Page 31 - Business Insights Technology Industry

TAXABILITY OF MITIGATING RISK AND COMPLIANCE:
TECHNOLOGY TRANSACTIONS
UNRAVELING SALES Beyond having nexus, it is also then important Given the complexity of managing sales tax
across multiple jurisdictions, many businesses
TAX COMPLIANCE FOR for technology companies to assess if their are turning to technology for assistance. Sales tax
TECHNOLOGY COMPANIES offering is subject to sales tax in the state itself. automation software can streamline the process
While state legislatures are continually updating
of tracking nexus, calculating tax liabilities,
their sales tax laws to address emerging trends
in technology, e-commerce and remote sales, and filing returns. Advanced systems integrate
with ERP and e-commerce platforms to ensure
emerging technology will always be ahead of
F or most technology companies sales tax Sales tax nexus refers to this, forcing companies to “put a square peg in accurate and timely compliance, reducing the
risk of errors and penalties. In response to
compliance represents one of the biggest the minimum connection
challenges and is often more burdensome or link that a business has a round hole.” It wasn’t until the mid-2010s that heightened enforcement efforts, businesses must
and difficult than income tax or payroll tax with a state or jurisdiction that some states released guidance or laws related to proactively monitor their nexus footprint and
compliance. Sales tax in particular is tough requires it to collect and remit sales tax Software-as-a-Service (SaaS) transactions, and assess their compliance obligations on a regular
given the extreme amount of latitude given to on sales made to customers in that state or still many have not directly addressed Platform- basis. Leveraging state-provided tools and
each state in terms of the rate, what transactions jurisdiction. Traditionally, nexus was established as-a-Service or Infrastructure-as-a-Service. States resources can facilitate sales tax collection and
are subject to sales tax and their legal right to through physical presence, such as if a business have historically looked at what is the “true filing processes, while participation in voluntary
impose sales tax collection on vendors. Much has a physical presence in a state—like an office, object” of a service to determine its taxability but disclosure programs can mitigate penalties for
like technology itself, this is an often changing store, employee, or warehouse—it generally has increasing software integrations and components non-compliance. Moreover, businesses should
and evolving arena which can require special nexus in that state and must collect sales tax. have made this more and more difficult and the advocate for clearer nexus guidelines and
attention to avoid both firm level and personal However, the Wayfair decision revolutionized line more blurred than ever. Further complicating engage in dialogue with policymakers to address
level risk for directors or officers, as they can this paradigm by introducing an economic nexus matters is the ability of each state to determine systemic challenges.
be held personally liable for unpaid sales tax in standard, holding that states can require out-of- what transactions are subject to tax – as an
certain circumstances. state sellers to collect sales tax based on their example most SaaS transactions are exempt in The landscape of sales tax continues to evolve,
economic and virtual connections to the state, California but are subject to tax in New York. driven by legislative changes, technological
UNDERSTANDING SALES TAX NEXUS rather than just a physical presence. The court As more technology firms are audited by states advancements, and increased enforcement.
reasoned that the previous physical presence rule and matters of controversy reach courts we get Technology companies operating in multiple
In the realm of sales tax compliance, was outdated due to the growth of e-commerce continued guidance on how each individual state states must stay informed about these
understanding sales tax nexus is paramount. and that it was necessary to level the playing is looking at matters, but often firms are in the developments and adopt robust compliance
As technology firms continue to expand their field between online and brick-and-mortar dark applying analog standards to a digital world. strategies to manage their tax obligations
operations across state lines, navigating the retailers. Many states have adopted economic effectively. Leveraging technology, staying
complex landscape of sales tax nexus has become nexus laws, which require businesses to collect STATE POLICIES AND ENFORCEMENT: abreast of legislative changes, and consulting
increasingly challenging. Recent developments sales tax based on economic activity rather than with tax professionals are key steps in ensuring
highlight several key strategies and regulatory physical presence. This often includes criteria Enforcement of economic nexus rules has become ongoing compliance in a complex multistate
updates that are crucial for maintaining like a certain amount of sales revenue or number more rigorous, driven in part by states’ efforts environment.
compliance in a multistate environment. Sales of transactions within the state. Each state has to address budget shortfalls exacerbated by the
tax nexus, the connection between a business and the right to make their own law – the law for COVID-19 pandemic. States are leveraging KIMBERLY MARTINEZ, CPA
a state that triggers tax obligations, has evolved California may not be the same as New York. technology and data analytics to identify non- DIRECTOR
significantly in recent years, particularly with Most states have used the threshold that South compliant businesses, including issuing nexus
the landmark Supreme Court decision in South Dakota used in the Wayfair decision of $100,000 questionnaires and monitoring online sales
Dakota v. Wayfair, Inc. This article delves into in annual transaction volume (in previous or activities. State tax authorities are ramping up
the intricacies of sales tax nexus, delineating current year) or 200 transactions. Some states their audit activities, focusing on businesses
between physical and economic nexus, exploring have economic floors as low as $10,000 or don’t with significant economic nexus but potentially
state policies, thresholds, and enforcement have a transaction bright line number, but luckily underreporting their tax obligations. It’s essential
trends, and offering insights for businesses to most of the states use a somewhat similar test. for businesses to maintain thorough records and
navigate this complex landscape. be prepared for potential audits. Regular internal
reviews and consultations with tax professionals
can help identify and address any compliance
gaps before they become issues.

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