Don’t Let a Sales and Use Tax Audit Notice Dampen Your Holiday Cheer
It’s that time of the year again—holiday shopping. That means that inventories are starting to build up in the stores and distribution centers. As the orders start to pour in from online and brick-and-mortar stores, businesses will prepare invoices that need to reflect the proper amount of sales tax. Business as usual? For many businesses, not exactly. The Wayfair economic nexus standard and the ever increasing use of online shopping by consumers has placed increasingly complex sales and use tax compliance obligations and substantial risk of improper or failure to comply upon businesses—and state auditors are ready to pounce.
For one taxpayer whose business location is in Pennsylvania, it may not be such a happy holiday. According to a recent article in the Philadelphia Inquirer a small business owner selling on a third-party platform was recently greeted with a letter from the California Department of Tax and Fee Administration (CDTFA), informing him that he owes $1.6M in sales and use taxes going back to 2012!
Where is my inventory stored?
Given the size of the proposed sales and use tax audit adjustment, maybe you think that this happened to a big retail business, right? That is not the case. This small business owner buys products on sale or clearance and then sells them all over the country primarily through a market provider that stores his products in distribution centers all over the country, including California. That physical storage created nexus wherever his inventory was stored. California says that the seller was responsible for collecting and remitting the sales tax on sales made in California and has gone back 6 years to collect. This places the very continuing viability of this business and so many thousands like it at risk.
Is Wayfair the Blame? Not This Time
As just about everyone is now acutely aware, SCOTUS’ decision in Wayfair increased the number of states in which businesses could now have SUT liability because of economic nexus. In fact, there are only two states left—Florida and Missouri—that do not have Wayfair-type economic presence rules in place. This has dramatically increased the risks of tax liability all over the country on both:
(1) The business itself in the form of unbudgeted taxes, penalties and interest.
(2) The key persons who run the business or who are responsible for signing tax returns and other documents in the form of criminal and civil breach of fiduciary responsibility.
However, although Wayfair added a new economic nexus rule, it never removed physical presence, or any other form of nexus states have applied, as a long-standing test of nexus creation. So, the physical storage of inventory is considered physical presence, and that test has always created nexus both before and after Wayfair.
New marketplace facilitator legislation in California
The new marketplace facilitator rules in California and 32 other states currently would probably prevent this result from happening quite this way going forward. In California beginning October 1, 2019, a new the law generally provides that a marketplace facilitator is responsible for collecting and paying the tax on retail sales made through their marketplace for delivery to California customers. A marketplace includes a physical or online place where marketplace sellers sell or offer for sale tangible merchandise for delivery in California. A marketplace facilitator is generally the operator of the marketplace.
Sellers may still be liable for sales and use taxes under these new marketplace facilitator rules
Sellers are still not completely “off the hook” for collecting and remitting sales tax. Here is why:
- The seller is still responsible for collecting and remitting sales and use taxes on sales not made on the marketplace facilitator platform.
- The marketplace seller is liable for the tax if the marketplace facilitator can show that:
- It has made a reasonable effort to obtain accurate and complete information from an unrelated marketplace seller about a retail sale.
- The failure to remit the correct amount of tax was due to incorrect or incomplete information provided to the marketplace facilitator by the unrelated marketplace seller.
Therefore, sellers must remain vigilant in keeping track of all of its sales and use transactions and in providing accurate information to its marketplace facilitator.
The Real Lesson Here—Prepare for aggressive state sales and use tax audits
The real story here for all businesses is how aggressive state auditors are becoming in collecting sales and use taxes under all nexus tests—physical presence and economic presence under Wayfair. And if this case is any indication of things to come, they are prepared to reach back many years to find deficiencies.
Lots of Compliance Risk So Get Ahead of the Curve
With time of the essence in this holiday season as orders pour in, invoices must be prepared correctly for each state that you now have nexus where you may not have had it in the past. Those invoices must get the sales tax right. But with all the new rates and rules—economic nexus, marketplace facilitators—what should be done to keep up and reduce later audit risk? Businesses need to use tools that accurately track ever-changing sales and use tax rates and rules, and receive expert guidance on how to implement technical sale tax solutions that can keep up with all the changes and be implemented quickly in order reduce their risk of non- or inaccurate-compliance.