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

2. 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

3. About Wolters Kluwer

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12. Common audit issues

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. Nexus issues

21. 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

22. 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

23. 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 ( ), 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

24. 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

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

26. 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

27. 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

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

29. 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

30. 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 , 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

31. 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

32. 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

33. 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

34. 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

35. 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:
Hot Issues in Sales and Use Tax

36. 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

37. 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

38. 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

39. 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

40. 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

41. VAT issues

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

43. 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

44. Question and answers