2008 Review of Sales & Use Tax Programs

From the August 2008 Issue

It seems as though the already-tedious process of managing sales and use tax compliance keeps getting more difficult. For many small businesses with only one or two brick-and-mortar stores, the process remains fairly simple, but the Internet’s revolutionary affect on commerce has made it possible for even a “small” business to have sales across the country, which can turn compliance into a recurring migraine.

“The biggest concern with compliance is the burden it places on businesses, according to Rosanna DiFilippo, a CPA at the accounting firm of Moody, Familglietti and Andronico (www.mfa-cpa.com) in Tewksbury, Massachusetts. MFA has a staff of approximately 100, providing local and national clients with comprehensive tax, accounting and business consulting services. “With more than 8,000 taxing jurisdictions, including states, cities, counties and even special tax zones, comes varying laws and inconsistencies. It becomes a major, time-consuming challenge for businesses to keep up with these issues.”

The primary factor that determines whether a business must collect sales taxes is nexus, as defined in the 1992 U.S. Supreme Court case of Quill vs. North Dakota. Usually, this requires collection and remittance of sales taxes to the purchaser’s taxing authorities if the business had a physical location, property, staff or other presence in the customer’s state.

During the early days of the Internet, consumers ran amok with purchases that, locally, could cost up to 10 percent more due to taxes. While most states have use taxes set identical to sales taxes, they rely upon self-reporting by taxpayers. Use taxes have failed so dramatically, in part because of lack of taxpayer education and because it’s hard to identify and enforce use tax on consumers. After an attempt at a national Internet sales tax fizzled in the 1990s, states began to realize the significant revenues they were missing out on, so they looked for ways to bridge this divide.

The most notable action on this front has been the Streamlined Sales Tax Project, a multi-state agreement geared toward simplifying sales tax laws. The program now has some 18 states participating as full members, but it is essentially a voluntary program insofar as business participation. Since participation in the program provides some amnesty benefits for businesses that violate nexus rules requiring mandatory sales tax compliance, the program has been generally successful with larger businesses. But for smaller entities, let’s say a convenience store in Dallas, the benefits of amnesty for potential violation of Indiana sales tax laws is obviously no incentive.

Furthermore, compliance with the program generally requires a fully comprehensive computer program for managing all taxing jurisdictions in the United States, some of which are reviewed here, but which can be cost-prohibitive to small businesses.
How the Streamlined Sales Tax Project will evolve from here is difficult to assess, but the latest development in sales and use tax compliance could draw more mid-sized businesses toward the program.

In June of this year, Amazon and the State of New York started a legal battle that may redefine what the term nexus means for thousands of businesses. Under New York’s recently rewritten code, nexus would extend to companies who actively and specifically market products in the state or have affiliate programs (think about when you see an Amazon link on a New Yorker’s blog or website). Amazon and other e-tailers are aggressively challenging this new definition, and the case will likely occupy the courts for some time.