A version of this interview was published in Praxity’s Tax Blast in June 2019
The United States doesn’t have a national consumption tax, such as the value-added tax (VAT) used in other countries. Instead, most US states impose indirect taxes, generally referred to as sales and use taxes. Some states allow local governments to impose sales and use tax in addition to the state level sales and use tax. The lack of consistency across states makes the tax system particularly challenging for multinational businesses to navigate, especially when considering the additional complexities of global trading and supply chains.
Anna Ferraro, Director at Moss Adams, chatted with Praxity’s Tax Blast about top issues that multinational companies are facing with the US tax system. Below is an excerpt from the interview. Praxity is the world’s largest alliance of independent accounting firms, and the seventh largest of all global accounting associations.
What tax trends are affecting businesses in your jurisdiction?
Economic nexus and marketplace facilitator collection requirements are the big trends in sales and use tax right now. Since the US Supreme Court issued its decision in the South Dakota v. Wayfair, Inc. case, most states have imposed an economic nexus standard.
Under an economic nexus standard, directing one’s sales into a state will create nexus—a potentially taxable connection to a jurisdiction—if the economic nexus thresholds are met. Economic nexus thresholds may be measured by gross receipts or based on the number of transactions into a state.
Currently, the gross receipts threshold starts as low as $100,000 of annual receipts for some states and the number of transactions as few as 200 per year. As a result, businesses are triggering nexus in more states. These businesses are dealing with registering for sales and use tax in multiple states, setting up processes to start collecting and remitting sales and use tax in multiple states, and contending with how to collect and maintain documentation to support exempt sales.
Marketplace facilitators are being required to collect and remit sales and use tax for vendors using the facilitator’s platform. Although only a few states currently impose this collection responsibility on the marketplace facilitators, more states are adopting this approach.
Vendors using marketplace facilitators need to provide the facilitators with taxability information on products so that the facilitators can properly collect sales and use tax. Terminology and taxability of products vary from state to state so businesses may struggle to make taxability decisions in multiple states.
What major tax initiatives are currently being addressed by stakeholders in your territory, and how are you inputting to these discussions?
Sales and use tax enforcement activities have been a priority for states for several years. Most states are overwhelmed right now with a significant increase in businesses registering for sales and use tax. However, many of these states were pursuing companies for sales and use tax compliance prior to the Wayfair decision, so states are aggressively pursuing companies for sales tax collection and asserting nexus due to physical presence.
States have obtained documentation through audits of marketplace facilitators and are using that information to identify companies whose inventory was held by the facilitators in local distribution centers. States also monitor property coming into their states and send notices to purchasers who owe use tax on certain purchases. The states leverage their longstanding information-sharing arrangements with customs officials as well.
We’re working with companies to clean up historical exposure and register in states. Typically, it’s better when companies reach out to states before a state identifies that the company already has nexus in the state.
How do these tax topics impact companies with a multinational presence?
Companies with a multinational presence now need to comply with sales and use tax laws in at least 46 different states, including the District of Columbia.
Historically, multinational companies may have had sales into the United States but might not have had a physical presence, which was the previous standard for sales and use tax nexus. With the economic nexus standard, multinationals are more likely to create nexus and have an obligation to collect and remit sales and use tax in many states.
Unlike the VAT, the taxability of products and services can differ from state to state adding a level of complexity for companies trying to comply with sales and use tax laws. Also unlike the VAT, sales taxes don’t typically consist of a multitier credit mechanism.
When should clients needing cross-border tax support start discussions? What are the implications of waiting until the last minute?
The best time to start discussions is before a company begins cross-border activities. When conversations take place in advance, companies can better understand how they and their customers may be affected by the company’s need to collect and remit sales and use tax. We can assist companies as they structure contracts to manage a company’s exposure and help to identify potential exemptions.
Setting up processes to handle sales and use tax collection as well as remittance responsibilities before they begin operating in a state can make compliance easier, and can generally help a company reduce mistakes that create exposure. When a company waits until the last minute to become compliant, mistakes are more likely to occur. They also may misunderstand the taxability of products and services. As a result, they may inadvertently set up systems so tax isn’t properly collected and remitted or they may fail to document exempt sales. These errors generally are uncovered later during an audit and can leave a company with a tax bill that may have been avoided with appropriate planning.
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As a founding member of Praxity, a global alliance of independent accounting firms, we’re able to leverage our connections with like-minded and high-quality firms in 97 countries around the world. For more information on how we can help your company navigate these challenges, contact your Moss Adams professional or firstname.lastname@example.org.