Written by: Derek Hoffman, Partner – Bellatoris Consulting, LLC

News of President Obama signing the Trade Facilitation and Trade Enforcement Act of 2015 (H.R. 644) is quickly sparking a lot of discussions since the final provision within the Act creates a permanent moratorium on internet access taxes.  Unfortunately, there is still a fair amount of confusion as to what Congress has been trying to accomplish over the past 18 years regarding this matter.

In 1998, the Internet Tax Freedom Act was widely celebrated as a piece of legislation that would enable consumers to purchase items over the internet without ever having to pay sales tax.  The problem was that the Bill was grossly misunderstood because it had no bearing whatsoever on whether sales taxes would or would not be due on purchases made over the internet.  Instead, the Bill was designed to prohibit any new taxes being imposed on charges made by internet service providers for internet access.

Regardless of how familiar people are with internet access taxes, discussions on that topic inevitably gravitate toward the issue of taxing purchases made via the internet.  Unfortunately, the recent barrage of state-level legislation on this matter has resulted in more questions being asked than answers being provided.

In the most simplistic terms, companies are legally required to collect a particular state’s sales tax if they have a substantial presence within that state.  Even though the states have complimentary use taxes that require purchasers to voluntarily pay the appropriate tax on their purchases when the sellers do not have a taxable presence in their state, only a small fraction of the population is diligent enough to comply with these laws.

Many states have feverishly passed legislation in hopes of making it easier to receive the tax revenue they are rightfully owed in light of the struggle to collect use taxes from consumers and businesses.  As is the case with most efforts to make sweeping tax reforms, this has been a hot topic of debate.

Some argue that brick and mortar retailers are being put at a competitive disadvantage when their online counterparts are not required to collect sales tax.  Others argue that a departure from the legal precedent set by the U.S. Supreme Court as well as the Due Process Clause and the Commerce Clause of the U.S. Constitution would cause an unjust burden for remote sellers.

In light of the fact that states are losing such a significant source of tax revenues from a lack of compliance with sales and use tax laws, they are training their auditors to make more comprehensive reviews of purchases in order to recover those lost revenues through audit assessments.

To better insulate your company from the risk of adverse sales/use tax audit assessments, the following questions need to be asked at least on a quarterly basis:

1.  In which jurisdictions are the company’s operations substantial enough to have created a sales tax collection responsibility?
2.  In the jurisdictions where the company has a taxable presence, are the products and/or services being sold by the company subject to that jurisdiction’s sales taxes?
3. What procedures are in place to ensure that the company is accurately accruing and remitting use taxes on taxable purchases when the vendor does not charge sales tax?

Because of how often legislative changes are made, and how quickly business practices evolve, a “set it and forget it” mentality toward sales and use tax compliance efforts can quickly create a costly level of exposure for a company.  To learn how to best insulate your company from the risk of outdated sales and use tax compliance procedures, please contact Thompson Greenspon at 703.385.8888 or tgcinfo@tgccpa.com.

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About the Author:

Derek Hoffman is a Partner with Bellatoris Consulting, LLC.  His practice focuses exclusively on sales/use tax issues and his client portfolio includes companies in all industries and with operations reaching across all states.  Prior to forming Bellatoris Consulting, LLC in 2009, Derek spent 11 years at PricewaterhouseCoopers, LLP where he was a Director in their State and Local Tax practice.  Derek can be reached at 703.593.0613 or derek.s.hoffman@bellatorisconsulting.com.  

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