Learn about constitutional restrictions that limit states` ability to force out-of-state sellers to levy a use tax on mail order and online sales. The publication of FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Clients (Topic 606), means that “all entities with federal, state, and sales tax compliance responsibilities should consider potential tax planning and reporting issues” (“U.S. Tax and FASB`s New Paradigm for Revenue Recognition,” JofA, June 2017). To the extent that a legally obliged undertaking does not collect VAT from its customer, the tax due becomes a debt of the taxable person. As a result, most companies have their books and records audited by independent third-party audit firms to assess and certify tax liability at the federal and federal levels, and a standardized measure of the relationship between state and local tax jurisdictions would make it easier for auditors. Income tax rules on economic presence have been in place for much longer than their VAT counterparts and, as such, taxpayers have actively challenged these income tax rules. The results of these cases show once again the inequality that exists today in the world of VAT. In Tax Commissioner v.
MBNA America Bank, N.A., 640 S.E.2d 226 (W.Va. 2006), the West Virginia Supreme Court of Appeals authorized tax enforcement against MBNA, which had no tangible connection to the state. The Decision partially recognises that income taxes do not appear to impose the same level of compliance burdens as VAT. In addition, the Court stated: “Instead of establishing a standard for physical presence, the Court considers that a significant criterion of economic presence is a better indicator of the existence of a material link for the purposes of the commercial clause” (emphasis added). This is the court`s response to the taxpayer`s argument in favour of using the presence standard for corporate income tax. The Court emphasises the requirement of a `significant` criterion of economic presence. 200 transactions do not necessarily reach the “significant” level of economic presence, especially when it comes to sellers of relatively inexpensive items. The biggest difference between economic connection laws and notice and reporting laws is that service and report laws have been in effect since July 1, 2017, starting with the Colorado State Notification and Reporting Act. The economic connection laws were not declared constitutional until June 21, 2018, when SCOTUS rendered its decision in South Dakota v. Wayfair. For transactions made on or after July 1, 2019, a distance seller must register for sales and use tax collection if they receive more than $100,000 in retail sales or any other minimum amount required by federal law in the previous or current calendar year, from retail sales in Virginia or 200 or more separate retail sales. or any other minimum amount required by federal law in Virginia during the preceding or current calendar year.
A market intermediary must also register to collect sales and use tax if it meets certain requirements, including establishing an economic context by either facilitating sales in Virginia that collectively generate more than $100,000 in retail revenue, or another minimum amount required by federal law, based on sales in the previous or current calendar year. or facilitate 200 or more separate retail transactions or any other minimum amount required by Virginia federal law in the preceding or current calendar year. This distance seller link table lists states that have adopted one or more types of laws related to the link. Most online sellers are now familiar with the term “VAT relationship” as defined in Quill v. North Dakota Supreme Court. In short, retailers must be present in a state before that state can require that retailer to collect sales tax from buyers in that state. Some states would seek to facilitate compliance with and collection of sales tax by taxpayers. Some examples include websites that allow users to manually calculate sales tax based on address, or an application programming interface (e.g., in California) that integrates with retailers` online order forms to determine the appropriate tax rate and location in real time. A majority of States now have such a search tool in one form or another.
Arkansas has a tool to search by zip code or address. The Washington State search tool includes a map of the state, allows you to search for geographic coordinates, and calculates tax for a specific taxable sales amount. The Colorado website includes a clickable map and provides a breakdown of the tax rate components. Maine passed legislation on June 11, 2021 to remove the 200-transaction threshold from the state`s economic context rules for distance sellers, effective January 1, 2022. Twenty-eight states use both dollar-based and transaction-based threshold link standards. Another 15 states have adopted only one sales dollar threshold standard. In a controversial situation where the governor of Kansas runs against the attorney general, Kansas is currently setting an economic nexus standard without any threshold. Of the states or territories with state and/or local sales taxes, all except Missouri have passed economic relations laws. Florida`s new economic connection legislation will go into effect on July 1, 2021. The Pennsylvania Department of Revenue outlined its economic context rules in a Sales and Use Tax Bulletin (see Pennsylvania Sales and Use Tax Bulletin 2019-01). In general, audit firms place a higher priority on federal and state income taxes than sales taxes.
In a post-Wayfair world, this needs to change, and taxpayers need to be aware that a potential significant liability is related to sales tax, as states are now applying an economic nexus measure. It should be reviewed quarterly, like income tax. In addition, businesses should set aside any sales tax obligations in the states where they operate. Distance sellers should also take into account contingent liabilities that need to be recognised in relation to potential liabilities due to exceeding the link thresholds. The “link” is the necessary contact between a taxpayer and a state before the state is responsible for taxing the taxpayer. Prior to the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, a physical presence in the state was required for the link between sales and use taxes. After Wayfair, the economic nexus standard, which historically applied only to corporate income tax, has become the dominant standard for the relationship between sales tax and use tax. The economic link examines economic activity within a state to determine whether an enterprise has a link. The new VAT link standards create a larger compliance footprint for U.S. businesses and potentially foreign companies selling to the U.S.
With the shift from physical presence to economic link, states have become more aggressive when it comes to identifying and requiring businesses to comply with sales tax collection and filing rules.