In most cases, the government moves incredibly slow. Two years would normally seem like a long time to get anything done—especially considering that the decision in Wayfair overturned half a century of precedent. But when it comes to collecting taxes, they rely on fear, surprise, and ruthless efficiency.
But South Dakota v. Wayfair proves that governments can be efficient or even proactive. After all, the case had state revenue agencies drafting legislation long before the justices announced the decision.
Within months, frameworks were ready and agencies were ready to collect—even if you weren’t. But who is the most aggressive? A new analysis from AICPA’s Journal of Accountancy looks to provide the answers.
Background: Businesses Still Working in a New Normal
As we discussed in an article on the two-year anniversary of the landmark Wayfair ruling, companies faced a tumultuous experience adopting new tax practices and adapting to the economic nexus requirements.
“On June 21, 2018, the court overturned Quill Corp. v. North Dakota, a 1992 case that imposed the physical presence test on states seeking to collect sales taxes from remote retailers shipping to residents in the state. This case, South Dakota v. Wayfair, Inc., changed everything about the way you collect and plan for sales tax.
In the months following Wayfair, nearly every state began to formalize documents regarding economic nexus. Often defining this as $100,000 or 200 transactions over the prior 12 months, states can now collect from you whether or not you have a presence in this state.”
In this article, we go on to explore five of the biggest concerns that companies face—and how an uncertain adoption landscape has made this a nightmare.
Who’s on the Hunt? A Look at How States Are Approaching Collections
In their article titled avoiding the sales tax economic nexus train wreck, David J. Brennan Jr., J.D., LL.M. (Tax), and Joseph C. Moffa, CPA, J.D. look at the states who were most aggressive in asserting Wayfair to claim revenue. Discussing the tactics and extreme cases, these experts look at the wide range of approaches taken by state revenue agencies as they work to collect ecommerce sales.
The Burden of Proof: It’s on You to Prove Exemption
Combining varying thresholds with differing views of what’s counted toward the threshold, states are putting a lot of burdens on businesses who sell there. Complicated enough as it is, it gets even harder when the burden is on your business to prove that sales are exempt.
“Even if all sales into a state are exempt, some states take the position the burden is on the business to prove the sales are exempt. If the business cannot prove an exemption, then the default position of many states is that the sales are taxable and the business has nexus, assuming the law removes exempt sales from the threshold. To make things even more complicated, there could be different criteria for meeting the same exemption in various states.
To identify businesses that might have a sales tax collection and reporting obligation, some states are sending letters to business owners asking them to fill out a nexus questionnaire.
In some cases, the business is presumed to have nexus until it proves otherwise via the questionnaire and any supporting documentation the state demands.”
Fulfilled By Amazon, Pursued by Revenue Agencies
Another tactic relied on by state collectors is to target those businesses using the Fulfilled by Amazon program or others like it to handle shipping. As noted in the article:
“States are potentially obtaining from Amazon lists of businesses that have inventory in an Amazon warehouse located within the state. […] Sometimes, states will find out about inventory being stored in the state before the business does, as Amazon can change where inventory is stored daily. Therefore, it is often not a question of if, but only a matter of when, the business will be contacted by the state with a nexus inquiry letter.
From here, states will determine that a business has nexus in the state—whether you know that or not.
Backtracking on Promises against Retroactive Application
Though many states argued that that there would be sufficient protections to limit retroactive application of Wayfair, this went out the window once the gavel hit.
In total, 41 states, including Florida, argued that it was not their intent to retroactively apply Wayfair. But as discussed in the JoA article, Florida changed its position, and it raises the question if others will do the same.
“The largest concern in this type of situation involves how far back a state may make a tax assessment. Normally, a state may go back only three or four years on average, due to the state’s statute of limitation. However, the statute of limitation normally applies in instances where a sales tax return has been filed in the state. If no sales tax return has been filed, most states allow for the possibility of a sales tax assessment going back to the very beginning of when the company first allegedly had nexus with the state.”
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