Sales and Use Tax and COVID-19: Recognise the risks and take advantage of the opportunities
As businesses continue to assess the myriad implications of the COVID-19 pandemic, one area of focus should be on the impact of legislation, regulations, and guidance issued at the state and local levels. Doing so becomes increasingly more complex for businesses that operate or have employees in multiple states. Over the past several months, state and local governments have released various tax-related measures in response to the coronavirus pandemic that could affect state tax obligations. These impacts include nexus and filing obligations imposed by new states, the introduction of new sales and use tax exemptions, sales and use tax filing extensions, and penalty abatements.
It has been more than two years since the U.S. Supreme Court issued its landmark decision in South Dakota v. Wayfair, in which the Court held that a physical presence is not required for a remote seller to collect sales tax in the state provided the seller meets an economic threshold. Based on Wayfair, states are empowered to require remote sellers to administer sales tax; only two states (Florida and Missouri) have not revised their sales tax laws to adopt “economic nexus.” However, all states that have enacted the concept of economic nexus (except Kansas) provide a safe harbour for small sellers. Many businesses are still evaluating the impact of economic nexus and determining in which states they are required to administer sales tax.
Businesses that were taking a no-nexus position in a state due to a safe harbour (for example, annual sales under USD 100,000 and fewer than 200 transactions) may now have nexus because they have employees working remotely in that state. A few states (including New Jersey and Rhode Island) provide an exception when nexus is triggered because an employee is temporarily working from home due to COVID-19.
Some states have introduced new sales and use tax exemptions as a result of the coronavirus pandemic. For example, there is an exemption from self-assessing and remitting use tax on eligible items that are withdrawn from inventory and donated for COVID-19 assistance; in Indiana, the exemption extends to medical supplies, food, and cleaning supplies.
Some states, like Florida and Texas, have expanded their back-to-school sales tax exemptions to include personal protective equipment (PPE), such as face masks and shields. Other states have bills pending to exempt the purchase of PPE from sales tax, though enactment of these proposals is likely to face some challenges. State general assemblies may not be in session until 2021 and, more fundamentally, states may object to new exemptions because they need the tax revenue to provide essential services.
Finally, some states have provided tax return filing extensions or abatements of automatic penalties. It should be noted that even if a state has not announced automatic relief, most states provide for an abatement of penalties due to “reasonable cause.” Companies seeking an abatement of penalties should consider taking steps to avoid paying penalties, rather than paying and subsequently requesting relief.
Two of the most formidable hurdles businesses face are limited resources and competing priorities. Addressing risk, while understanding potential savings opportunities, will prepare businesses to emerge stronger from the uncertainty created by the pandemic.