Special Report: How COVID-19 is changing business sales tax obligations and enhancing risk [Part 13]
Sales and Use Tax Compliance: Risk and Complexity Have Soared for Many Businesses
COVID-19 is changing the way we do business, the way we buy, the way we sell and how all of this affects businesses of all sizes and industries as well as their customers.
Greetings from my home office in NYC. It’s my Week 13 covering COVID-19 changing the way you and I literally live our lives. I’m sincerely hopeful you and your families are safe and well. In this week’s installment of my special report, I examine how COVID-19 and SCOTUS’ decision on Wayfair have combined to create a substantial sales take burden for small businesses and how CPA firms can help with that burden.You can see more COVID-19 related blogs here.
COVID-19 has changed the way we do business, the way we buy, the way we sell — this series of blogs follows how all of this affects businesses of all sizes and in most industries as well as their customers and their tax advisors.
Greetings from my home office in NYC. I have covered how COVID-19 is changing the way you and I literally live our lives since early March. I sincerely hope you and your families are safe and well.
In this 13th of a weekly series, we examine how COVID-19 and SCOTUS’ decision on Wayfair have combined to create a substantial sales take burden for small businesses and how CPA firms can help with that burden. You can follow this series and more information on sales and use tax on our blog.
As I have closely followed tax, business and consumer trends, particularly since the COVID-19 lockdowns began in the U.S. in early March, it has become increasingly clear that there is one tax type in particular that has a direct and constant effect on many of the roughly 31 million small businesses (over 90% of all businesses) in this country. This is the sales and use tax (SUT) that is imposed by 45 of our states (and an estimated 13,000 local jurisdictions) on sales of goods and some services. Most of the top 100 CPA firms reportedly are showing significant increases in revenue in their SUT practices.
In June of 2018, the Supreme Court, in Wayfair v. South Dakota expanded the reach of states to impose sales and use tax obligations on retail and other businesses on the basis of economic activity in a state (so-called economic nexus); actual physical presence no longer required. As of now, 43 of the 45 states who have sales tax have adopted the economic nexus standard. Florida and Missouri remain the two holdouts.
In March, consumer behavior and the way many businesses operate changed dramatically as the pandemic spread across the U.S.; individuals were told to stay home, and brick and mortar stores were forced to close. Many small businesses established or greatly expanded their online selling presence and capabilities. That has resulted in an explosion in e-commerce and remote selling and a resultant significant increase in online sales tax revenues in most states. Web sales are up from last year in the U.S., reaching $73.2 billion as compared with $41.5 billion a year earlier. That’s true even though the U.S. gross domestic product was down a record 33% in the second quarter and unemployment levels remain high. During this period, the one tax type in particular that is having the most pervasive impact on many of the roughly 31 million small businesses (over 90% of all businesses) is the sales tax. The increases in online sales tax collections has been the one bright spot for state tax revenue collections during the pandemic.
As more and more online and other businesses sell into new states and municipalities, they risk becoming subject to registration, and sales tax collection and remittance rules there, particularly as states and municipalities become increasingly aware of the amount of tax revenue they’re losing, they are seeking better ways to collect. Increasingly, that means that they are demanding that retailers and other online and remote sellers be responsible for figuring and remitting the tax – and the requirements differ from state to state and extend down to the local level in many states.
Who Is Facing the Greatest Risk?
Smaller, unsuspecting businesses that have sales in states where they are not physically present or collecting sales tax, including many of the large marketplaces’ (e.g., Amazon, Walmart, Etsy) third-party sellers and sellers based outside the U.S.
I discussed the sales tax compliance challenges faced by small businesses with Brad Scott, the Director of Finance at Halstead Bead, Inc., a jewelry component wholesaler located in Arizona. Scott says that the Wayfair decision and the changes in state sales tax rules it has caused has resulted in a more complicated system — one that applies as equally to a Walmart as it does to a Halstead and other small businesses. As Scott notes, while those compliance burdens are the same, “I don’t have the team that Walmart already has.”
The cost to comply is substantial for many businesses, chasing some retailers out of business while encouraging others to consider aligning with bigger businesses to do the heavy lifting (though it’s not always that simple). And there’s collateral damage, too. Halstead had to replace its long-time accountant, properly licensed in the state where they are located, because they needed someone who could reach — and comply with laws — in all states where they did business.
What to do?
Many companies are using experienced, third-party firms to outsource sales and use tax compliance to reduce costs, make them more competitive, and minimize the substantial risk of noncompliance.
Why Now — Key Drivers
Here are some of the key drivers working to make the consideration of tax compliance outsourcing more attractive than ever:
- Impact of Wayfair on greatly increasing sales tax compliance exposure and burden
- COVID-19-driven business lockdowns and business closures resulting in an explosion in online and remote selling-resulting in often unanticipated economic nexus;
- Growing need for states to find additional sources of revenue as a result of the huge tax revenue reductions resulting from the pandemic;
- More frequent and more comprehensive sales and use tax audits by states and localities;
- Rapidly changing sales and use tax rates and rules-during H1 2020, over 150 sales tax rate changes;
- State sales tax auditors have increased use of software, big data and other sophisticated tools to surface businesses that have not registered with the states in which they do business;
- Need for businesses to replace labor-intensive processes with automated processing in order to reduce costs, increase efficiency, get more competitive and avoid disruptive state tax audits and unbudgeted for tax liabilities;
- Significantly enhanced risk for businesses and their executives of “no” or inaccurate sales and use tax compliance. Risk is financial and reputational … with a possibility of even criminal exposure.
The above key drivers have led to greater complexity and increased accountability in sales tax compliance
- Increased audit exposure resulting in greater tax and penalty liability both for businesses and, potentially, key executives;
- Increased costs of operations;
- Substantially more competitive business environment;
- Increased difficulty and cost of finding, training and keeping qualified staff;
- COVID-19-driven staff reductions;
- More and more rate, rule and filing and payment changes occurring not only the state level-but also at the local level;
Benefits from Outsourcing the Sales Tax Compliance Function
- Expertise to avoid costly or even draconian sales tax compliance surprises-ongoing nexus reviews
- Reduce headcount and produce other cost savings;
- Reduce impact on other departments in the organization who have roles in the compliance process such as Accounts Payables, Treasury, etc.
- Improve compliance accuracy, which will reduce audit exposure and financial risk to you and your business
- Improve efficiency, accuracy and reduce risk while freeing up key resources to focus on higher-value tasks — business and tax strategy and planning in an ever-increasing competitive and regulatory landscape
- Introduce and implement new technologies, e.g., AI, IoT, data analytics, big data to your business reducing costs and improving productivity
- Look objectively and with “fresh eyes” across your industry, your competitors and quickly share new information to make you more competitive
- Work directly with tax and revenue authorities in all jurisdictions where you do business
- Leverage the knowledge gained from other clients and leverage those relationships
- Bring rates and rules tracking, sales and use tax compliance and audit preparation and defense together under a single, expert source
Who Best Can Provide Outsourced Sales and Use Tax Services?
Firms who provide outsourcing services must be able to do the following:
- Can apply their technology and value-added expertise in a cost-effective manner to address a wide range of sales and use tax issues, especially the client-specific issues or processes not readily solvable internally at an acceptable risk level
- Have a proven track record of successful implementation in other companies
- Have a reputation and brand recognition as a trusted company in all tax matters both in the US and around the world
- Provide the resources to be able to determine not only what functions and operational changes are needed now, but in the future as well
- Should be particularly competent in:
- Internal tax operations, particularly compliance
- Tax and accounting principles and procedures
- Indirect taxes: one or more processes, e.g. reporting, calculation, etc.
For many small companies facing the complex and costly task of complying with sales and use tax compliance obligations in states and municipalities in which they are now making substantial sales, outsourcing this compliance function to firms like Wolters Kluwer can be a cost-effective alternative that will ensure accurate and timely compliance, minimizing risk and exposure to penalties and interest.