2022 is expected to bring heightened enforcement and increased sales tax audit activity for remote sellers. Charles Maniace, a vice president at the tax software firm Sovos, states that “States are now truly ready to [start] being fairly aggressive in their enforcement against existing online sellers.” [Forbes, Sales Taxes in 2022 – Issues to Watch for Online Retailers, by Liz Farmer (November 30, 2021)]
2022 – the Year of the Sales Tax Audit
It has been 3 ½ years since the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair... the typical statue of limitations for auditing registered taxpayers is 3 to 4 years.
It has been 3 ½ years since the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair, which enabled states to require remote sellers with no physical presence in a state to collect sales tax on sales of taxable products and services delivered to customers in that state. Since then, every state has adopted an economic nexus threshold, through which a remote seller’s sales now establish sales tax nexus. States typically ramp up sales tax audit activities against an impacted group of taxpayers three (3) to four (4) years after adopting a change affecting that impacted group. This is because the typical statue of limitations for auditing registered taxpayers is 3 to 4 years.
As such, 2022 is the year in which state sales tax audit divisions will contact registered taxpayers to verify compliance, and to verify that taxpayers registered when they first triggered economic nexus in the state. Many taxpayers registered in several states subsequent to crossing the states’ economic nexus threshold – most typically because they adopted a “wit and see” approach to see what competitors would do, or what would come of the post-Wayfair landscape, or due to sheer ignorance of these obligations. State sales tax auditors see this as “low-hanging fruit”, that they can pluck simply by verifying that the taxpayers’ sales tax account start dates are accurate relative to sales and the economic nexus threshold.
States also see the audit as a means of verifying that taxpayers’ exempt sales (eg, sales for resale, sales to exempt entities) are supported by valid exemption certificates. This typically proves problematic for parties to drop-shipment transactions, either because they lack documentation, or they lack the appropriate resale certificates acceptable to the state on audit.
“It is imperative that companies proactively seek the regular guidance and input of experienced sales tax professionals, not only to ensure that they are registered in each state in which they have nexus, but also to ensure that they are compliant with the every changing sales tax laws.”
As states continue to expand their sales tax base – particularly through informal policy changes and interpretations of existing laws – it is critical for sellers to routinely monitor their sales to ensure that they are properly coded as taxable. This is particularly true for sellers of digital goods and services and Software As a Service (SAAS), such as online subscription-based gaming, information and website platform-driven consumer tools. In addition, as more businesses have permitted employees to work from home during the pandemic, or have hired employees in additional states - even those employees in a non-sales, administrative capacity - these companies have unintentionally expanded their sales tax nexus footprint, necessitating the need for increased sales tax compliance.
As I stated in my recent blogpost, 2021 Sales Tax Highlights and Advice for 2022, “It is imperative that companies proactively seek the regular guidance and input of experienced sales tax professionals, not only to ensure that they are registered in each state in which they have nexus, but also to ensure that they are compliant with the every changing sales tax laws.” Companies should routinely review their sales tax nexus, sales tax decision matrices, sales tax automation mapping, certificate management, and proactively address historical compliance gaps to minimize sales tax audit exposure risk.