Were sales and use tax laws hard to understand before the Wayfair decision? Even after five years, these tax laws remain formidable hurdles for businesses. With 2024 underway, the onus is on companies to take the reins and prepare for issues that may loom ahead. In our recent webinar, CohnReznick's National Tax and Manufacturing and Distribution practices shared strategies to better equip your business against potential costly pitfalls and help set the stage for a successful 2024.

Here's a sneak peek at the invaluable insights awaiting you:

Physical presence: 

Before the Wayfair decision (South Dakota v. Wayfair, Inc., 585 U.S. __ (2018)), understanding physical presence was somewhat straightforward. However, the post-Wayfair era demands a nuanced approach to avoid unintended non-compliance. Often overlooked is the concern that remote workers can trigger sales tax nexus in multiple jurisdictions even if on a working vacation of as little as one week. Wayfair mandates that businesses register in every state where tax collection is intended, irrespective of economic thresholds.

Physical presence, once confined to some type of physical footprint such as fixed locations, salespeople resident in a state, or tangible good storage, now extends to activities like provision of services and revenue generated within a state. This expansion beyond traditional boundaries, coupled with the discernible footprints left by equipment and mobile properties (e.g., cookies left on a consumer computer), calls for a comprehensive approach. With sales and use taxes applicable across 45 states plus the District of Columbia and some local jurisdictions in Alaska, a proactive and holistic perspective is essential to mitigate risks of unintentional non-compliance.

Economic nexus beyond physical presence:

Understanding economic nexus involves grasping practical considerations beyond the details of transactions. Economic nexus is not a one-size-fits-all concept – it is a nuanced and quite complex dance with various factors. For high-volume online retailers, it is not just about dollars; transaction volumes also play a crucial role. When it comes to inventory distribution channels, especially with today’s state tax laws, a thorough review of third-party platforms becomes essential, not just advisable. For example, remote sellers that sell through a marketplace facilitator must consider where a marketplace facilitator is storing its goods. This seemingly innocuous activity may create a filing requirement never considered by the company. Franchise taxes also fall under the economic nexus spotlight because filing sales tax returns in a state often triggers other non-income tax-based filings including franchise taxes. 

Although some states have lower thresholds than others, general nexus thresholds take precedence, and considering both sales and the number of transactions is essential. While quite a few states like North Carolina offer a threshold of $100,000 in gross sales, or 200 or more transactions, others, like New York, require $500,000 in sales of tangible personal property and more than 100 sales transactions. Alabama, on the other hand, requires over $250,000 in retail sales, but no transaction limit at all with a growing number of states doing away with the number of transaction threshold. The intersection of transactions, sales, and state-specific benchmarks are where compliance meets strategy. Staying vigilant and adapting isn't just good practice, it's fundamental for businesses aiming to remain compliant and reduce potential risk.

Enhancing sellers' compliance:

Sellers have a dual obligation: imposing sales tax on the buyer or meticulously collecting essential documentation to refrain from charging a customer sales tax. This documentation encompasses a spectrum of crucial records, including sales details based upon ship to (not bill to) for its customers and pertinent exemption certificates. The repercussions of non-compliance are significant, especially for wholesalers. Failure to gather the required documentation sets the stage for potential audits, shifting what could be routine exempt resale transactions into taxable events. The consequences are not only financial; they extend to the business's reputation, inviting significant penalties and legal ramifications. It's a stark reminder that meticulous compliance is not just a regulatory box to check, it's a shield against potential challenges that could compromise financial stability and business integrity.

Integrating technology:

The advancement of robust tax software, potentially with the ability to automate many of these functions, is a game-changer, especially for larger companies seeking comprehensive solutions beyond plug-and-play functionalities. Staying compliant requires more than periodic checks – it demands a continuous, vigilant approach. Advanced tax software is a protective measure that regularly updates tax rates and changes in tax law. These real-time updates are crucial to avoid overlooked notifications that might lead to inadvertent non-compliance. However, it is also essential to recognize that effective tax management is not solely about relying on algorithms and automation. Businesses must balance cutting-edge technology with human oversight. This is where the role of trusted tax advisors becomes paramount. While technology streamlines the processes and reduces the risk of errors, human expertise adds a layer of skilled understanding. By incorporating both elements, businesses can address potential issues, preventing unexpected tax issues, or worse, tax bills, and maintaining a well-informed stance on tax obligations. Integrating technology and human oversight helps ensure adherence to sales and use tax laws and fosters a resilient foundation for sustainable business growth.

Take a strategic approach in 2024

In the new year, beyond mitigating risks, businesses need to stay current and up to speed on the constant flux of tax law changes as this is becoming a cornerstone for innovation, growth, and sustained success. Businesses both large and small, should avoid segmenting sales channels and instead adopt a holistic perspective for accurate and compliant reporting. Companies can avoid possible adverse consequences with proper due diligence and professional advice. Interestingly, some businesses only realize their non-compliance when they receive a nexus questionnaire or inquiry from the taxing jurisdiction. In this case, ignorance isn't bliss; it's a liability. Therefore, staying informed and securing the right advisors isn't just an option; it's a smart business move.

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}