Changes in the sales tax nexus landscape can trip up purchasers

The Supreme Court's 2018 decision in Wayfair V. South Dakota changed the requirement for nexus from physical presence to economic presence. The focus has, perhaps correctly, been on what sellers can do to comply with state laws and avoid exposure. Since economic nexus has become law, thought leadership outlets have regularly covered topics such as analyzing nexus and selecting software. Compliance tips are also included. The impact on the purchasers' sales/use tax policies and practices is perhaps equally important.

Wayfair made it easy for sellers to avoid having a nexus in the entire country, and pass on the responsibility of paying the appropriate use tax to purchasers, who would then have the process in place in order to collect and remit that tax. As more sellers are now registered, and sales tax collection in the United States is at an unprecedented level, sales tax has been included on many invoices previously untaxed. This could result in a double tax payment for purchasers who have historically accrued use tax vendor-by vendor as part of their month-to-month process.

Many sellers updated their ERP software in response to the need to establish nexus across the country. This included a functionality for collecting sales tax. When used correctly, these tools can be very effective. It becomes a problem when sellers offer a variety of products and services which are hard to map in order to determine the correct taxability for each state. In many cases, the default mapping (especially for software/tech purchases) is taxable. This leads to sellers overcharging tax. The tax is already paid when an invoice with an incorrect tax amount reaches the tax department. It may be more difficult to remove the tax from future purchases, since it requires remapping taxability decisions in the vendor’s ERP system. The vendor might not be able or willing to do this.

In the post-Wayfair world, buyers are often confused when a vendor's state sales tax rate is charged on an invoice. It is difficult to detect these situations because the invoice looks accurate. A manual calculation may be required to discover that the tax rate is incorrect. This results in the fact that the transaction will be taxable not in the state of the seller, but rather the ship-to state. Ship-to states do not usually give credit for taxes that are not paid correctly and will likely assess tax during an audit despite the fact that sales tax was included on invoice. In turn, this would result in a refund in the state where the seller incorrectly collected sales tax.

Exemption certificates are also a hot issue, since many taxpayers received updates to exemption certificate requests from vendors. Unfortunately, these requests are often not sent to the right person or not answered in a timely manner, which leads to the tax being applied to items that should be exempt. The error isn't noticed until the invoices with the tax are sent out. The short-paying of tax can create a number of account receivable problems, especially if the error is caught before payment. Many vendors will have already paid the tax to various states. The vendor may refuse to honor the short payment. Other exemption-certificate-related issues purchasers must be aware of include providing proper multijurisdictional certificates (many states only accept these as resale certificates), drop shipments (which could be a separate topic itself) and exemption certificates for items that are not statutorily taxable in the first place (presumably an exemption certificate cannot be provided since there is not a 'taxable' transaction to exempt, but often vendors will still request/require them).

If you find that you've overpaid your sales tax, there is a process to recover the money. The mechanics for obtaining refunds may vary from state to state, and taxpayers may need to work with vendors to secure funds. Before pursuing a reimbursement, it is important to perform an exposure analysis in order to determine if the potential liability for taxable purchases exceeds the refund amount.

The change in sales tax laws is the perfect opportunity for purchasers and their accounting departments to re-evaluate and review their policies and procedures regarding accounts payable, use tax accrual and sales tax to ensure that sales tax is paid correctly throughout the organization. It may be necessary to have an upfront discussion with vendors about taxability before purchasing, provide proper exemption documentation prior to making purchases and possibly file refund claims if applicable.

GBQ is here to help you comply with the constantly changing tax sales landscape. Contact a member from GBQ’s State & Local Tax Services Team. This team is made up of professionals with experience who are available to plan and manage state and local taxes for progressive, local or nationally focused companies.

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Jeff Monsman has more than 10 years' experience in state and local taxes. He specializes in indirect taxes such as multistate sales taxes, use taxes, and real and personal properties taxes. He is responsible for the firm's service in unclaimed property and helps clients with income/franchise taxes.