Since the beginning of time, multistate taxpayers have faced significant administrative challenges to complying with all the variations in state and local tax laws. If “the beginning of time” may be a bit of a stretch, those challenges are a reality today. And any business that operates in multiple states is keenly aware that understanding and complying with the administrative requirements of state and local tax laws are extremely difficult. Technology has come a long way to lighten some of the burdens, but significant room for improvement remains.
This article highlights some discussions and trends in state and local tax policy that aim to alleviate the difficulties faced by multistate businesses that must collect and remit sales and use and other transactional taxes. Specifically, the article discusses how these taxes differ from other state and local taxes directly imposed on businesses, how they create administrative compliance and audit pain points, and some things being done to alleviate some of those challenges.
Administrative Challenges, Audit Pain Points
The task of collecting and remitting sales and use and similar taxes by businesses operating in multiple jurisdictions is no easy feat. This is not to discount the difficulty of complying with the whole host of state and local taxes on corporate or other business income, gross receipts, and property. But there are significant differences. Each of those taxes is generally imposed directly on a business, whereas sales and use and similar taxes are indirect or “pass-through” taxes. In these indirect situations, the business is not considered the taxpayer. Rather, it becomes an agent of the state, in that it is charged with collecting tax from the actual taxpayer—the business’ customers—and then remitting the tax to the state to which the tax is due. This distinction is important, particularly in a post-Wayfair world where so many more businesses now must develop systems or purchase sales tax compliance services or software to properly collect and remit these taxes on behalf of the states.
Among their specific administrative challenges, businesses must determine one by one whether transactions are taxable, but multistate businesses must also manage exemption certificates and determine specific rates. Taken individually or on a state-by-state basis, these issues may seem relatively simple or not all that consequential. In the context of a business that sells all over the country, however, the challenges start to stack up. Anything that can streamline the process of collecting and remitting taxes and ease the challenges faced on audit would be welcome. It is time for businesses to push the states on this issue.
Keeping in mind its role as an agent of the state in collecting sales and use taxes, a business is generally most concerned with whether it has collected the proper amount of tax from its customers. In other words, its goal is not to lower the amount of tax or to assert an aggressive position regarding taxability, because the tax at issue is not that business’ tax. Rather, it is charged with collecting and remitting a tax owed the state by the business’ customers. Thus, the business’ primary interest is to collect all the tax it should and not push the boundaries to risk a situation where tax was not collected but is later determined to be due.
A multistate business is also likely at some point to be subject to an audit. Typically audits start several years after a transaction has occurred. And even though taxpayers understand that audits by nature are meant to look back in time, it can be difficult for businesses to obtain information years down the road. The vast scope of sales and use tax audits can make this “lookback” approach even more daunting. Considering the complexity of these audits, it makes sense to explore alternative approaches that provide businesses and states with more certainty and build trust as they collaborate.
Such alternatives could also relieve another burden many businesses face post-audit: interest. Interest, from the business perspective, has become a stick that the states can rely on during audit. Not all states fall into this camp, but some definitely seem to use interest as a safety net to delay or not work as diligently as one would hope. And while interest is often seen as a key tenet of taxation based on the time value of money, that premise falls apart in the indirect tax context, since a business that has failed to collect tax that its customers owed has never had the privilege of using those funds during the period between when the tax was due and when the business was assessed for it during an audit. Again, this is a key difference between these pass-through taxes and direct ones like local and state taxes.
Low-Hanging Fruit—A Multistate POA
With some of these challenges in mind, I will turn to some solutions being discussed in the state and local tax policy arena. The first idea—a multistate power of attorney form—is one that has been called a no-brainer.
To assist taxpayers and businesses with their state and local sales and use tax compliance requirements, providers and practitioners generally must have a power of attorney (POA) on file with the state. Those who work with and represent businesses in multiple jurisdictions know the pain of preparing and getting signatures for numerous POA forms. And the businesses required to provide the POAs also know the pain of having to deal with and sign numerous POAs. All state-specific POA forms require essentially the same information, yet the idiosyncrasies of each differ. Although filling out multiple forms that require essentially the same information may not seem all that challenging, the process can be time-consuming, because one must understand what information each form requires.
To illustrate the challenges created by the current state POA system, let’s consider a multistate business—a remote seller—that hires a firm to assist with all its sales tax compliance filings. The remote seller’s goal is to focus on its business, not to spend time dealing with multiple state taxes. To handle state tax compliance, the newly hired firm must obtain POA forms for all jurisdictions where the business has nexus. Assuming the business sells into and has nexus in all fifty states, the process requires obtaining at least forty-five state-level POA forms and potentially more, depending on local filings. Assuming it takes ten to fifteen minutes to fill out each state-specific form, the provider would spend between eight and eleven hours just filling out state POAs. The provider would then have to obtain signatures from the business and submit the forms in accordance with each state’s specific rules. Additionally, the business would be required to take time away from running its operations to sign multiple forms.
Compare this tedious process with the provider being able to use a single POA form that could be submitted to multiple states. In this (new and wonderful) world, only one form would need to be prepared and signed. The form would still be required to be submitted to various jurisdictions in accordance with the state-specific rules, but the time savings are nonetheless undeniable.
With this backdrop in mind, work on the multistate POA form (M-POA) project has been ongoing since mid-2022, when the idea was presented to the Multistate Tax Commission (MTC). Since then, the MTC has facilitated three meetings for interested parties; the Federation of Tax Administrators and the Streamlined Sales and Use Tax Project have become involved; the form was finalized in April 2023; and six states now accept the form (Colorado, Idaho, Illinois, Kansas, Texas, and Utah). Several other states are currently reviewing the M-POA, with the goal of the project to have all states accept the M-POA as an alternative to state-specific POA forms.
The multistate POA project is an example of how the business community and the states can work together to create efficiencies. State POAs are burdensome, and the ability to submit a single form to multiple states will alleviate this burden significantly.
A Heavier Lift—Rethinking the Audit Manual
The current approach to sales tax audits has been around for many years. The goal of any audit is to ensure that a taxpayer has properly reported and remitted the relevant tax at issue, and the general process is to go back in time to a certain period and review the transactions at issue (generally done through sampling) to determine whether tax was properly imposed, collected, and remitted. Although this approach to audits is longstanding, it is worth asking whether it is still the best approach to sales and use tax.
Again, with sales and use tax audits, the business charged with collecting and remitting tax is not the ultimate taxpayer. Thus, the business is likely to be extremely focused on ensuring that it has collected the proper amount of tax at the time of the relevant transactions, because if it has not, and transactions are later determined to be taxable, then the business will be on the hook, since it is unlikely that it can go back and collect the tax from its customers. Knowing from the start whether a transaction is taxable is essential so the business can collect the tax then. But taxability is not always a simple determination.
The complexity of determining taxability, combined with businesses’ desire to collect the proper amount of tax, means that the current audit approach that looks back several years is less than ideal. Would it not be better if businesses and taxing agencies worked together to ensure the proper imposition and collection of tax in real time? Similar to a managed audit or the IRS’ Compliance Assurance Process (CAP) program, state taxing agencies and businesses should consider collaborating to ensure the proper amount of tax is collected and remitted in real time. This would benefit the state, since it would receive the proper amount of tax sooner, rather than having to wait several years until a mistake is detected. Businesses would also benefit, since mistakes would be found sooner, reducing or eliminating interest and penalties imposed years later.
Another area where businesses face challenges is exemption certificates. It would seem that with today’s technology a certificate management system should exist to simplify verifying the validity of exemption certificates, but unfortunately that is not the case. It would also seem that the “good faith” standard that many states use would also ease the burden here, since a business should be covered if a certificate was accepted in good faith. Yet again, this unfortunately is not the case. Rather, what we see is that too many states dig into the specific information included on certificates that have been accepted in good faith and assert that the certificate is invalid for one reason or another. Specifically, more states seem to require businesses to verify the information on the certificate for it to be considered to have been accepted in good faith. What with many businesses’ high volume of exemption certificates, verifying certificate information can be an impossible task.
Here is yet another opportunity for businesses and taxing agencies to work together to streamline the process. For example, a business could annually, or even more frequently, work with a taxing agency to verify or validate a business exemption certificate. Assuming the agency’s technology is sufficient and a business can provide the information in a format the agency’s technology can process, this validation process would help the business to jettison any invalid certificates from its system. Again, this would allow the business to fix issues sooner rather than later to ensure the proper amount of tax is collected in closer to real time. Under the current audit system, a business that accepts a certificate in good faith and does not collect tax from the certificate holder will be required to pay the tax, plus interest and any penalties, if on audit the state asserts years later that the certificate is invalid. Businesses and taxing agencies collaborating to ensure the validity of certificates would be another win-win for both.
State and local tax compliance will never be easy, but the process can be made less painful. The items discussed above are just a few solutions being discussed, and I have to imagine that others can be devised to alleviate administrative and audit challenges. Now is the perfect time for businesses to get creative and think about how we might challenge the states to meet us halfway on some of these issues.
Nikki Dobay is a shareholder at Greenberg Traurig LLP.