Sales Tax Update – December 2023

Online commerce provides the ideal environment for wholesale transactions and drop-shipments.  You can literally have no employees or inventory – just a website and you are in business.  BUT – if you are the wholesaler, every sale you make is considered a retail transaction by taxing authorities, and is subject to applicable sales tax, unless and until you can prove that it is exempt from sales tax (that is, present a valid resale exemption certificate).  This means that the wholesaler is subject to sales tax nexus rules, and is responsible to either (1) collect and remit sales tax, OR (2) collect, verify and maintain applicable resale exemption certificates.

When a state audits the wholesaler and the sales are not supported by providing valid resale exemption certificates, the auditor will treat all sales to customers in the auditing state as taxable retail sales.

You don’t necessarily need a sales tax license to sell at wholesale, but you do need to ensure that your reseller customers are providing valid resale exemption certificates to support the lack of sales tax on your sale to the customer.  Sales tax economic nexus standards apply to all remote sellers, including wholesalers, so you may have nexus everywhere you deliver sales.  When a state audits the wholesaler and the sales are not supported by providing valid resale exemption certificates, the auditor will treat all sales to customers in the auditing state as taxable retail sales.  The burden of proving otherwise is on the wholesaler.  As such, the wholesaler faces exposure for all historical sales tax on sales for resale delivered to the auditing state, plus interest and penalties (which can nearly double the assessment).

Your sales tax expert should review your nexus and resale exemption certificate management procedures.  There are several steps that can be taken immediately to ensure you are capturing resale exemption certificates from your reseller customers.  There are automated Exemption Certificate Management tools that make this seamless and effortless, reducing audit exposure by multiples of the cost.

Remote sellers and customers rely on delivery vehicles and state transportation infrastructure for delivering goods purchased online.  Post-Wayfair sales tax revenues have more or less flattened, and consumers are utilizing an increasing number of electric, hybrid and fuel efficient vehicles, thereby reducing fuel tax revenues for states.   States such as Colorado and Minnesota have adopted Retail Delivery Fees as a means of increasing revenues for transportation projects and infrastructure through measures seemingly imposed directly on those benefitting from the use of the roads and infrastructure.  Retail Delivery Fees are fees (and therefore, not a sales tax) imposed on deliveries to customers in a state. So far, Colorado and Minnesota have implemented such fees, however New York State and New York City are considering similar fees to fund transportation and infrastructure projects.

As states continue to seek novel measures to fund specific needs, companies must seek sales tax experts to advise and guide them and they must implement sales tax software solutions to automate their current and growing compliance obligations.

In July 2022, Colorado became the first state to impose a retail delivery fee (now $0.28) on all retail deliveries made by a motor vehicle to a location in Colorado that contained at least one item subject to state sales or use tax.  The fees fund transportation and infrastructure programs.  Recent amendments aimed at easing the burden on smaller retailers include an exemption for retailers with retail sales of tangible personal property, commodities or services in Colorado in the previous year totaling $500,000 or less.  Also, Colorado will allow businesses to elect to collect the fee from customers as an invoice line item, or absorb and pay the fee on behalf of their customers without separately stating the fee on invoices.

Effective July 1, 2024, Minnesota will impose a $0.50 retail delivery fee to help fund transportation infrastructure. Minnesota’s retail delivery fee will be imposed on each delivery of tangible personal property, subject to state and local sales tax, that equals or exceeds $100, including some sales that exempt from sales tax, such as clothing. Sales exempt from the retail delivery fee include, among other sales, Food, prepared food, prescription drugs, medical devices, baby products, and certain motor vehicles.  Similarly, retailers with less than $1Million in prior calendar year sales, small marketplace sellers (less than $100,000 in sales) and sales to tax exempt purchasers are exempt from the retail delivery fee.

Though the Minnesota retail delivery fee is imposed on retailers, as in Colorado, retailers elect to collect the fee from customers as an invoice line item labelled “road improvement and food delivery fee”, or absorb and pay the fee on behalf of their customers without separately stating the fee on invoices. The fee will be reported on a return created by the Minnesota Department of Revenue.

As states continue to seek novel measures to fund specific needs, companies must seek sales tax experts to advise and guide them and they must implement sales tax software solutions to automate their current and growing compliance obligations.

A company recently came to us and requested that we review their sales tax software settings.  I am a big fan of sales tax software, such as Avalara, for automating the multistate sales tax compliance responsibilities of a business.  However, as great as these tools are, they can only be as good as the customer sets them up to be.  As part of this review, we reviewed the tax codes to which the client’s products were mapped.  We reviewed the tax compliance settings to verify that the client was collecting the appropriate taxes, based on its nexus and sales tax registrations. We ensured the client was set up for and filing the appropriate returns, based on its account type and filing frequency.  To the extent there were any errors that create historical obligations and exposure for the Company, we addressed and resolved these obligations.  Lastly, we reviewed all electronic and paper notices to ensure corrective measures were taken where appropriate.

Moral of the story: if you’re utilizing sales tax software – and you definitely should be – make sure to have your sales tax expert review your account to verify that everything is set up as it should be.

For this one company, we identified nearly two dozen corrections to mapped tax codes, tax type, return type, and filing frequency, as well as numerous notices to which we responded.  We avoided potential six-figure sales tax audit exposure, and successfully avoiding penalties by orchestrating resolution of the outstanding notices with state taxing authorities. 

Moral of the story: if you’re utilizing sales tax software – and you definitely should be – make sure to have your sales tax expert review your account to verify that everything is set up as it should be.