Since the U.S. Supreme Court endorsed economic nexus in last year’s South Dakota v. Wayfair decision, nearly every state has adopted or is considering a sales tax nexus policy based on the dollar amount or volume of a seller’s in-state transactions. In tandem with economic nexus, states are aggressively pursuing marketplace facilitator policies. These policies require so-called “marketplace facilitators” to collect tax on transactions between third-party sellers and consumers when those transactions occur on or through the facilitator’s platform. There are myriad legal issues raised by marketplace facilitator laws, which will be litigated in the coming years. In the near term, however, marketplaces and multichannel sellers are attempting to comply with the new requirements. A number of states have announced that they will waive penalties on marketplaces for imperfect compliance while phasing in the new laws. These waivers do not, however, extend to buyers’ use tax obligations on purchases they make. The complex new marketplace facilitator regimes also mean that buyers may be overcharged sales tax on their purchases if, for example, the third-party seller has not accurately transmitted taxability or location information to the marketplace that collects the tax.
In this time of uncertainty, verifying that vendor-charged tax is accurate, or that use tax is accrued as needed, is especially important. Here are a few tips for ensuring marketplace facilitator policies don’t upend your accounts payable processes:
- Verify your exemption certificate needs. You don’t want to pay sales tax when you should be eligible for a reseller or manufacturer exemption or when you have a direct pay permit in a given state. Even if you have a current exemption certificate on file with a third-party seller, you may need to submit a new certificate through the marketplace facilitator so that the facilitator will apply your tax exemption. Several marketplaces have online wizards that streamline this process, but note that these self-serve tools may limit the types of exemptions recognized.
- Leverage tax technology. You have data on what you’re buying and how and where it’s delivered. With marketplace facilitator tax collection, the marketplaces rely on third-party sellers to accurately describe the products being sold and may not have all the relevant location information for correct sourcing. In November, the Multistate Tax Commission work group tasked with addressing marketplace facilitator taxation reached a consensus recommendation that states should limit the marketplace’s liability when the marketplace has relied on incorrect taxability information provided by sellers. It’s easy to imagine a situation where a seller tells the marketplace that Product XYZ is prewritten software delivered on a physical CD when the software is actually delivered electronically – in states like California or Florida, that may result in the product being incorrectly coded as taxable. Without automation, accounts payable and procurement teams essentially need to be tax experts and monitor changes across the thousands of jurisdictions in the United States that impose a sales or use tax. Using a tax determination engine that integrates with your ERP can provide confidence that your procure-to-pay processes accurately calculate vendor-charged tax and accrue any use tax due.
- Consider a reverse audit. A reverse (or internal) audit can identify past overpayments of sales tax and underaccruals of use tax, so that you can correct any errors in a timely manner and request a refund before the statute of limitations expires. With states increasingly asking sellers for transaction information – through formal notice and reporting regimes or informal document requests – purchasers have an increased risk of a use tax audit. In some cases, catching errors before being contacted by a state tax agency may mean the difference between eligibility for voluntary disclosure and penalty waivers or being shut out of those programs entirely. By employing a tax determination engine, it’s now possible to automate much of this process, by running past transactions through the engine at fraction of the time and cost of manual review.
Since June 2018, an overwhelming majority of states have passed or are considering economic nexus and marketplace facilitator laws. There is unprecedented disruption in sales tax collection processes. But, with tax technology and a proactive tax department, you can ensure that you’re paying the right amount of sales and use tax on every purchase.
About the Author Melissa A. Oaks is a Proposition Manager for Indirect Tax at Thomson Reuters. Prior to this role, Melissa was the Managing Editor of State & Local Tax for Checkpoint Catalyst, where she specialized in complex nexus, apportionment, and e-commerce issues. Before joining Thomson Reuters in 2013, Melissa practiced law in New York. Melissa is a graduate of Cornell University and Columbia Law School and earned an LL.M. in Taxation from NYU School of Law. Twitter: @melissaaoaks