With many B2B companies modifying their buying and selling operations as they deal more with cloud technology and changes stemming from the pandemic, tax experts advise how businesses can prepare to avoid tax pitfalls.
Following are answers to pressing questions addressed by tax professionals:
How has COVID-19 affected B2B tax preparations?
“As companies have accelerated online sales, many that historically were only doing B2B sales were also now doing business-to-consumer sales,” says Silvia Aguirre, vice president, certificate management, at tax management software firm Avalara. “When they were only doing B2B sales, they knew they had to collect tax-exemption certificates from qualified buyers. But when you have a combination of B2B and B2C sales, it becomes a more complex process to identify what sales are B2B or B2C.”
Kael Kelly, general manager, compliance documents products at Avalara, adds that online sellers risk providing a poor customer experience if they fail to properly account for exemption certificates and mistakenly charge an exempted customer sale tax. At the same time, some sellers may fail to update exemption certificates for qualified B2B buyers, leaving them without proper records during tax audits. Kelly notes that about 15% to 20% of exemption certificates expire every year.
Adding to the complexity in managing tax collection has been the 2018 U.S. Supreme Court South Dakota v. Wayfair ruling, which resulted in broadly expanded tax-collection responsibility by online sellers. Many B2B sellers have seen the number of tax-exemption certificates they must manage increase by tenfold or more. The task of identifying and managing those certificates, meanwhile, has been more challenging for accounting department personnel working from home.
What is the status of sales tax rules for online marketplaces?
Forty-four states plus the District of Columbia have passed marketplace facilitator laws that set rules on how marketplace operators must collect and remit sales tax, and manage tax-exemption certificates, on behalf of sellers, as noted in the below map provided by the tax practice of the Washington, D.C., law firm of McDermott Will & Emery LLP.
The three states with pending marketplace facilitator bills (Florida, Kansas and Missouri) “are all very early in the legislative process,” says Eric D. Carstens, an associate in the tax practice at McDermott Will & Emery. “We anticipate each state will enact a marketplace facilitator law in some form this 2021 session, given they are outliers and the vast majority of states have already done so.”
These laws cover how states are requiring the marketplace operators, or facilitators, to collect and remit sales tax on behalf of individual sellers.
One of the reasons for the laws, experts say, is to enable states to collect sales tax for a marketplace’s overall sales; without the facilitator laws, states would be hard-pressed to collect sales tax from the many small sellers on marketplaces whose annual sales do not reach the minimum annual sales threshold that triggers sales collection duties for individual sellers.
Managing tax exemptions: The rules can also require marketplace operators to collect exemption certificates from sellers when they sell products in transactions not subject to sales tax, such as when products are sold to B2B customers for resale of products in transactions that pass the sales tax onto the end-customer. Many online sellers use online tax management software designed to manage tax-exemption certificates and automatically apply up-to-date state tax laws to an online seller’s sales transactions.
Are there new taxes on cloud services as more companies utilize cloud storage/computing?
“Cloud computing can be thought of as a number of things, including storage, processing, SaaS, virtual networks and voice systems,” says Toby Bargar, senior tax strategist for communications at Avalara. “What’s tricky is that any of these definitions of cloud computing could potentially be taxed differently.
“The same can be said for digital goods because of the different types, delivery methods and monetization models they can take. For example, digital goods come in different types of content like video, audio, software and games. They can also be delivered in different ways like download and streaming, and with different monetization models including direct sale, rental and subscription.
“Every one of these combinations can lead to a different tax determination and even impose areas with special taxes or utility and communication taxes,” Bargar says.
If businesses are now delivering goods digitally due to the pandemic, are there new tax obligations?
“Thirty states impose a tax of some form on digital goods or steaming services, or both. While it’s unlikely that every state will do start taxing either, the number of states that end up doing so will likely slowly continue to increase,” says Scott Peterson, vice president of U.S. tax policy at Avalara.
“In most states, what a product or service is, or how it is provided, changes everything about its taxability,” he adds. “The way taxability is applied in these cases is driven by old laws, but also by new products and services that are coming to market.
“Often, it’s the product creators who are adding complexity and confusion by introducing new products that blur the lines of existing tax rules,” Peterson says. “At the end of the day, the Wayfair ruling is still creating the majority of new tax obligations for businesses, as those who are delivering goods digitally face economic nexus obligations. Outside of Wayfair and the proposed excise taxes on digital advertising in states like Maryland, there aren’t new taxes being proposed. Businesses should expect states to expand their existing sales and communication taxes to streaming and digitally delivered goods.”
“What’s taking place is that more states are imposing taxes on streaming services which include sales and use tax, more complex communications taxes, or both,” says Steve Lacoff, general manager of communications at Avalara. “Overall, taxes on streaming are becoming more pervasive month-by-month as jurisdictions seek to recoup a tax basis hollowed out from cord-cutting. Most recently, the Maryland legislature overturned the governor’s veto imposing the nation’s first digital advertising tax, but what many didn’t realize is that within that tax, the state also imposed sales and use taxes on streaming services.”
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