In the wake of the Wayfair Supreme Court decision and new economic nexus laws, many states rolled out sales tax amnesty programs. Just like state nexus laws, amnesty programs are complex and vary state to state. In this post, we’ll review different types of programs and things you need to consider before signing up.
Despite Wayfair being over a year old, the question is still the same. Wayfair happened. What's next?
For most businesses, it’s about trying to understand your Nexus footprint and the taxability of what you sell. It's a consistent question that's asked and it's a consistent issue that many businesses face.
During this process, businesses and their accountants often identify a taxability. Sometimes there will be a liability or exposure. When that happens, they’ll need to identify the best programs and best methods to mitigate any tax penalty and interest that comes out of the company’s pocket.
There's lots of different ways that you can do that.
One of the most well-known methods is voluntary disclosure programs that are available in many states.
But another method is amnesty.
Historically, states would occasionally offer sales tax amnesty. In the wake of Wayfair, states have been offering them much more frequently.
The value of amnesty programs is that they provide the state a way to bring taxpayers into compliance while enabling tax payers to catch up on compliance without being crushed by delinquency penalties.
In theory, this should be a win-win for both sides. Yet the ways states implement these programs are complex.
When most people hear the term sales tax amnesty, their initial thought is,
“If I register, I won't have to pay any tax, penalties or interest. They'll just forgive what I didn't know.”
The prospect of amnesty is enticing, and many businesses want to register quickly to take advantage of the purported benefits.
But the thing is, each amnesty program is different. A miscalculation in selecting an amnesty program has legal and financial repercussions. Before you register for amnesty, you’ll need to carefully evaluate the program you’re considering.
A lot of sales tax amnesty programs are deceptive; they’re not amnesty in the way you might think of amnesty. And many of the pure amnesty programs are brief, providing a small window for registration.
Because the topic of amnesty is so complex and varied, it’s helpful to look at
examples. Here’s a few that illustrate the types of programs out there.
California Sales Tax Amnesty
The California amnesty program was a limited opportunity. It was effective on June 27, 2019 and ended on September 25, 2019.
The program offered a clear path forward for qualifying retailers to reduce their liability and increase compliance.
Unfortunately, that 90-day window has passed. If you have nexus and liability in California, you still have options, but amnesty is no longer one of them.
California’s amnesty program is an example of a comprehensive amnesty program that was effective for businesses. However, it happened so fast that many people got left behind.
Alabama Sales Tax Amnesty
If you have nexus in Alabama, you may have received a letter regarding the state’s simplified sellers use tax amnesty.
Simplified sellers use is different than the regular sales and use tax and is imposed by the state of Alabama. Simplified sellers use is specific to remote sellers and has specific guidelines associated with it.
There’s some question as to whether this program Alabama is offering is even amnesty. But you may or may not have to pay any tax, penalty or interest. Compared to new amnesty programs states are issuing (more on that in a bit), this program is pretty merciful.
The Alabama letter states that under this new economic nexus law, there's an amnesty for any simplified sellers on uncollected taxes. This amnesty applies to any uncollected taxes dated prior to October of 2018.
On the surface, this sounds great. It's a waiver of tax penalty and interest, without the limited window.
However, if we turn back time a little bit, we can see that the whole simplified sellers use program was passed prior to Wayfarer. It was one of the original programs that was written so Alabama could be the ones to get to the Supreme Court.
Alabama wanted to be the state to transform economic nexus law. But South Dakota got there first.
So, having lost the race to the Supreme Court, Alabama made a decision. Because they knew everybody was holding back on collecting, they were not going to start enforcing new nexus laws until October of 2018.
Really, this law is a cleanup. If you didn't start collecting until October 2018, it doesn’t really change anything for you. It just means that, as long as you never collected that tax, there's not a chance of the department knowing of a backlog of taxability.
That's really what amnesty means in Alabama. The program offers the benefits of traditional amnesty without fitting into the definition of amnesty.
Illinois Sales Tax Amnesty
Illinois’ sales tax amnesty program is probably the closest representation of what most states are doing with amnesty. Programs like these regularly pop up with great fanfare. There’s usually some kind of ad campaign to create excitement.
The catch? They're incredibly short-lived.
For Illinois, and the other states that use this approach, the goal is to get as much buzz going as possible. This enables states to get as many people amnestied as possible and to get as much money as possible in a short time period.
Usually these programs will fall right around a fiscal year end or year beginning for a state. They do this because it helps them stack the books in their favor.
In the case of Illinois, the amnesty waves penalties and interest for any periods that are applicable under the amnesty period they set. Normally they’ll just wave the penalty. They almost never wave interest.
And so far, that sounds great. The catch is that the department still has not set limitations on how far back liability goes.
This has serious repercussions on how affected businesses need to approach the amnesty program.
For example, let’s say you have more than the usual three to four years of exposure. You've been doing business in Illinois for seven years. You've had physical presence. But the state never caught you. You were thinking about a voluntary disclosure, but all of a sudden amnesty comes up. You read about the program in a flyer. And it sounds pretty great.
But because there's no limit on the look-back period, you would be paying tax out of your pocket for the last seven years. Just to save on penalty and interest.
Instead, the better path for many taxpayers in this situation would be to use the voluntary disclosure program and only pay the three to four years’ worth of back tax and then get the penalty waived. The interest will pale in comparison to three extra years’ worth of tax of your pocket.
From these examples you can see there is a ton of variety between just three amnesty programs. There are many other amnesty programs throughout the U.S., each with their own, unique approach.
Additionally, the economic nexus thresholds of who is liable in the first place are extremely diverse. There's now thirty-one states that have some sort of legislation or future anticipation of passing marketplace facilitator tax laws. And each one has a different effective date.
To make things even more complex, if you have nexus in more than one state, you’ll have to consider amnesty programs in multiple states.
Before you participate in any of these amnesty programs, you need to understand both the programs in question and your nexus footprint.
For most businesses, meeting with a state sales tax consultant to discuss your options is the best path towards compliance.
Need help with reviewing your amnesty options? We can help. Click here to set up your free 45-minute consulting session with Peisner Johnson’s sales tax experts today!