Hot Issues in Sales and Use Tax Dan O’Rourke, Director Tax Consulting Services November 15, 2018

Agenda 1. About Wolters Kluwer 2. Common audit Issues 3. Nexus issues Wayfair overturned Business implications Business considerations 4. VAT issues 5. Question and answers

About Wolters Kluwer

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Common audit issues

Common audit issues Missing exemption certificates Use tax Fixed assets Expenses Exempting taxable items/services Not taxing transactions in a jurisdiction when you have nexus Drop shipment scenarios Hot Issues in Sales and Use Tax

Background of an audit Reasons According to the states – ensure the Taxpayer compiles with current tax laws; real reason – states need revenue Requirement Must have the valid certificate for the jurisdiction when the Auditor requests it Financial Pressures States have been increasingly aggressive in enforcing exemption certificates Plan “The best defense is a good offense.” - adage Hot Issues in Sales and Use Tax

Exemption certificate enforcement Audit enforcement Main area of emphasis for states Why? States know you can’t obtain all the certificates that you are missing Result States receive back taxes, interest and penalties on a transaction that should have been exempt. A tax that should have been completely a flow through and no cost to the business is now an expense and a cost to the business Hot Issues in Sales and Use Tax

Enforcement examples Oklahoma has a policy not to allow Taxpayers to retrieve certificates Indiana now compels their Auditors to bring in 5x their salary in assessments Other local tax jurisdictions are using third-party Auditors who may receive a percentage of the recovery Hot Issues in Sales and Use Tax

Calculation and workflow solutions There are two types of solutions businesses can deploy to support their exemption certificate requirements: Calculation – license a third-party tax package with a robust exemption certificate module like CCH® SureTax® by Wolters Kluwer Workflow – license an exemption certificate workflow solution Hot Issues in Sales and Use Tax

Best practices for retail How to support e-commerce applications: Integrate a third-party tax solution (“package”), like CCH® SureTax® by Wolters Kluwer with the e-commerce application Configure the packaging with the specifics of the certificate (“cert”) Advantage: you will receive the cert Create a field in the e-commerce application to exempt customers Disadvantage: you may not receive the cert How to support POS transactions: Have the cashier enter the cert information directly into the point-of-sale (POS) application when they receive the certificate Enable a field in the POS application to exempt the customer in real-time Hot Issues in Sales and Use Tax

Federal, State, and Local Legislation It’s a dynamic landscape — jurisdictions morph, rates changes, taxability rules evolve, legislation is enacted. 100,000+ Taxability changes annually, including over 20,000+ records for newly added groups and items* 25,000+ Taxing authorities 6,000+ Rate changes annually* *An individual rate/taxability change may result in updates to several records in our databases. This provides the nuance and precision Wolters Kluwer customers need to effectively manage their sales and use tax obligations. Hot Issues in Sales and Use Tax

Nexus issues

What is nexus? Term used to describe a company’s physical presence or connection within a taxing jurisdiction; although, most states use the phrase “engaged in business” rather than nexus Name for the first test of whether a tax on interstate commerce is allowed under the Constitution and thus, whether a taxing jurisdiction can make, charge, collect and remit transaction-based taxes; such as, sales tax Hot Issues in Sales and Use Tax

The importance of nexus Supreme Court established physical presence in a state as one of four requirements that a tax on interstate commerce must meet to pass constitutional muster: (Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)) Activity being taxed must have physical presence in state Tax cannot discriminate against interstate commerce Tax must be fairly apportioned State must provide benefits to Taxpayer Hot Issues in Sales and Use Tax

The importance of nexus continued For sales and use tax, the Supreme Court established that nexus with a state was the “bright-line” test for determining whether a state could tax an interstate activity (Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992)) As a result, states have adopted rules that require sales tax collection by remote sellers with any physical presence that is not de minimis Hot Issues in Sales and Use Tax

What happened? Long-standing nexus standard overturned: Supreme Court of the United States upheld South Dakota’s central argument that physical presence (established in Quill, 1992) is no longer a realistic standard in today’s rapidly expanding and far-reaching digital marketplace New nexus standard(s): The decision effectively establishes that an “economic presence” (based on transaction volume and/or actual sales revenue) is sufficient (in addition to physical presence) to create sales tax nexus Hot Issues in Sales and Use Tax

What does it mean Source: Sales Tax Nexus Map Hot Issues in Sales and Use Tax

What does it mean continued States can now set their own nexus standards - there is no small business exception e.g. Oklahoma and Pennsylvania will assert nexus with $10,000 in sales States are already passing legislation to collect sales tax based on economic nexus standards Continued monitoring of newly issued nexus standards is necessary to stay compliant The Court did not place any limitations on the effective date of the economic nexus – some states have effective dates back to 2016 and 2017 Hot Issues in Sales and Use Tax

What does it mean for your business Additional sales tax registrations Increased sales tax monthly filings Increased sales tax rate maintenance Increased sales tax taxability consideration Increased sales tax audit exposure Hot Issues in Sales and Use Tax

What does it mean for your business continued How much is 2% of your organization’s revenue? Hot Issues in Sales and Use Tax

Nexus – how do we get there? Direct Nexus Affiliate Nexus Attributional Nexus Click-through Nexus (“Amazon Laws”) Economic Nexus Other Nexus Developments Hot Issues in Sales and Use Tax

Direct nexus Ownership of real or personal property in a state Employees performing services in state Employees soliciting sales Nexus for sales tax is different than income taxes Taxpayers have protection of Public Law 86-272, solicitation is protected from income, not sales taxes Maintaining an office, or other place of business Other in-state activities that assist in creating a market in the state; i.e. tradeshows, advertising Hot Issues in Sales and Use Tax

Affiliate nexus Solicitation by affiliated company States typically use federal definitions for affiliated Provision of in-state services provided by affiliated company; i.e. accepting returns from the mail order customer at the affiliated brick and mortar store Legal affiliation; such as, filing a consolidated return Hot Issues in Sales and Use Tax

Attributional nexus Attributional nexus refers to the concept that a state can assert nexus over an entity on the premise that the entity has an economic, legal or operation relationship with another entity already subject to taxation State attribute nexus to related out-of-state companies based on similarity with the in-state business Colorado and Oklahoma have passed attribution nexus standards that require collection by out-of-state retailers based on the attributes of their related in-state company Hot Issues in Sales and Use Tax

Click-through nexus (“Amazon Laws”) Nexus imposed on internet retailers who pay commissions to in-state internet retailers for click-through sales The states argue that the in-state internet retailer is an agent or representative of the out-of-state retailer, thus giving the remote seller a representative in-state Hot Issues in Sales and Use Tax

Economic nexus No physical presence in the state whatsoever Nexus based on purposeful availment of the market Standard is used in the income/franchise tax area through the (Geoffrey, Inc. v. South Carolina Tax Commission, 313 S.C. 15 (July 6, 1993)) States like New Jersey and North Carolina have adopted the logic in the Geoffrey case Standard for imposition is typically that the activities of the remote seller were directed at in-state residents to create a market for the seller’s goods Hot Issues in Sales and Use Tax

Other nexus developments “Cookie” Nexus Massachusetts has finalized “cookie” nexus regulations into its sales tax code. Beginning Oct. 1, 2017, online sellers without physical presence in Massachusetts are required to collect and remit sales tax if sales meet a certain threshold and the seller had other contacts with the state. Massachusetts sales must exceed $500,000 and the seller must have made 100 or more sales which were delivered into the state. […] Source: http://www.bakertilly.com/insights/2017-year-end-tax-letter-sales-and-use-taxes Hot Issues in Sales and Use Tax

New business – services needed Register before first sales Understand sales tax rate structure Determine rate calculation process Product taxability Service taxability Customer taxability Local taxability Implement process Hot Issues in Sales and Use Tax

Existing business registered – services needed Review activity that could create nexus to states where customer has significant sales Determine first date where business establish nexus with state (Nexus Study) Quantify potential liability Determine taxability of customers Determine whether to register and pay penalties or to pursue negotiated settlement often referred to as a voluntary disclosure agreement (VDA) Hot Issues in Sales and Use Tax

Existing business collecting without registration Potential criminal sanctions Need to address immediately and register with state as soon as possible Many states do not allow a voluntary disclosure when the business has collected the tax, but not remitted Negotiate some form of settlement with State Tax Authority Hot Issues in Sales and Use Tax

Other nexus triggers Existing business with a field sales force In-house sales force located strategically throughout the United States Independent representative network Service business with services provided on site Repair services Computer software consulting Monitoring services Rental or leasing business Multi-state operations Hot Issues in Sales and Use Tax

Marketplace Fairness Act (MFA) A version of the bill has passed the United States Senate The bill requires states to simplify their laws before they can take advantage of the MFA to require remote sellers to charge sales tax The current version of the bill contain no small business exception The cost of compliance for small remote sellers could be burdensome Hot Issues in Sales and Use Tax

VAT issues

VAT issues Triangulation Reporting/Compliance European Union Transactions Import/Export Regulations Maintenance of Tax Rates and Rules Hot Issues in Sales and Use Tax

What should you consider now Nexus: Understand where you have a tax obligations – physical and economic nexus Tax liabilities: Do you have past period sales tax liabilities? Business registrations: Sales tax registration requirements Software solutions: Sales tax calculation software Tax requirements: Review of current sales tax processes and needs Workflow management: Sales tax compliance management tools Data accuracy: Customer address clean up Hot Issues in Sales and Use Tax

Question and answers