State sales and use tax changes in 2019 and what to expect in 2020
The year 2019 was a continuation of the banner year of 2018 for major law and administrative changes in sales and use tax compliance, inspired and driven in large part by the Supreme Court’s decision in South Dakota v Wayfair. This landmark decision greatly expanded the reach of states to impose sales and use tax collection and remittance obligations on businesses beyond actual physical presence to also include mere economic presence.
Not only has the Wayfair decision on nexus directly empowered the states to impose sales and use tax collection and remittance obligations on businesses that had been beyond their reach, but it has also indirectly inspired other changes in state taxation rules across the country. This article:
- Reviews economic nexus and other types of nexus in more detail as they have been playing out in various states around the country in 2019;
- Highlights other significant rates and taxability rules around the country in 2019, and then
- Peers into my crystal ball to take a sneak peek at 2020.
Economic and other types of nexus
Growth of state-wide economic nexus rules
Driven by the need to find new sources of state revenue, all but two states (Florida and Missouri) have enacted economic nexus laws, and it is expected that in 2020, Florida will be on board. Missouri might remain the only holdout in 2020, mostly because it has a very complex system of districts and special rules that will make it administratively challenging to navigate and implement
Growth of local economic nexus rules
And to make matters even more complex for businesses, especially in home rule states like Colorado and California, local governments also have the power to adopt economic nexus rules that vary from locality to locality. So, these jurisdictions within jurisdictions must also be tracked.
Growth of economic nexus “flavors”
And if the state and local jurisdictional challenges weren’t enough, there are many flavors of economic nexus for each state that have emerged in 2019.
- How much economic activity is enough to trigger nexus in a state? Some states look to both the amount of economic activity in a state and the number of transactions; other states look to either the amount of economic activity or the number of transactions in a state; and still other states are flirting with the idea of no safeguard threshold amounts at all.
- How do you compute the amount of economic activity? Some states include both taxable and nontaxable sales in the total for economic nexus purposes. Other states don’t. Some states measure economic activity by the number of sales; other states use total revenue or some combination of them.
- When do you start counting up the volume of activity and the number of transactions? When does the state’s law take effect? The date of enactment? The initial start-collection date determined by the departments of revenue? Subsequent modifications to that date for special circumstances?
- When do you know when you have exceeded the thresholds of activity? Once you determine the start date for collection, some states make you start counting from previous periods and, as soon as you cross the threshold, you have to start collecting sales tax from that time forward. What if the level of activity in a state goes down, when can you stop collecting?
Effects of Wayfair on other types of nexus
Before Wayfair, there were many types of nexus on the books.
Such existing statutes include: physical presence nexus, affiliate or attributional nexus, cookie nexus, click-through nexus, online market platform facilitator nexus, and use tax notification/reporting requirement laws (see the U.S. map below).
Current U.S. map of nexus-related laws
As states added new economic presence laws and related administrative rules in 2019 where none previously existed, they also started to review and in some cases repeal or reinterpret existing nexus laws and rulings in order to “fit” economic presence principles into them. Most of these laws are still on the books and remain relevant to nexus determinations.
Growth of new state tax registrations under economic nexus and the resulting potential prior-period liability under other pre-Wayfair nexus laws
Increased registration under economic nexus rules has increased the risk of prior-year liability under then existing pre-Wayfair nexus rules, as well as the ability to take advantage of voluntary disclosure agreements (VDA) and various state amnesty relief programs
However, post-Wayfair, most, if not all, of those laws are still on the books and so far, remain effective for current as well as past years. And there are two risks here:
- These rules might have applied to the business in the past (whether it knew it or should have known it). So, in a company’s zeal to register in states under Wayfair, a business may find itself liable for unexpected and unbudgeted past tax liability under these other nexus rules.
- Once a business registers, it may no longer be entitled to use a VDA to limit past liability exposure. However, prior contact between a state and the taxpayer concerning sale tax, for example, may disqualify the business from participation in a VDA with respect to sales tax. Contact includes filing a tax return, paying tax, or even receiving an inquiry from the state regarding sales tax.
The audit risks of inadequate exemption certificate management
Nonretail businesses, such as manufacturing, wholesalers and distributors, have increased sales and use tax registration and exemption certificate management requirements in 2019
Since nonretail businesses have nexus in more states because of Wayfair. These businesses are required to register in those states. This means that manufacturers, wholesalers and distributors may have to register as well where the volume of business or number of transactions exceeds the minimums thresholds created by the economic nexus laws in each state. And although sometimes these businesses will be eligible for various resale and manufacturer’s exemptions and will owe no tax, they may still have to file what are called “zero-tax” state tax returns. The bottom line is that all nonretail businesses will have to have systems and expert support in place to manage all of the various exemption requirements of the states. This will be key when the taxing authorities come knocking at the door.
The rise of marketplace facilitator laws in step with economic nexus laws
More and more businesses continue to sell their goods to buyers all over the country on so-called marketplace platforms, such as Amazon, Etsy, etc. In step with the rise of economic nexus laws, the states are passing what are called marketplace facilitator laws that shift the burden of collecting sales and use tax to the marketplace facilitator. At latest count, the number of states adopting marketplace facilitator laws has more than quadrupled in 2019 to over 36 and more will be added in 2020
In a nutshell, these laws generally provide that a marketplace facilitator is responsible for collecting and paying the tax on retail sales made through their marketplace for delivery to state customers.
So, are marketplace sellers now off the hook for sales and use tax compliance? Not really. Sellers may still be liable for sales and use taxes under these new marketplace facilitator rules. Here’s why:
- The seller is still responsible for collecting and remitting sales and use taxes on sales not made on the marketplace facilitator platform.
- The marketplace seller is liable for the tax if the marketplace facilitator can show that:
- It has made a reasonable effort to obtain accurate and complete information from an unrelated marketplace seller about a retail sale.
- The failure to remit the correct amount of tax was due to incorrect or incomplete information provided to the marketplace facilitator by the unrelated marketplace seller.
State sales and use tax audit enforcement
Although the numbers are not yet in for state audit results in 2019, the numbers for 2018 show an increase in state revenue attributable to Wayfair. Most states have been reluctant to publicize the sales tax collection windfall they have experienced as a result of SCOTUS’s landmark decision in Wayfair a little more than a year ago. However, South Carolina has been more forthcoming. Top officials at the state Department of Revenue told me that the state collected $46.8 million in extra revenue from 3,089 registered remote sellers from Nov. 1 through June 30. The bulk of this increase comes from online companies. That’s because remote sellers — or companies that don’t have a physical presence but do business in the state — have been required for nearly a year to collect sales and remit taxes on the products they sell to South Carolina customers. Keep in mind that the almost $47 million in state tax collections is on top of what they would have otherwise collected. “Regular” collections during that same period shot up by $89 million.
I expect that 2019 and 2020 will show even higher Wayfair-related revenue increases and that part of that will come from audit adjustments that took place in 2019, as well as audits in 2020.
Roundup of other key sales and use tax development in 2019
As explained in detail above, the vast majority of the important sales and use tax developments in 2019 for all states centered in some way or another around the Wayfair holding. But as usual, all states have also made changes to the rates and rules of various taxable products and services, not just statewide but also in many local jurisdictions. Therefore, taxpayers and practitioners should check out the state tax websites for these changes.
Specific noteworthy state changes
Among the thousands of changes made to state tax rates and rules around the country, here are a few that should not be overlooked for 2020.
A new law:
- expands existing amnesty provisions for remote sellers participating in the Simplified Sellers Use Tax Remittance (SSUT) Program; and
- bars class action lawsuits against remote sellers for over-collecting taxes under the SSUT Program.
Guidance: The amnesty programs in all states around the country should be checked for changes as well.
The U.S. Supreme Court denied a petition for certiorari challenging the constitutionality of a car-rental surcharge imposed in Arizona. The Maricopa County Tourism and Sports Authority imposes the surcharge on car rental companies. The companies pass the costs along to customers. The companies had asked the Court to consider whether:
- the surcharge violated the dormant Commerce Clause by forcing nonresidents to bear a disproportionate share of the tax burden; and
- there was an intent to impose a disproportionate burden on nonresidents.
Saban Rent-A-Car LLC, et al. v. Arizona Department of Revenue, et al., U.S. Supreme Court, Dkt. 19-136, petition for certiorari denied October 7, 2019
Guidance: Any time the Supreme Court gets involved in a state action, that is worthy of note.
Relief may be available to marketplace sellers using fulfillment centers in California. An out-of-state retailer (marketplace seller) may qualify for reduced liability for certain California sales and use taxes, penalties, and interest if:
- the out-of-state retailer that is or was engaged in business in California solely because the retailer used a marketplace facilitator to facilitate sales of merchandise for delivery in California; and
- that marketplace facilitator stored the retailer’s inventory in California.
What relief is available?
The California Department of Tax and Fee Administration (CDTFA) is prohibited from assessing sales and use taxes on sales made by a qualifying retailer prior to April 1, 2016. The CDTFA is required to relieve any penalties imposed on a qualifying retailer with respect to sales made for the period April 1, 2016 to March 31, 2019. Special Notice L-681, California Department of Tax and Fee Administration, July 2019
Guidance: Of course, now that marketplace facility statutes are in place in over 36 states now, any issues that arose before Wayfair may no longer be as relevant after the new marketplace facility legislation.
The threshold for click-through nexus has been lowered. Every person who sells property or services through an agreement with a person located in Connecticut must collect and remit sales tax on their in-state taxable sales. The agreement must provide that:
- in return for the person in Connecticut referring potential customers to the retailer, directly or indirectly, by any means including a website link;
- the person will receive a commission or other consideration from that retailer; and
- the cumulative gross receipts from sales by the retailer to in-state customers who are referred to the retailer by all such persons with this type of an agreement with the retailer is in excess of $100,000 during the preceding four quarterly periods.
Formerly, this requirement applied to any retailer that annually earned more than $250,000 in gross receipts from sales in the state under such referral agreements in the preceding four quarters. This provision is effective July 1, 2019, and applicable to sales that occur as of that date.
District of Columbia
DC passes permanent sales tax laws for digital music, books and games. Digital goods, including music, books, movies and games, are subject to sales and use tax in the District of Columbia. In prior temporary legislation, sales tax law for digital goods was effective January 1, 2019. The permanent legislation also includes changes to DC’s sales tax nexus laws. Act 22-584 (D.C.B. 22-914), Laws 2017, approved Jan. 18, 2019, effective after a 30-day congressional review period
Guidance: The taxability of digital products is at the forefront of states all across the country.
A managing member was personally liable for a penalty based on twice the total amount of Florida sales and use tax owed for the audit period. The taxpayer was responsible for, and had administrative control over, the collection and payment of taxes for the company. Moreover, the taxpayer willfully attempted to evade or defeat his responsibility to pay sales tax owed. Scott v. Department of Revenue, Florida Department of Revenue, DOAH Case No. 18-4464 (DOR 2019-003-FOF), July 8, 2019
Guidance: This case is a reminder that states can impose business sales and use tax liability personally on key persons in the business.
As a reminder that states are becoming more aggressive in the taxation of digital-type products, a seller of exempt software was advised to register in Florida. A taxpayer’s retail sales of prewritten computer software were exempt from Georgia sales tax because it was only delivered electronically. However, the taxpayer was required to indicate this electronic method of delivery on its invoices to customers. Though the sales were exempt, the Georgia Department of Revenue found that the taxpayer should register for a Georgia sales and use tax number as a "dealer" because it had an active Georgia withholding tax account. Due to the withholding account, the DOR assumed the taxpayer was a "dealer " for sales and use tax purposes and stated that it should file sales and use tax returns even if no sales were made or tax was due. Letter Ruling LR SUT-2018-10, Georgia Department of Revenue, Aug. 7, 2018, released January 15, 2019, ¶201-252
Guidance: The taxability of digital products is on the forefront of states all across the country.
Periodic general excise tax returns for Hawaii for months beginning on or after July 1, 2020 will be required to be filed electronically. In addition, annual returns for taxable years beginning on or after Jan. 1, 2020 will be required to be filed electronically. Taxpayers may file general excise tax returns electronically by using Form G-45, Periodic General Excise / Use Tax Return, and Form G-49, Annual Return and Reconciliation of General Excise / Use Tax, available online at https://hitax.hawaii.gov. The department will impose a two-percent penalty on the amount of tax required to be shown on the return if the return is not filed electronically unless the failure is due to reasonable cause and not due to neglect. Announcement No. 2019-16, Hawaii Department of Taxation, Dec. 6, 2019, ¶201-112
Guidance: More and more states are now requiring electronic filing of tax returns and other key documents.
In a recent case, a taxpayer was responsible for Idaho use tax, penalty, and interest because it failed to file a return and submit the documentation requested by the Tax Discovery Bureau. In this matter, the bureau sent the taxpayer three letters requesting documentation to show that sales/use tax had been paid on the purchases of prefabricated building materials or to show these transactions qualified for an exemption. However, the taxpayer failed to provide any documentation and, therefore, the bureau issued a notice of deficiency determination assessing use tax, penalty and interest. The court rejected the taxpayer’s request for abatement of the interest and penalties on the grounds that he did not know the tax was due at the time of purchase. Decision No. 0-647-038-976, Idaho State Tax Commission, November 2018, received April 3, 2019
Guidance: Once again the court makes it clear that ignorance of the law is no excuse.
Effective Jan. 1, 2020, Illinois legalizes the growing and selling cannabis as of June 25, 2019, and taxes cannabis sales as well. The state imposes:
- a cannabis purchaser excise tax, varying from 10 to 25 percent.
- a 7 percent privilege tax on cannabis cultivation centers;
- a 7 percent privilege tax on craft growers of cannabis;
- a 7 percent "cannabis cultivation privilege tax" on both cultivation centers and craft growers.
H.B. 1438, Laws 2019
In addition to the cannabis legislation now effective in Illinois, two unrelated recent Illinois court cases are also worthy of note.
- The Illinois Appellate Court affirmed the circuit court’s decision of upholding the constitutionality of the streaming services tax. Labell v. The City of Chicago, Appellate Court of Illinois, First District, No. 15 CH 13399, Nov. 21, 2019.
- The Appellate Court of Illinois affirmed the judgment of the circuit court that a taxpayer’s change of ownership was a taxable event. In this matter, the taxpayer bought an aircraft and paid a corresponding general use tax. Subsequently, the taxpayer changed the legal ownership of that aircraft to himself as trustee of his revocable trust. The Department of Revenue noticed the change in legal ownership and sent the taxpayer a notice of tax liability under the Aircraft Use Tax Law. The circuit court found that the department properly imposed the aircraft use tax on the taxpayer.
- Shakman v. The Department of Revenue, Appellate Court of Illinois, First District, No. 1-18-2197, Dec. 12, 2019
Guidance: This case reminds us that a change in ownership, even if “related,” can trigger a taxable sales and use tax event.
Vape regulations adopted. Iowa has adopted regulations implementing changes to its cigarette tax law. The legislation has imposed sales and use tax on all delivery sales of alternative nicotine products or vapor ("vape") products within Iowa. In-state or out-of-state retailers of these products into Iowa are required to obtain a delivery sale permit. A retailer holding a delivery sale permit must also have an Iowa sale and use tax permit. Rule 701—82.12, Iowa Department of Revenue, effective April 3, 2019
Guidance: We are just starting to scratch the surface of many issues related to Vaping. Stay tuned.
The Kansas Attorney General’s office has opined that the Department of Revenue’s policy in Notice 19-04, requiring all remote sellers to collect and remit sales tax by Oct. 1, 2019, has no force or legal effect.
Guidance: Politics aside, the real issue is whether the Kansas economic nexus law, or frankly any state nexus law, can constitutionally exclude statutory safe-harbor minimums.
The latest Kentucky Sales Tax Facts discusses 2019 sales and use, utilities gross receipts, excise, and gross receipts tax changes. This document should be reviewed on its website. The newsletter highlights the changes enacted by H.B. 354, Laws 2019:
Guidance: This is a great tool for practitioners to use to catch up with all the changes at least in those states that provide such a document. Check all websites.
The Supreme Court of Louisiana affirmed the decision of the district court that the law that allowed funding mechanism for the Louisiana Uniform Local Sales Tax Board was unconstitutional. West Feliciana Parish Government v. State of Louisiana, Louisiana Supreme Court, No. 2019-CA-00878, Dec. 11, 2019
Guidance: Any time the Supreme Court gets involved in a state action, that is worthy of note.
Maine has enacted a number of sales and use tax sourcing rules depending upon whether the property or services are received at a seller’s business location, other location, where the business records are found or where the property is shipped, or services provided. H.P. 1279, Laws 2019, effective Sept. 18, 2019
Guidance: Sourcing rules are critical components of sales and use tax analysis and compliance.
Answering services are not subject to Maryland sales and use tax if the physical act of answering a telephone is less than 5% of the service provider’s gross receipts in a taxable year. Ch. 292 S.B. 945, Laws 2019, effective April 30, 2019
Guidance: Who knew answering a telephone too much could make you subject to tax?
In a recent court case, a taxpayer’s sales of standardized software online were subject to Massachusetts sales tax because the transactions constituted taxable sales of tangible personal property (TPP). The taxpayer sold its software in a subscription format wherein customers paid a monthly or annual subscription fees for unlimited access to the software during the subscription period. In this case, the court rejected the taxpayer’s argument that (1) the transactions at issue did not involve the transfer of software, and (2) the sale of software constituted a sale of service and not TPP and therefore should not be subject to tax. Citrix Systems, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, No. C321160 and C325421, Nov. 2, 2018
Guidance: Again, the taxability of digital products is on the forefront of states all across the country. This is a good case to review for how the court analyzes these special fact patterns
Nexus Extended to Marketplace Facilitators. Michigan has just enacted legislation that extends sales and use tax collection obligations to marketplace facilitators. Act 143 (H.B. 4540) and Act 144 (H.B. 4541), Laws 2019, effective Jan. 1, 2020
Guidance: Although we cover marketplace facilitator nexus above, it is worth noting here since it was just enacted, making it No. 37. But laws are being added so quickly that state tax changes in this area must be monitored daily.
The Minnesota Department of Revenue revoked and replaced a revenue notice setting out its position on physical presence nexus standards. The notice discusses the criteria used by the department for determining when a retailer or marketplace provider is a "retailer maintaining a place of business in this state" or a "marketplace provider maintaining a place of business in this state" and therefore has physical presence nexus in Minnesota, such that they must register, collect and remit Minnesota sales or use tax on all taxable retail sales made or facilitated into Minnesota. However, this notice does not apply for the purpose of determining when a retailer or marketplace provider is not maintaining a place of business in this state but may have economic nexus with Minnesota. Minnesota DOR Notice Replaces Notice on Physical Presence Nexus Standards (Oct. 2, 2019)
Guidance: Physical presence is still alive and well.
Mississippi has extended the sunset dates of two incentive programs that offer sales and use tax incentives. The sunset dates of the following programs have been extended four years (from July 1, 2019, to July 1, 2023):
- the Major Economic Impact Act, and
- the Growth and Prosperity Act.
S.B. 2133, Laws 2019, effective April 3, 2019
Guidance: Most states have special incentive programs, regimes and holidays that are effective for very specific periods of time. These must be checked every year in all states.
Enacted legislation contains various Missouri sales and use tax changes, including those on:
- tax receipt requirements;
- deadline for filing refund for erroneously paid taxes; and
- authorization for additional transient guest taxes.
S.B. 87, Laws 2019, effective Aug. 28, 2019
Guidance: Missouri has a very complex state-local tax system as noted above by the fact that it is only one of two states yet to adopt economic nexus. So, paying attention to changes requires close scrutiny.
An exemption from Nevada sales and use taxes has been enacted for certain medical equipment. Effective July 1, 2019, a sales and use tax exemption applies to:
- durable medical equipment;
- oxygen delivery equipment; and
- mobility enhancing equipment.
Nevada voters approved an amendment to the state constitution to provide for the exemption. Ch. 244 (S.B. 447), Laws 2019
Guidance: The important note here is that it required a voter approval to get the changes. Voter-approval-required legislation is always worth tracking no matter the state.
The New Hampshire Attorney General has advised New Hampshire businesses that have been contacted by another state regarding sales tax collection to contact:
- an accountant, attorney or other appropriate advisor; and
- the New Hampshire Department of Justice Consumer Protection Bureau.
The Consumer Protection Bureau will help determine if the attempt to collect taxes is legitimate and if states are complying with recently enacted legislation (Ch. 280, Laws 2019). Reporting Out-of-State Sales Tax Requests for New Hampshire Businesses, New Hampshire Attorney General, Aug. 29, 2019
Guidance: New Hampshire is one of only five states that does not have a sales tax. Such states may feel, like New Hampshire, that requiring its businesses to collect a tax that it itself does not have is onerous. Therefore, they want to give their businesses a mechanism to appeal abusive tax collection rules from another state. Whether the other four states will enact such protections is an open question to watch in 2020.
In this case, a conveyor systems manufacturer (taxpayer) was not entitled to an exemption from New Jersey sales and use tax because it did not qualify as a subcontractor. Jervis B. Webb Company v. Director, Division of Taxation, New Jersey Tax Court, No. 000054-2016, 000269-2016, 000270-2016, 000271-2016, 000272-2016, 000273-2016, 000274-2016, 000275-2016, 000276-2016, 000277-2016, Aug. 13, 2019.
Comment: Sales and use taxes around construction in general can be complex and often center around the definition of a contractor. It may be useful for practitioners of all states to track such litigation although not directly impacting other states.
New Mexico enacted destination sourcing rules for its gross receipts and compensating taxes, effective July 1, 2021. The legislation requires the Department of Taxation and Revenue to create a database that sets out the local tax rates in the state by address. The legislation authorizes the department to issue additional guidance on sourcing, such as for taxpayers having more than one place of business. H.B. 6, Laws 2019, effective as noted
Guidance: Sourcing rules are critical components of sales and use tax analysis and compliance.
A recent case in New York confirmed the audit methodology utilized by the New York Division of Taxation to calculate sales and use taxes due on a grocery store operator (taxpayer) The method was reasonable because the taxpayer failed to establish that the audit methodology employed by the division to calculate the tax due was unreasonably inaccurate. Silver Saddle Deli Grocery Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 827058 and 827059, April 25, 2019
Guidance: This case provides a good discussion of the indirect methods that tax authorities can utilize to determine sales tax liability. Such indirect methods are often a mystery to taxpayer.
North Carolina has extended the sunset date of a number of sales and use tax exemptions and refunds. The sunset date for the dry cleaning solvent tax is also extended.
- Exemption for qualifying airlines;
- Exemptions and refunds for professional motorsports teams;
- Dry cleaning solvent tax: The sunset date of the dry cleaning solvent tax is extended from Jan. 1, 2020, to Jan. 1, 2030.
Ch. 237 (H.B. 399), Laws 2019, effective Nov. 1, 2019
Guidance: Most states have special incentive programs, regimes and exemption holidays that are effective for very specific periods of time and then expire. These “sunset” provisions must be checked every year in all states.
Cryptocurrency payment program suspended. The Ohio Attorney General’s office has opined that the use of OhioCrypto.com cryptocurrency payment processor to accept payment of commercial activity (CAT) tax and sales tax, among other taxes, is not authorized. As a "device or method for making an electronic payment or transfer of funds, " OhioCrypto.com constitutes a "financial transaction device" pursuant to Ohio statute. Therefore, this payment processor may not be utilized without the express approval of the Board of Deposit. Opinion 2019-033, Ohio Attorney General, Nov. 5, 2019
Guidance: Cryptocurrency is a relatively new payment method. Practitioners must pay careful attention to such new technologies and the regulations around them.
Ohio’s rule on manufacturing amended. The definition of an item transferred for use in a manufacturing operation is expanded to include:
- Machinery, detergents and supplies located at a manufacturing facility and used to clean towels, linens, mopheads and clothing to be supplied to a consumer as part of laundry or dry cleaning services, if the towels, linens and similar items belong to the service provider; and
- Equipment and supplies used to clean processing equipment part of a continuous manufacturing operation to produce milk, yogurt, ice cream and other dairy products.
OAC5703-9-21, Ohio Department of Taxation, effective March 24, 2019
Guidance: The manufacturing exemption is a very important and complex area of the law so it’s noteworthy whenever any state changes the rules.
Medical equipment exemption amended. Enacted Oklahoma sales tax legislation makes changes concerning a medical equipment exemption. H.B. 1262, Laws 2019, effective May 28, 2019
Statute of limitations for most taxes now 10 years. Pennsylvania may collect tax owed if the collection begins within 10 years of the date the settlement, determination or assessment of the tax becomes final. The change applies to all taxes administered by the Department of Revenue, except the inheritance tax. H.B. 17, Laws 2019, effective Nov. 27, 2019.
Guidance: Practitioners must stay current on the running of any statute of limitations because if the date is overlooked, it usually results in unhappy taxpayers.
Federal law requires tax preparers to have a written plan to protect clients' data. The Rhode Island Department of Revenue issued an advisory reminding tax professionals that federal law requires them to create and follow a written information security plan to protect their clients’ data. Advisory for Tax Professionals 2019-36, Rhode Island Department of Revenue, Dec. 6, 2019
Guidance: Privacy issues are of concern all over the country in many contexts, but especially when it falls on practitioners to take specific statutory action.
Amazon was liable for third-party merchant sales. Amazon Services is liable for South Carolina sales taxes on the sale of third-party merchant products because it is "in the business of selling" for purposes of the Sales and Use Tax Act. Amazon accepts customer payments and is the point of sale for all transactions. Amazon Services LLC v. Department of Revenue, South Carolina Administrative Law Judge Division, No. 17-ALJ-17-0238-CC, Sept. 10, 2019
Guidance: Any case involving third-party companies like Amazon, Etsy, etc., is especially relevant for sales and use tax compliance purposes.
U.S. Supreme Court will not review tax imposed on fuel purchased by railroads. The U.S. Supreme Court has denied a petition for certiorari filed by taxpayers who argued that the imposition of Tennessee sales and use tax on diesel fuel purchased by railroads discriminates against railroads under the Railroad Revitalization and Regulatory Reform Act of 1976. Illinois Central Railroad Company v. Tennessee Department of Revenue, U.S. Supreme Court, Dkt. No. 18-866, petition for certiorari denied June 24, 2019
Guidance: As mentioned before, any time the Supreme Court gets involved in a state action, that is worthy of note.
Single local use tax rate for remote sellers announced. The Texas single local use tax rate for remote sellers is set at 1.75 percent. The rate is in effect beginning Jan. 1, 2020, through Dec. 31, 2020. The single local use tax rate provides an optional way of computing the amount of local use tax that remote sellers would be required to collect on taxable items. Certification of the Single Local Use Tax Rate for Remote Sellers - 2020, Texas Comptroller of Public Accounts, Dec. 12, 2019
Guidance: Such state efforts are intended to simplify compliance when remote sales are involved.
Sellers allowed to pay sales tax for customers. Texas has enacted legislation that now allows sellers to pay the sales tax on products they sell. A seller can advertise, hold out or state that it will pay the sales tax for a customer if:
- it indicates in the advertisement, holding out or statement that it will pay the tax for the customer;
- it does not indicate or imply that the sale is exempt or excluded from taxation; and
- any receipt or other statement given to the customer separately states the tax amount and indicates that the seller will pay the tax.
H.B. 2358, Laws 2019, effective Oct. 1, 2019
Guidance: The significance here is that before this legislation, taxpayers faced heavy fines for paying the sales tax for customers.
Taxpayer’s charges for subscriptions to its computer software programs subject to tax. A taxpayer’s charges for subscriptions to its computer software programs of pre-recorded audio fitness instructions were subject to Vermont sales tax because the law provides for imposition of the tax on retail sales charges for audio or video programming and specified digital products. In this matter, the taxpayer’s customers were end users who purchased digital audio works obtained by means other than tangible storage media. Therefore, the taxpayer was deemed to be selling specified digital products subject to sales tax. Accordingly, the taxpayer’s charges for the subscriptions were subject to tax. Formal Ruling 2019-04, Vermont Department of Taxes, March 11, 2019, released July 2019
Guidance: Again, the taxability of digital products is on the forefront of states all across the country and many states tax them differently.
Motor vehicle tax eliminated. Washington Initiative 976 has eliminated the additional 0.3 percent sales and use tax applied to sales and leases of motor vehicles. Sellers and lessors may stop collecting this tax on Dec. 5, 2019. Any local sales and use tax exemption from the public safety component of retail sales tax remains. This exemption applies to the retail sales of motor vehicles and the first 36 months of lease payments on such vehicles. In addition, the rental car tax continues to apply to rentals of passenger cars for a period of less than 30 days. Special Notice, Washington Department of Revenue, Nov. 19, 2019, ¶204-524
Guidance: It is important to track laws that authorize no longer collecting tax. A mistake in timing here could be costly.
Taxpayer’s purchase of point-of-sale services subject to tax. A taxpayer’s purchase of point-of-sale services from an application provider was properly subject to Washington sales and use tax because the services were taxable digital automated services rather than nontaxable data processing services. Determination No. 16-0374, Washington Department of Revenue, Oct. 7, 2019
Guidance: This particularly affects companies that offer software solutions to point of sale technology.
Exemption enacted for sales of investment metal bullion and coins. Sales of investment metal bullion and investment coins are exempt from West Virginia sales and use tax. S.B. 502, Laws 2019, effective July 1, 2019.
Guidance: This should please folks who collect such things in West Virginia.
What about 2020 and beyond and the audit risk
The catchword in 2020 is increased audit risk resulting from the Wayfair decision and follow-on legislative, judicial and administrative action. State auditors are more sophisticated than ever and will use more sophisticated tools and data analytics to get more bang for the buck in audit targets where:
- Risks and the potential cost of incorrect compliance are growing and could result in large tax adjustments;
- That liability risk extends personally to key personnel in the business, such as officers, tax directors, financial directors, etc.
The audit risks are real and material. Each company must determine its risk profile by answering questions like:
- How much audit risk are you willing to take?
- Are you prepared to accept significant tax adjustments, with interest and penalties going back at least three years and maybe more?
- Are you prepared for audits that may go on for many months, significantly disrupting your business operations?
- How much potential business reputational damage can you accept if perceived as a tax cheat?
Depending on a business’s answer to these questions and no doubt others specific to each business — the predetermined level of risk taking and aversion — one should take the time to review any audit “red flags” the company may have and where possible perform simulated audits to identify points of vulnerability and correct them before an actual audit.
Another step in addressing this increased risk is to undertake a careful review of the business activity in all the states in which the business has nexus currently, as well as planning to do business in the future. In those states, a review of all relevant nexus laws is crucial — not just economic nexus laws under Wayfair, but the other types of nexus still on the books, such as click-through nexus, cookie nexus, affiliate nexus, etc. And this also means that business planning must include retroactive tax liability for prior years; therefore, before a business registers in a state, it should review its past liabilities in that state and understand the potential risks that are likely to follow.