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.
Maryland Jumps Aboard the Bandwagon to Tax SaaS and Digital Products
Readers of this blog know that we regularly post about states which tax SaaS and digital products, because so many of our clients face these issues. Now, Maryland has enacted House Bill (HB) 932 that will subject Digital Products such as e-books, songs and movies along with electronically delivered software, including Software as a Service (“SaaS”) to sales and use taxation. The legislation becomes effective on March 14, 2021.
A Bit of History
Up until now Digital Products in Maryland were not subject to sales and use tax. Consequently, the sale of canned software was taxable only if delivered in tangible form.
Focus on Hawaii
Aloha! This month we travel west to the island paradise of Hawaii. In the state, you can attend a luau to experience true Hawaiian culture, relax on the beach or hike in one of the many tropical forests or mountains.
Hawaii is unique because it the only state made up of part of the volcanic Hawaiian archipelago, which consists of hundreds of islands spread over 1,500 miles. At the southeastern end of the archipelago are eight islands known as the state of Hawaii. They are: Niihau, Kauai, Oahu, Molokai, Lanai, Kahoolawe, Maui and Hawaii.
Due to its central location in the Pacific Ocean and its 19th-century labor migration, Hawaii’s culture is strongly influenced by North American and Asian cultures, in addition to its indigenous Hawaiian culture. This is exhibited by the many customs and food cuisines that the state has to offer. For example, it is customary to bring a small gift for one’s host (i.e., a dessert). Many Hawaiian plates have been influenced by Polynesian, Asian and American foods as well.
How States Have Benefited From The Wayfair Decision
Over the last several years, the U.S. Supreme Court's decision in South Dakota v. Wayfair has led to rule changes regarding online sales tax in almost every state in the country.
The ruling, that South Dakota's economic nexus law was constitutional and that the state could require companies who met certain sales thresholds to collect and remit sales tax on sales to South Dakota customers, even if the company had no physical presence, has impacted states, retailers, online marketplaces and even brick-and-mortar businesses.
In this article, we'll discuss the positive effects of the Wayfair ruling on states that have implemented Wayfair-related legislation.
Perhaps most notably, Wayfair-related legislation and economic nexus have allowed states to fare better during the pandemic than states that have not implemented it.
The pandemic resulted in an explosion of online shopping in the spring of 2020, which has persisted in the time since. Those states that have economic nexus in place have seen a drastic increase in tax revenue from online sales tax collections, especially as many retailers have triggered economic nexus in states they previously did not have nexus in.
As one example, Texas is facing budget shortfalls due to the pandemic, but it is far less than was originally projected, largely in part due to the implementation of Wayfair-related legislation.
Even before the pandemic took hold in early 2020, states have been experiencing the financial benefits of economic nexus and marketplace facilitation.
In 2018 alone, more than 20 states implemented Wayfair-related legislation, with another 20 implementing it in 2019. While not every state has reported specific numbers in regards to the increase in online sales tax revenue they have seen due to these laws, the revenue increases are pretty much across the board.
Lawmakers in the two remaining states with a general sales tax that have yet to implement economic nexus, Florida and Missouri, are pushing hard for 2021 to be the year it gets implemented.
States have also been able to cash in on additional revenue collected from marketplace facilitators. While these gains are not as impressive as the revenue from economic nexus laws, marketplace facilitation legislation has allowed states to standardize and concentrate on large marketplace facilitators as a source of tax revenue as opposed to trying to source taxes from many small online retailers.
Overall, states have largely benefited from the Wayfair decision and further advancements to economic nexus and marketplace facilitation legislation are sure to be on the way.
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.
An Update On The Taxation of Remote Workers
When the U.S. began to feel the full brunt of the COVID-19 pandemic, businesses from every industry transitioned their employees to remote working. Nearly a year later, many of those employees are still working remotely.
In July, we shared a post discussing the tax implications of remote workers and whether they created nexus. The situation has continued to evolve since then, so we'd like to share an update on the tax implications of remote workers.
When the pandemic first hit, many states were forced to consider whether remote workers would create "nexus," which is the amount of contact from a company needed in order to be obligated to collect tax in a state. For many employers, this could create additional tax obligations in states where they previously did not have nexus. Additionally, questions arose regarding the taxation of employee's income and which state would collect the tax.
As is often the case in the tax world, states came to a variety of answers. Some states specified they would not assert nexus on companies solely due to short-term telecommuting situations, others specified that employees displaced due to the ongoing pandemic would not create nexus, whereas others waived nexus for a period of time, but after that time had passed, remote workers would create nexus. Other states did not, and have yet to issue specific guidance on the subject.
This document from Hodgson Russ LLP offers a breakdown of remote working guidance on a state-by-state basis, including information on which state will tax the income of the remote worker.
As previously stated, states have come to differing conclusions on the subject. This has created sticky tax situations in a handful of cases, most notably in New England.
In October 2020, New Hampshire sued Massachusetts over the taxation of remote workers. The case eventually made its way to the U.S. Supreme Court, which in January 2021 asked the solicitor general to weigh in on whether it should hear the complaint.
In regards to income tax, New York issued controversial guidance in October 2020 that specified that if the employee was working remotely due to "convenience" rather than "necessity," the tax would be sourced to the state where the employer is located. While it seems like most remote workers would fall into the "necessity" category due to the pandemic, Covington & Burling LLP explain that this is often not the case due to a specific list of factors that employees are required to satisfy in order to fit into that category.
Other states are applying similar rules, including Connecticut, Delaware and Pennsylvania.
Overall, the taxation of remote workers continues to create tax complications across the U.S., and as the pandemic continues, the tax implications will be felt by businesses and remote workers across the country.
To stay on top of your tax obligations due to remote workers, or any other tax situations, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
