Update on US Sales and Use Taxes - Retro-activity and VDAs
The ongoing drama around sales and use taxes continues. Despite the fact that forty-one states, two U.S. territories, and the District of Columbia joined the amicus brief supporting South Dakota’s position before the Supreme Court and stating otherwise, the State of California is now retroactively seeking sales tax from out-of-state online merchants, going back as far as 2012.
How is this possible? Prior to Wayfair, there were many other kinds of nexus statutes on the books of states that businesses had to comply with, e.g., “click-thru nexus”, “cookie nexus”, “affiliate nexus”, “marketplace nexus”, etc. These nexus rules were variations on the physical presence test under Quill. However, post-Wayfair, those laws are still on the books and so far, remain effective for current as well as past years. And there are two risks here.
- . The first risk is that these rules might have applied to the business in the past (whether it knew it, should have known it or not) and so in its zeal to register in states under Wayfair, a business may find itself liable for unexpected and unbudgeted past tax liability under these other nexus rules.
- . The second risk is that once a business registers, it may no longer be entitled to use a VDA to limit past liability exposure.
Voluntary Disclosure Agreements to Manage Past Liability
There are two basic types of VDAs:
1. individual state-sponsored VDAs and
2. the multistate VDA.
Businesses that use either type of VDA are looking to avoid criminal responsibilities, avoid penalties and interest, and limit the so-called lookback period—how far back the revenue authorities can go for past assessments. Most importantly, businesses want confidentiality—until a VDA is reached, businesses only want to be known to that state by its voluntary disclosure case number. In the case of the multistate VDA, neither the VDA nor any of its terms is disclosed to any other state. And the business does not have to disclose any information that would reveal its identity prior to execution of the VDA.
However, prior contact between a state and the taxpayer concerning sale tax, for example, disqualifies the business from participation in a VDA with respect to sale tax. Contact includes filing a tax return, paying tax, or even receiving an inquiry form the state regarding sales tax.
Risk Assessment: Look Before You Leap
A first step in addressing this increased risk is to undertake a careful review of the business activity in all the states in which you are doing business currently as well as planning to do business in the future. In those states, a review of all nexus laws in those states would be needed–not just economic nexus laws under Wayfair, but the other types of nexus still on the books, e.g., click-thru nexus, cookie nexus, affiliate nexus, etc. And this also means that business planning will have to include retroactive tax liability for prior years; therefore, before you register in a state, be sure you review past liabilities in that state. This can be challenging so it’s worth enlisting the help of an experienced and knowledgeable sales and use tax team — one that can assess the situation, make recommendations and then implement the technical and research solutions needed to help you to reduce risk and stay compliant.
If you’re new to online selling, then do start here - http://www.mooresrowland.tax/2019/11/6-steps-to-starting-your-location.html
If you’re a non US seller, then read - http://www.mooresrowland.tax/2019/11/are-you-foreign-company-or-non-us.html
Remember that even though you sell through a company, you can be personally held responsible for any sales and use tax liability - http://www.mooresrowland.tax/2019/11/responsible-person-rules-in-wake-of.html
Here’s a comprehensive overview of the Sales and Use tax world –