It’s not too often that there is groundbreaking tax legislation or landmark tax related Supreme Court Decisions that affect the vast majority of Americans, but in the last six months we have had both.
The Tax Cuts and Jobs Act was signed into law in December, 2017, and has been written about extensively in publications as well as in our AVMD Newsletter. We plan on spending the remainder of 2018 working with clients to see just how this new law affects them, from both a procedural perspective and a dollars and cents perspective.
In the past two weeks, the U.S. Supreme Court handed down a major tax ruling which has the potential to affect any business doing business in states other than their own. In South Dakota v. Wayfair, the Supreme Court held that states can assert “nexus” for Sales and Use Tax purposes without requiring a seller to have a physical presence within the state.
In a prior, precedent setting Supreme Court decision from 1992, (The Quill Decision), businesses were required to have nexus within a state in order to be required to adhere to that state’s tax laws and filing requirements for both Business Income Taxes and Sales and Use Tax, if applicable. Generally, this required a business to have either a physical presence, warehouse, retail location, or employees/agents within the state in order to comply with that state’s tax laws and filing requirements. In the age of internet purchasing, which has ostensibly replaced mail order/catalogue purchasing, it had been possible for a business to ship goods to a customer located out-of-state and avoid having to register, collect sales tax, pay business income taxes, and abide by all of the rules and regulations of such state. The recent Supreme Court decision has changed all of that.
The Court concluded that all prior decisions were an “incorrect interpretation of the Commerce Clause” of the Constitution. The Court was critical of The Quill Decision on several grounds. First, the physical presence rule is not a necessary interpretation of the “closely related” nexus requirement. Second, the Court found that The Quill Decision creates market distortions. Third, the Court found that Quill imposes arbitrary and formalistic distinctions. They noted that Quill actually discouraged interstate commerce by creating incentives to avoid economic activities in many states.
For many years, states have been seeking ways to broaden their tax base and to find new sources of revenue. This is a nice way of saying that states are looking for ways to extract more tax dollars from all of us. States have typically sent selected business taxpayers a questionnaire or made a phone call seeking to learn more about their activities within their respective states. States can generally locate out-of-state businesses with possible ties to their state through a variety of ways; audits of other in-state taxpayers; internet searches; whistleblower programs; and so on.
What can you do if you have a business which operates in multiple states or simply ships products to states other than your own home state? There are a number of things to consider.
There are 50 states in the United States. From years of practice, we know that each state has their own rules and requirements for registration and compliance with their business and sales and use tax laws. As a matter of fact, most larger states have tax offices or tax representatives in New York State. Each state will also likely have “minimums” where a business can have a small number of transactions within the state during a year, without triggering the need to register and file. We recommend that businesses evaluate their activities with reference to the locations of their customers, keeping in mind that now, with this Supreme Court decision, they may be subject to registration and compliance with the tax laws in each of their customer’s states.
The Statute of Limitations can be your friend or your enemy. The Statute of Limitations can protect you and your business from unlimited government scrutiny of your tax filings with reference to timing. Generally, the government has up to 3 years from the date you file your tax returns to audit or make additional assessments against you or your business. If a business has been “doing business” within a state without being registered or properly filing tax returns in that state, the Statute of Limitations never starts to run. Therefore, the government can impose a tax upon you for the non-filing of your tax returns going back to the day you commenced business. Scary thought.
One more scary thought. Shareholders, partners or responsible persons within a business entity have personal liability for sales and use tax. This means that a shareholder, partner or responsible person of a business can be held personally responsible for sales and use taxes whether these taxes were properly charged to a customer or not. The corporate or LLC veil will not protect you. It is entirely possible for a state to conduct an audit of your business sales tax returns going back 10 years in a state where you have been deemed to have nexus, (or now just shipping product) and hold you personally responsible for the sales and use tax even though the business never charged their customers sales tax. States take the position that the price you charged assumed the inclusion of sales tax.
The best thing to do is to do it right from the beginning. If you haven’t been doing it right, next best thing is to consult a tax advisor who is knowledgeable and experienced in the area of sales and use taxation.