As we set sail into another year of navigating sales tax landscapes, there’s a wave of anticipation for the exciting changes ahead! Across various states, policymakers have been diligently reassessing their sales tax frameworks to usher in favorable adjustments for taxpayers. Following a dynamic 2023 legislative session brimming with bold tax proposals, 2024 promises a continuation of this momentum.
For professionals entrusted with the complexities of sales tax compliance, readiness is key in embracing these forthcoming changes. Drawing from the expertise of our sales tax specialists, let’s delve into three prominent sales tax issues of 2024 poised to influence operational landscapes significantly.
Wayfair Aftermath: States Escalate Audit Inquiries
The rush to preempt the aftermath of the Wayfair ruling is in full swing, with states nationwide actively pursuing taxpayers who were liable for sales tax due to physical nexus activities predating the 2018 South Dakota v. Wayfair Supreme Court Case. Companies that should have been collecting sales tax but remain non-compliant must heed the heightened scrutiny from state audits. It’s imperative for these entities to assess their operations diligently and take proactive measures to achieve compliance.
With the establishment of regulations governing economic nexus, marketplace facilitators, and reporting mandates in every state, a surge in related litigations and disputes has emerged. States are grappling with identifying parties responsible for taxes owed before the enactment of these laws.
As one of the nation’s largest marketplace facilitators, Amazon finds itself embroiled in legal battles. The South Carolina Court of Appeals upheld a decision requiring Amazon Services, LLC to remit uncollected taxes, penalties, and interest on third-party sales facilitated prior to the Wayfair ruling, amounting to approximately $12.5 million. The court ruled that Amazon met the criteria for engaging in sales activities outlined in South Carolina’s sales and use tax laws and dismissed Amazon’s claims of constitutional violations against the Department of Revenue. Consequently, Amazon was held liable for taxes on third-party sales facilitated through its platform.
In Washington, the case involving Citibank has attracted significant attention. The state contended that Citibank was liable for their B&O tax for the years 2007-2010 due to activities related to retailers’ private-label credit cards. Although Citibank argued the absence of physical presence based on employees, property, or business locations during those years, Washington asserted that Citibank’s agreements with retailers, coupled with debt collection lawsuits filed in Washington courts, constituted sufficient activity to trigger B&O tax obligations. This case underscores the constitutional thresholds for imposing taxes based on third-party activities conducted on behalf of a business. Several states and localities levy similar taxes based on gross receipts, such as Ohio’s Commercial Activity Tax, Nevada’s Commerce Tax, and Oregon’s Corporate Activity Tax.
These legal battles serve as stark reminders that physical nexus remains relevant, and states continue to pursue companies that should have registered prior to the advent of economic nexus standards. In the aftermath of the Wayfair ruling, some states aggressively targeted taxpayers with physical presence, notably Amazon FBA sellers. Even over five years post-decision, numerous businesses remain undetected by state authorities for either physical or economic nexus. Such entities should conduct thorough assessments of their operations, as proactive measures like pursuing voluntary disclosure agreements with states could yield significant tax savings by reducing the applicable lookback period.
Exploring AI-driven Solutions in Taxation
The realm of taxation is undergoing rapid evolution, with artificial intelligence (AI) at its forefront. AI stands poised to revolutionize the landscape of sales tax collection, management, and enforcement, presenting lucrative prospects for businesses. In the United States, navigating sales tax has historically been intricate and data-intensive, presenting a perpetual challenge for businesses and consumers alike. AI’s influence on sales tax processes is profound, promising practical implications for businesses operating within the U.S.
The investment in AI solutions is increasingly justified, as advancements facilitate more streamlined sales tax management. These solutions simplify tasks such as filing, payment, and auditing, enhancing accuracy and efficiency. Moreover, AI tools can detect tax fraud, optimize deductions, and credits, and aid in global pricing comparisons for compliance purposes. As we progress into 2024, an array of sales tax solutions leveraging AI is expected to become available to companies.
Noteworthy developments from sales tax vendors include:
- Avalara’s Exemption Certificate Management Pro, driving compliance automation through next-gen technology.
- Avalara’s Sales Tax Calculator Plugin for ChatGPT offers enhanced functionality.
- Avalara’s AI-Based Tax Classification Tool aids in precise tax determination.
- TaxJar’s Emmet, the pioneering AI for sales tax.
The integration of Generative AI and Machine Learning into sales tax functions presents abundant opportunities. However, it’s imperative to prioritize confidentiality, ethics, and result validation when adopting these technologies. By identifying suitable applications, sales tax professionals can reclaim time and mental bandwidth for value-added activities, thus addressing complex sales tax challenges more effectively.
Streamlining Electronic Filing: A Wave of Change
The push for simplified sales tax filing gains momentum as states migrate to electronic systems, marking a significant step towards tax reform. Since the onset of the pandemic, states have recognized the imperative shift toward electronic filing. While every state offers some form of electronic filing, the disparity in systems poses challenges. However, several states are making strides toward enhancing electronic filing, aiming for greater ease and comprehensiveness. This transition takes various forms, including mandating e-filing for additional tax types, improving existing systems, and eliminating cumbersome reconciliation returns.
Modernizing E-filing Systems:
- Maryland Tax Connect: Effective February 2024, Maryland migrated several business tax filings, such as Withholding, Sales and Use, and Admissions and Amusements, to its new online portal, Maryland Tax Connect. The portal streamlines processes, offering self-service access for payments, viewing historical returns, and more.
- New Jersey’s New Taxpayer Portal: In 2024, New Jersey unveiled a new taxpayer portal, prioritizing Sales and Use tax filings. The revamped portal promises faster access, simplified filing, and enhanced self-service options.
Reform of E-filing Systems:
- Retirement of e-TIDES: Pennsylvania’s e-TIDES system bid farewell in February 2023, necessitating taxpayers to transition to myPATH for various tax filings, including sales tax, employer withholding, and corporation taxes. Additionally, myPATH facilitates the submission of essential tax forms.
Removing Reconciliation Returns:
- Rhode Island’s Tax Reconciliation Update: The Rhode Island Department of Revenue announced the discontinuation of the Annual Sales and Use Tax Reconciliation Return (Form T-204R-Annual) from tax year 2023 onwards. The introduction of the updated sales tax return (Form RI-STR) streamlines the reconciliation process, alleviating the year-end filing burden for taxpayers.
As states converge their online systems onto more unified platforms, taxpayers stand to benefit from enhanced efficiency and navigability. This transition promises to alleviate administrative complexities, enabling taxpayers to navigate systems with greater ease, and ultimately fostering efficiency in compliance endeavors.
Disclaimer: This is not legal advice, consult an attorney for legal advice or contact us.
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