First when you look at tax from the perspective of State and local Governments, Tax equals revenue. In this current economy virtually every state is facing budget deficits. And because for most states sales tax revenue is more than 50% of their revenue, they are aggressively going after sales tax dollars. In the state of Washington, nearly 60% of state tax money is derived from sales taxes!
States are going after this money in the following ways:
1. States are hiring auditors. For example, Idaho hired 48 sales tax auditors so far this year. More auditors means more audits for more companies, which in turn means more money for State & Local Governments.
2. States are also broadening their tax bases at the same time. They are passing laws lowering the threshold for Nexus. I’m sure you read about Amazon’s legal battles and how states like California, New York, and several others have passed “affiliate nexus laws” to target ecommerce businesses without a physical presence in their states. Amazon initially challenged these laws but has conceded and has made deals to start collecting taxes in many of these states. If Amazon, with their bankroll, can’t battle these aggressive actions by the states, what is the outlook for small and mid-sized businesses?
3. At the same time states are passing new statutes to tax items and services that previously were not taxed in their states. When technology drives new businesses that existing tax laws don’t cover, and those industries start growing, states pass new laws to capture that revenue. You can see that with emerging markets like Digital Goods & Content and Cloud Software Solutions. Many states are passing laws to define these non-tangible items as taxable to increase tax revenues.
4. If that’s not enough, States have rallied together before congress and are trying to pass bills at a federal level to enforce Remote Nexus Laws that would make it so that companies are required to collect taxes no matter where they sell regardless of if they have a physical connection to the State. They have a lot of momentum and it looks like a matter of time before one of these bills is passed and implemented.
So, what does this all mean to businesses?
It’s a huge source of risk. Companies used to wonder what would happen if they got audited; however, now they are wondering what will happen when they get audited. As States increase their efforts to go after these taxes, small and mid-sized companies will be targeted.
Prepare yourself today by taking our sales and use tax compliance check up.