Marcum LLP
2017 Year-End Tax Guide

 

Sales Tax Collection – The New Wild West

Sales Tax Collection – The New Wild West
 

State taxation is an ever-changing world. States are stretching the limitations of their power.

The world of state taxation is ever-changing. States have taken it upon themselves to create statutes that are, at best, a stretch of the limitations of the power of the state and, at worst, unconstitutional.

The most recent trend by states in this area, and the one with the most significant economic impact, will be the creation of sales tax nexus based purely on sales. These laws, now enacted by states such as AL, IN, MA, ME, ND, NE, SD, TN & VT, will require businesses to collect and remit sales tax in a state if the level of sales exceeds a predetermined amount, generally between $100,000 and $500,000, annually.

The major problem with such statutes is that they may be in direct contradiction to the U.S. Supreme Court case, Quill v. North Dakota, decided in 1992. In Quill, a "physical presence" test was determined to be necessary before a state could impose sales tax collection requirements on a business. In an age where internet sales are growing exponentially each year, states are searching for ways to recoup the lost sales tax revenue that was formerly provided by brick and mortar retailers. Lost sales tax revenue by all states has been estimated to exceed $26 billion annually and growing.

For years, states have attempted to achieve a consensus to make sales tax filing simpler and easier, with the goal of having Congress enact legislation requiring all companies to collect a state's sales tax based on sales thresholds. This was called the SSSP, Streamlined Sales Tax Simplification Project, and has been in the works for over two decades. With the unrelenting gridlock in Washington, many states have decided to not wait for Congress to act and have created their own statutes. Several court cases are winding their way through various state legal systems, with the expectation that one will eventually reach the U.S. Supreme Court, resulting in the overturning of Quill and allowing for sales tax collection requirements based only on sales.

There are two schools of thought on this issue. One is that the court is reluctant to reopen precedent and thus will refuse to review a case coming out of a State Supreme Court on this matter. Refusing to hear the case will allow the state court ruling to stand – not a good answer for merchants if the state court has deemed the statute legal. The other school of thought is that the court will accept the case and, based on public statements made by a number of the justices, will overturn Quill and do away with the physical presence requirement for sales tax collection.

In either event, this becomes an extremely important issue for all businesses to be aware of and potentially plan for. In the realm of sales taxes, if a business has established nexus, say, based only on sales to customers, and fails to collect the sales tax, the business becomes liable for the taxes due. This can be a significant sum to a small business. Assume $1,000,000 in sales and a sales tax rate of 6%, and the uncollected tax would be $60,000 before interest and penalties. Include prior years in this equation, and you see that the amount can rise rapidly to very significant proportions for a small business.



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