DRS Sales Tax

Connecticut Successor Liability

When an entity is purchased (membership interest, stock, etc.) the entity generally retains all past liabilities, including any unsettled tax obligations. By purchasing the assets of a business the purchaser can avoid taking on some liabilities of the acquired business.

In Connecticut (and many other states) certain outstanding tax liabilities can follow a business even in an asset acquisition. The admissions and dues taxes, cigarette taxes, room occupancy taxes, sales and use taxes, tobacco products taxes, and Connecticut income tax withholding can all result in “successor liabilities” in Connecticut when all or substantially all of the assets of a business are acquired. This does not necessarily mean all or substantially all of the assets of a legal entity must be purchased, as a legal entity may have multiple lines of business and buying one of those lines of business could result in successor liabilities.

Buyers can, and usually should, have letters of indemnity from sellers and isolate liabilities from a newly acquired business in a separate legal entity. Buyers can also request a tax clearance certificate by filing Form AU-866. Form AU-866 is submitted to the Connecticut Department of Revenue Services (“DRS”) along with required attachments, such as a draft purchase contract. Once submitted the DRS will either issue appropriate tax clearance certificates or request that funds are put in escrow at closing to settle potential outstanding tax liabilities. This will occur within 60 days from submission. If the escrowed funds are remitted to the DRS after closing then appropriate tax clearance certificates will be issued and the seller can work with the DRS to have the escrowed funds released, removing the buyer from the process.

While not all buyers choose to file the Form AU-866, the benefits of filing the form should be seriously considered by buyers.

Sales Tax Voluntary Disclosure

Economic Nexus and Voluntary Disclosure Agreements

In the summer of 2018 the United States Supreme Court South Dakota v. Wayfair, Inc., et al (“Wayfair”) decision upheld South Dakota’s law that imposed nexus for sales tax purposes on a business that delivers more than $100,000 of goods or services into the state or engages in 200 or more separate transactions for the delivery of goods or services into the state. Since the decision was published, many other states have implemented similar economic nexus standards.

This may seem like old news now, but many businesses around the world are just coming to terms with their obligations to file sales tax returns in many US states and some local jurisdictions.

Depending on facts and circumstances, some businesses may decide to comply with sales tax requirements prospectively, others will be well advised to seek out voluntary disclosure (or similar) agreements in those jurisdictions that allow them.

Voluntary disclosure (or similar) agreements (“VDA”) are offered by many states and some local jurisdictions. While terms vary from place to place, most VDAs offer taxpayers limited look-back (the time period in the past during which a company agrees to pay back sales tax, usually limited to three or four years) and no penalties.

Some states also offer a reduction or elimination of interest. VDAs can be costly because, unlike collecting sales tax from customers when making a sale, the tax paid to the state is usually paid by the business itself. However, the VDA offers the benefit of penalty waiver and knowing that a state cannot pursue back tax periods at some later date. These benefits are not available when a business elects to comply with sales tax requirements prospectively.

Typically a taxpayer with no physical presence in a state would look to when a state first implemented an economic nexus standard and when the business first exceeded that standard, then pay prior period sales tax from the later of the two times forward. From a compliance perspective, VDAs with states that only implement one level tax are generally relatively straightforward to complete. States with complex local rates can require significant compliance efforts.

If your business makes sales in multiple jurisdictions and you have not considered whether or not you also have to file sales tax returns in those jurisdictions, then you should engage a tax professional to help determine the best path forward.

Audits Sales Tax

Garbage-In, Garbage-Out and Sales Tax

According to Wikipedia, “in computer science, garbage in, garbage out (GIGO) is the concept that flawed, or nonsense input data produces nonsense output or ‘garbage’.”

It should come as no surprise then that when computers are used to streamline the sales tax process for a business, GIGO applies.

This post falls somewhat outside the typical scope of this blog. However, I have on numerous occasions been involved in helping companies fix their sales tax coding, and on even more occasions represented taxpayers before a taxing authority when “garbage” coding resulted in a sales tax assessment that could have been easily avoided had things been set up correctly when implementing a sales tax software package.

Many reputable companies offer software solutions to taxpayers that promise to make filing state sales tax returns in multiple states quick, easy, and reasonably priced. However, if a taxpayer does not understand some basics of sales tax then even the best software solution will lead to the problems discussed above.

At minimum, a taxpayer must consider the following when setting up sales tax software:

In which jurisdictions will goods and services be sold
In which jurisdictions will the taxpayer have sales tax nexus (the “filing jurisdictions”)
In each filing jurisdiction every good and service must be coded as either taxable (with an applicable rate) or non-taxable
Whether or not some of of the taxpayer’s customers may be exempt (due to resale or for some other reason) from sales tax in some or all filing jurisdictions (taxpayer must also maintain current exemption certificates)
That one customer may have locations in multiple jurisdictions, and in some jurisdictions an exemption may be available, but not in others

Common mistakes I have seen made when building out sales tax software include assuming different states apply sales tax to one item the same way or that exemptions by type of taxpayer are the same across state borders. Similarly, I have seen taxpayers code an item as non-taxable because it is “only sold to tax exempt” entities which then later creates a tax obligation if that same item becomes popular with entities subject to sales tax.

When setting up accounting and sales tax software a company would be well advised to hire specialists in both sales tax (from a legal perspective) as well as a specialist in the software in question. Failure to understand the necessary upfront setup of sales tax software can result in expensive audit results down the road.