Special Report: How COVID-19 is changing business sales tax obligations and enhancing risk [Part 1]

Like you I’m watching this pandemic unfold as a person first and a tax professional second.

This is unprecedented in my lifetime and like you my focus is primarily on my personal health and wellbeing as well as that of the people I care most about. But I also know that behavioral change brought on by COVID-19 will have lasting financial impact on all of us. I’m dedicated to helping all of you see more clearly what’s coming in relation to tax relief, risks and opportunities as we navigate through and beyond COVID-19 to a way of life I believe will be different than it is today in all respects.

This is the first dispatch from me on this subject and there will be many more as changing circumstances and laws require. You can follow this series and more information on sales and use tax compliance here.

We are all witnessing a massive personal and business transformation at the moment, one not seen since the Great Depression, with people rapidly losing their jobs and people on the whole changing where and how they work and live. Abrupt closures of places we have relied upon everyday — retail outlets, restaurants, bars, schools, gyms and more have rocked all of us.

Responding to these closures and the growing concern of the spread of COVID-19, we’re seeing e-commerce rapidly become not only the new normal, but in many cases the primary way to buy and sell products and services for businesses and consumers during this crisis. This will increasingly be the way most of us get what they need for the foreseeable future. Amazon, Walmart, eBay marketplaces are experiencing a huge spike in demand. Amazon announced it is hiring 100K warehouse and delivery workers to meet the demand. Third-party sellers, whether on these marketplaces or elsewhere, have experienced similar spikes in orders from customers in many states and many municipalities in which they will now have Wayfair-economic nexus, and therefore will be subject to sales tax compliance obligations.

The result of these developments is that retail and other businesses selling products online will be facing significantly increased and more complex sales and use tax compliance obligations in more states and municipalities.

Even though they are facing staffing challenges, many state Departments of Revenue (DORs) are beginning to make plans to be much more aggressive in monitoring business registrations and comparing registrations to sales and use tax filings. They are likely to focus their audit and enforcement activities in this area as states face increasing revenue short falls as a result of Coronavirus-related government and business actions taken to protect the public’s health and reduce the severity of our economy’s downturn.

Why focus on sales and use tax in particular? History teaches us that whenever there is a significant economic downturn states see sales tax revenue being pretty stable where income tax revenue (corporate and individual) takes a huge hit. In short, focusing audit activity on sales tax revenue likely will result in a substantially greater return for the states than focusing on income tax audits.

A helpful and instructive example and explanation is provided by the Tax Foundation.

“The relative stability of sales taxes compared to income taxes was not unique to the Great Recession, and indeed, it makes logical sense. While most of us curtail some expenditures during an economic downturn, there is only so much we can — or are willing to — cut. Even those with no wage income continue to consume, supported by savings and governmental assistance, while those whose incomes decline are likely to reduce savings rates more drastically than consumption. Corporate income tax collections are the most volatile because, even in a deep recession, most individuals earn taxable income, whereas corporations may post actual losses and thus have no net income to tax.

Both income and consumption fall when the economy contracts, but not in tandem, with personal expenditures representing a greater share of income during a downturn. This can be seen by digging into the changes in spending and income that underlie those fluctuations in tax collections. Personal consumption expenditures were relatively stable throughout the Great Recession, and personal income wasn’t much worse, but adjusted gross income proved extremely volatile.”

The IRS, in Notice 2020-17, directed that for most corporate and individual payments of 2019 Federal return income tax liabilities the deadline is extended from April 15, 2020, to July 15, 2020. The IRS is expected to extend the filing dates to July 15 as well at the time of this writing. States have begun to extend filing dates and payments for most tax types, including sales and use tax. What does this mean for states with an income tax … a significant amount of income tax revenues, particularly from businesses will not be received until July 15 rather than April 15 (or earlier). This will place even more financial pressure on states, and significantly further the need for audit and enforcement focus that will help lessen the revenue shortfall.

As noted earlier in this post, I’ll be tracking this closely. Look for frequent blogs addressing this and other factors that are likely to have a significant effect on your business as we all navigate a new normal, now and well into the future.

If you have comments, questions, concerns in the interim, feel free to reach out to me directly at mark.friedlich@wolterskluwer.com, visit the Indirect Tax Blog or gain additional timely and relevant tax information during the COVID-19 crisis here.

 

NOTE: CCH Incorporated is not engaged in rendering legal, accounting, tax or other professional services. If legal, accounting, tax or other expert assistance is required, the services of a competent professional should be obtained.

This special report on how COVID-19 is rapidly driving change in consumer and business buying behavior and the potential for enhanced sales tax compliance risks for retailers is the first of what will be an ongoing series that Wolters Kluwer will publish as the tax and business developments, legislation and government relief efforts evolve. If you have comments, you can reach out to author, Mark Friedlich, at mark.friedlich@wolterskluwer.com.

COVID-19 (Coronavirus) Resources for Tax & Accounting Professionals

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Wolters Kluwer is right by your side to help you stay up to date with tax and compliance changes and support your ability to work remotely. Please visit our Coronavirus (COVID-19) Resource Page for Tax & Accounting Professionals.

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Mark Friedlich

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