Sales and Use Tax Technology Solutions: Compliance Considerations

Sales and Use Tax Technology Solutions: Compliance Considerations

By Rebecca M. Balinskas, Associate, Morrison & Foerster LLP And Michael J. Hilkin, Associate, Morrison & Foerster LLP

Rebecca M. Balinskas, Associate, Morrison & Foerster LLP

Reaching customers virtually anywhere in the world over the Internet has inspired the creation and remove full stop after 'businesses' and make the t of 'That' to lowercase. Fortunately, tax technology solutions may provide support to businesses facing dramatically increased tax collection and return filing responsibilities in the wake of recent changes in U.S. law. This article examines some considerations to maximize the benefits of tax technology solutions in satisfying their State and local sales and use tax obligations.     

Recent U.S. Supreme Court Case Law Will Expand Sales and Use Tax Responsibilities for Businesses

The recent U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. ruled that the U.S. Constitution allows jurisdictions to require a business to collect use tax on the jurisdiction’s behalf if the business makes sufficient sales to customers located in the jurisdiction, regardless of whether the business has any sort of physical presence in that State. The Wayfair decision overruled 50 years of precedent holding that under the Commerce Clause of the U.S. Constitution, a business must have a physical presence, such as property or employees, in a jurisdiction to be subject to that jurisdiction’s use tax collection obligations. Prior to the Wayfair decision, businesses did not necessarily need to worry about the sales and use tax laws of jurisdictions outside of its physical footprint. Now, every business will need to be aware of the sales and use tax laws of many (if not all) jurisdictions in which they have customers. Tax technology solutions will play an important role in aiding businesses now facing collection and return compliance obligations in numerous U.S. States and localities. 

"Every business will need to be aware of the sales and use tax laws of many jurisdictions in which they have customers"

Considerations for Determining Where to Collect Tax

Tax technology solutions can help businesses determine whether they have an obligation to collect sales or use tax on behalf of a particular jurisdiction. In the wake of Wayfair, many States have adopted bright-line tax collection obligation thresholds that may make this determination more clear. The law at issue in South Dakota v. Wayfair, Inc. imposes sales or use tax collection obligations on sellers with either (a) gross revenue from sales into South Dakota exceeding $100,000 or (b) sales for delivery into South Dakota in 200 or more separate transactions. In the coming months, it is likely that most jurisdictions imposing sales or use tax will establish similar “bright line” collection thresholds, either by statute or by regulation—if they haven’t already.

Therefore, a tax technology solution should to be programmed to accurately track where a business’s customers are receiving their purchases. A tax technology solution should also notify the business when it reaches the threshold of transactions in a jurisdiction requiring it to start collecting sales or use tax on sales in that jurisdiction, if the business does not start collection on day one of the first potential collection quarter. And because the transaction threshold in any particular jurisdiction may change, the tax technology solution should be regularly updated to conform to current law. (This is already being done for sales and use tax rates.)

Considerations for Determining Which Sales Are Subject to Tax

Once a business concludes that it must collect sales or use tax in a particular jurisdiction, it must next determine which of its sales will be subject to tax in that jurisdiction. Most jurisdictions impose tax on sales of tangible personal property and may impose tax on specified services. However, what constitutes taxable tangible personal property, and which services are classified as taxable, can vary widely by jurisdiction. Further, digital and cloud based products and services often have characteristics of both tangible personal property and a service and, therefore, may be hard to classify as being either tangible personal property or a service.

Michael J. Hilkin, Associate, Morrison & Foerster LLP

For example, in Pennsylvania streamed video, games, music, and apps (among others) are statutorily defined as “tangible personal property” and thus are subject to sales and use tax. In contrast, some jurisdictions will consider streamed products to be services, which may not be subject to tax depending on the applicable law. Both Illinois and the City of Chicago consider streamed products to be services, but Chicago imposes tax on certain streamed services by interpreting its long-standing “amusement” tax provisions to apply to such services, whereas Illinois does not impose sales or use tax on streamed services. Further, in some jurisdictions it is unclear whether a specific digital product or service will be treated as subject to sales or use tax. 

Maintenance of Systems

States and localities often update their statutes—or their interpretations of their old statutes—to keep up with evolving technology. Therefore, any tax collection technology solution will have to be regularly updated. Separately, tax technology solutions should permit a degree of customization for businesses to make judgement calls regarding whether tax should be collected on a particular product or service and notify businesses of any changes in a jurisdiction’s laws so the customization is revisited.

Conclusion

It is difficult to imagine how businesses could manage their sales and use tax responsibilities without the help of tax technology solutions. It is important to maximize the solutions for accuracy and efficiency.    

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