is considered physical presence forsales tax purposes.
Roll: One big issue is lack of uniformity among states. A certain level of uniformity has been achieved among the 24 states that enacted legislation that conforms to Streamlined Sales and Use Tax Agreement provisions. But even here, important differences remain. For example, the SSUTA member states have yet to adopt a uniform policy addressing the tax treatment of remote access to software and cloud computing models. The states that have not enacted SSUTA provisions include California and New York.
Rawlings: From a business perspective, especially those selling goods in multiple states, one of the biggest issues is the continually changing and complex nature of tax compliance - understanding complex sourcing rules, trying to interpret state definitions on product exemptions and exceptions, and keeping track of the ever-changing tax rates and geographic boundaries of the 11,000 jurisdictions, along with jurisdictions that enact new sales taxes.
Sablan: Oneissue is audits. During our annual user conference, 87.5 percent of our customers said that they have seen increased activity by the taxing authorities over the last few years, with more businesses undergoing audits, especially at the local level. Taxing jurisdictions are still in dire need of revenue, resulting in more scrutiny of businesses.
Are there any "hidden dangers" -- SUTA issues that people should be concerned about that they're not?
Sablan: Businesses can underestimate how dangerous it can be to get just one tax rate incorrect. So even if your systems are 95 percent accurate, your company is still at high risk. Let's take for example an e-commerce store that inadvertently under-taxes its customers. By the time the error is discovered, it could equate to thousands of invoices and, depending on the invoice amount, hundreds of thousands of dollars in uncollected taxes.
Barwick: Sales tax is full of hidden dangers, but one that is increasingly becoming problematic is the trend of states going paperless. States are beginning to issue notices directly to the taxpayer account via their online filing systems, and we are seeing a drastic tick up in notices and tax liens due to the fact that the taxpayer has not updated their contact's e-mail address with the state since the account was set up. Taxpayers are simply missing these changes to their accounts and are having to fight with states to get out of assessments, or they have to cave and pay a notice that they may feel is invalid, all over an honest oversight in most cases. Tie into that increased efforts by states to require electronic filing and the matter becomes more cumbersome for small to medium-size businesses that may not have the resources to comply.
Corrie: Based on my experience, many people, including businesspeople, either are not clear regarding what exactly use tax is, or make a conscious decision to ignore their use tax obligations. State tax departments are aware of the problem and are concentrating more resources on remedying it. I've heard of the purchaser of a highly publicized painting being approached by authorities of the New York State Department of Taxation and Finance regarding use tax due on the painting after an article about its purchase and subsequent importation into the state appeared in the New York City newspapers.
Roll: Perhaps the biggest "hidden danger" are enforcement mechanisms that go beyond state tax revenue agencies. If a retailer collects too much tax, they may anger customers and become a defendant in a class-action lawsuit. If they don't collect enough tax, they may be targeted for a qui tam or whistleblower lawsuit in states such as Illinois and New York.
Rawlings: The biggest danger is in making a mistake in calculating and remitting sales tax, and an auditor discovering it three years later and assessing heavy penalties and interest when the mistake was made three years earlier and there is nothing the business can do other than pay the state.
Where do you see things going in the next six to 12 months?
Barwick: I definitely think that state efforts to increase their revenues will continue. What this means to the taxpayer is increased audits that are going to scrutinize their businesses in ways that they may not have done in the past. We have already seen many rate increases across the board to deal with budget deficits as well, and I expect for this to continue unless Congress comes to a consensus on addressing remote seller (or Internet tax) nexus ... . As much as I would like to see the Internet nexus issue addressed in the next six to 12 months, I do not currently believe that it will be resolved in that time period.
Rawlings: If Congress decides to act and pass a law that mandates collection of the currently uncollected sales tax on Internet sales, states will change their focus from enforcing their law and auditing sellers to implementing the new federal law and dealing with the huge influx of registrations and returns from the Internet retailers affected by the legislation. The big question is whether Congress will act.
Roll: States will continue to be aggressive on the Internet tax issue and continue to resort to their own enforcement tactics. At the state level, there seems to be an erosion taking place in the argument that the imposition of sales tax on Internet purchases amounts to a "new tax." Traditionally, "red" states such as Georgia and Utah have enacted so-called click-through legislation requiring online retailers with in-state affiliates to collect tax.
One trigger that might spur congressional action on the online sales tax issue is the looming expiration of the Internet Tax Freedom Act in 2014. While the ITFA is limited to the issue of taxing Internet access, it might become a vehicle for the tax treatment of other forms of online commerce.
Corrie: On a short-term basis, I think state taxing authorities will ramp up their audit activities, and more of them will look to third-party auditors to perform audits on behalf of the states. As a longer-term remedy, it is likely that states will look to legislative, regulatory or administrative solutions in an attempt to buttress their budgets with additional sales and use tax revenue, either by subjecting new products or services to tax, by expanding the scope of what they consider to be taxable under existing legislation, or by adopting new nexus standards aimed at internet sales.
Sablan: We believe that taxing jurisdictions will continue the aggressive pace they have set this year, in which we have seen an 85 percent increase in new taxes, as well as rate hikes. For example, we already know that California's state tax rate will rise by a quarter percent, and Arkansas by half a percent.