1. MANAGING THE SALES TAX EXEMPTION CERTIFICATE AFTER THE SUPREME COURT RULING: BEST PRACTICES FOR THE CREDIT TEAM
Scott E. Blakeley, Esq.
Blakeley LLP
Matthew MacNeil
Avalara Certcapture

2. AGENDA The Sales Tax Process Exemption Certificates
Nexus – Post Supreme Court Ruling Change
Controlling Certificates
Common Problems
Sales Tax Collection
Consequences of Failing to Collect Sales Tax
A Look Ahead
SCOTT
Todays lecture will guide us through the sales tax process, then take a deeper dive into nexus requirement of sales tax and what the recent Supreme Court decision has changed. From there we will explore the process of working with sales tax exemption certificates and discuss some of the most common problems faced by credit managers, the ramifications of errors and audits, and also some best practices. Finally we will take a look at the road ahead and what changes in sales tax law might affect your job in a few years.

3. Overview
Responsibility for managing sales tax exemption certificates historically falls upon the credit team
State taxing authorities recognize the mismanagement of exemption certificates and see it as one of the easiest way to collect funds for the state.
Property taxes 1.6%
Other taxes 3.9%
Corporation net income taxes 5.3%
When general sales tax and selective sales tax are combined, sales tax makes up 47% of total state revenue
Individual income taxes 35.3%
Total license taxes 6.8%
MATT
A study by the Credit Research Foundation shows that 62% of respondents to their survey stated that the collection and daily management of sales tax exemption certificates falls upon the credit department. Credit departments are not normally trained on how to identify a proper document versus an invalid exemption certificate. In recent years state auditors have identified this weakness and have begun focusing their audits on this area, as it generates the revenue they need.
Total selective sales taxes 16.6%
General sales and gross receipts taxes 30.5%

4. Exemption Certificates
Nexus – Pre-Supreme Court Ruling
Collect sales taxes and certificates if you have Nexus in the state
What it takes to achieve Nexus in most states
In most states, a “physical presence” usually creates nexus and can mean a number of things, including:
Having an office
Having an employee
Having a warehouse
Having an affiliate
Storing inventory
Drop shipping from a 3rd party provider
Temporarily doing physical business in a state (trade show, fair, etc.)
MATT
The first step in collecting exemption certificates is to determine where you need to collect them. Nexus is the legal term for the requirement of a company to either charge sales tax or else collect a sales tax exemption certificate in that state. If you do not have nexus, you do not need to acquire an exemption certificate from the buyer. Nexus rules vary from state to state, but prior to the Supreme Court Ruling in most cases it was generated by a physical presence of employees or equipment within the state. The basic rule of thumb used to be that if you are registered for any other taxes in the state, income tax, property tax, or payroll tax, then you should most likely be registered for sales tax and be collecting exemption certificates.

5. Summary of Supreme Court Case
South Dakota enacted a law requiring out-of-state businesses to collect sales tax.
Three online retailers did not comply, citing the “physical presence” requirement of substantial nexus.
The Supreme Court overruled the “physical presence” requirement because:
Quill, the case from which “physical presence” was derived, had flawed logic.
“Physical presence” does not make sense in a world with increased e-commerce.
The “physical presence” requirement harms interstate commerce.
Other areas of the Commerce Clause can offer protection to small businesses.
SCOTT
The recent Supreme Court case drastically changes the requirements for nexus. South Dakota enacted a law requiring out-of-state businesses with either $100,000 or more in sales or 200 or more transactions in the state to collect sales tax. Three large online retailers (Wayfair, Overstock, Newegg), challenged that law, citing the “physical presence” requirement of nexus established over the last few decades. The Supreme Court decided that “physical presence” was no longer necessary to establish nexus and upheld South Dakota’s law.

6. What does this mean? Stakeholders
New nexus standard now that physical presence is overturned
States
States will be encouraged to enact sales and use tax economic nexus legislation such as that enacted by South Dakota. Many expect a period of chaos will ensue during the time it takes for states to determine their respective sales and use tax collection responsibilities relating to remote sellers.  States will also be encouraged to enact state income tax economic nexus provisions. About a dozen states already have economic nexus provisions for state income tax purposes.
E-Commerce
Remote sellers will be required to register and collect sales and use tax in all the states and localities where they have sales that satisfy the economic nexus standards.  Sellers could have exposure for past periods in at least some states, meaning they will have to remit sales taxes retroactively even if uncollected from the consumer.  Remote sellers will also need to pay state income taxes in states where they meet the economic nexus standards
Digital Service Providers
Digital service providers will be impacted similarly to other e-commerce companies but may face additional sourcing challenges related to determining in which taxing jurisdiction the customer received the digital good or service.
Consumers
Consumers, except those currently self-assessing use tax on their online purchases, will pay additional taxes on these purchases. Fifty-one percent of online shoppers consider the sales tax before making a purchase, according to the latest BDO Consumer Beat Survey.
Buyers and Sellers of Businesses
Buyers may be more reluctant to assume nexus risk in states where the Quill decision had previously provided some protection. Buyers may also need to factor into their investment decisions the administrative burden and compliance costs that will result from having to file in more jurisdictions.
SCOTT/MATT
The Supreme Court ruling has expanded the definition of nexus and thus will allow states to enact legislation like South Dakota’s. States will be encouraged to expand their own legislation to include virtual or economic ties to establish nexus. Large E-Commerce websites will most likely be required to collect sales tax in most, if not all states they do business in. (Amazon is already ahead of the curve on this as it has been collecting sales tax in every state that has sales tax due in most part to the expansion of warehouses, distribution centers and data centers). Finally, buyers will need to factor into their investment the administrative burden of collecting sales tax from multiple states.
Source: BDO Alliance

7. Exemption Certificates
Nexus – Post-Supreme Court Ruling
Collect sales taxes and certificates if you have Nexus in the state
What it takes to achieve Nexus in most states
“Physical presence” is no longer a precursor to nexus. Now nexus can include:
Having an office
Having an employee
Having a warehouse
Having an affiliate
Storing inventory
Drop shipping from a 3rd party provider
Temporarily doing physical business in a state (trade show, fair, etc.)
Selling a large amount of merchandise in a State
Selling merchandise with a high dollar value
Economic and virtual ties
MATT
Now that the Supreme Court has expanded the definition of nexus, different types of activity in a state could establish a nexus. For instance, selling a large amount of merchandise in a state, or engaging in a significant amount of transactions could now be considered sufficient to establish. Only time will tell how weak of a connection to a state will establish a nexus, but the South Dakota law the Supreme Court upheld is a good starting point. Moreover, the Commerce Clause provides protections to out-of-state businesses, requiring states not to discriminate against or unduly burden out-of-state businesses.

8. Example of New Nexus Requirement
South Dakota Law
The South Dakota law upheld in the Supreme Court case is a good example of what the future of “substantial nexus” holds.
Applies to sales of “tangible personal property, products transferred electronically, or services for delivery into South Dakota”
Applies to those who deliver more than $100,000 of goods or services to the state
Applies to those who engage in 200 or more separate transactions
SCOTT
The South Dakota law offers protections for small businesses by requiring a threshold that an out-of-state business must reach before being required to collect and remit sales tax. Essentially what this law is looking for is a substantial effect or presence in the state even without a physical presence. It is likely that new state laws will be similar to this, in fact 31 of 45 states with sales tax already have similar provisions to this, however the Supreme Court decision did not rule on what the standard should be across the states so there may be litigation from state to state establishing a new definition of nexus.

9. Sales Tax Collection
Once the vendor has nexus and the purchaser does not have a valid exemption certificate, the vendor must begin its collection process
Problems with collection
Preventative measures
Collection shouldn’t be a burden on seller if done right
MATT
Once you realize that you have Nexus in a state you must create a plan for the collection of all the exemption certificates needed. Be prepared for some problems to come up in collection process, such as customer’s having changed their address or else customers having gone out of business.
If you know you will eventually have nexus in a state, you may want to implement preventative measures of collecting forms in all the states as soon as a customer signs up
Overall the collection of these new certificates should be easily implemented with the right mailing tools and data. Be prepared to charge tax on those customers who do not comply quickly.

10. Consequences of Failing to Collect Sales Tax When Vendor Does Not Have A Valid Exemption Certificate
YOU will be responsible for paying any taxes that are nor supported by an exemption certificate
YOU will pay all late fees and penalties the states finds are due
Your company may lose its privilege to do business within the state
The buyer will almost never pay you back for these charges
SCOTT

11. 3 Things to Improve Your Process
Document exempt buyers as part of the new customer on-boarding process.
Set a policy to review form expirations on a regular basis.
Enforce a policy of taxation if no exemption forms are present.
MATT
If you wanted to make an impact today on the sales tax exemption certificate process, here are three things that could greatly improve your process.
As soon as a customer signs up, collect the certificates along with them filling out the credit application or other onboarding process
Either thru the use of automation or schedules or part of your ERP, make a plan to track expirations and get new forms on file prior to expirations
If nothing is on file showing a customer is exempt, always charge tax.

12. Exemption Certificates: A Look Ahead
MATT

13. Exemption Certificates: A Look Ahead
How soon should I start collecting?
The U.S.Supreme Court decision places requirements on the South Dakota Supreme Court that will clearly take weeks to complete. There will be no immediate collection enforcement
What other states should I watch for?
South Dakota was the first to get permission from the court, but several other states with economic nexus rules will follow its lead. Each state will have different state dates and transaction requirements. You will need to continually monitor this.
I am not doing eCommerce, does this apply to me?
Yes, this is not just about online selling and includes all sellers delivering goods into states.
MATT