As we march steadily toward year-end (boy, didn’t that happen quickly?), we thought it might be a good time to let you know some of the things that are “going on” in state and local tax. Though it would be impossible to cover everything that has impacted the world of state and local taxes, this article addresses some of the highlights and trends.
Trend #1 – “If we can’t make you collect, we’ll make you help us audit.”
Those following sales tax nexus are well aware that the U.S. Supreme Court case Quill requires that a company have physical presence in a state before that state can compel the collection of sales tax and the filing of sales tax returns. Frustrated with those limitations and the revenue drain created by e commerce, states have a new plan of attack. Multiple states have implemented laws that require out-of-state retailers with no physical presence in their state to report information about their in-state sales. These laws don’t require the collection of the tax; they instead require the retailer to notify customers of their use tax responsibilities and provide data such as customer names and sales data to the Department of Revenue. Penalties for noncompliance are significant. Want to know more? Read Colorado Use Tax Notice and Reporting Requirements Effective July 2017 which addresses the Colorado law that passed legal challenge and went into effect in July 2017.
Trend #2 – “Quill? We don’t care anymore.”
States see the requirement for physical presence to create sales tax nexus as outdated, and they have been unable to push through Congressional action mandating the collection of sales tax by out-of-state retailers. In response, a growing number of states have implemented laws that clearly violate Quill. Their aim? To prompt a second “review” of the Quill case by the U.S. Supreme Court, with the desired outcome of overturning Quill.
For example, South Dakota implemented laws requiring out-of-state retailers with South Dakota sales exceeding $100,000 or more than 200 separate transactions to collect South Dakota sales tax. On September 13, 2017, the South Dakota Supreme Court ruled that the South Dakota law violated Quill. South Dakota fully intends to appeal to the U.S. Supreme Court. While the Supreme Court has recently been unwilling to hear state tax cases, some believe that this may be an exception. It remains to be seen.
South Dakota is not the only player in this arena. States such as Alabama, Indiana, Tennessee, and Wyoming have their own variation on this theme. In addition, Massachusetts just adopted regulations generally targeting Internet vendors that use sales of $500,000 and 100 or more transactions as filing benchmarks. Careful review of the regulations by out-of-state vendors is necessary to determine applicability to sellers.
Trend #3 – Amazon Nexus
As Amazon continues to change the way consumer goods are purchased and distributed throughout the United States, more and more businesses have “hitched their wagon” to the Amazon distribution machine. There may, however, be an unintended consequence—multistate nexus. Under these distribution agreements, the distributor, rather than Amazon, may well own the inventory located in Amazon’s distribution centers. Ownership of inventory will create both income tax and sales and use tax filing requirements in most states, something that is easily missed.
There is some good news. For qualifying businesses, the Multistate Tax Commission has implemented a voluntary disclosure program that is quite favorable—but of very short duration, since it ends October 17, 2017. For more information, read Multistate Tax Commission Announces Special Voluntary Disclosure Program – Businesses Must Act Quickly.
Trend #4 – Digital Products
We’ve often said that sales tax law cannot keep up with technology changes. Nowhere is this clearer than in the arena of products and services delivered electronically. Taxpayers struggle with making the determination of whether they are purchasing a software, digital products, information services, data processing services, and so on.
In an effort to capture lost revenue, more states are taxing digital products. (Idaho, Minnesota, Washington, and Wisconsin are a few examples.) Pennsylvania began taxing digital books, games, music, video, audio, and other items in August 2016. Pennsylvania ruling SUT-17-002 determined that information retrieval products are to be treated as tangible personal property and are therefore subject to sales tax. The language of the ruling has also raised concern that Pennsylvania could take the position that software as a service is taxable.
Trend #5 – Economic Nexus
States continue to adopt and enforce economic and factor presence nexus standards. Typically, though not always, these standards establish filing requirements when a certain level of in-state sales, property, or payroll has been achieved regardless of the in-state activities occurring to generate those factors. The enforcement of these standards has also become far more aggressive. Wisconsin has recently begun vigorously enforcing its interpretation of economic nexus for service providers when the customer receives the benefit of those services in Wisconsin. Vendors licensing software in Wisconsin have been one of the targeted industries.
Trend #6 – Budget Bills
A significant number of state and local tax changes are implemented through states’ budget bills. This year Illinois, Minnesota, and Wisconsin implemented changes through their new budgets. It appears that Pennsylvania, though later to the party, will also implement changes via an upcoming budget bill. The tax issues addressed in a budget bill are often extremely varied. For more information on some of the more impactful changes, read Illinois Budget Bill Enacted and 2017 Wisconsin Budget Bill Updates.
Trend #7 – Amnesty
Virginia is the latest state to initiate an amnesty program for individuals, corporations, estates, trusts, and partnerships. The program runs from September 13 through November 14, 2017. It allows the payment of back taxes with no penalties and 50% of the normal interest. When the amnesty program is complete, outstanding amnesty-eligible liabilities will be subject to an additional 20% penalty. As with any program of this nature, taxpayers should carefully consider the requirements to determine whether they qualify and whether any applicable Virginia voluntary disclosure could achieve more favorable results. New Jersey and Oklahoma also have ongoing amnesty programs.
The examples above are just a sampling of the ever-changing landscape of state and local taxes. In the current environment, it is critical that businesses regularly review their activities to determine what changes must be made in their state tax compliance. Wipfli’s State and Local Tax experts can assist you by providing practical approaches to meeting your state and local tax obligations.