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31.05.2019

US Sales & Use Tax: How to execute post-Wayfair decision

Sales and Use Taxes are indirect taxes, that if passed on to customers minimise the impact to the bottom line

Key Facts
  • The concept of sales reporting and notification requirements was introduced in Colorado to potentially identify untaxed sales and compel the purchasers to self-assess the Use Tax.
  • Seven states implemented reporting requirements before Wayfair. More states announced immediately after the decision that they would also enact reporting requirements.
  • If a business doesn’t properly implement or consider these issues, it becomes liable during audit.

In my last article, I covered the difference between US Sales and Use Tax (SUT) and VAT. If you have been tracking SUT recently you may have heard about the Wayfair case and its impact on US Sales and Use Tax. In this article, I cover how to execute SUT post-Wayfair decision.

Reporting requirements

As states’ Sales Tax revenues declined due to remote sales, they reacted with more aggressive enforcement and auditing of existing taxpayers and policy changes that sought to increase the taxable base. The concept of sales reporting and notification requirements was introduced in Colorado to potentially identify untaxed sales and compel the purchasers to self-assess the Use Tax.

Seven states implemented reporting requirements before Wayfair. More states announced immediately after the decision that they would also enact reporting requirements. Reporting requirements don’t require businesses to officially register to collect the state Sales Tax; rather, they establish thresholds for annual reporting that would be required in lieu of collecting. Reports may have to be sent to customers indicating the total amount of tax-free purchases they made. Those same reports may also have to be sent to state taxing authorities.

After Wayfair, states that were on constitutionally shaky ground are now firmly justified and these requirements may have already been implemented. This is one of the first important areas to address post-Wayfair. Those responsible for Sales Tax collection and remittance should ask themselves:

  • Does my business operate in one of the states that have already implemented reporting requirements?
  • Are there more states enacting changes that take effect in the fourth quarter that I need to worry about?
  • What type of data do I need to report to my customers and taxing authorities?

Reporting requirements could have a multitude of effects. Obviously, customers who have not been self-assessing Use Tax might take a second look at their purchases and their procedures knowing that their vendors are now required to report to taxing authorities. Our clients are primarily large corporations, and we have seen some of these companies compel their vendors to collect the state’s tax. Don’t be surprised if some customers request that you charge Sales Tax going forward. It may be a requirement for their continued business.

Registration

Once a business has decided that it is going to collect these taxes, it needs to look at requirements to do business in the state. Registration is usually a simple process but may vary by state. A business has the option of registering centrally, but if it does so, it may be automatically registered for all states that participate in the programme. Be prepared to provide some personal information for owners or officers. This seems simple enough, but the scrutiny over the security of personal data could make this a challenge.

Exemption documentation

In the old paradigm, a distributor would only register where it had physical locations. Distributors are generally exempt from Sales Tax collection because their sales are for resale. Wayfair is not going to change that. If a company’s sales are for resale, it may be compelled to register, but not necessarily collect the state tax. It will, however, have documentation requirements under the new regime. The burden of collecting and maintaining exemption documentation is on the seller. Although it may not have a Sales Tax collection burden, if it is required to register, it must maintain exemption documentation to ensure that during an audit, those sales are not deemed taxable and included in its assessment.

Businesses should consider automation in this area, too. The burden of collecting and validating certificates is not an easy one – it’s an ongoing process. New customers must be set up and documentation will need to be received and maintained. In addition, many states have mandated that certificates expire either annually or every two years, so this is a process that will require maintenance.

The other issue is that this task usually must be shared between two groups. Tax does not want to be involved in accounts receivable operations or setting up new customers – nor should it be. Here again is where automation can help, as the company may be able to develop a workflow that includes a tax review but does not hold up the process for new customers and invoicing.

Conclusion

Businesses should start considering the potential changes and their effects. Sales and Use Taxes are indirect taxes, that if passed on to customers minimise the impact to the bottom line. If a business doesn’t properly implement or consider these issues, it becomes liable during audit.


Contact

James Ford
Email: jford@gtmtax.com

Article published in WTS Global VAT Newsletter Q1/2019
Recent or expected changes in VAT and GST regulations and compliance duties in various EU and third countries
View publication
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