Update on US Sales and Use Taxes – Retro-activity and VDAs
The ongoing drama around sales and use taxes continues. Despite the fact that forty-one states, two
U.S. territories, and the District of Columbia joined the amicus brief
supporting South Dakota’s position before the Supreme Court and stating
otherwise, the State of California is now retroactively seeking sales tax from
out-of-state online merchants, going back as far as 2012.
How is this possible? Prior to Wayfair, there
were many other kinds of nexus statutes on the books of states that businesses
had to comply with, e.g., “click-thru nexus”, “cookie nexus”, “affiliate
nexus”, “marketplace nexus”, etc. These nexus rules were variations on the
physical presence test under Quill. However, post-Wayfair, those
laws are still on the books and so far, remain effective for current as well as
past years. And there are two risks here.
- . The first risk is that these rules might have
applied to the business in the past (whether it knew it, should have known it
or not) and so in its zeal to register in states under Wayfair, a business
may find itself liable for unexpected and unbudgeted past tax liability under
these other nexus rules.
- . The second risk is that once a business
registers, it may no longer be entitled to use a VDA to limit past liability
Voluntary Disclosure Agreements to Manage Past Liability
There are two basic types of VDAs:
state-sponsored VDAs and
2. the multistate VDA.
Businesses that use either
type of VDA are looking to avoid criminal responsibilities, avoid penalties and
interest, and limit the so-called lookback period—how far back the revenue
authorities can go for past assessments. Most importantly, businesses
want confidentiality—until a VDA is reached, businesses only want to be known
to that state by its voluntary disclosure case number. In the case of the
multistate VDA, neither the VDA nor any of its terms is disclosed to any other
state. And the business does not have to disclose any information that
would reveal its identity prior to execution of the VDA.
However, prior contact between a state and the taxpayer
concerning sale tax, for example, disqualifies the business from participation
in a VDA with respect to sale tax. Contact includes filing a tax return,
paying tax, or even receiving an inquiry form the state regarding sales tax.
Risk Assessment: Look Before You Leap
A first step in addressing this increased risk is to
undertake a careful review of the business activity in all the states in which
you are doing business currently as well as planning to do business in the
future. In those states, a review of all nexus laws in those states would
be needed–not just economic nexus laws under Wayfair, but the other types
of nexus still on the books, e.g., click-thru nexus, cookie nexus, affiliate
nexus, etc. And this also means that business planning will have to
include retroactive tax liability for prior years; therefore, before you
register in a state, be sure you review past liabilities in that state.
This can be challenging so it’s worth enlisting the help of an experienced and
knowledgeable sales and use tax team — one that can assess the situation, make
recommendations and then implement the technical and research solutions needed
to help you to reduce risk and stay compliant.
If you’re new to online selling, then do start here - https://www.mooresrowland.tax/2019/11/6-steps-to-starting-your-location.html
If you’re a non US seller, then read - https://www.mooresrowland.tax/2019/11/are-you-foreign-company-or-non-us.html
Remember that even though you sell through a company, you
can be personally held responsible for any sales and use tax liability - https://www.mooresrowland.tax/2019/11/responsible-person-rules-in-wake-of.html
Here’s a comprehensive overview of the Sales and Use tax