Remote sellers coping with overdue liabilities or lingering audits should use the coming weeks to resolve their disputes with state revenue agencies and avoid a possible post-coronavirus compliance surge.
State revenue departments have responded to the public health crisis by extending tax filing and payment deadlines, and pulling back on new audits. In this forgiving climate, remote retailers affected by tax laws inspired by the Supreme Court’s 2018 South Dakota v. Wayfair ruling may want to quickly remedy past tax problems, said Alex Thacher, a state and local tax partner in the San Jose office of the tax consulting firm Armanino.
“It’s an opportunity to resolve things in a more collegial or beneficial manner,” Thacher said. “That’s not going to be the case post Covid-19.”
Thacher said he has heard revenue departments will be under intense pressure to ramp up audits after states begin lifting shelter-in-place orders and business restrictions related to the public health crisis. Revenue losses anticipated across state tax programs will force departments to double down on enforcement and collection efforts to revitalize exhausted revenue streams.
Thacher issued a specific warning regarding “Wayfair nexus audits"—audits aimed at establishing a remote business’s economic presence within a state for tax purposes.
Every state sales tax law responsive to the Wayfair ruling features minimum thresholds for triggering tax collection duties. Some states have taken additional steps, expressing economic nexus standards under their corporate income, franchise, and gross receipts taxes. Some states are expected to use these nexus audits to sweep businesses into compliance with their tax regimes.
“With Wayfair nexus, the states have been somewhat forgiving, but I don’t think states are going to be as forgiving coming out of this,” Thacher said. “There is going to be a real hard line on out-of-state taxpayers with economic nexus. Those audits are going to be more difficult to resolve.”
Wayfair created a framework for states to collect sales taxes from remote retailers by tossing the physical presence standard affirmed in 1992’s Quill Corp. v. North Dakota. The majority in the 5-4 Wayfair ruling suggested strongly that South Dakota’s law requiring remote sellers that meet thresholds of $100,000 in annual in-state sales, or 200 transactions to collect and remit sales tax, would pass constitutional muster.
Since the Wayfair decision, all but two of the sales-tax states have begun imposing remote sales tax based on a measure of economic activity, instead of physical presence. In addition, more than 30 states have passed marketplace-facilitator laws, which place a duty to collect and remit sales tax on large websites that broker transactions.
Louisiana Refocuses Post-Walmart
Walmart.com’s recent win before the Louisiana Supreme Court and the economic crisis triggered by the coronavirus pandemic are creating a new sense of urgency for the Louisiana Legislature to modify the state’s sales tax code, Rep. Tanner Magee (R) said in an interview Tuesday.
“Everybody’s ordering online now,” he said. “If you don’t have your system set up to capture that money, you’re really going to be in a world of hurt.”
Magee has proposed streamlining local sales and use tax collections for Louisiana-based online sellers. His bill, H.B. 429, would allow voters to decide Nov. 3 whether the state should form a central collection commission permitting remote sellers to remit local sales and use taxes. Lawmakers may also take action on S.B. 138, which would impose tax collection duties on marketplace facilitators. The state Legislature is scheduled to wrap up its 2020 session on June 1.
The Louisiana Sales and Use Tax Commission is working separately to make things easier for out-of-state businesses by creating an electronic tax-filing portal. Louisiana law allows individual parishes to administer and collect their own sales taxes.
Two-thirds of each legislative chamber would have to approve Magee’s bill before it gets to Louisiana voters. State ballot measures need approval from a simple majority of voters to pass.
Magee pitched a similar proposal in the 2019 legislative session, but the idea never got traction. He predicted that the Louisiana Supreme Court decision favoring Walmart.com would turn his critics into supporters, especially as the state looks to overcome revenue shortfalls stemming from the pandemic.
“What I heard from businesses is, ‘We’re tired of dealing with 64 tax collectors,’” Magee said.
The high court’s Jan. 29 decision found Walmart.com wasn’t required to pay local sales taxes to Jefferson Parish on sales through its online marketplace. The court last week denied the parish tax collector’s petition for a rehearing in the case.
Car Rental Platform Must Collect
Peer-to-peer car rental websites qualify as marketplace facilitators in South Carolina and must collect and remit sales taxes, the state Department of Revenue recently ruled.
In a private letter ruling signed by revenue director W. Hartley Powell, the department found a car rental platform must be treated as a retailer and a marketplace facilitator as defined in sales and use tax code Section 12-36-71. The letter responded to a request by a business, characterized as “ABC,” that asked whether it had duties under South Carolina’s marketplace law, which became effective in April 2019.
“ABC, as a marketplace facilitator, is a retailer and, therefore, responsible for remitting the sales tax on all peer-to-peer, short-term motor vehicle rentals in South Carolina,” Powell wrote. “Charges by ABC, for peer-to-peer, short-term vehicle rentals, as described in the facts, are subject to sales tax.”
Powell stipulated that the department’s opinion was “advisory,” and contingent on the specific facts presented by the taxpayer. The opinion suggests taxpayers with similar characterization questions consult Revenue Ruling 19-6, which addresses marketplace facilitators and sellers using marketplaces.
California Regs Go Live
California’s regulations administering the new state law imposing tax collection duties on out-of-state retailers are now in effect.
Updates to two existing rules for retailers from the California Department of Tax and Fee Administration won final approval from the state’s Office of Administrative Law and became effective March 30. The rules apply to a law enacted in April 2019 in response to the Wayfair ruling.
One of the new regulations spells out how retailers must comply if they meet California’s threshold of $500,000 of annual sales in the preceding 12 months. The other new regulation explains how similar collection duties apply to locally imposed district taxes.
Registrations Climb in Alaska
Nearly 200 retailers have registered to collect and remit sales and use taxes in Alaska under the state’s one-of-a-kind strategy for taxing e-commerce transactions.
A spokesperson for the Alaska Remote Seller Sales Tax Commission said it has received registrations for 191 remote sellers and marketplace facilitators. Those businesses will have duties to collect and remit taxes to local jurisdictions that have adopted the remote sellers’ uniform municipal tax code.
Alaska is the only state without a statewide sales tax to permit local jurisdictions to collect tax on remote transactions. The Alaska Municipal League worked with towns and boroughs across the state to establish the commission, the uniform code, and other standards for extending local taxing authorities to remote sellers. While only 16 municipalities have adopted the uniform code, dozens more are expected to sign on in the coming year.
—With assistance from Laura Mahoney in Sacramento, Calif. and Jennifer Kay in Miami