Multistate Tax Symposium - Deloitte US€¦ · Streamlined Sales Tax –Certified Service Providers...

The 2020 National Multistate Tax SymposiumMastering the Art (and Articulation) of State Tax—Distilling the Complex

January 29-31, 2020

State indirect tax complexities post-WayfairRick Heller, Deloitte Tax LLPStacey Sprinkle, Verizon Communications Inc.Marilyn A. Wethekam, HMB Legal Counsel

January 29-31, 2020

3The National Multistate Tax Symposium: January 29-31, 2020Copyright © 2020 Deloitte Development LLC. All rights reserved.

• State Sales Tax Nexus Principles

• U.S. Sales Tax Nexus Post Wayfair Decision

• Reserves, Remediation & Systems Considerations

• Income/Franchise Tax Considerations

Agenda

4

State Sales Tax Nexus Principles


Difference in non-U.S. and U.S. Indirect Taxes

• Unlike a countrywide VAT or GST, general U.S. sales/use taxes are currently imposed by 45 of 50 states plus the District of Columbia

• Many states also have local-level sales/use taxes at differing rates that generally mirror the state sales/use tax structure and may or may not be collected centrally

• Some states have “home-rule” localities that are authorized to impose sales/use taxes on a different tax base

• Unlike a VAT, sales/use taxes are theoretically imposed only upon the ultimate end user of the taxable good or service

• States are not a party to U.S. bilateral tax treaties, so those rules generally don’t directly apply to U.S. states or localities. Transaction taxes are generally excluded from the treaty

• Permanent Establishment (PE) principles, i.e., a fixed place of business, do not apply to determine registration, collection and remittance obligations. Rather, the concept of nexus with a state is the standard

• Federal effectively connected income (ECI) could create nexus

Difference in non-US and US Indirect Taxes


What are U.S. sales-and-use tax nexus creating activities?

Various ways of establishing Physical Presence (traditional)

U.S. state sales and use tax nexus was not based upon Permanent Establishment (PE) principles or treaties. Previously, nexus could be created in various ways:

• In-state employees & independent contractors

• Sporadic employee/independent contractor visits

• Attending trade shows and seminars

• In-state deliveries made by one’s own truck

• Physical presence of property even temporality

• Incidental ownership of property

• Voluntary registration or incorporation

Pushing the Edges of Physical Presence

States wanted to change ‘physical presence standard’ and started to pursue remote sellers in various ways:

• Affiliate or agency nexus; volunteers, agents, independent contractors

• Click–through nexus (e.g., NY)

• Internet nexus through “cookie” or electronic nexus presence

• Marketplace provider platforms nexus

• Notification and reporting statutes for remote sellers with steep penalties for non-compliance (e.g., CO)

7

U.S. Sales Tax Nexus Post Wayfair Decision


Wayfair U.S. Supreme Court decision on nexus—South Dakota law in question

On March 22, 2016, Governor Dennis Daugaard signed Senate Bill 106 (S.B. 106) amending S.D. Codified Laws § 10–45 and 10–52, effective May 1, 2016, to require the collection of South Dakota sales tax on sales into South Dakota if, in the previous or current calendar year:

• The seller’s sales into South Dakota arehigher than $100,000, or

• The seller had two hundred or more separate transactions into South Dakota.

S.B. 106 provided the authority for South Dakota to bring a declaratory judgement action in order to expedite the determination as the validity of this nexus standard under state and federal law. S.B. 106 also provided an injunction provision to enjoin enforcement of the law pending the declaratory judgment action.


The Wayfair Decision: June 21, 2018

• In a 5-4 Decision, Justice Kennedy (joined by Thomas, Gorsuch, Ginsburg, Alito) held that:

− Quill and National Bellas Hess are overruled regarding physical presence requirement

− The physical presence rule is unsound, is an incorrect interpretation of the Commerce Clause, and restricts the states’ authority to “collect taxes and perform critical public functions”

• Majority concluded that the following features of South Dakota’s law minimized the burdens on interstate commerce:

− Included a transactional safe harbor (but “undue burden” not clearly addressed)

− Did not apply retroactively

− South Dakota was a full member of the Streamlined Sales and Use Tax Agreement (SSUTA)


Wayfair—Other decisional factors

• Tax compliance burden on small sellers was acknowledged as a potential legitimate concern in some instances.

−Potential solutions: Technology and/or Congress?

− Certified Service Providers?


What impact on historical Nexus trends?

What about economic nexus for state net income taxes and gross receipts taxes?

Will Congress intervene and impose uniform national nexus and/or simplification requirements?

Attributional nexus

Affiliate nexus

Click through nexus

Notice and Reporting statutes

Drop Shipment statutes

Sales Tax


Federal Developments impacting State Taxation

Post-Wayfair bills

•House

−Protecting Businesses from Burdensome Compliance Cost Act of 2019 (H.R. 379) – Sponsor: Rep. Gibbs (1 cosponsor)

−Online Sales Simplicity and Small Business Relief Act of 2019 (H.R. 1933) – Sponsor: Rep. Sensenbrenner (10 cosponsors)

•Senate

−Stop Taxing Our Potential Act of 2019 (S. 128) – Sponsor: Sen. Tester (4 cosponsors)

−Online Sales Simplicity and Small Business Relief Act of 2019 (S. 2350) – Sponsor: Sen. Shaheen (3 cosponsors)


Streamlined sales tax

Post-Wayfair landscape

Adoption of streamlined sales & use tax agreement:

• Single state level administration

• Uniform definitions of products and services

• Simplified tax rate structures

• Other uniform rules


Streamlined Sales Tax – Certified Service Providers & Automated Services

Certified Service Providers (CSPs)

•A CSP is an agent certified under the Streamlined Sales and Use Tax Agreement (SSUTA) to perform all the seller's sales and use tax functions, other than the seller's obligation to remit tax on its own purchases. A CSP is designed to allow a business to outsource most of its sales tax administration responsibilities. CSP services are provided free to sellers in the Streamlined Member states in which the seller is a "volunteer seller" as defined in Section D.2. of the CSP contract – essentially someone that did not have a “physical presence” in the state and volunteered to collect and remit taxes under the SSUTA.

• The Wayfair decision has changed the concept of “volunteer seller” and is something the Governing Board is reviewing.

Certified Automated Service (CAS)

•A CAS is software certified under the Streamlined Sales and Use Tax Agreement that is designed for a seller that wants to use certified tax calculation software but keep the responsibility for filing returns and remitting the tax in-house.


Streamlined Sales Tax – Benefits of using CSP & CAS

Certified Service Providers (CSPs) -

The software system of a CSP interfaces with the seller's accounting system to:

• identify which products and services are taxable,

• apply the appropriate tax rate, and

• maintain a record of the transaction.

The CSP will also provide the services necessary to:

• set-up and integrate the CSP's software with the seller's system,

• prepare and file the required tax returns,

• remit the tax to each of the Streamlined member states,

• resolve any notices or audits by any Streamlined member states, and

• protect the privacy of the tax information it obtains.

Each Streamlined full member, contingent member, and associate member state has certified the accuracy of the software and will provide liability relief for incorrect tax calculation based on that certification.


Streamlined Sales Tax – Benefits of using CSP & CAS

Certified Automated Services (CAS) -

The software system of a CAS interfaces with the seller's accounting system to: 1. identify which products and services are taxable,

2. apply the appropriate tax rate,3. maintain a record of the transaction, and 4. determine the amount of tax to report and pay to the Streamlined member states.

A seller that uses a CAS is responsible for filing the tax returns, paying the taxes due to each of the Streamlined states, and resolving any notices or audits by any of the Streamlined member states.

Each Streamlined full member, contingent member and associate member state has certified the accuracy of the software and will provide liability relief for incorrect tax calculation based on that certification.


Economic nexus states


States that have passed economic nexus or

Wayfair-inspired legislation*

(*Not necessarily effective as of yet)

..

FL

NM

DEMD

TX

OK

KS

NE

SD

NDMT

WY

COUT

ID

AZ

NV

WA

CA

OR

KY

ME

NY

PA

MI

VT

NH

MA

RICT

VAWV

OHINIL

NCTN

SC

ALMS

AR

LA

MO

IA

MN

WI

NJ

GA

DC

AK

HI

• Most states have adopted South Dakota’s threshold, but some states elected for a higher threshold. For example, in New York:

o “A person shall be presumed to be regularly or systematically soliciting business in this state if… the cumulative total of suchperson’s gross receipts from sales of property delivered in this state exceeds $500,000 and such person made more than 100 sales of property delivered in this state…”

• One state, KS, has adopted no threshold.

Localities that have adopted economic nexus or

Wayfair-inspired standards


Marketplace is Deemed to be the Tax Collector and Remitter (Consignment Shop Model)

Wayfair decision sparked jurisdictionaladoption of “marketplace” laws, also referred to as “platform” laws.

In general, these laws impose collection and/or reporting obligations on a “marketplace facilitator” or “marketplace providers” for sales made by “marketplace sellers” through their platform.


Marketplace Facilitator Definition

Example: Marketplace Facilitator - A person that facilitates the retail sale of tangible personal property or digital property by listing or advertising the tangible personal property for sale at retail and either directly or indirectly through agreements or arrangements with third parties, collects the payment from the purchaser, and transmits the payment to the person selling the property. NCSL has adopted model legislation to help drive uniformity of these provisions among the states.

Key Features

Listing or advertising the item for

sale

Collects payment

Transmits the

payment to seller


Marketplace facilitator states


States that have passed marketplace facilitator legislation/rules*

(*Not necessarily effective yet)

..

FL

NM

DEMD

TX

OK

KS

NE

SD

NDMT

WY

COUT

ID

AZ

NV

WA

CA

OR

KY

ME

NY

PA

MI

VT

NH

MA

RICT

VAWV

OHINIL

NCTN

SC

ALMS

AR

LA

MO

IA

MN

WI

NJ

GA

DC

AK

HI

Three distinct legislative models:

• With no exceptions, marketplace provider/facilitator collects and remits sales tax.

• A waiver process where registered third-party sales tax vendors can opt out of the platform remitting on their behalf.

• Platform has the option to collect and remit sales tax on third-party sales, or comply with the “Colorado-style” information reporting requirements.


Tangible personal property and common services may be subject to tax:What are the sourcing and taxing rules in each state?

All tangible Personal Property

and Equipment

Software (including

electronically downloaded) Software

as a Service (SaaS) Cloud

ServicesDigital Goods (e.g., music,

movies, books,

magazines, Apps)

Data processing

Information services

Note: Several states impose sales tax on services generally

The Following may be Subject to Sales Tax Depending upon Specific State Law and Regulations


Expansion of Taxes to Digital Commerce & Other Services

Sales taxes – many states considering expansion to digital commerce

─Proposals are focused on digital downloads, all forms of video (downloads and streaming,) all forms of software (downloads and cloud-based access) and/or all of the above

─Some measures sought to expand the tax base, while others sought to specifically exclude certain digital products from taxation

▪AZ, CT, DC, IA, KS, NC, RI & VA

▪Did not pass in KS & VA

―Efforts to limit local taxes on OTT

▪AZ


Expansion of Taxes to Digital Commerce & Other Services

Other “taxes” on digital commerce

―NV

Other “taxes/fees” on video services

―GA, IL, KY, MA, MO & WI

ITFA Overlay

―“Electronic Commerce” protected from discriminatory tax


Considerations

Mergers & acquisitions

Adapting to current landscape

Understand if there is exposure that could potentially warrant a purchase price adjustment or escrow

Sell-side

• Voluntary disclosure

• Possible amnesty programsRemedial measures

Need to overlay rules in due diligence to properly vet nexus profile according to changing post-Wayfairstandards (vs. pre-Wayfair)

Buy-side

• Consider target’s historical sales tax filing profile against its sales-by-state profile

• Consider income tax risk as well

• Successor liability concerns

25

Reserves, Remediation and Systems Considerations


When a loss contingency such as the uncertain incurrence of a transaction tax liability exists, the

likelihood that the future event or events will confirm the incurrence of the liability can range from

probable to remote:

ASC 450 considerations — When recognizing a liability is appropriate

Probable

The future event or events are likely to occur (higher level of likelihood than more likely than not contained in ASC 740).

Reasonably possible

The chance of the future event or events occurring is more than remote, but less than likely.

Remote

The chance of the future event or events occurring is slight.


ASC 450 considerations (cont’d)

Financial reporting analysis necessary on a state-by-state basis

Companies should revisit positions they may have taken for sales and use tax collection purposes regarding the need for physical presence to establish substantial nexus.

While the facts at issue in Wayfair involved a statute with prospective application, potential retroactive application and enforcement to the effective date of a state’s applicable statute remains uncertain.

Notification and reporting statutes

Twelve states have enacted notification statutes which can carry substantial penalties.

Such states require remote sellers to provide in-state buyers with information regarding their use tax obligations, as well as provide a report to the state detailing in-state purchases.


Knowledge and experience tells us this is what tax teams may need to know and do.

Systems/technology view

• Provide awareness and recognition for IT and Operations, as well as the broader organization of the scope and volume of the impact

• Educate IT, Finance, and Leadership of impact to business, operations, as well as increased cost of compliance for the organization

• Assess impact to current operations and footprint, as well as anticipated strategy and operational changes

• Identify and prioritize needs with Tax, IT, and Operations with consideration of ongoing system initiatives

• Develop proposed solution roadmap and timeline to address gaps and mitigate potential exposure

• Continue to manage change and educate the organization regarding the impact

Tax departments should understand how:

Tax departments should be prepared to:

• Business models/processes are affected

• Calculating, reporting and remitting sales tax compliance can be scaled for expansion

• States characterize, for sales tax base purposes, the goods and service currently being sold to customers

• Sales are sourced (i.e., tax situs) and will the necessary customer data be available and validated

• State notification requirements can be met with proper data and reports


Key steps to begin your evaluation

Understand historic and future nexus implications

Determine how states may tax the company’s products or services

Perform a system’s readiness assessment

Collect and verify information needed to source sales

Evaluate internalresources available to comply in new states

• Determine which states the company is not currently collecting and remitting

• Understand past, present, and future activities that may establish physical presence

• Evaluate state’s current economic nexus thresholds and effective dates

• Determine a nexus creation date, if any, for each state where the company is not currently registered and remitting sales and use tax

• If the company is selling tangiblepersonal property, presumption is the sale is taxable unless an exemption or exclusion applies

• If the company sells services, including software or electronically delivered services, a characterization analysis may be necessary

• In order to properly characterize products, customer agreements, marketing materials, and delivery models should be analyzed

• Evaluate exemptions or exclusions that may apply to the product

• If a state’s statute or guidance is not clear, the company may consider requesting a ruling from the state

• Evaluate currentfinancial systems and associated capabilities

• Analyze current sales and use tax reporting software, if available

• If no tax collection software is available, analyze potential providers

• Determine whethersystems are able to report and reconcile returns to financial data

• Evaluate whether automated analytics and dashboards can drive efficiencies within the tax compliance and reporting process

• Analyze whether shipping address, place of receipt, and delivered-from location are available

• Determine whether full address information, including zip code plus 4, is available when no shipping address is needed

• Evaluate whether third party vendors (e.g., payment processors, marketplace facilitators) provide necessary sales detail to support sourcing position?

• Determine whether system can calculate tax based on proportional users across multiple states

• Will state compliance administrative burden increase with new filing requirements

• Evaluate the availability of internal resources to file monthly, quarterly, or annual returns based on each state’s assigned filing frequency

• Evaluate the cost and benefits of outsourcing returns versus using internal resources

• Evaluate exemption certificate collection processes to ensure proper collection, when applicable

Nexus Taxability Automation SourcingCompliance Readiness


Issues to consider….

Does your company sell goods and services under a wholesale (for resale) or retail (purchaser consumes) basis?

• If wholesale sales, should the seller be collecting sale-for-resale exemption certificates? Is the buyer registered?

• If retail sales, the seller should be monitoring its nexus positions for both sales taxes and income taxes.

• If retail sales consist of services, software, Cloud services/platforms or other things that are not TPP, then a taxability study may be needed for relevant sales tax nexus states

31

Income/Franchise Tax Considerations


Sales tax registration may trigger state income tax inquiries

Unlike registering for a VAT, the concept and protection of P/E may not apply to state income/franchise/gross receipts taxes (“Income Taxes”).

• Once a company is registered for sales taxes, the state will want to know the company’s state Income Tax nexus position

• State Income Taxes have their own nexus standards.

• State Income Tax nexus may not be the same as Indirect Tax nexus standards.

• Likewise, if a company registers for income tax, they may need to register for sales tax


What are some U.S. state income tax nexus creating activities?

A non-resident corporation may be protected by P.L. 86-272 from the imposition of a net income tax if its only in-state activity is:• “Solicitation of orders”

for the sale of tangible personal property

• Approved outside the state, and

• Shipped or delivered from a point outside the state

Examples of “Protected” activities• Solicitation of orders• Providing at no charge

samples and promotional materials

• Providing a vehicle to sales personnel for their use in conducting protected activities

Examples of “Unprotected” activities• Installation and start-

up• Customer training• Engineering, design and

technical assistance• Warranty, maintenance

and repair


Possible income tax implications

• The Supreme Court in Wayfair has established that “[p]hysical presence is not necessary to create a substantial nexus.”

• Whether physical presence is necessary for the imposition of income taxes has been the subject of uncertainty

• To date, however, the Supreme Court has not granted certiorari in any such case pertaining to economic nexus. In recent years, a number of states have enacted so-called “factor-based” economic presence nexus standards for income or gross receipts-type taxes.

• In light of the Court’s unequivocal statement in Wayfair that physical presence is not a necessary element for “substantial nexus,” and the Court’s review and approval of South Dakota’s economic nexus sales tax statute, taxpayers will need to revisit positions they may have taken regarding both sales/use taxes and other taxes and the need for physical presence in order the establish substantial nexus.


Wayfair: Impact on income taxes

• Because Quill was a sales tax case, many states had enacted economic (i.e., non-physical) nexus standards for income tax purposes. Conversely, some companies may have interpreted a physical requirement to apply to state income taxes as well.

• After Wayfair, there may be no question as to the constitutionality of economic or factor presence nexus standards for both income tax and sales tax purposes.

• Further Questions to Consider:

− Without a physical presence requirement will the states:

◦ Enact factor presence nexus provisions and/or other broad nexus rules?

◦ Broaden the definition of doing business without bright-line test?

◦ Challenge historic filing positions based on the Court’s ruling?


Factor-Based Nexus Standards

..

FL

NM

DEMD

TX

OK

KS

NE

SD

NDMT

WY

COUT

ID

AZ

NV

WA

CA

OR

KY

ME

NY

PA

MI

VT

NHMA

RICT

VAWV

OHINIL

NCTN

SC

ALMS

AR

LA

MO

IA

MN

WI

NJ

GA

DC

AK

HI

• Multistate Tax Commission Model “Factor Nexus” Statute

• Substantial nexus is established if any of the following thresholds are exceeded during the tax period: $50,000 of property; or $50,000 of payroll; or $500,000 of sales; or 25% of total property, total payroll or total sales.

Example of States adopting “Bright-Line” Nexus Tests

New York State (2015)

• Under a bright-line “factor-based” standard, nexus is created with a state when a minimum amount of property, payroll or sales in the state is met.


Economic Presence Nexus

• A growing number of states have statutes or rulings that assert nexus over taxpayers that have an economic presence in the state, even those that lack a physical presence in the state.

• “Geoffrey” Nexus – applies when licensed intellectual property is used in a state.

Maine’s explanation of economic nexus

• “Economic nexus is a short-hand term for the principle that a taxpayer's purposefully directed business activity in a State (other than solicitation of sales activity protected by P.L. 86-272) may be sufficient to subject that taxpayer to income tax in that State regardless of the level – or absence – of physical presence in that State”

Will the Wayfair decision influence the number of states asserting economic nexus from an income tax perspective?


Recent nexus developments

Oregon’s Corporate Activity Tax utilizes multiple nexus tests:

• The taxpayer “owns or uses a part or all of its capital” in Oregon

• Holds a certificate of existence/authorization issued by Oregon Secretary of State

• Has bright-line nexus with Oregon:

− Owns property or maintains payroll in Oregon exceeding $50k/year

− Has commercial activity in Oregon exceeding $750k/year

− Taxpayer’s total property, payroll, or sales factor exceeds 25% of total factor at any point in tax year

• Otherwise has nexus with Oregon under the United States Constitution


Wayfair: Impact on Income Taxes

Potential ASC 740 Considerations may include:

• New separate company filing obligations

• Combined/unitary filings

− New filing obligations based on one member having nexus

− Impact to sales apportionment based on “Joyce/Finnigan” filing requirement

− NOL and credit utilization within the group

P.L. 86-272 is still valid after Wayfair.

• P.L. 86-272 generally precludes a state from imposing an income tax if the only in-state business activities involve the solicitation of orders for sales of tangible personal property.

• If virtual connections can create nexus, can virtual connections constitute an “in-state” activity that exceeds solicitation such that the protections of P.L. 86-272 are lost?

• Note that by its terms P.L. 86-272 protection operates in interstate commerce, not foreign commerce.


Contact information

Marilyn A. Wethekam

HMB Legal Counsel

[email protected]

Rick Heller

Deloitte Tax LLP

[email protected]

Stacey Sprinkle

Verizon Communications Inc.

[email protected]

mailto:[email protected]




This presentation and related panel discussions contain general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

Copyright © 2020 Deloitte Development LLC. All rights reserved.

https://www2.deloitte.com/us/en/legal/about-deloitte.html

Multistate Tax Symposium - Deloitte US€¦ · Streamlined Sales Tax –Certified Service Providers...

Documents

Transcript of Multistate Tax Symposium - Deloitte US€¦ · Streamlined Sales Tax –Certified Service Providers...