Big changes on the way in sales and use tax?
The simple fact about sales and use taxes is that there is nothing simple about them. Many businesses provide a mix of goods and services where some sales or services are taxable, and others are not. And depending upon the individual business and its location, there may be multiple reporting requirements and varying rates. Add in customers such as nonprofits that are exempt from being burdened with sales taxes, and you have a recipe for complexity, an opportunity for errors, and exposure to increasingly frequent sales tax audits.
There are many reasons for this prediction, but two of the major ones are the need for more local funding and revenue, and the ever-present problem of nexus. With corporate taxes reduced, so is the likelihood of ongoing increases in federal funding for state and local projects and education. That money needs to come from somewhere, and raising property and real estate taxes to any great extent is unlikely to happen.
Sales and use taxes are an obvious source of revenue, and it’s almost inevitable that these taxes will increase where they already exist, and may be established in currently tax-free localities. Also likely, at some point, is the establishment of taxes on goods and services that are currently tax-exempt, and an uptick in sales and use tax audits. As Peggi Rockefeller, chief tax officer at Vertex Inc., said, “Jurisdictions will continue to look for ways to generate more revenue. As a result, they are looking to tax additional products or in different ways than they currently do. Audits have been and will continue to be more stringent and tax administrations have had more success increasing revenue through audit processes. From a compliance standpoint, jurisdictions are also increasing e-file and data requirements from returns.”
And compliance, in the form of keeping records of exempt transactions, and remitting taxes and filing the required forms accurately and on time, adds insult to the injury of imposing the taxes. A possibly even bigger fly in the ointment and invitation to increased complexity is the question of nexus and the “Kill Quill” movement.
We asked many of the major suppliers of sales, use and VAT tax software about issues surrounding SUT, and where they think the industry and legislation are going.
Change in the wind
One of the questions we had for vendors is how and where they thought sales and use tax compliance would change in the next few years. Ignoring the issue of Quill for the moment, a number of respondents told us they expect an expansion of what is subject to sales and use tax.
“Over the past few years, we’ve seen many efforts by states to plug the revenue gap created by internet sales. The states are pushing Congress to enact the Marketplace Fairness Act. Many are adopting economic nexus and click-through nexus policies, and luring businesses into taxpaying status with amnesty programs. They’re also taking businesses to court over uncollected sales and use tax,” explained Marshal Kushniruk, executive vice president of global business development at Avalara. “South Carolina is going after Amazon for tax on its marketplace sales, and South Dakota’s attempt to collect sales and use taxes has led all the way to the U.S. Supreme Court.”
Mark Friedlich, Esq., CPA, senior director at Wolters Kluwer Tax & Accounting North America, added, “The number and complexity of transactions subject to tax, especially with the rise of e-commerce, at the global, federal, state and local levels will continue to increase as the need for revenue to support governmental services in the U.S. and around the world grows. In addition, emerging technologies such as the cloud, big data, artificial intelligence, and the rise of the use of business analytics, coupled with globalization, is resulting in greater demands by users for customized solutions, consulting services and productivity improvement.”
Meanwhile, Stephen Barnes, director of merchant development at TaxCloud, noted, “In a broader sense, the greatest issue facing sales/use tax is accepting that technology can now facilitate tax calculation, filing and remittance in a way that keeps costs low, if not altogether eliminated, and ensures compliance with states’ tax laws. It is likely that states’ sales and use tax laws will continue to be updated to adjust to this new reality.”
And Vertex’s Rockefeller adds several other issues: “The monthly compliance time crunch is increasing. While the expanse of taxable goods and services is broadening, the time frame is not. Also, jurisdictional tax changes are coming at a faster pace and the associated adoption lead times are shrinking.”
TaxJar’s chief of content, Jennifer Dunn, pointed out some of the issues she sees, starting with what and how much to collect. “Once a seller decides to collect sales tax in a remote state, they then have to figure out things like which rates to collect — can they just collect the state rate, or are they required to collect at local rates, too? Are their products taxable in that state? Is shipping and freight taxable? States don’t make this information intuitive or easy to find, and an online seller can spend hours of their valuable time just trying to figure out how to register and collect in a state,” she said. “States don’t make filing easy for online sellers, either. Most states require that online sellers break down how much sales tax was collected based on city, county and other taxing jurisdictions based on where the item was shipped. This can mean that a seller living on one side the country can be stuck trying to determine if her buyer on the other side of the country lives within the city limits of the city and is thus subject to an extra 0.375 percent sales tax rate.”
Finally, Rene Blocker, managing editor for sales and use tax at Bloomberg Tax, added, “We are likely to see continued growth in the use of software technology to streamline retailers’ tax compliance activities. Advancement in the next few years may include the rise of real-time tax collection/remittance software. We’ve already seen the use of real-time sales tax monitoring in a tax theft case in Washington State involving the use of sales suppression software. The opportunity to collect sales and use tax in real time may become more appealing to states in need of immediate revenue, and perhaps will appeal to businesses as well, especially if real-time tax remittance helps to minimize the administrative burdens of filing and payment. Applying sales and use taxes to emerging technologies like cloud computing, digital products, and the ‘Internet of things,’ and new sharing or gig economy business models, like ridesharing services, are also challenges for businesses and tax administrators, alike.”
The “Kill Quill” movement is not a Quentin Tarantino sequel, but rather an effort to redefine economic nexus. Nexus is the legal construct that defines a state’s right to collect taxes from an out-of-state vendor, including when it doesn’t have an actual physical presence in a taxing jurisdiction but does have a substantial percentage of its overall sales in the state and/or locality. To a large extent, the establishment of nexus relies on the ruling in the 1992 Supreme Court case of Quill Corp. v. North Dakota.
The Quill decision established that a state is barred from requiring a remote seller to collect sales and use tax unless the business has a strong enough sales connection to the state. Obviously, this nexus is difficult to establish, and even more difficult to track. Given the huge shift from brick-and-mortar to internet sales over the last decade or so, establishing nexus has gotten even muddier. Over the years, states have engaged in aggressive attributed-nexus approaches such as click-through nexus. Click-through nexus establishes a presumption that an out-of-state seller has nexus with the state if it has an agreement with in-state contractors or other representatives to refer customers to the company’s website in exchange for compensation. Click-though nexus usually has a baseline amount of compensation that needs to be reached in the preceding four quarters, and is an attempt by states to cash in on internet sales.
States obviously have a stake in establishing nexus for the sales that take place in their jurisdiction, regardless of the actual physical location of the seller. Out of that need comes a growing movement by states to overturn the Quill decision. One of the most recent attempts in regard to this is the case currently before the Supreme Court to overturn the Quill decision and allow states to more easily establish nexus on out-of-state sellers. Many of the vendors Accounting Today spoke to think there is a good likelihood of Quill being overturned, as to at least some extent the Quill decision was based on the difficulty of accommodating the huge additional complexity and burden on the sellers of imposing nexus on out-of-state sellers. But that was in 1992. Today’s software largely abrogates the additional complexity on the part of sellers to comply with increased liabilities as a result of the expansion of nexus.
An amicus brief on technology in the SCOTUS case makes the point that existing vendors of SUT-compliance software can quickly accommodate any major shift concerning nexus. As Vertex’s Rockefeller put it, “With the rapid growth of online selling and tax automation, the situations for both businesses and the states have changed dramatically since 1992 when the Quill decision was made. This leads us to believe that the Supreme Court is seriously reconsidering the Quill precedent.”
Wolters Kluwer’s Friedlich also thinks it likely that Quill will be overturned and pointed out some possible ramifications if it is: “I believe it will be overturned. Frankly, otherwise it would make little sense for the Supreme Court to hear the case. They could have continued status quo until Congress decides to do something about the issues surrounding nexus in this context,” he said. “Not only is this case (South Dakota v. Wayfair) of great interest to the states, but taxpayers in the U.S. and abroad, as well as their advisors, could face increased future sales and use tax liabilities and penalties for incorrect filings that would require significant operational (e.g., registration, taxability rules and rates, exemption certificates) and provisioning changes. Non-U.S. companies who in the past did not pay much attention to U.S. SUT liability may find themselves with new administrative burdens that may not work at all, like the value-added tax with which most non-U.S. companies must comply with as an inherent part of their business and compliance operations. If the court does not reverse or otherwise materially change or distinguish its holding in Quill, it will likely be up to Congress to legislate any changes.”
While many of our vendors felt that Quill was likely to be overturned or modified to at least some extent, Thomson Reuters’ Chris Carlstead, managing director of ONESOURCE Indirect & Property Tax, isn’t so sure: “I don’t think it will get overturned, as the Supreme Court does not make a habit of doing so. But I do think it is probable that the definition of physical nexus will be expanded to accommodate the internet and digital sales. One might consider an electronic device an extension of your sales team, satisfying the physical presence requirement, and giving you nexus everywhere.”
The next level
For the most part, there were no huge leaps in technology this past year. All of the vendors offer cloud-based applications, and all of them provide application programming interfaces that allow their engines to work with accounting software.
Several of the vendors let us know what improvements they’ve worked on over the past year or so, or are currently working on. For example, Vertex will be expanding the functionality of its Vertex Indirect Tax O Series product in the 9.0 release to add advanced exemption certificate management capabilities in order to streamline the gathering and validation of required exemptions to support audits. Version 9.0 will also include a latitude and longitude address service to determine and create tax area IDs for specific locations (available now).
TaxCloud also updated its application with a redesigned user interface. This upgrade makes TaxCloud’s APIs easier to use for merchants, and easier for developers to integrate into existing e-commerce platforms and online marketplaces.
Thomson Reuters and Wolters Kluwer both made software updates, with Thomson Reuters releasing the latest version of the ONESOURCE Indirect Tax engine and compliance software with a new, more intuitive user interface. According to Carlstead, “As part of redesigning the user interface, we also incorporated ONESOURCE Indirect Tax into the ONESOURCE platform alongside all the other tax applications on the platform, such as income tax, tax provision, transfer pricing, etc. We have also significantly added to our retail tax content and have more than doubled the amount of product categories our engine supports; we also built out prepared food and beverage tax functionality (including alcohol sales tax) and added intelligent content extract features for point of sale systems that can’t call a tax engine.”
Wolters Kluwer’s upgrades included integrations for Magento and Salesforce Commerce Cloud, integration of Wolters Kluwer in-depth sales and use tax research tools, the addition of smart chart tools for quick answers, and links to in-depth explanations, reference materials for in-depth research, and sophisticated calendaring and workflows that integrate with a user’s own compliance calendars, compliance assignment and tracking to reduce risk and enhance efficiency.
While each vendor continued to make improvements and update their software last year, the industry as a whole seems to be collectively holding its breath waiting to see what happens in the Supreme Court.