How States Find Remote Sellers with Sales Tax Nexus
Twelve months have passed since the Wayfair decision and states are more motivated than ever to enforce sales tax nexus requirements. Revenue departments are aggressively searching for taxpayers with unidentified physical presence or newly enforced economic presence. So what are the two questions you should not ask when it comes to sales tax nexus?
1) Can we hold off on registering?
2) Will the states really come looking for us?
By now the answers are clear. If you need to register in states, do not delay. Revenue departments are looking to non--filers and they are using a variety of techniques to find them. Why? Because states desperately need tax dollars and revenue departments would rather enforce existing tax laws than introduce new revenue generating legislation.
For a complete list of states with economic nexus laws, download these complimentary nexus charts:
Commonly, a state will identify remote sellers with nexus by sending out nexus questionnaires. Recipients must complete a series of questions about their activities in the state and return the form within a specific time period. If nexus is confirmed, the state will require the seller to register and remit sales tax. Additionally, the revenue department often will collect past due taxes along with penalties and interest.
When you receive a nexus questionnaire from a state, your ability to shorten look-back periods and reduce penalties and interest is lost. So don’t wait for that questionnaire to arrive. Determine if you have nexus and approach the revenue department to negotiate a solution.
How do state revenue departments decide which remote sellers may have nexus in their states? A variety of methods, from sophisticated data analytics to simple word of mouth, are used to identify potential out-of-state taxpayers.
Here are examples of some ways that states are identifying businesses that may need to begin collecting and remitting sales tax.
States are turning to data analytics to identify potential remote taxpayers. Some states have purchased data mining software which sifts through businesses that may have a presence in the state and “red flags” those most likely to have sales tax compliance issues based on a series of scores and classifications. The New York Department of Taxation and Finance, for example, uses a software program to help select their audit cases. This digital system sorts through thousands of tax returns to identify taxpayers with the highest likelihood of compliance issues.
Some states are hiring data analytics firms to provide lists of likely non-compliant companies. The Indiana Department of Revenue claims that a data analytics company has helped to identify about 1,000 potential new taxpayers.
While some of these taxpayers may be intentionally avoiding their sales tax responsibilities, most are just not aware of their obligations. States typically reach out to these remote sellers to explain the laws and provide instructions about registration and compliance options.
Auditors often reach across state borders to identify businesses selling remotely into their state. They look for companies with nationwide sales, or those that they know are marketing products or services to taxpayers in their states. Some revenue departments hire auditors from other states to find unregistered companies. It’s also not uncommon for auditors from different states to share taxpayer information. For example, if an auditor identifies a remote seller with substantial transactions in the state, he or she may notify other states of these findings. It’s the “you scratch my back and I’ll scratch yours” approach to finding remote sellers.
Customers of Audited Taxpayers
Auditors often contact the customers of previous audit subjects, especially if they see evidence of sales tax payment errors on invoices.
Companies have been known to tip off a state revenue department to suspicions that a competitor is mishandling sales and use tax obligations. It’s one way of making sure that the competition doesn’t get an unfair economic advantage from avoiding sales tax obligations.
Subpoenas and Legal Demands
Many businesses sell online using the services of a marketplace facilitator such as Amazon. Some states subpoena these facilitators or issue legal demands requiring them to provide the revenue departments with contact information for their third-party sellers. Then these states contact the remote sellers to explain their nexus laws and compliance processes. Last year, California required Amazon to turn over contact information for thousands of their third-party sellers with inventory in the state. Massachusetts also issued a subpoena to Amazon demanding third-party seller information.
Auditors go as far as tracking trucks at state borders. Are the trucks delivering products to end users? In most states, delivery trucks create physical presence. In other states, auditors will research companies to determine if sales tax was collected for the delivered products.
The bottom line is that remote sellers of all shapes and sizes need to address sales tax nexus now. Review all your business activities to determine if you have established nexus in any states, then develop a compliance plan. These new sales tax obligations are here to stay and states will find you.
If you have questions or want to schedule a consultation with our sales tax nexus experts, visit our website or complete this request form: