What is Use Tax Reporting?

While businesses scramble to abide by new economic nexus laws in the post-Wayfair craze, many are overlooking a potentially even larger burden. This burden, Use Tax Reporting, has been lurking since before the Wayfair case and has become only more relevant after it. Use Tax Reporting evolved when states were restricted by the then-current case law from requiring out-of-state businesses to collect and remit their sales tax. Instead, states effectively decided that although they may not be able to get sales tax from remote sellers, they could require their help in getting use tax from their customers.

These Use Tax Reporting requirements punished remote sellers by making them do several things and imposing steep penalties should they fail to comply. First, states could require businesses to inform customers that they must remit use tax on their purchases to the state. Second, states could require businesses to report their sales and customers to the state so it could go after the customers directly for the sales tax. Talk about bad for business! Imagine having to tell your customers that you’re going to report their purchases to the Department of Revenue! Some states enacted additional requirements, such as providing annual sales reports by customer to the state to make the process of hunting down customers for use tax easier on Department of Revenue employees.

Believe it or not, this was the “conservative” approach taken by states. Other states simply ignored the pre-existing law allowing for states only to impose their taxing authority on businesses with a physical presence within the state. Such states passed new nexus standards in direct conflict with the physical presence standard. One such standard, Economic Nexus, imposed sales and transaction thresholds that, once surpassed, required businesses to collect and remit.

June 2018 changed those preexisting sales tax laws forever when the landmark economic nexus case, South Dakota vs. Wayfair, came down from the Supreme Court of the United States. The result of the case was a new power given to states allowing them to require remote sellers to collect and remit their state and local taxes even when those businesses have no physical presence within the state. Previously, the law required businesses to first have an actual, physical presence within a state in order for it to be subject to the sales tax laws of a state. You would think that states would drop the Use Tax Reporting requirements once they were able to increase revenues by getting sales tax from so many remote sellers. However, that couldn’t be further from the truth.

Much attention has been given to the states that disregarded Supreme Court case precedent and passed these new nexus standards in direct conflict with the physical presence standard. While such thresholds should be carefully observed, it is important for taxpayers not to overlook Use Tax Reporting requirements that may potentially be a worse burden on your business. If you thought registering to collect and remit was a burden, you perhaps have not considered the full burden of the alternative. Such use tax reporting rules have already been challenged and those challenges have failed. As a result, states are going forth full steam ahead in the imposition of these use tax reporting requirements in addition to post-Wayfair economic nexus standards. With this method, they can capture virtually all businesses making sales into their states.

In states that have enacted use tax requirements, the option for businesses is simply to register or report. The decision hinges on what is best for your business. Unfortunately, many businesses are solely looking at the economic nexus laws in states and making their decision whether to register based solely upon these economic thresholds. These owners don’t realize that their decision not to register and maintain their perceived competitive edge in a state may come at a cost. Worse yet, that cost may ultimately end up being substantially greater than any benefit derived from selling items without charging sales tax. When customers are put in a position where they must pay 6% more in sales tax or face the Department of Revenue potentially auditing them on their purchases, it is not guaranteed they will go for the sales tax savings. As a result, it is vital for businesses to carefully consider the consequences of their choices.

Fortunately, a competent state and local tax attorney can guide you through this mess of a problem. Increasingly, businesses are engaging in Nexus Studies, in which a professional evaluates their business and helps determine the best strategy going forward in each state. Aside from the often-discussed economic nexus standards, there are also other types of nexus as well, such as affiliate nexus, marketplace nexus, and click-through nexus that may affect your business too. Those whose business operates on websites such as Amazon.com or Ebay.com may have unique nexus issues as well. Regardless, one thing is for certain: use tax reporting requirements are gaining momentum in the wake of the Wayfair case, and the consequence of being unprepared for them could be devastating to a business.

Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College.

Additional Resources:

What is the Definition of Nexus? by Jeanette Moffa
What is Affiliate Nexus? by Jeanette Moffa
What is Click-Through Nexus? by Jeanette Moffa
What is Economic Nexus? by Jeanette Moffa