Do Wayfair Laws Need Reform To Reduce The Burden On Retailers?
If you're at all involved in the tax world, whether on the accounting side or as a business owner, you should be well aware of the 2018 Wayfair ruling at this point.
As a result of the Supreme Court's decision in that case, almost every state with a general sales tax has implemented what many in the business refer to as 'Wayfair Laws.' More specifically, the ruling opened the door for economic nexus and marketplace facilitation legislation to be implemented across the country.
Now, nearly three years after the decision was rendered , the effects of these Wayfair laws are coming to a head and many groups are calling for reform to reduce the burden on online retailers.
When it comes to economic nexus and marketplace facilitation, it's not the laws themselves that cause problems, it's that each state has its own regulations and they can differ wildly across the nation.
Beyond the inherent complications of differing tax rates and the sheer number of state and local sales tax jurisdictions, additional complexity can be found in the application of Wayfair laws. In most states, economic nexus is only triggered when the out-of-state retailer meets a certain threshold for sales, the number of transactions on an annual basis, or a combination of both. The same can be said for marketplace facilitation regulations. However, these thresholds are set by each state separately and the components of how they are measured can vary (i.e.; gross sales vs. taxable sales)..
And all this complication is before we even get into differing procedures for sales tax audits and varying requirements for submitting tax returns.
All said, small- or medium-sized companies that lack large accounting departments, the resources to hire a vendor or the budget to purchase software to manage Wayfair-related tax obligations, are suddenly finding themselves in a rather sticky situation.
While the agreement proved popular in certain circles, only 23 state have adopted it since its implementation, limiting its effectiveness in regards to the Wayfair situation.
Instead, many retailers and concerned parties are looking for federal action. However, any action by the federal government will be slow going and, in the meantime, retailers are struggling to deal with the burden that Wayfair laws have created.
To keep ahead of tax obligations and ensure compliance, the only option for these retailers have is to stay proactive and informed when it comes to Wayfair laws and their application. This is especially hard when these laws continue to change as states refine legislation to best suit their needs.
Three years out from the Supreme Court's ruling in Wayfair, we still have discussions with clients every day (yes, truly, every day) about how the rules work and how they impact the clients' businesses. So, of course, we are at the ground level to see how these rules have impacted companies of all sizes. The important thing, from our perspective, is to address these issues early. And make sure you understand any exposure that might be out there relative to retroactive non-compliance. We can assist with identifying and mitigating sales tax exposure risk - we do it, literally, every day! (So you're in good company.)
If you have questions regarding your online sales tax liabilities, or any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on Nebraska
This month, we take a journey out west to Nebraska, where early settlers roamed the state. It used to be nicknamed the “Tree Planter’s State,” but was changed in 1945 to the “Cornhusker State.” Husking corn was done by hand by early settlers of course (before the invention of husking machinery). The University of Nebraska athletic team is called the Cornhuskers.
Nebraska is a Midwestern U.S. State encompassing the prairies of the Great Plains, the towering dunes of the Sandhills and the panhandle’s dramatic rock formations. Lincoln, the capital and a vibrant university town, is distinguished by its soaring state capitol. The city of Omaha is home to the Durham Museum, which honors the state’s pioneering past in a converted railroad depot.
What Increased Ecommerce Means For Online Retailers
While the world has been dealing with the impacts of the COVID-19 pandemic, online retailers have been dealing with an additional issue: the tax implications of increased ecommerce.
As a result of stay-at-home orders, social distancing and health concerns, consumers have turned to online retailers for their shopping. Many of these retailers have seen huge spikes in business, which proved to be a well-timed life preserver as the economic effects of the pandemic took hold last year.
However, in the long term, this jump in sales has created additional tax liabilities and headaches for small retailers that were unprepared to handle it.
According to Digital Commerce 360, consumers spent "$861.12 billion online with U.S. merchants in 2020, up an incredible 44.0% year over year."
While online retail has been steadily gaining traction over the last handful of years, there's no question that 2020 was a landmark year. This sort of overnight change (as it was for many retailers offering essential goods) is hard to adapt to, even for larger companies. For a small or mid-sized company, the increased ecommerce can be overwhelming.
Many states offered sales tax filing or payment extensions, as well as penalty or interest waivers to mitigate the impact increased ecommerce had on retailers. However, many of those extensions and waivers have since run their course and businesses are now expected to handle the full brunt of their tax liabilities. Only a few states are continuing to offer tax relief for business impacted by the pandemic, including California, Maryland, Massachusetts, New Mexico, and New York.
When the pandemic hit, many retailers saw increased business. They also suddenly found themselves triggering economic nexus in states they previously did not have it.
We've frequently discussed the burden that economic nexus, marketplace facilitation and other Wayfair-inspired laws have created for small retailers. Much of the burden comes from the fact that each state imposes its own rules and regulations, creating a complicated web that's hard for even experts to unweave. Now multiply that level of complication many times over. That's what online retailers are dealing with today.
Looking to the future, we expect that the economic impact of the pandemic will be far reaching and that taxes on ecommerce will be an even more important revenue stream for states. As a result, states will likely become even more aggressive when it comes to tax compliance.
So, where does this leave small online retailers? The best way for small business owners to protect themselves is to be proactive about multi-state sales tax compliance and if needed, contact a professional for assistance with their tax liabilities.
If you have questions regarding your online sales tax liabilities, or any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
What To Know About Recent Tax Changes In Florida, Maryland and Oregon
The past few years have seen incredible and widespread changes to online sales tax legislation across the country. A large number of these changes stem from the 2018 Wayfair decision, which prompted many states to adopt economic nexus and marketplace facilitation legislation.
Now that almost every state with a general sales tax has implemented Wayfair-related legislation, you might expect things to calm down a bit.
You would be wrong. As a result of evolving attitudes regarding digital services, such as video streaming, and the continued growth of e-commerce, many states are reevaluating, changing or implementing new legislation to govern these digital transactions.
Additionally, while the majority of states have implemented economic nexus and marketplace facilitation legislation, most are still tweaking and refining their laws. A number of organizations are also calling for reform due to the increased complexity that these laws are creating. And, in the case of Oregon (which doesn't have a sales tax), they've created a new tax to increase their revenue streams!
To cut a long story short, the world of online sales tax has never been more tumultuous, and change is happening at a rapid pace. To help you stay informed and keep up with online sales tax developments, we've outlined several recent changes that could impact your business below.
While Oregon doesn't have a general sales tax, the state is still looking for ways to boost revenue. The Gross Receipts Tax (GRT) is one such avenue. One major difference to note is that instead of being paid by the consumer, this tax is paid by the retailer. Currently, there are only nine states that impose GRT: Delaware, Michigan, Nevada, Ohio, Tennessee, Texas, and Washington with the newest member on the list, Oregon.
The GRT is also known as a Corporate Activity Tax (CAT), which is imposed on each person with taxable commercial activity for the privilege of doing business in this state. It is measured on a business's commercial activity, which is the total amount a business realizes from transactions and activity in Oregon. Oregon's CAT became effective on January 1, 2020.
The term "Person" includes individuals, combinations of individuals of any form, firms, companies, C corporations, LLCs and partnerships. Certain items are excluded from the definition of commercial activity and, therefore, will not be subject to the CAT, including but not limited to, interest income, dividends, retail sales, gifts, tips or gratuities collected. In addition, Oregon's CAT allows a 35 percent subtraction for certain business expenses.
Oregon has four thresholds that determine whether a business or unitary group is responsible for the CAT. The thresholds depend on the amount of commercial activity the business or group has during the year.
- Less than $750,000 in sales: No CAT requirements.
- $750,000+: Business or unitary group must register for the CAT.
- $1,000,000: Business or unitary group must file a return.
- More than $1,000,000: Business or unitary group must file a return and pay CAT.
The department may impose a penalty for failing to register, not to exceed $100 per month, up to $1,000 per calendar year. The corporate activity tax is due and estimated tax payments are payable to the department on or before the last day of January, April, July and October of each year for the previous calendar quarter.
Additionally, a taxpayer expecting $5,000 or less of CAT liability for a calendar year does not need to make estimated payments, but still must file an annual return and pay CAT liability no later than April 15 of the following calendar year.
If you're doing business in Oregon, it's important to note that if you expect a CAT liability for 2020 the first returns were due April 15, 2021. However, if you missed the filing date, you can still go back and file as soon as possible to avoid or reduce underpayment penalties.
As we shared in last week's blog article, Florida has finally joined the ranks of states with Wayfair-related legislation. To support businesses through the transition, Florida has also implemented an economic nexus amnesty program, which allows companies to come forward and self-report tax liabilities.
Details of the program include:
- The company must register as a Florida retailer for sales tax before Oct. 1, 2021 to qualify for the amnesty. The statute leaves no wiggle room for registering on or after Oct. 1, 2021.
- The amnesty is only for remote sales that happen before July 1, 2021. So, a remote seller that registers during September of 2021 will still be responsible for Florida sales tax on remote sales made into Florida for July, August and September 2021 (unless made through a marketplace provider).
- This amnesty also applies to remote sales facilitated through a marketplace provider before July 1, 2021.
- The amnesty program does not apply to anyone who, as of July 1, 2021, is under audit or has been issued an assessment, notice, demand for payment or is under an administrative or judicial proceeding.
- If a company qualifies for the amnesty program, it will be applied to remote sales by company, even if the remote sales began 15 years ago. This is a huge win for many remote sellers, potentially even Amazon FBA sellers.
We recently published an article detailing Maryland's new tax on digital products and services. More recently, the state's general assembly passed S.B. 787, which amends this legislation.
It clarifies how tax applies to digital products and services, by exempting digital advertising services. The state governor has 30 days to act on the bill, but is neither expected to sign it nor veto it. Subsequently, this makes it law. This law becomes retroactive as of March 14.
These changes shared above are just the tip of the iceberg when it comes to the evolving world of online sales tax. If you're a business owner and have questions about online sales tax, economic nexus or marketplace facilitation, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Important Updates About Wayfair Legislation In 2021
After the landmark decision in South Dakota v. Wayfair (2018), states across the nation rushed to implement Wayfair-related legislation. For most states, this meant implementing economic nexus and/or marketplace facilitation laws to better capitalize on the sales tax opportunities presented by online retail.
While it's taken some states longer than others, 2021 could be the year that every state with a general sales tax finally implements Wayfair-related legislation.
It's also important to note that states that already have Wayfair-related legislation are still making tweaks and refining their laws to best suit their economic needs.
When first establishing economic nexus within the state, the Kansas Department of Revenue (DOR) announced it would use the Wayfair decision to tax remote sales "to the fullest extent possible permitted by law." As such, the state does not offer safe harbor or exceptions for small retailers.
A recent bill would have changed that. Kansas SB 50, which was passed by the state congress in March, would have placed a $100,000 annual gross receipts threshold on economic nexus, which is more in line with economic nexus legislation in other states. The bill would have also required marketplace facilitators that reach the threshold to collect and remit the tax on sales into the state through their platform.
However, despite support by state legislatures, Kansas Gov. Laura Kelly vetoed the bill on April 16. While some lawmakers have promised to try and override her veto once lawmakers return from their spring break on May 3, there is no guarantee that the bill will move forward.
As a result, any retailer making sales into the state is still subject to economic nexus, and Kansas remains one of the only states in the nation without Wayfair-inspired marketplace facilitation legislation.
After remaining one of the few states without economic nexus or marketplace facilitation, Florida has finally adopted both. The bill, Florida SB 50, was passed by the state congress and presented to Gov. Ron DeSantis on April 12. On April 19, the bill was approved by the governor and signed into law.
The legislation implements economic nexus in Florida with a $100,000 sales threshold and will go into effect July 1, 2021. The bill also requires specific marketplace facilitators with a physical presence in Florida or that have hit the $100,000 sales threshold to collect and remit sales tax on behalf of third-party sellers starting July 1, 2021.
Now that Florida has implemented Wayfair-related legislation, Missouri, as the only state with a general sales tax without economic nexus or marketplace facilitation legislation, is the last holdout.
State legislators are considering a bill now, SB 153, that would implement both. The state's legislative session, with convened on Jan. 6, is set to adjourn on May 14.
If you have questions regarding Wayfair-related legislation, or any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on Rhode Island
This month we travel across the country to The Ocean State of Rhode Island. The state is one of the most densely populated and heavy industrialized for its size. For a state that is only 37 miles wide and 48 miles long, it is notable that its shoreline on Narragansett Bay in the Atlantic Ocean runs for 400 miles.
Rhode Island has two distinct natural regions. Eastern Rhode Island contains the lowlands of the Narragansett Bay, while Western Rhode Island forms part of the New England Upland. The state’s forests are part of the Northeastern coastal forests ecoregion.
What You Need To Know About Voluntary Disclosure Agreements
When it comes to business taxes, compliance is absolutely essential. That said, mistakes happen. When they do, it's often better for your business to be up front about those potential tax liabilities than keeping silent and hoping for the best. In this blog, we're weighing the pros and cons of voluntary disclosure agreements (VDAs) and why a business might want to enter into such an agreement with a state.
Simply put, entering into voluntary disclosure agreements is about companies identifying their potential state tax exposure (sales tax, income tax, or both) and coming forward voluntarily to pay any outstanding liabilities before the state identifies the company as part of an audit or other outreach effort. As states are becoming more aggressive in their pursuit of out-of-state taxpayers, it's becoming a bit of an inevitability that businesses with tax liabilities will be found eventually.
It's also important to consider that states have the benefit of technology on their side, making it faster and easier than ever to match records and search for inconsistencies. If they find something, you'll quickly receive a notice and lose your ability to file a VDA. This is a key reason for being proactive about outstanding tax liabilities.
In considering whether to come forward proactively, a company may wonder what the benefits of doing so are and why they shouldn't just wait and hope they're looked over.
Here are some of the advantages of doing a VDA:
- Limited lookback - Many companies engage in a VDA because it limits the lookback period to three or four years. This is beneficial if a company has created nexus many years ago and has failed to collect and remit sales tax, or hasn't filed income tax returns. The state will allow them to cut off several of those years and simply report on the last few years.
- Penalty abatement or reduction - Generally all states that have a VDA program will waive penalties for companies that come forward voluntarily. This is important because penalties can often amount to 25% or more of the overall tax liabilities. Several states also waive or reduce interest, including Texas and New York, which has a lower statutory rate for companies in voluntary disclosure, versus a more punitive rate if they discover the company first.
- Anonymity during the process - Most states will allow companies to remain anonymous through at least some of the process. This is beneficial because we can explain the client's entire situation and determine if the state will accept the proposal before revealing the company name. A few states require the company to disclose its name up front, but most still have a period of time where the company can be "protected" insofar as getting credit for coming forward even before they must identify the company name.
- Being on offense vs defense with the state - As in sports and life, it is generally better to be on the offense than defense. It's similar when dealing with states. If a state selects a company for audit, there is generally a very specific audit plan, with a number of documents requested during the process. If some of these are not satisfactory, the auditor can use his or her discretion to disallow credits, or exemptions. However, if a company comes forward with tax liabilities voluntarily, there is generally not a detailed audit of their records. (It's important to note that states reserve the right to audit VDAs, but it's not often that they do.) In short, coming forward voluntarily simplifies the process as far as backup documentation and allows you to move forward on your terms.
VDAs are nothing new, but we have seen an increase in them over the last few years. Part of this can be attributed to increased state tax responsibilities due to the Wayfair decision. As a result, companies are finding that they need to determine whether they may previously have had enough physical presence to create nexus. If so, the company needs to determine how far back the exposure goes.
That said, even three years later, many companies are still discovering this potential landmine and as a result, turning to VDAs to get compliant. This is also true for international companies. We recently helped three consumer product companies with international affiliations remediate their U.S. liabilities relative to sales tax.
Another reason why Wayfair has drawn attention to the area of non-compliance and the need to go the voluntary disclosure route is the flurry of new rules for marketplace facilitators. As we've described in previous blogs, marketplace facilitators (such as Amazon, Etsy, etc.) are now responsible for collecting the sales tax on sales made by sellers through their marketplaces. So, often sellers believe they are relieved of the duty to collect tax. They are - but only on the marketplace. Depending on their other sales channels (for instance, direct to consumer from their own website), they often still have to collect some sales tax. Many times, companies don't even realize they may have a problem.
One of the benefits of doing VDAs has historically been that companies could easily work with an assigned VDA representative at the state and file the various paperwork (registrations, returns, sales schedules, etc.) directly with that representative.
Generally, states didn't require electronic filings until after the VDA process was complete. While we still work with these representatives in most states, more states are requiring at least some registration to be completed online. For a variety of reasons, this can be somewhat challenging, which is why working with a tax partner like Miles Consulting Group can be beneficial.
By their nature, voluntary disclosures lend themselves to some assistance from a consultant. If a company wants to remain anonymous, they must use a third party to assist. Also, because each state has different lookback periods, different rules for reporting, and sometimes specific nuances in how to finalize the paperwork, it helps to have someone on your side with a little experience in the process.
That said, it's important to choose a partner that will consider your particular situation and help you determine if a VDA is the best way forward for your business. Maybe you don't need the formality of a VDA and simply registering and back-filing returns is sufficient.
At Miles Consulting Group, we generally recommend VDAs for larger liability states and we always work with our clients to consider not only the sales tax ramifications of a VDA, but also how it might impact income tax or gross receipts tax filing requirements, which not all firms consider.
Our goal is to find the most advantageous answer for your business and build a comprehensive road map that will lead you to tax compliance.
Our consultants have dealt with VDAs in states all across the country and we know the ins and outs of the various nuances. Contact us today to see if we can assist with your overall state tax analysis and whether VDAs might be the best course of action to remedy any unreported liabilities!
Happy Anniversary Miles Consulting Group!
We are happy to announce our 19 year anniversary this month! It seems like just yesterday when we left Big 4 public accounting! The firm was founded in March of 2002, when two state tax consultants got the entrepreneurial itch and decided that we could build a practice to better serve clients by focusing on their needs, being cost effective, and offering unwavering client service! And I believe that in the last 19 years we’ve done that most of the time!
In traipsing down Memory Lane a bit this month, I decided to Google which other companies were founded in 2002, and one specifically caught my eye and made me smile. The consumer products company, Wayfair, is also 19 years old in 2021! Of course, our readers know that we talk a lot about Wayfair – not just because they share our anniversary year and sell some cool products. In 2018, the United States Supreme Court ruled on the concept of economic nexus in its ruling in South Dakota v. Wayfair, and it’s safe to say that life hasn’t been the same in the world of state tax consulting ever since. In the last three years, we’ve helped countless companies determine where and when they’ve created economic nexus and then how to come into compliance. And I don’t think we’re done yet!
California- Tax Relief for Marketplace Facilitators
On the heels of the U.S. Supreme Court decision in South Dakota v. Wayfair (2018) many states enacted marketplace facilitator laws to tighten the sales and use tax collection net and reduce their tax collection costs. The marketplace facilitator laws give states one-stop collection of sales and use tax: one platform reports the tax of many sellers and the state only has to look to that one platform for uncollected tax. Why chase many debtors when one will pay for them all?
The marketplace facilitator laws are still relatively new, and anytime a law is new there will be those that are unaware of the change. So, the State of California graciously passed two laws to provide some tax relief for the unwary marketplace facilitators. Unfortunately, the tax relief laws are buried in the law books and are known to very few taxpayers. Fortunately, because of Miles Consulting Group’s careful study of California’s marketplace facilitator laws we discovered these hidden lifelines for California marketplace facilitators. We have also requested and received from the state an operations memo that was written for the California Department of Tax and Fee Administration’s tax auditors, which we will summarize in this blog.
What You Need To Know About Alcohol Taxes And Wayfair Legislation
There's nothing quite like winding down after a long week with a glass of wine, but what you might not be aware of is the complex tax regulations that are impacting the sale of your alcoholic beverage of choice.
For most people, alcohol taxes aren't particularly notable beyond how they impact the final sales price. For businesses involved in the sale of alcohol (especially online retailers) however, recent changes due to the pandemic and the 2018 Wayfair decision are creating a bit of a mess.
The first factor in this mess are the taxes placed on alcohol sales. Alcohol taxes are particularly complicated for a number of reasons. Some of this is due to its nature as a legal but still heavily regulated drug. Some of it may also trace back to the historic importance of alcohol taxes as a source of revenue for the U.S. government.
Taxes on alcohol have also been seen as a way of offsetting the negative externalities associated with alcohol consumption, including motor vehicle accidents, the burden of alcohol-related illness on the healthcare system and alcohol-related violence.
The inherent complication of federal excise taxes and the fact that alcoholic beverages are taxed at different rates depending on the amount of ethanol contained in the drink only adds to the complexity. And that's before you consider the sales taxes on alcohol at a state and local level. Those rates also depend on the previously mentioned factors, which are individually weighed and applied by each state and local government.
What this all boils down to is that, similar to economic nexus and marketplace facilitation regulations, the rate alcohol is taxed at varies wildly across the country.
Readers of this blog are well aware of the complexity of Wayfair-related legislation. When you throw in alcohol taxes, it gets exponentially worse.
In terms of marketplace facilitator legislation, recent booms in the sale and purchase of alcohol online (which comes with its own complications) due to the pandemic and relaxing restrictions on those sales are putting some retailers and marketplace facilitators in a sticky situation. In regards to online sales of alcohol made across state lines, states are still determining how economic nexus factors in within those situations as well.
Accounting Today recently shared how Uber's upcoming acquisition of alcohol delivery service Drizly as well as a recent round of funding for Vivino, an online wine marketplace, likely herald many upcoming changes to online alcohol sales and the taxation of them.
For instance, California's Alcoholic Beverage Control department ("CA-ABC") issued a directive on November 18, 2020, based on "numerous inquiries seeking clarification or further guidance in the context of unlicensed activities and licensee relationships with unlicensed service providers."
The CA-ABC "remains concerned that certain activities by Third Party Providers may violate California law, particularly in the areas of sales by a person without a license…" Nevertheless, the CA-ABC "believes that licensees and Third Party Providers can form business relationships that facilitate lawful transactions for sales of alcoholic beverages over the Internet."
The CA-ABC directive describes the limitations and responsibilities of the alcoholic beverage licensee and the Third-Party Provider; in other words, marketplace facilitators.
It would behoove all online marketplace facilitators that intend to sell alcoholic beverages to review this directive. In fact, Texas considered the "California model" in their "Marketing Practices Advisory - MPA056".
In 2019, the Texas Alcoholic Beverage Commission ("TABC") started issuing "Consumer Delivery Permits" that allow third-party companies to make alcohol deliveries; the third-party companies are permitted to pick up alcohol from businesses licensed by the TABC, such as bars, restaurants and liquor stores.
Complying with tax regulations is always important for online retailers, but it's especially important for businesses making sales on alcohol.
If businesses fail to accurately collect and remit these taxes, they face more than just a potential audit or fines. Instead, they may lose necessary alcohol beverage licenses and their ability to make sales of alcohol altogether.
If you have questions regarding the taxation of alcohol and how it impacts your business, or any other state sales tax compliance questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate and ensure your business stays tax compliant.
