Posted on October 09, 2020
The COVID-19 pandemic has been and will be remembered as one of the most impactful global events of our era. An unprecedented challenge was thrust upon the medical, government, and business community that will clearly change many of the behaviors of our society in the long run.
When state enforced lockdowns and the advice of medical professionals globally forced the ceasing of business as usual for industries across the country, businesses both large and small were left with one choice: adapt or die.
In an inspiring display of free market forces, most businesses chose to adapt and did so quickly. By the end of March, a stunning number of businesses had employees working from home, restaurants were full curbside and delivery, retailers and customers were shifting to e-commerce in ways they were not previously, and everyone had ZOOM on their electronic devices.
When your back is to the wall, you act decisively in order to do what you must to survive, weighing options and making the right decisions when they are needed most. However, do you know what many businesses are not considering when making decisions on the precipice? – Sales tax.
Why care? Because businesses are held legally liable for uncollected sales tax or tax calculation errors. Combined sales and use tax rates can be as high as over 9.5%. Is your business prepared to take a hit of 9.5% of gross sales plus penalties and interest?
Sweeping changes to operations, especially ones that must be done swiftly without tremendous planning, are going to trigger implications in the tax that, according to the Tax Foundation, provides the second largest source of state and local tax revenue. Most businesses do not have solid processes to constantly monitor changes in operations for such consequences. This three part article highlights my top 3 implications.
Mistake #1 – Remote Employees are expanding your sales tax obligations
The first critical step in determining if your business must be concerned with state sales tax is evaluating what is referred to by tax professionals as “nexus”. Nexus is the connection between a taxing jurisdiction and the taxpayer. The US Supreme Court has interpreted certain clauses of the US Constitution to limit a taxing authority’s influence only to those businesses that have “sufficient nexus” with them. What I refer to as “traditional nexus” is any nexus that was in constitutional favor prior to July of 2018 (more on that in Part 2). Traditional nexus is predominantly dictated by physical presence of people or property in the jurisdiction of the taxing authority, whether under the direct or indirect use by the taxpayer. The most common instance of implications in traditional nexus during the pandemic is in the shift to work from home.
Let’s say your business sells the infamously highly taxable “widgets” via the Internet across the US, with one physical headquarters location in New York City. Since your business only has employees or property in New York, and you are only in the business of selling online with generally less than $100,000 in sales or similar level of business into each state (again, more on this in Part 2), WidgetsRus only has nexus in New York. In this hypothetical example, no other state has the level of connection with you necessary to impose a tax burden on you or require you to become a collecting agent of the state. However, when the pandemic began to reach consequential levels in March, you made the executive decision to allow all employees who could perform their work remotely to work from home for the remainder of the year. Some employees live in neighboring Connecticut and New Jersey, and some choose to travel to friends and family in other states to avoid coronavirus hotspots.
You made the right call as a business owner for your operations and employees. Now, however, you have members of your organization physically in states where you weren’t previously. In many states, regardless of their specific functions, their presence alone creates sufficient nexus. Perhaps these employees have company owned assets with them, or even worse, inventory. This only makes the case for nexus stronger. Now, these states have valid reasons to require you to determine the taxability of your products, register for the appropriate tax account, collect the required tax or applicable (and validated) exemption certificate, and remit that tax to the state. Whether or not you chose to collect that tax is not a big concern for them at this point because you are now on the legal hook. Whether you collect it or not, you will have to pay it.
Some states have come out with guidance on the implications of employees working from home due to Coronavirus, and some have even stated they are waiving such requirements to register for the time being given the temporary and necessary circumstances. Unfortunately, most states have not provided guidance, which means without a valid statutory reason indicating otherwise, these remote employees have created sales tax obligations.
Some states who are allowing leeway during the state of emergency are: Kentucky (on a case by case basis) Massachusetts (through Dec. 31), Minnesota, New Jersey, Oklahoma, Pennsylvania, Rhode Island, and South Carolina (through Dec. 31).
States who have confirmed remote workers due to COVID-19 will continue to create nexus are: Colorado, Indiana, Michigan, and Ohio.
The remaining states with a sales tax have not issued guidance one way or the other. It should be assumed for the sake of registrations and voluntary disclosure agreements that while they may choose to decide internally not to actively pursue such businesses, they have not made such decisions public and the legal obligations still apply.
Keep in mind, earlier I spoke of “traditional nexus” and not just “physical presence nexus”, because there is more to this than just your employees, property, or inventory. Over the years with physical presence nexus as the general law of the land and other forms of nexus being limited by SCOTUS, states got creative in how they could stretch those parameters to apply to derivatives of such presence.
If WidgetsRus has a sister company, and part of the response to the pandemic was to utilize that sister company in another state to perform certain actions, that agency relationship could create nexus outside of NY. Perhaps WidgetsRus chose to take advantage of certain vendors located in other states to perform actions for them as they closed their offices? An agency relationship has formed, and that can create nexus too.
As I said earlier, none of these scenarios were poor decisions by the business, and with adequately managed tax processes, sales tax should not tip the scale in how these decisions are made. However, businesses should be prepared to take appropriate action to ensure they are not liable for uncollected tax.
Tips for the Taxpayer
Start immediately on a thorough nexus review for all nexus types across the states. Your earliest point of nexus is the day your tax liabilities began, and though this article has been specific to COVID-19 actions, nexus can go all the way back to the inception of your business with certain triggers.
Conduct a survey of your employees to find out where they have been remotely working through the pandemic and when they started in those locations. Ensure your employees know to keep you notified of such moves, and in certain cases you may want to restrict employees from working remote in certain problem states.
Additionally part of that review should entail analyzing economic nexus by assessing sales and transactions per state. This, like traditional nexus, can go back prior to COVID-19 but will not likely go past the 2018 SCOTUS decision in South Dakota v. Wayfair. We will address more on this in Part 2.
All the above have nuances and exceptions. Consult with a state tax expert, it will be the most effective and economical decision in the long run.
How Can We Help?
Allyn International has been helping businesses with their tax issues for over 25 years and is led by experienced professionals whose sales tax knowledge goes well beyond that. Allyn regularly conducts nexus reviews as a part of our end-to-end sales tax compliance services or as one-off consulting projects. When we say end-to-end services, we mean we will work with your data in its least prepared form and take actions far beyond the point of our competitors. Our mission statement calls for us to enable you to succeed by allowing you to focus on your core business. With Allyn on your side, you will not have sales tax lingering in the back of your mind. We have been providing that peace of mind in all aspects of Federal, state, and local tax compliance and consulting for large US and global corporations since our inception.
Allyn is also happy to announce this year we upgraded our existing ECM software solution and are introducing CERTlocker, the ECM software for professionals by professionals. While we recommend you engage us to apply our end-to-end incomparable ECM services to your operations while we leverage the technology, CERTlocker is available for licensing as well.
At Allyn we have seen significant success in defending exempt sales for our clients under audit when we have been managing their exemption certificates for years prior. This allows Allyn to focus our energies to further audit savings opportunities at a lower total cost of compliance to the taxpayer.
Trust that with Allyn on your side you will pay your fair share in taxes but not a penny more. Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: firstname.lastname@example.org.
For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com.
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe and Asia and Allyn regional headquarters are strategically located in Fort Myers FL USA, Shanghai P.R. CHINA and Prague, CZECH REPUBLIC. For more information, log on to www.allynintl.com.