In the first episode of this technology podcast series, we highlighted a few key sales tax considerations for technology companies. In this follow-up episode, Cherry Bekaert’s Sales Tax team focuses on issues that impact sellers of technology.
Listen as Megan Hutchinson, Technology Tax Partner, is joined once again by Lauren Stinson, Sales & Use Tax Leader, and Don King, Indirect Tax Director, as they discuss marketplace sales, tax-exempt wholesalers’ sales, and sales tax technology solutions. They will also share their predictions for 2023 as they pertain to recent tax law changes.
Listen to other episodes in this series:
- Episode 1: What Tech Companies Overlook in Sales Tax Reporting
- Episode 3: Three State and Local Tax Issues Tech Companies Need to Address Now
- Episode 4: State Credits & Incentives Your Tech Company Should Take Advantage Of
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MEGAN HUTCHINSON: Welcome back to Cherry Bekaert's Technology Podcast. I'm Megan Hutchinson, a tax partner in Cherry Bekaert's Technology Group, and I'm joined once again by Lauren Stinson and Don King from our Sales & Use Tax practice.
MEGAN HUTCHINSON: This episode is part two in a short series we're presenting on state and local tax for technology companies. If you haven't listened to part one, give that a listen.
MEGAN HUTCHINSON: In our previous podcast, Lauren and Don reviewed the pitfalls of not properly reporting for Sales & Use Tax and important items for tech companies to watch out for. Today, I sit down with them to talk about some best practices and how to help your company become compliant with its Sales & Use Tax obligations. Lauren and Don, welcome back. I'd like to start our discussion with you, Lauren. The tax laws have been changing pretty rapidly. What have you seen in the past year and what do you predict looking forward to 2023?
LAUREN STINSON: This has been a hot area, especially for technology companies. Over the last year or so, at least a dozen states introduced legislation to start taxing digital products and services, so we will start seeing many states that previously did not tax digital goods or cloud-based software begin to tax those products as they look for ways to raise revenue.
LAUREN STINSON: A big issue last year was Maryland. They started taxing digital software and then, less than a year later, carved out a business exemption, so they moved in and out quickly. I also expect to see a lot more class action lawsuits, similar to what happened with Peloton, where companies face suits for not collecting tax where they should be or for over-collecting when they shouldn't.
LAUREN STINSON: It's important that companies are mindful of their Sales & Use Tax obligations and work to be accurate in where they collect. States are also starting to consider new products and services, like NFTs, for taxation, so there's a lot of movement toward more taxation in this area.
MEGAN HUTCHINSON: Don, once a company understands it has Sales & Use Tax obligations and likely has had them for many years, what's the best way to handle that exposure?
DON KING: There are a few different approaches. As we discussed in the previous podcast, once you determine you have nexus in a jurisdiction, you must register, collect, and remit tax going forward. You need to determine where and when nexus began, and whether you need to register based on those periods.
DON KING: One option is a voluntary disclosure agreement (VDA), where you negotiate with the state on the covered lookback period. For example, if your exposure spans eight years, you might obtain a VDA that limits the lookback to three or four years, which shortens the period. Depending on the jurisdiction, you may be able to reduce penalties or have some interest waived.
DON KING: Another option is to register and file past-due returns and request penalties be waived. You can also register and file only going forward, but that leaves you open to potential risk because statute limitations remain open on periods where you have not been filing returns. Once you file a return for a period, that period typically closes under the statute of limitations, so it's best to file past returns or obtain a VDA to limit your risk and avoid future reserve issues.
LAUREN STINSON: I would caution any tech company that assumes it can ignore past periods and just start registering today. States are savvy and often audit companies that suddenly begin registering because there's a good chance they should have been collecting earlier.
MEGAN HUTCHINSON: What about companies making tax-exempt sales to wholesalers? How should they handle that?
LAUREN STINSON: Many companies assume that if their sales are exempt, they don't have Sales & Use Tax obligations, but that's not true. If your purchaser is exempt, for example under a resale exemption, it's your obligation to collect exemption certificate documentation to prove the sale was exempt. Auditors commonly assess tax when exemption certificates are missing or invalid, so collect proper, valid, and unexpired certificates for all exempt sales.
MEGAN HUTCHINSON: If a company has exemption certificates for all sales, are they still required to file a Sales & Use Tax return?
LAUREN STINSON: Some states have provisions that exempt filing when all sales are wholesale exempt, but most states still require registration and the filing of zero-dollar returns.
DON KING: As an additional suggestion, maintain exemption certificates in a centralized repository where they're easy to access. Make sure your accounts receivable system is set up so customer accounts are properly coded as exempt or taxable, and keep the certificates on hand so you can present them promptly during an audit.
MEGAN HUTCHINSON: If you're selling through a marketplace, does that change how you look at Sales & Use Tax?
DON KING: Yes. Marketplace facilitator rules have become widespread because states prefer to collect tax from one source. Under these rules, the facilitator is responsible for collecting and remitting tax for the seller. For example, if you sell through Amazon, Amazon generally collects and remits Sales & Use Tax on your sales.
DON KING: Often the marketplace arrangement is agency-based rather than a buy-sell transaction, so it may still be your sale for purposes other taxes. For example, in Washington State, you may have B&O tax liability because it's still your sale, and the marketplace facilitator will not report B&O tax on your behalf. Be mindful of potential gross receipts or income tax implications when selling through a marketplace.
MEGAN HUTCHINSON: What technology is available to help technology companies manage these challenges?
LAUREN STINSON: There are several tax technology solutions, including Avalara, Vertex, Sovos, and OneSource. These tax engines integrate with your billing system or shopping cart and your accounting software. When a transaction runs through, the engine determines the correct rate for the jurisdiction and product type to calculate tax accurately.
LAUREN STINSON: The key is that tax technology is not set-and-forget. As your business evolves, you must maintain the configuration so the solution knows when to collect in new states, when you've crossed economic nexus thresholds, or when new employees create nexus. You also need to map new products and services to the correct product tax codes.
DON KING: When setting up tax technology, think about scalability and future changes. Make sure you can adjust configurations on the fly rather than reconstructing the solution later.
MEGAN HUTCHINSON: What is one main takeaway you'd like our audience to know before we wrap up?
LAUREN STINSON: Sales & Use Tax is very complicated, and for many companies this is not a do-it-yourself project. Understanding product taxability, nexus, and systems is nuanced and complex. We have a Sales & Use Tax team with broad knowledge and deep expertise, and we're available to guide companies through their Sales & Use Tax challenges.
MEGAN HUTCHINSON: Lauren, Don, thank you for your time and for sharing your knowledge. We invite our audience to check back soon as we continue this series covering tax matters specific to technology companies.
DON KING: Thanks, Megan.
MEGAN HUTCHINSON: Thank you.
