Do You Know the Sales Tax Rules for the States in Your Supply Chain? If Not, It Could Be Costly.
Retailers that operate in multiple tax jurisdictions across the U.S. are facing an increasingly complex and onerous landscape. While once they were able to trust customers to settle their own sales tax bill, the Supreme Court's decision in Wayfair vs. South Dakota now forces merchants to account for and collect the tax on every transaction, a bookkeeping nightmare for small businesses.
But, as if that isn't difficult enough, these retailers face the added burden of monitoring nexus -- or (sometimes fleeting) business ties -- in multiple jurisdictions to assure compliance with increasingly stringent sales tax laws for increasingly aggressive tax collectors.
Whether to bolster sagging income tax dollars due to the Tax Reform and Jobs Creation Act of 2018, or to fund soaring infrastructure and social services costs, many states are taking the most expansive view possible on defining nexus in order to drive tax collections.
Further complicating matters is the increasing complexity of supply chains, in which an item can pass through facilities in numerous cities in the long journey from manufacturer to end user. Retailers who typically don't watch every link in that chain may well find out details the hard way -- in the form of a tax bill.
The most extreme examples are Ohio and Washington state. Particularly if a business orders goods through Amazon or another major multistate seller, it's highly likely that some semblance of business will wind through one of these states. If you're unaware and haven't settled up promptly, you could be hit with penalties and interest, reaching back as much as 10 years for non-filers or three years for filers. If you have not filed, no statute of limitations stands in the way, and states are able to access records from major sellers.
The taxes are not only due on transactions in a particular state, but on overall receipts from one's own ecommerce site, plus business and occupation excise tax on gross receipts. These taxes may be deducted from a Federal return but will not reduce state tax liability. Also, owners and officers can be held personally responsible for delinquencies.
International businesses of course face the same rules, regardless of whether they have facilities in these states. My firm recently assisted a New Zealand-based client that sells a food product through Amazon to register for sales tax and monitor their gross receipts in U.S.
In one extreme case, we worked with a client found to have just six dollars in inventory in Washington, that had to pay a six-figure sum in back taxes and penalties. The state assessed sales tax on all sales, back to 2006 (12 years), plus the retailer had to pay business and occupation tax.
The easiest way to avoid an excise/gross receipts nightmare is voluntary disclosure. If you identify a connection to Ohio or Washington, contact state authorities to file back taxes. Some states will allow voluntary filers to submit three years plus interest with no penalties. Others ask for four. Some states may also require you to share client information. Ohio is setting itself apart from other states in saying that gross receipts apply to any item that ships through the state, including goods from retailers such as Walmart, Macy's or Dress Barn. Most states allocate based on where product winds up, but Ohio doesn't.
This nuance puts small businesses in a difficult position as they don't have the ability to say no to those retailers. Our advice to clients is to keep in touch with their business partners to find out where and how their inventory is moving
Businesses selling merchandise on Amazon will not have the option of settlement via voluntary disclosure, however, since Washington state authorities will already have gross receipts data, shared via agreement with the world's largest online retailer. Paying everything due promptly up front will prevent assessment of penalties and interest.
The most important advice is not to leave anything to chance, or leave yourself at the mercy of tax collectors. Keeping up to date on all aspects of supply operations and of partners may seem onerous, but it is better than having to play catch-up later.