On February 19, 2009, Wisconsin Governor Jim Doyle signed 2009 Wisconsin Act 2 (Act 2) into law. Act 2 contains a number of changes to Wisconsin’s sales and use tax. Most of these changes are meant to bring Wisconsin into compliance with the Streamlined Sales and Use Tax Agreement (Agreement). Provisions of Act 2 related to the Agreement (Provisions) become effective in Wisconsin on October 1, 2009.
For many sellers, Act 2 will bring no major changes. Act 2 contains the following modifications to the tax base:
Most, but not all, of the statutory changes in Act 2 are intended to bring the Wisconsin Statutes into compliance with the Agreement. The Agreement strives to achieve two separate and distinct goals. The first is to simply decrease sales tax compliance costs, especially for sellers who make sales in multiple states. The second goal is to overcome the “nexus problem” by enticing sellers to voluntarily collect sales tax from sales to purchasers in states where the sellers do not have nexus.
1. Decrease Compliance Costs/Ease of Application
In general, multistate sellers should welcome the standardization of definitions and procedures and, hopefully, experience a corresponding decrease in compliance costs. Each participating state now uses the standard set of definitions.3
The Agreement attempts to balance the need for individual states to legislate their own sales tax preferences with the need for certainty and simplicity for sellers. The standardized definitions and procedures allow participating states to decide whether to tax each particular good or service.
a. Standard Definitions
The Agreement provides more than 60 separate standardized definitions for a variety of products. Highlights of how the Wisconsin definitions were amended by Act 2 follow.
Most food products that are exempt will remain exempt (or taxable, as is the case for candy and soda). While the prior Wisconsin statute had limited exceptions to the general rule that food products are exempt, Act 2 does not allow for these exceptions. For example, popcorn, carbonated (unsweetened) water, and frozen ice cream novelties are no longer subject to sales tax.4 Retailers who sell products that may not strictly be considered food should review the new definitions.
Act 2 looks to the intentions of the purchaser of medical equipment to determine taxability. Act 2 generally exempts equipment purchased for in-home use, including hospital-type beds, patient lifts, and intravenous stands.5 The same equipment purchased for use in a hospital will be taxable. Since this exemption is based on the specific “use” of the product (akin to the manufacturing tax exemption) sellers of medical products should request an exemption certificate and charge Wisconsin sales tax if the buyer does not produce it. Those retailers who frequently sell products for in-home use may consider prompting their customers for an exemption certificate.
Act 2 provides a number of different definitions for telecommunications services and similar services.6 These changes are largely academic because Wisconsin currently taxes nearly all telecommunications services, with the exception of “detailed telecommunications billing service”7 and “Interstate 800 Service.”8
Act 2 extends sales and use tax to almost all digital goods. The broad application of the tax eliminates the problems associated with attempting to categorize items.9 Although the definitions are mandated, this expansion is not required by the Agreement and represents a separate decision by the Wisconsin Legislature to extend the sales and use tax to digital goods. Digital goods include all downloaded music, downloaded novels, and prewritten computer programs, regardless if the purchase is for rights to permanent use, for a limited time, or conditioned on continued payment.10
Act 2 expands the definition of a lease. Leases now explicitly include transfers with future options to purchase.11 Act 2 provides that sales and use tax will apply to removable property provided with leased real property if the lessor has the right to remove the leased property upon breach or termination of the lease agreement unless the lessor of the leased property also is the lessor of the real property (i.e., store fixtures).12
Licenses for services (i.e., telecommunications services) are subject to the sales tax regardless of whether the consumer or user has the right of permanent use and regardless of whether the service is conditioned on continued payment from the purchaser.13
Act 2 expands the definition of taxable “prewritten software,” which effectively repeals portions of the Menasha decision.14
Act 2 replaces the term “gross receipts” with the term “sales price.” The definitions and results are similar. Under Act 2, seller-provided discounts to purchasers are reflected in the sales price, but any third-party payments to the seller or the purchaser do not decrease the sales price. Thus, while manufacturers’ rebates may lower the ultimate price for the consumer, they do not reduce the amount subject to sales tax.15
The current rule that gross receipts does not include the value of any trade-ins (i.e., automobiles, airplanes, and equipment) also is the new rule in the sales price definition.16
b. Ease of Compliance
Act 2 decreases the burdens of retailers who accept exemption certificates. Currently, a seller may only accept an exemption certificate “in good faith.” Act 2 deletes the in good faith requirement.17 Instead, the retailer accepting an exemption certificate retains liability only if the certificate clearly and affirmatively indicates that the claimed exemption is not available or the retailer attempts to obtain an improper exemption certificate.18 The purchaser remains responsible for paying use tax, interest, and penalties for claiming an incorrect exemption. As a result of this change, a retailer need only determine if (1) the exemption claimed is available in Wisconsin, and (2) the certificate has been properly completed. Act 2 allows the Wisconsin Department of Revenue (Department) to provide for a uniform exemption certificate.19
Act 2 also simplifies certain rules:
If taxable and nontaxable goods are bundled together (sold together while maintaining their separate form), the entire transaction will be taxable unless either the taxable goods consist of less than 10 percent of the total bundle or unless the retailer can identify from its books and records the portion of the price that is attributable to exempt products.20
Operator Provided With Rental
The rental of property or equipment in which the operator is included with the rental will be not be treated as the rental of tangible personal property if the operator is necessary for the property to perform in the manner for which it was designed and the operator does more than maintain, inspect, or set up the tangible personal property.21 The retailer will be treated as selling a service. Act 2 does not provide any new insight into the taxability of particular services. The rental of the same property or equipment in which the renter provides its own operator will be treated as the rental of the property or equipment and, therefore, taxable. If the transaction is treated as a service, then the service provider will not be able to claim a resale exemption in purchasing property used to provide the service.22
Each participating state must maintain easy access to matrices that identify specific items as taxable or nontaxable, applicable tax rates, taxing jurisdiction boundaries, and the ZIP code or address assignments related to the administration of state and local taxes.23 Wisconsin’s product tax matrix may be found at: http://www.revenue.wi.gov/sstp/taxmatrix.pdf. Sellers may rely on these state-provided matrices and will not be liable for errors in sales tax collections (including all tax, interest, and penalties) as a result of this reliance.24
In addition, under Act 2, the Department may simplify the sales tax return.25
c. Standardized Source Rules
Wisconsin’s source rules remain “destination-based” but the wording of the statute has been revised. These sourcing rules are standardized among participating states, which should significantly decrease the compliance burden placed on multistate sellers and purchasers. These standardized sources should decrease the risk that an item is subject to double taxation.26
Some specific source rules were changed:
Sale of Advertising and Other Items
Oftentimes, a purchaser will contract with an out-of-state seller for items to be distributed directly to Wisconsin residents without the purchaser taking possession or control (such as phone books). Under the current statutes and the J.C. Penney decisions,27 the sales tax does not apply if these items are given away without charge because the definition of “use” does not include the ordering of items to be sent, for free, to third parties.
Under Act 2, the purchaser will owe sales and use tax on the transaction, regardless of whether the purchaser takes custody of the assets.28 However, catalogs and envelopes may be exempt under the previously enacted exemption in Wis. Stat. § 77.54(25m).
Currently, if a Wisconsin manufacturer or distributor makes a shipment pursuant to the orders of an out-of-state retailer (who does not have Wisconsin nexus) to a Wisconsin purchaser, the Wisconsin manufacturer is required to collect sales tax. Act 2 relieves the manufacturer or distributor of responsibility for collecting sales tax. The Wisconsin purchaser remains liable for use tax.29
Sourcing rules for direct mail simplify the obligations of the seller. Under the new rules, the seller must collect Wisconsin sales tax on the entire amount if shipped from Wisconsin unless an exception applies.30 The provision by the purchaser of either an exemption certificate or direct pay permit relieves the seller of all responsibility for collecting tax. Additionally, if the purchaser provides to the seller a listing of the jurisdiction of the recipients, the seller may rely on that listing for determining sales to Wisconsin destinations.
In passing Act 2, the Wisconsin State Legislature clearly intended to adopt the Provisions in order to become a full member under the Agreement. While the Agreement states explicitly that it does not intend to override state law,31 interpreting any ambiguity in the Provisions requires a review of the scheme of the Agreement and the considerations of its drafters.
In addition, a taxpayer can request an interpretation of the Agreement from the Streamlined Sales Tax Governing Board, Inc. These interpretations, when issued, are published as an appendix to the Agreement. The interpretations are not binding precedent in Wisconsin, but, given the Legislature’s intent to conform to the Agreement, the Wisconsin Tax Appeals Commission and the courts may give weight to these interpretations. Decisions issued in other participating states also should not be binding precedent but rather persuasive authority in Wisconsin.
2. The Provisions and the Solution to the Nexus Problem
While decreasing the compliance costs of the sales tax is a valuable benefit, the driving force behind the Agreement is solving the nexus problem. Under the U.S. Constitution, Wisconsin, like all other states, can only impose an obligation to collect Wisconsin sales tax on those retailers with sufficient connections to Wisconsin (called nexus). Historically, a sufficient connection exists only if the seller has some “physical presence” in the state — a salesman, a warehouse, a store, or an agent. See Quill Corp. v. N.D.; Nat’l Bellas Hess, Inc. v. DOR.32 A typical “remote retailer” may have a physical presence in only a few states while making Internet or catalog sales across the nation. The remote seller only collects sales tax in those states in which it has a physical presence. For transactions with purchasers in other states, the seller does not collect the sales tax on the transaction and the purchaser is liable for use tax. Unfortunately for the state coffers, the individual states lack an effective means to make sure the use tax is properly assessed and paid.
Many remote retailers resist collecting sales tax in multiple jurisdictions for two important reasons. The first is that the various states have complicated and differing sales tax provisions. This complexity creates large compliance costs. The second is the price advantage of selling goods without sales tax, assuming the consumers do not pay corresponding use tax, making the sale effectively tax-free.
The states seek to solve the nexus problem for two reasons: (1) the need for more financial resources, especially from out-of-state businesses with little political influence, and (2) to create tax equity between out-of-state remote sellers and local brick-and-mortar retailers. Given these goals, states have responded with three different, but related, tactics.
First, adoption of the Agreement simplifies the tax and decreases compliance costs for multistate retailers (discussed above). If collecting the tax is easier, perhaps some remote retailers will voluntarily collect the tax for sales sourced to states where the retailer does not have nexus.
Second, the Provisions make it easier to collect the sales tax by allowing sellers to outsource collection to third parties and by granting amnesty to certain sellers (discussed below).
Third, the states aggressively assert that out-of-state retailers actually do have nexus and are actually in-state retailers liable for collecting sales tax.
State statutes govern the standard for being subject to the sales tax. Although the statutes themselves may not violate the U.S. Constitution as interpreted in Quill and Bellas Hess, states can choose to assert taxing jurisdiction broadly, (up to the U.S. Constitutional limit). State revenue departments also may try to aggressively assert nexus in order to pull in retailers that have conducted only minimal amounts of activity in the state.
The Agreement does not address nexus standards. On its own volition, the Wisconsin Legislature extended the
Wisconsinnexus standard to the broadest permissible by adding Wis. Stat. § 77.51(13g)(c) to the statutes. The statute states that any seller who makes a Wisconsin sale is liable for collecting sales tax, “unless otherwise limited by federal law.”33 Thus, any retailer who meets the standard for nexus set by Quill is liable for collecting tax. Unfortunately, in practice, this places the burden of determining whether a U.S. Constitutional nexus exists (and thus statutory authority to tax) squarely on the seller. The seller now has the difficult task of understanding somewhat vague and uneven U.S. Constitutional case law and applying it to a specific set of facts. To add to the difficulty, if the seller asserts to an auditor or court that it does not have nexus, the seller must prove a negative — that it has not made a sufficient connection to be subject to tax.
In practice, this gives sellers an incentive to “voluntarily” collect Wisconsin sales tax rather than asserting that they are not subject to Wisconsin nexus and run the risk of not collecting the tax, being audited, having the Department determine that there was in fact nexus, and being held liable for the uncollected tax and penalties. If the risk of this scenario increases, sellers will be more inclined to voluntarily collect sales tax.
Other Enticements to Voluntarily Collect Sales Tax
Act 2 aims to make the idea of voluntary sales tax collection more palatable to retailers.34
a. Certified Service Providers/Automated Systems
To assist in the voluntary collection of sales tax, the Agreement contemplates outsourcing much of the burden of sales tax collection. The Agreement creates Certified Service Providers (CSP), which are specially certified businesses that perform all of a seller’s sales tax functions related to the seller’s retail sales.35
The Agreement allows the CSP to take responsibility for the retailer’s sales tax collections. A CSP is certified under the Agreement. Using a CSP relieves the seller of responsibility for errors on transactions that the CSP processes. The Department may only audit a seller if the Department has probable cause to believe the seller has committed fraud or made a material misrepresentation.36 The CSP electronically submits the seller’s returns and remits the tax to the various states.37
Wisconsin currently allows a sellers’ discount of 0.5 percent, that is, a retailer remits 99.5 percent of the sales tax it collects from its customers to the state (in order to partially cover compliance costs). Act 2 allows a higher sellers’ discount for retailers who employ a CSP to voluntarily collect and remit sales tax for states where the retailer does not have nexus. The extra amount is set by contracts with the participating states.38
The Agreement also creates Certified Automated Systems (CAS), certified software that calculates state and local sales and use taxes on transactions by the appropriate tax for each jurisdiction, determines the amount of tax to remit to the appropriate state, and maintains a record of the transaction.39 Sellers using a CAS software system retain responsibility for filing returns and remitting the tax. However, use of CAS software relieves sellers of liability for underpayments attributable to errors in the system’s functioning or application of sales tax rules.40 Act 2 also provides for the use of proprietary sales tax systems for large retailers.
The second enticement for retailers to voluntarily collect sales tax is amnesty for all past uncollected sales tax amounts.
Sellers that register by October 1, 2010 will receive amnesty for all previous sales tax collections made to Wisconsin purchasers if they collect sales tax for the next three years. The amnesty provisions exclude sellers who have already registered or are currently under audit. The amnesty does not apply to the commission of a fraud or intentional misrepresentation of a material fact.41 The amnesty provisions only cover uncollected sales tax and do not apply to other tax obligations such as income or franchise tax.
This is a provision designed to incent voluntary registrants (or sellers who have a questionable liability to collect tax that would rather avoid a possible audit in exchange for collecting tax going forward). While this is a limited amnesty, it could be advantageous to some sellers who have taken questionable positions in the past.
c. Avoiding Income Tax Nexus
Sellers that voluntarily register with the state to pay sales tax will not have their willingness to register used against them in ascertaining if they have nexus for income tax purposes.42
3 Full member states of the Agreement are: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, Washington, West Virginia, and Wyoming. Associate member states are: Ohio, Tennessee, and Utah. Full members are in full compliance with the Agreement; associate members are states that are scheduled to go into full compliance.
27 Wis. Dep’t. of Rev. v. J.C Penney Co., Inc., 108 Wis 2d 662 , 323 NW2d 168 (1982); J.C. Penney, Inc., et. al. v. Dep’t. of Revenue, Case No. 84-CV-3978, Wis. Tax. Rep. (CCH) ¶ 202-692 (Wis. Cir. Ct. Dane County May 21, 1985).
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Timothy L. Voigtman
Jason J. Kohout
Carl D. Fortner
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