Many taxpayers who chose wrong dates, registered late, or haven’t registered at all to collect sales tax are now receiving notices from states catching up on enforcement from as far back as 2018.
Remote sellers that did not collect sales tax can be held responsible for payments due from nexus-creating activities that, in some cases, predate the U.S. Supreme Court decision in South Dakota vs. Wayfair. Wayfair affirmed a minimum acceptable “economic” threshold for sales tax nexus of $100,000 in sales or 200 transactions into a state, creating a measurable yardstick for holding remote sellers accountable for sales tax. Economic nexus allows states to charge tax based on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state.
When it comes to measuring economic nexus, there are at least three dates by which a remote seller can be held accountable for sales tax in any one jurisdiction: the enactment date, the effective date, and the enforcement date. Enactment dates in fifteen states predate the June 21, 2018, Wayfair decision that led to the widespread adoption of economic nexus standards. Effective dates may or may not have been included in pre-Wayfair state laws enacting economic nexus. Several early adoption states, such as New York, held off enforcing their law until Wayfair was decided. Finally, enforcement dates can be set and are subject to change on the whim of state administrators when they are not statutorily defined.
Business taxpayers and their providers have struggled to track and choose the right date for measuring and quantifying economic nexus in each jurisdiction. Many of those that chose wrong, registered late, or haven’t registered at all, are now receiving notices from states that are catching up on enforcement from as far back as 2018.
Getting compliant is particularly daunting for vendors operating in states that use the date pre-Wayfair laws hit the books to measure economic nexus. By enacting a “Wayfair law” of their own–saying economic nexus and traditional physical presence nexus, as outlined in Quill Corporation vs. North Dakota, both constitute standards that trigger sales and use tax obligations–these states started a clock ticking on sales tax collection requirements under economic nexus standards. In Maine, this means vendors without physical presence must look at sales before June 21, 2018, to see if the economic nexus threshold was exceeded at any point. Those vendors that failed to account for pre-registration sales in 2018 are now receiving notices.
States have different periods for measuring economic nexus, some based on the calendar year and others on a statutory or administrative set of dates. While it is possible a state with an economic nexus standard that predates the Wayfair decision could enforce delinquent compliance, most states have administratively begun enforcement July 1, 2018. If you meet the measurement leading up to the enforcement date, you are expected to comply, either immediately or within a month or two. Unfortunately, the exact date with which to start complying is usually unspecified. So, if you start complying 12 to 24 months after the enforcement date, or you are putting off registering until you “can get around to it,” you are likely late.
Consequences of late registration
Late sales tax registration can quickly become a painful cost of doing business, especially as state and local jurisdictions look to recover losses from COVID-19. Many early adopters waited until after the Wayfair decision to enforce economic nexus laws predating Wayfair. Back in Maine, a state with a population of 1.3 million people, tax authorities set that enforcement date mere days after the Wayfair decision. Vendors who made more than $100,000 in sales annually or exceeded 200 transactions into the state prior to June 21, 2018, were expected to register and collect pertinent Maine sales taxes from buyers in the state on July 1, 2018.
To spot later-filers, Maine has gone through its records of newer sales tax registrants and found taxpayers who filed later than July 1, 2018. The state is then sending those remote sellers a notice asking the taxpayer to tell the state why it failed to file and to share records of sales between July 1, 2018, and current, or demonstrate that the taxpayer didn’t exceed nexus thresholds since July 1, 2018.
Other states are following suit, using a variety of enactment, effective, and enforcement dates to find late registrants and compute potential delinquencies. When late registration is detected or suspected, states are sending a notice or request for information, holding the taxpayer accountable for taxes due or, at the least, an explanation as to why sales transactions are not subject to sales tax collections.
Remote vendors that have not considered these nexus issues and choose to register anyway are likely to see a notice. Statutes of limitations do not run until 3-to-8 years post registration and remittance, giving states years to catch up on enforcement. States can easily identify new registrants based on a quick query of filings that compares effective dates to the date certain on registrations, and waa-lah, states can pick out the late registrants and go after them!
States are putting the onus on taxpayers to know when sales tax laws became effective and furnish supporting documents and tax payments on sales that factor into the nexus measurement. This includes taxpayers working on compliance. If a taxpayer took a couple months after the effective date of July 1, 2018, to interpret Maine’s sales tax law, implement a compliance strategy, and register for sales tax on October 1, 2018, three months after the effective date, the taxpayer can expect a notice from the state looking for tax due from July, August, and September.
Options for late filers
We began seeing late registration notices at the end of 2019, before they tapered off as resources were diverted by COVID-19. Once again, the number of notices is climbing as states turn their attention to enforcement and recovering lost revenue.
All sellers should be collecting sales taxes once they have hit relevant physical and economic nexus thresholds. Start thinking about any states where your business or clients may have filed late registrations based on effective, enactment, and enforcement dates being used by tax authorities. Taxpayers who did not collect may be on the hook for the payments due, interest and penalties, with no limit on lookback unless they pursue remediation which is typically not a winning lawsuit for the taxpayer; the states hold all the cards, leaving the taxpayer’s hand exposed.
Unregistered taxpayers are generally better positioned to negotiate settlements and enter into Voluntary Disclosure Agreements (VDA) than registered taxpayers. Once registered and in the system, taxpayers may not be eligible to remediate prior liabilities. In some states, remote sellers who have registered cannot elect voluntary disclosure for the pre-registration period. In this situation, registered taxpayers who do not know the facts around their sales are likely to owe interest on back payments and eat uncollected taxes unless they can remediate payment from those customers or come to an agreement with the state.
Don’t despair, there are ways to manage sales tax issues. Taxpayers that recognize they should have filed and collected have options.
- Take advantage of automation. Get into the business of collecting sales tax across the nation. With multiple sales tax automation solutions on the market, it is more possible than it ever was when I got started in state and local tax (SALT) 25 years ago to get and stay in compliance with over 10,000 different sets of jurisdictional rates.
- Negotiate a VDA. A taxpayer that should have registered in Maine by July 1, 2018, and sold goods and services exceeding the economic threshold can remediate through voluntary disclosure. Or, if the tax owed is minimal, register as to the correct date, file and catch up old returns, pay taxes owed and interest while asking permission to remediate penalties, if minimal. VDA’s are a legal agreement that is binding on both the taxpayer and the governments, so often that is the best option to get all in writing.
- Assess exposure. Review potential risks prior to each state and local tax registration and consult with your tax advisor to proactively manage that risk, potentially limiting taxes owed and lookback periods.
- Document, document, document. Maintain strict records on nexus-creating activities and your sales footprint. While this may not preclude enforcement, it will strengthen a remote seller’s position should the tax authorities issue a notice or assessment.
Following the last global recession in 2007 to 2009, we saw aggressive state enforcement. We can expect to see even more of this enforcement in recovery from Covid-19 shutdowns.
Are you ready? Contact the SALTovation team at TaxOps and find out. Unlike other CPAs and tax advisors, managing SALT issues is all we do! Let us be your SALT department.
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Judy Vorndran can be reached at firstname.lastname@example.org or 720.227.0420.