The Economic Nexus is up and running in more than 40 states and Washington D.C., with more expected to join the taxation system soon. For states struggling to meet the demands of an ever-growing population, claiming sales tax for online purchases is a way of increasing their general fund.
Both large and small online retailers face the issue of states seeking payment of taxes dating back years. There are several options open to online retailers to limit their liabilities, including establishing a Voluntary Disclosure Agreement, VDA, or a tax amnesty program.
What is the Economic Nexus?
In 2021, the online retailer Wayfair and the state of South Dakota took their case to the Supreme Court regarding the payment of sales taxes. The dispute centered on the existing laws requiring a retailer to have a physical presence in a state for taxes to be levied. The economic nexus is a system allowing states to work together to charge sales tax on items and services sold by online retailers across state borders. The nexus has become a way for states to keep current on their taxes and ensure all taxes are collected.
More than 40 states are already signed up for the nexus and more will enter soon. The fairness of the nexus has not been disputed because several states have introduced minimum sales levels before taxes are charged. The Sales Tax Institute reports the majority of states do not charge sales taxes until a retailer reaches $250,000 or $100,000. Those who do not reach these minimum taxation requirements are not required to pay taxes.
Common Problems
There are several issues facing retailers when they have topped the minimum requirements in states involved in the economic nexus. The initial problem facing an online retailer is the high level of taxes they will be charged. The biggest issue facing online retailers is the statute of limitations does not apply to taxes. If a state taxation agency believes an online retailer is liable for taxes, they will be required to pay all their back taxes for the life of their company.
What is a Voluntary Disclosure Agreement?
If a company believes they could be held responsible for the taxes they have not paid for the last few years, a VDA could be a good option. The use of a Voluntary Disclosure Agreement is a good option for those who feel they could be responsible for a large tax bill. Wipfli reports the Voluntary Disclosure Agreement is put into place for those who want to limit the audit they face to a short period of time. The agreement requires a company to declare they have not paid their taxes for several years and compromise with the state about the number of years they will explore.
In the majority of states, a Voluntary Disclosure Agreement is agreed upon for a period of three to four years. The state agrees that a company will be audited across this specific time and no more, in return for the company paying their back taxes promptly. This is a good option for those who believe their historic tax bill will be greater than looking back over the last three to four years.
Tax Amnesty Programs
Home business owners need to explore the options open to them before deciding to enter into a Voluntary Disclosure Agreement. Several states in the economic nexus program have started tax amnesty projects. Entering a tax amnesty program is recommended for home business owners who feel they have performed well in the last three to four years and poorly in the past. The tax amnesty programs in several states do not have a qualifying time period for the life of taxes.
Instead, these programs look back at the entire history of a home business and calculate owed taxes. After the taxes are calculated, the home business owner has the chance to repay their owed taxes without having to pay interest charges. In several states, home businesses entering a tax amnesty program will not face penalty charges for late payments.
Complete a Study
Before deciding whether to enter into a VDA, a home business can contact a taxation professional and complete a study regarding their back taxes. Home business owners face several issues when deciding whether to enter a Voluntary Disclosure Agreement or a tax amnesty program.
A study will help decide by providing information about the level of payments each option requires. A study helps home business owners understand if they can apply for an exemption certificate for their taxes. A home business owner can limit their tax obligations with the use of exemption certificates.
The aim of Voluntary Disclosure Agreements has become important following the recent decision by several states to begin chasing home business owners for unpaid taxes. Business owners in California already face the problem of late taxes and are using Voluntary Disclosure Agreements to limit their losses.