In our previous article on the topic of sales tax in September 2018, titled “Understanding Sales Tax in the US” Click here to read the post, we discussed the ways in which US states themselves have taxing powers over sales where there is a sales tax nexus. The sales tax nexus is where your business has a substantial enough presence in a state for the state authorities to deem that you are taxable in such state. Now, however, companies that engage in online sales may be subject to tax obligations regardless of their sales tax nexus under the recent Supreme Court case, South Dakota v. Wayfair.

What happened in South Dakota v. Wayfair?

In South Dakota v. Wayfair, the state of South Dakota was suing Wayfair, an online retailer, for their failure to withhold and remit taxes on online sales inthe state.Wayfair argued against having to do so because under a prior Supreme Court decision, states could only apply sales tax on sellers with a sales tax nexus, which required some sort of physical presence. The Supreme Court decided it was time to take a hard look at this precedent as the growth of online retailers skyrocketed. In doing so, the Court held that states can now require online retailers to collect sales tax if certain revenue or quantity thresholds are met, regardless of whether they have a physical presence in the state.

What are the effects of South Dakota v. Wayfair?

Now, your business will need to withhold sales tax where the business:

1. Has a sales tax nexus with the state; or
2. Engages in online sales that meet the threshold level for the state (“Economic Nexus”).

This ruling primarily affects businesses with large eCommerce sales, Software as a Service sales, and digital goods/services sales. Additionally, for foreign companies who transact business in the US, this ruling may affect you even if you do not have a US permanent establishment.

What is the applicable state “threshold” for online sales?

A business will only need to comply with the ruling of South Dakota v. Wayfair if it reaches the particular state’s gross revenue or quantitative transaction threshold. The most popular gross revenue threshold utilized by states is $100,000 or more in in-state sales; whereas, the most popular state threshold based on the number of transactions is 200 in-state sales. It is critical that for each state you transact business in, you review their specific threshold requirements to ensure compliance.

I think my business meets the online sales threshold of a state, what next?

If your business has meets the online threshold of a particular state pursuant to the sales tax rules of such state, you will be required to register for a state sales tax permit and collect sales tax from all buyers in that state. The sales tax permit is obtained from the relevant state tax department.It is imperative that your business file sales tax in all jurisdictions where your business meets the threshold.

Upon receiving the sales tax permit you will be assigned a sales tax filing ‘frequency’ requiring sales tax filing to be made monthly, quarterly or annually. Again, each state has its own requirements and criteria in determining the filing frequency.

It is important to note that the process of determining whether your business is subject to the state sales tax and therefore is required to register for a sales tax permit, is of particular importance as failing to obtain a sales tax permit is deemed as criminal fraud.

How can CST help you?

Navigating through the sales tax rules can become an overwhelming process when trying to focus on the growth of your business in a new market. If you need assistance in analyzing whether your business has a sales tax nexus (physical and/or economical) in a state and whether you are required to be sales tax compliant, please don’t hesitate to get in contact with a member of our team.

The IRS has announced that it will close the 2014 OVDP effective September 28, 2018. For taxpayers that have failed to disclose foreign financial assets and income, this limits avenues to coming into compliant with the U.S. tax requirements.

Clients with foreign holdings, financial assets and business holdings are often unaware of the stringent disclosure requirements in the US and it is very common for taxpayers to be entering into the various programs with the IRS to properly disclose financial assets.

Under certain circumstances and where a taxpayer was completely unaware of their disclosure and reporting requirements, this leaves the following options to get into compliance with IRS requirements:

c. Filing under the streamlined procedures; or

d. filing of delinquent FBARs and amended tax returns.

Streamlined procedures

The streamlined procedures include the streamlined domestic offshore procedures(SDOP) and streamlined foreign offshore procedures(SFOP). The streamlined domestic offshore procedure is available where a U.S. taxpayer does not meet the non-residency requirement contained in section 911 of the Internal Revenue Code (IRC) and is designed for U.S. taxpayers primarily residing in the U.S. The streamlined foreign offshore procedure is available where a U.S. taxpayer meets the non-residency requirement contained in section 911 of the IRC and is designed for U.S. taxpayers not living in the U.S.

The streamlined procedures require amending the last 3 years of tax returns to report undisclosed income from foreign assets, and filing FBAR disclosures for the last 6 years. The program also requires that a taxpayer files a statement to the satisfaction of the IRS that their noncompliance was non-willful. This is of particular importance as the taxpayer will do so under the penalty of perjury which can have criminal penalties. Making a fraudulent statement can carry substantial penalties and carry criminal charges.

In addition to payment of back-taxes, a miscellaneous offshore penalty of 5% is due under the SDOP. There is no miscellaneous penalty under the SFOP. The 5% penalty is on the highest aggregate balance of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the 3-year tax return period and the 6-year FBAR period. For this purpose, the highest aggregate balance is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the covered years and selecting the highest aggregate balance from among those years.

As you can see, the streamlined procedures were designed for U.S. taxpayers that have non-willfully failed to disclose their foreign financial assets and foreign income.

Delinquent and amended filings

In certain circumstances, it can make more sense to file amended tax returns and delinquent FBARs outside of the streamlined procedures. This will generally be the case where you have foreign financial accounts that have not been disclosed, and where there is no additional income and therefore no further US tax liability.

In our experience, this may be the case where you have failed to disclose your superannuation on an FBAR, and you may need to include rental income from a foreign property in your U.S. tax return, however the property is generating losses.

Taxpayers should file delinquent FBARs if they do not need to use either the OVDP or the streamlined procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

• have not filed an FBAR,
• are not under a civil examination or a criminal investigation by the IRS, and
• have not already been contacted by the IRS about the delinquent FBARs

The IRS will not impose a penalty for the failure to file the delinquent FBARs if you have properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

The key requirement of filing delinquent FBARs is including a statement explaining why you are filing the FBARs late and that your failure to report is non-wilful. Willfulness has been defined by courts as “an intentional violation of a known legal duty”.

The IRS recommends that amended returns should be filed where a taxpayer has claimed the wrong filing status and has to change income, deductions or credits. This method is advisable where no further tax is due as you are able to disclose the correct income and information without penalties, tax and interest. To the extent further tax should be due upon amending the prior tax returns due to undisclosed income, you may not be able to file amended returns without penalties in which case the streamline process is advisable.