Accounting Today - - Tax Practice -

The im­me­di­ate con­se­quences

Many states al­ready have leg­is­la­tion on the books with dif­fer­ent ef­fec­tive dates, which can be de­scribed as “eco­nomic pres­ence” laws be­cause they have some “vol­ume of eco­nomic ac­tiv­ity” re­quire­ment to es­tab­lish nexus, just like the South Dakota statute. How­ever, the im­me­di­ate is­sue is the ef­fec­tive date for col­lect­ing the tax, which varies with each state. For ex­am­ple:

States like Hawaii and Ver­mont have July 1, 2018, ef­fec­tive dates and have al­ready made an­nounce­ments to use “catch up” pro­ce­dures for trans­ac­tions in 2018 be­fore the Wayfair de­ci­sion.

Ken­tucky and Iowa, on the other hand, have an­nounced that taxes will be col­lected on a “prospec­tive” ba­sis, with Iowa say­ing specif­i­cally Jan. 1, 2019.

Idaho an­nounced that it is “still re­view­ing” next steps.

Iron­i­cally, South Dakota must wait while the case is be­ing wrapped up in the state court sys­tem on re­mand, so the in­junc­tion pre­vent­ing the en­force­ment of the law will re­main in place.

The Min­nesota Depart­ment of Rev­enue will pro­vide more guid­ance within 30 days.

Lou­i­si­ana will re­quire re­mote re­tail­ers to col­lect sales and use tax if they meet cer­tain sales thresh­olds. The thresh­olds ap­ply to tax pe­ri­ods on or af­ter the date of the Wayfair de­ci­sion.

Illi­nois, Wis­con­sin and Alabama will re­quire re­mote re­tail­ers to col­lect use and ser­vice use tax when they meet cer­tain sales thresh­olds. This col­lec­tion re­quire­ment be­gins Oct. 1, 2018.

In­di­ana will not en­force the law retroac­tively and will soon pro­vide a spe­cific date for en­force­ment.

Bot­tom line: State-spe­cific guid­ance is be­ing an­nounced al­most daily, and rec­om­men­da­tions from groups like the Na­tional Con­fer­ence of State Leg­is­la­tures, the Mul­ti­state Tax Com­mis­sion and the Stream­lined Sales Tax Gov­ern­ing Board are forth­com­ing as well — all of which should be tracked care­fully by re­tail­ers and their tax ad­vi­sors.

The long-term con­se­quences

Phys­i­cal pres­ence may no longer be a nec­es­sary el­e­ment of sales tax nexus, but that doesn’t mean is­sues in this area will be greatly sim­pli­fied. Once you elim­i­nate the phys­i­cal pres­ence re­quire­ment, it opens up so many other things.

It’s a win for the states, par­tic­u­larly the smaller, less pop­u­lous states with fewer brick-and-mor­tar re­tail­ers. But states like New York and Cal­i­for­nia, which have very com­plex statutes on the books, will have to make some sig­nif­i­cant changes to their laws.

Wayfair has an es­pe­cially im­por­tant im­pact, par­tic­u­larly on those states that don’t im­pose state and lo­cal in­come taxes, be­cause it’s their pri­mary source of tax rev­enue.

New Hamp­shire is a state with­out a sales tax. Ac­cord­ing to a re­cent an­nounce­ment, the gov­er­nor plans to call a spe­cial ses­sion to con­sider leg­is­la­tion to pro­tect New Hamp­shire busi­nesses from im­proper at­tempts by other states to force col­lec­tion of sales and uses taxes.

In ad­di­tion, se­na­tors from two other “non-sales tax states” (Ore­gon and Mon­tana) have joined the se­na­tor from New Hamp­shire to in­tro­duce fed­eral leg­is­la­tion (Se­nate Bill 3180) ti­tled, “A bill to reg­u­late cer­tain state im­po­si­tions on in­ter­state com­merce” in an ef­fort to over­turn the U.S. Supreme Court’s de­ci­sion in Wayfair.

It re­mains to be seen what the states will ac­tu­ally do, but state gov­ern­ments and their tax­ing au­thor­i­ties are well ad­vised to adopt the eco­nomic pres­ence nexus stan­dard along lines sim­i­lar to the South Dakota statute, which specif­i­cally re­quires only a cer­tain vol­ume of eco­nomic ac­tiv­ity mea­sured by ei­ther amount or num­ber of sales in the state.

It’s a safe bet that if states fol­low the South Dakota model, they won’t be chal­lenged by tax­ing au­thor­i­ties, tax ad­vi­sors, re­tail­ers or any­body else.

It will take most states months to get their col­lec­tion sys­tems up and run­ning. This is not likely to take place un­til Jan­uary 2019 for many ju­ris­dic­tions. A key fea­ture of the South Dakota law was that there would be no retroac­tive im­po­si­tion of sales tax on e-com­merce sell­ers. The­o­ret­i­cally, states can im­pose sales tax retroac­tively as far back as 10 years, but most states would not go in that di­rec­tion, be­cause it would be chal­lenged.

More leg­isla­tive ac­tion?

There will be a lot of pres­sure for Congress to step in and sim­plify the sales tax col­lec­tion and com­pli­ance process by pro­vid­ing one set of rates and stan­dards that ap­ply to all states that im­pose the sales tax. Sev­eral states that don’t cur­rently im­pose a sales tax are ac­tively con­sid­er­ing do­ing so now that they ef­fec­tively have been given a “safe har­bor” to do so on e-com­merce. Tax ad­vi­sors and re­tail­ers, in par­tic­u­lar, take note.

Al­though the Wayfair de­ci­sion only ap­plies to sales and use tax for the mo­ment, there are some com­men­ta­tors who sug­gest that Wayfair may even­tu­ally be ex­tended to other types of in­come, such as cor­po­rate in­come tax.

Whether the states will re­peal or re­tain some of the other al­ter­na­tive nexus laws, e.g., cookie nexus, re­port­ing/ no­tice laws, click-through nexus, etc., cur­rently on the books is an open ques­tion. State leg­isla­tive ac­tions over the com­ing weeks will have to be mon­i­tored care­fully.

Next steps for re­tail­ers

To en­sure that busi­nesses will stay sales and use tax-com­pli­ant with the ex­panded nexus stan­dards and min­i­mize risks to their busi­nesses, best prac­tices should be put in place:

Un­der­stand their nexus pro­file — where do they have a sales tax obli­ga­tion based on evolv­ing stan­dards?

As­sess their ca­pa­bil­ity to ac­cu­rately, con­sis­tently and ef­fi­ciently meet their obli­ga­tions. AT

Mark Friedlich, Esq., CPA, is a se­nior di­rec­tor for tax & ac­count­ing for North Amer­ica for Wolters Kluwer.

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