Sales Tax Exposure
Sales and Use Tax Exposure Resolution
Tax exposure exists whenever a company has unpaid tax liabilities that have not yet been discovered by the taxing authorities. Sales and use tax exposure can exist either on purchases or sales. For most companies, exposure on the purchase side is limited to one or a small number of states where the company is headquartered, has a warehouse, a plant, or some other significant facility where the total dollar value of taxable purchases and/or use is materially significant. One area where material use tax exposure could exist in other states is with respect to sample products and promotional materials.
The most common area where materially significant sales and use tax exposure typically exists is on multistate sales. For example, a company may be headquartered in one state and make taxable sales nationwide. A company can only be compelled to collect a state’s sales and use taxes in states where it has “substantial nexus”. Prior to June 21, 2018, Quill Corp v. North Dakota, 505 U.S. 298 (1992) provided that only sellers with physical presence in a state could legally compelled to collect sales and use tax. However, in South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018), the United States Supreme Court overturned Quill holding that the physical presence requirement was erroneous. Accordingly, states are not longer prohibited from requiring out-of-state sellers to collect sales and use tax merely because they lack physical presence. Substantial nexus is still required, however, and a precise definition of such remains unclear. In Wayfair, the Court considered the following aspects of South Carolina’s to meet the substantial nexus standard:
Sales and use tax collection is only required if in-state sales exceed $100,000 or the seller engages in 200 or in-state sales transactions;
Collection requirements are not retroactive;
South Dakota adopted the Streamline Sales and Use Tax Agreement;
South Dakota’s nexus laws would not be enforced until all constitutional claims have been addressed.
The above criteria can serve as safe-harbor that other states may follow but they are not necessarily minimum standards. For example, $100,000 in sales is sufficient to meet the substantial nexus standard but lower sales thresholds might also be sufficient. South Dakota adopted the Streamline Sales and Use Tax Agreement, but such may or may not have been required. Congress is invited to step into set a clearer standard.
With everything that is happening in this area, it is not surprising that many companies are concerned and confused about where they may have sales and use tax exposure on the sales side. Sales and use tax exposure on sales can be particularly problematic because it often involves numerous states and because the sales and use tax expense is intended to be borne by the purchaser, not the seller. For most companies, billing customers for previously uncollected sales and use taxes is not a realistic alternative so they end up bearing the expense burden associated with paying the tax plus any applicable penalties and interest.
Our professionals have significant experience helping companies identify, quantify and resolve their potential sales and use tax exposures and get into compliance going forward. Where there is significant sales and use tax exposure, it generally makes financial sense to be proactive in resolving it. If the taxpayer does nothing and is selected for audit, such taxpayer is in the worst possible position. If the taxpayer has not yet been contacted by the taxing authority, there are generally alternatives available pursuant to which prior period liabilities can be resolved for significantly less than would be owed if the taxpayer was instead discovered and audited by the taxing authority.
Possible benefits of taking such proactive steps include limitation of the number of prior periods subject to tax, abatement of penalties and partial to full abatement of interest. In some cases, it is possible to receive full forgiveness of all prior period obligations with the taxpayer agreeing to comply going forward. Alternatives for resolving prior period exposure and the related benefits vary by state and what makes sense to implement often also varies depending on a taxpayer’s specific set of facts. Our professional are well-apprised of existing voluntary disclosure programs, currently available amnesty programs and other alternatives for resolving and minimizing prior period sales, use and transaction tax obligations.
Exposure resolution projects can often be divided into subprojects for which the time required to perform the work can be reasonably predicted based on prior history. When such is the case, Antonious and Associates will offer to perform the work for a fixed fee. For example, there is typically a separate fixed fee for exposure review and quantification work and a per state fixed fee for exposure resolution work.