Sales and use tax compliance is complicated. Both sellers and purchasers are required to determine where they have nexus, where the purchased products or services should be sourced, and whether the product or service itself is subject to tax. While this sounds simple enough, in practice, it is extremely difficult.
There are thousands of sales/use taxing jurisdictions in the United States alone and each jurisdiction can address these questions differently. As such, for large national companies, there could be thousands of taxing decisions that have to be made to accurately report the tax of one order that is being shipped or used across the county.
As we shift to a service based economy, including remote services, these questions become even more complex. Further, sourcing, which traditionally was a fairly straightforward question, has become complicated. Historically, purchased product was taxable where it was used. However, with services, taxing jurisdictions have taken somewhat different approaches. Some jurisdictions require that where the service was provided is where it is subject to tax. Other jurisdictions require that where the benefit of the service is received is where that service is subject to tax. With more and more service providers offering remote services, such as data processing, cloud software solutions, and even marketing services, the world of sourcing has become more complex.
Additionally, we may add yet another layer of complexity to this already complex taxing regime. The possibility of economic nexus for sales/seller’s use tax purposes is being discussed in the South Dakota v. Wayfair case. If the Supreme Court rules in favor of South Dakota, these complexities will increase even more. Sellers typically have little to no control over who buys their products and services. If South Dakota is successful, sellers will be required to comply with the taxing rules for all jurisdictions that their customers are located and that impose economic nexus standards for which the seller meets that jurisdiction’s economic nexus threshold. This includes not only collecting the tax, but knowing what is subject to tax, remitting that tax to the taxing authority on a regular basis, submitting returns, and complying with regular sales/use tax audits, to name a few.
Purchasers, on the other hand, may have reduced compliance complexities if all their remote sellers begin to collect sales/seller’s use tax. However, it is much more likely that purchasers will continue to address the same tax compliance issues that they do now, if not more so, because: 1) not all sellers will be required to collect sales/seller’s use tax; and 2) not all jurisdictions tax the same things, therefore, out-of-state sellers may incorrectly tax or exempt some purchases. In either case, purchasers may need to forgo or modify the tax on the invoice and thus manage extended discussions with their vendors, request a refund at a later time from the taxing jurisdiction, again requiring additional time and input from the purchaser and potentially the vendor, or remit use tax to the taxing authority if no tax was collected by the vendor on a taxable purchase.
Regardless of how the Supreme Court rules in the Wayfair case, taxpayers will continue to have difficulties properly complying with sales/use tax rules because it is not getting simpler, only more complex.