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As States Consider Ways to Generate Revenue Through Tax Laws, Here’s How to Avoid Penalties

This article was written and produced by Elena Margrey, CPA, Senior Accountant. Looking to get in touch with Elena? Reach out today: emargrey@bonadio.com.

The COVID-19 pandemic had, and continues to have, an impact on the states’ revenues. In comparison with May 2019, May 2020 state sales tax receipts were down almost $6 billion, or 21 percent. States that rely heavily on revenue from sales tax experienced substantial decreases in revenue due to the state-mandated lockdowns, especially Connecticut, New York, North Dakota, and Florida.

COVID-19 also changed the way consumers purchase products. When brick-and-mortar stores were forced to close their doors during pandemic lockdowns, many consumers turned to online commerce for their shopping needs. Despite re-openings nationwide, online shopping continues to be a large part of how consumers obtain goods, creating a need for businesses selling remotely to review compliance obligations in the states they are doing business in.

States Respond to COVID-19

Even with the aid of the American Rescue Plan Act of 2021, states are still going to need to find ways to boost their revenue coming out of the pandemic. One way the states are considering generating revenue is by adjusting existing tax rates or enacting entirely new taxes. While there have not been any laws passed to this extent, states are turning to laws they have already passed to generate revenue – their Wayfair economic nexus standards.

Wayfair Background

While it’s hard to believe it, we have been living in a “post-South Dakota vs. Wayfair, Inc. world” for over three years now. On June 21, 2018, the Supreme Court ruled in favor of South Dakota, giving states the right to collect sales and use tax on remote sales. Since then, 44 of the 45 states that impose sales and use tax standards have enacted laws to regulate the collection of sales and use tax on remote sales. Most states require remote sellers to collect and remit sales and use tax once they have reached $100,000 in taxable sales.

Voluntary Disclosure

States have begun to identify businesses that are suspected of having reached their economic nexus threshold. Businesses are now receiving sales tax questionnaires that could require them to register, file, and pay sales and use tax, dating back to when they first reached a level of economic nexus in the state. This liability would also come with late filing and payment penalties, as well as interest on the amount owed.

However, there is a way to act ahead of the states’ findings and potentially avoid any penalties for late filing and payment. Almost every state that imposes sales and use tax has a Voluntary Disclosure Program in place, as well as a limited look-back period. These programs allow businesses to voluntarily disclose that they had a sales tax responsibility in the state and should have been remitting sales tax. The business will go through a process of explaining how much sales tax is owed, why they were not in compliance with sales tax regulations, and how they intend on becoming compliant for the future. These programs allow businesses to pay the sales tax they owe, usually for a look-back period of 3-4 years, or the date nexus was established, depending on the state, without having to pay any late filing and payment penalties. Paying interest, though, is almost entirely unavoidable.

Moving forward, the business will register for sales tax with the state and file on a state-required basis, typically monthly or quarterly. Becoming compliant with the state as soon as possible will show that the business acted in good faith when filing their voluntary disclosure and is taking the necessary actions moving forward.

Aside from hefty penalties, waiting to be discovered for non-compliance with the state could result in sales tax audits and an overall burden on your business. To keep your business in the best-standing position possible, review your compliance obligations in each state to determine the necessary course of action. Reach out to our State and Local Tax experts today to further discuss your specific situation.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.