State taxing authorities have had almost five years to navigate sales tax issues after the Supreme Court ruling in South Dakota v. Wayfair. In that case, the court essentially relaxed the rules on when a state can tax a business. In the past the government required a physical presence, or nexus to the state before the state could tax the business. After this ruling, states were able to move forward with taxation even when the business did not have a physical presence in the state.
The court argued that the move was a reasonable response to our society’s growing reliance on the online marketplace. Since the customer’s relationship with business had changed, so too, they reasoned, should the relationship between state taxing authorities and businesses.
State taxing authorities responded. Some set up state tax obligations almost immediately while others took longer to establish the rules that navigate when their state tax applies for businesses that do not meet the previously established traditional physical nexus requirements.
Where are we now?
We have reached the point where states have had rules on the books for a couple of years. As such, states are starting to review the situation and issue state sales tax nexus audits for those it believes has failed to follow the new rules.
How can my business avoid a sales nexus audit?
Business leaders who believe their organization could be subject to state tax liability can take action to mitigate the risk of a sales nexus audit. A voluntary disclosure can provide two key benefits for those who believe they are likely subject to state sales tax but have yet to pay.
- Control. First, it gives you the opportunity to proactively take control of the situation.
- Start the time limit. Second, it can cut off the statute of limitations period. State auditors can often reach back indefinitely if the taxpayer, in this case the business, has failed to file tax returns.
Those who move forward with a voluntary disclosure trigger the statute of limitations. That means it starts running when you file, and the state no longer has free range to go back as far as they want.
What are my options if my business is the target of a sales nexus audit?
Options vary depending on the details of the case, but can include:
- Conference with the auditor. A meeting can provide information about the issues that led to the audit. Although it may not resolve the issue, in certain situations it can serve as a foundational step towards building a defense to the allegations.
- Fight the assessment. The business can appeal or protest the assessment. There is often a time limit to moving forward with this course of action. Review the material carefully to check for this deadline.
- Go to court. In some cases, the best answer is to take the matter to court and litigate the issue.
- Due Process. A business, just like an individual, generally has a right to due process. This means the business has a right to know the basis of the allegations.
The attorneys at Goldburd McCone have experience with these types of tax audits and can provide guidance throughout the process. They will advocate for your interests, better ensuring you understand what is happening and have the information you need to make the decision that is best for your business interests.