WHAT COMPANIES NEED TO KNOW ABOUT VOLUNTARY DISCLOSURE AGREEMENTS.
The phrase of the day is “V-D-A”! In the state tax world, that refers to
Voluntary Disclosure Agreements, and we are working on many of these for our
clients lately. What are they, exactly,
and why should your company perhaps be considering them as well?
What is a Voluntary
Disclosure Agreement?
Simply put, entering into voluntary disclosure agreements
with states 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 a game of “Beat the Clock!”
What are the
advantages?
In considering whether to come forward proactively, a company may ask some of these questions, “Why should we come forward and tell the state that we have liabilities? Can’t we just wait for them to contact me? Maybe they won’t find me at all!” (Trust me, we’ve heard all of these, and then some!) 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. That means, even 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. For instance, if a state has a four-year lookback period for sales tax and notifies the state on May 31, 2019, then the lookback period would generally be from June 1, 2015 through May 31, 2019. The company would need to report any liability for that period, but not prior.
- 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 liability. Most states will not waive interest, because it is statutory and the Department of Revenue can’t waive it. However, Texas currently does waive interest on VDAs, and New York 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. That’s helpful because we can explain the client’s entire situation, with dates, etc. 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 several initial document requests. Then, during the audit, the auditor will want to sample invoices, see exemption certificates and resale certificates, etc. 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 voluntarily, there is generally not a detailed audit of their records. (It’s important to note that the state does reserve the right to audit VDAs, but it’s not often that they do.) Companies still want to make every effort to pay the correct amount during the VDA process, but the record-keeping is a little less onerous. Also, the VDA comes at timing set out by the company. Part of what makes an audit so daunting is that it often comes when you least expect it. In planning for a VDA, the company can proceed at its own pace, to some degree.
How has Wayfair
complicated the matter?
VDAs are nothing new. We’ve been assisting clients with them for years. So why are we seeing more of them right now? Part of the reason is that companies are starting to be more aware of their overall state tax filing responsibilities as part of the larger discussion of the US Supreme Court case in South Dakota v. Wayfair (June 2018). As a result of the economic nexus concept and companies now having to register to collect and remit in states in which they have minimum sales volume (often $100,000 of sales or 200 transactions) many companies are finding that they need to analyze whether they may previously have had enough physical presence to create nexus. The answer is often “Yes”. And then, the company needs to determine how far back the exposure goes. Also note that often VDAs encompass both income tax and sales tax filings, so companies need to examine the exposure for both.
What’s new with
states and VDAs?
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 on-line. For a variety of reasons, this can be
somewhat challenging. At the very least,
it has taken some of the human element out of it. And, well, quite frankly, we kind of liked
the human element!
How can we help?
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. How about 20+ years of experience? Even
better! Our consultants have dealt with
VDAs in states all across the country and we know the ins and outs of the
various nuances. Schedule a conversation
with 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!
What You Need To Know About Resale Certificates & Online Sales Tax
If you’ve been following this blog, you know we’ve shared a lot about online sales tax legislation and how it affects online retailers. But what about ecommerce websites that purchase items at wholesale with the purpose of turning around and selling them to consumers?
If there weren’t a special exemption, online retailers would need to pay sales tax on the wholesale items, only to turn around and have their customers pay it again when they buy their products, resulting in double taxation. This is where resale certificates come in.
FOCUS ON PENNSYLVANIA
Pennsylvania, a northeastern state and one of the 13
original colonies, has a diverse terrain, which includes wide stretches of
farmland, national forests and mountains. Philadelphia, the Keystone State’s
largest city, displays its rich history in Independence Hall (where the
Declaration of Independence and Constitution were signed) and the Liberty Bell,
an enduring symbol of American Freedom. It was the second state to ratify U.S.
Constitution, on December 12, 1787.
The Appalachian Mountains run through the middle of the
state. Pennsylvania’s diverse topography also produces a variety of climates,
though the entire state experiences cold winters and humid summers. Straddling
two major zones, the majority of the state, with the exception of the southeastern
corner, has a humid continental climate. The southern portion of the state has
a humid subtropical climate that covers much of Delaware and Maryland to the
South.
WAYFAIR AND CALIFORNIA- YES, INDEED! PART 2
It has been almost a year since the U.S. Supreme Court handed down its landmark decision in South Dakota v. Wayfair Inc. (June 2018) , making it easier for states across the country to enact nexus triggering legislation, and ultimately leading to the collection of sales tax from companies doing business in various states.
The Supreme Court’s ruling in June 2018 did not automatically make economic nexus the law of the land for all 50 states. The Court ruled that South Dakota’s economic nexus law was constitutional. (The state had enacted legislation which stated that economic nexus is created in if an out of state company makes sales of products or services into South Dakota in excess of $100,000 or has 200 or more transactions in the state within a year.) However, since this ruling, over 35 states have enacted similar economic nexus legislation. As we describe in a recent blog, economic nexus is based upon the amount of sales or number of transactions in the state. If a certain threshold is met, nexus is deemed to be created.,
2 States with Potential New Economic Nexus Legislation
Last week we looked at states with new economic nexus legislation pending after the Wayfair Supreme Court ruling this past summer.
Today we’ll look at companies with pending online sales tax provisions. We’ll be keeping an eye on them in the coming months.
Florida’s Senate Bill 1112 for Online Sales Tax
Quick Florida highlights:
- Passed? Not yet, it’s still in legislation
- Effective date? If it passes, July 1, 2019
- Thresholds? 200 separate transactions or sales exceeding $100,000
- Anything else? Marketplace facilitators need to collect and remit online sales tax on behalf of sellers
Florida’s legislature is considering Senate Bill 1112, which would potentially go into effect July 1, 2019. Under this bill, a company would establish economic nexus in Florida if at least one of these thresholds are met:
- 200 or more separate retail sales of tangible personal property or taxable services
- Any number of retail sales of tangible personal property or taxable services in an amount more than $100,000
Senate Bill 1112 would also mandate that marketplace facilitators need to collect and remit online sales tax on transactions on behalf of third-party sellers. This would apply to those selling to consumers through programs like Fulfillment by Amazon.
4 States with New Economic Nexus Legislation
Following last year’s Wayfair Supreme Court case, which set precedent for states to enact economic nexus provisions, legislatures across the country have defined and implemented new online sales tax laws.
Although many states quickly implemented economic nexus provisions and have already started collecting online sales tax, there are some that have decided to take a little bit of extra time.
Arkansas’ Online Sales Tax Legislation
Here are four states that recently passed online sales tax provisions. Keep reading for the details!
Quick Arkansas highlights:
- Passed? Yes
- Effective date? July 1, 2019
- Thresholds? 200 separate transactions or sales exceeding $100,000 of tangible personal property, taxable services, digital codes or specified digital products
With very similar to the wording in South Dakota’s SB 106 (the law that went before the U.S. Supreme Court in the Wayfair case), Arkansas’ online sales tax legislation establishes economic nexus on companies with at least 200 transactions or more than $100,000 in sales. Relevant purchases include tangible personal property, taxable services, digital codes or specified digital products.
Focus on Minnesota
Minnesota is a state in the Upper Midwest and northern
regions of the United States. Minnesota is the 12th largest state in
area and the 22nd most populous state, where 60% of its residents
live in the Minneapolis-Saint Paul metropolitan area (known as the “Twin
Cities”). This area is the center of transportation, business, industry,
education, and government, while being home to an internationally known arts
community. The remainder of the state consists of western prairies now given
over to intensive agriculture; deciduous forests in the southeast, now
partially cleared, farmed, and settled; and the less populated North Woods,
used for mining, forestry and recreation.
State Tax Credits & Incentives in the News: How Much Focus is Too Much?
It’s no secret that lawmakers use legislation like state tax credits to implement change, such as standardizing the legal drinking age or attracting new business to their state. Most of the time, credits and incentives DO cater to specific industries or desired activities, like increasing employment or attracting corporate headquarters to states. But do legislators ever take this method of wielding influence too far?
I’ve included two interesting examples in the news I recently found and included my thoughts; let me know if you agree!
Washington: Microsoft Requests More State Tax
In Washington state, Microsoft is asking the legislature to increase state tax collected from tech companies in an effort to increase funds dedicated to workforce education. The request includes a provision that specifically targets two companies that make more than $100 billion in annual revenue: Microsoft itself and Amazon.
Wayfair and California- Yes, Indeed!
Breaking news: Assembly Bill 147 has been passed by the CA state legislature and signed by the Governor on April 25, 2019, that eliminates the transaction threshold and raises the sales threshold from $100,000 to $500,000. For more information on this new legislation, click here to view our latest blog.
It’s been over 9 months since the U.S. Supreme Court handed down its landmark decision in South Dakota v. Wayfair Inc., which made it easier for states to enact nexus triggering legislation, leading ultimately to the collection of sales tax revenue from companies doing business in the state.
The Supreme Court’s ruling in June 2018 did not automatically make economic nexus the law of the land for all 50 states. The high court’s decision was that South Dakota’s economic nexus law was constitutional. Since this ruling, states have been jumping on the economic nexus bandwagon by enacting similar legislation. As we describe in a recent blog, economic nexus is based upon the amount of sales or number of transactions in the state. If a certain threshold is met, nexus is deemed to be created. For instance in South Dakota, economic nexus is created in if an out of state company makes sales of products or services into South Dakota in excess of $100,000 or has 200 or more transactions.
Happy Anniversary! And A Quick Look Back at This Year's Big Changes
A very happy anniversary to Miles Consulting Group! It’s hard to believe we’re already celebrating our 17th year in business. As you can imagine, we’ve seen a lot of legislative changes come and go in that time, but the past year specifically has held quite a few noteworthy milestones, especially in the online sales tax debate.
The Online Sales Tax Debate Goes to the Supreme Court
This past June, the Supreme Court ruled on Wayfair, setting precedent for states to define economic nexus and online sales tax legislation for purchases made online. It’s amazing how almost every state has enacted some kind of economic nexus statute since last June, and it’s the first time in 17 years we’ve seen this many states come together to agree on something!
