Tax Changes Report: Get Ready for Scrutiny Around Sales Tax, Global E-invoice Compliance

After the flood of new e-commerce sales tax rules in the five years since the South Dakota v. Wayfair Supreme Court decision, this may be the year when more economic nexus laws finally start getting simpler.

The Streamlined Sales and Use Tax Governing Board, an organization comprised of state and local government officials and business leaders, is encouraging states to get rid of their transaction thresholds so that businesses only have to track total sales in a state to determine if they have to collect and remit sales tax, instead of tracking both total sales and total transactions.

According to the eighth annual Tax Changes report by tax compliance automation solutions provider Avalara, as of October 1, 2023, 20 states had adjusted their transaction thresholds and 10 states decided to drop that threshold altogether. Minnesota and Utah are reportedly introducing legislation to do away with theirs. And meanwhile, 13 states never had a transaction threshold in the first place.

But while this particular area of state tax law is loosening up, businesses need to prepare for an uptick in visits from state auditors.

Why more sales tax audits?

In a press release, Scott Peterson, VP of U.S. Tax Policy at Avalara, said, “Tax policy continues to evolve rapidly in the U.S. as the economy shifts and state governments look to adapt rules to keep pace with the changes technology is bringing to commerce. Because state budgets aren’t experiencing the same windfalls as they were in the immediate impacts of the pandemic, legislatures will encourage an increase in audits to make up for any lost revenue.”

States also stand to indirectly benefit from the $45 billion earmarked in the Inflation Reduction Act for federal tax enforcement. For example, If the IRS requires a business to amend a federal tax return, that taxpayer may also need to amend their state tax return.

Your A/P team should prepare by ensuring your sales tax collection and remittance practices are fully compliant with current sales tax rules and regulations in the states you do business regarding exemptions, tax rates and recordkeeping requirements.

Step two: Ensure that all purchase invoices are readily accessible and can be organized by vendor and date, and are identified as tax charged or exempt (be able to produce supporting documentation for tax-exempt purchases).

To correctly manage tax obligations and avoid penalties, procedural changes may be in order, such as:

• regular reviews of sales activity by state to determine if and when economic nexus thresholds are met
• internal audits for inconsistencies in tax calculations, missing exemption certificates or purchases from vendors in unknown tax jurisdictions, and
• possibly investing in tax compliance software to manage sales tax calculations, exemptions and filings more efficiently.

Do you have new e-invoice requirements?

Internationally, e-invoices – digital files containing structured data designed to be automatically exchanged and processed by accounting and enterprise resource planning systems – are required by law in a lot of places.

More than 60 countries either have e-invoicing laws, or will soon have them. This year, Romania, Malaysia, Israel and others will begin enforcing mandatory e-invoicing.

The main reasons behind it are that e-invoicing:

• helps streamline tax reporting
• increases tax collections, and
• reduces tax gaps (the difference between expected and actual tax collections).

In a statement, Avalara’s VP of e-invoicing, Alex Baulf, said, “For businesses looking to get ahead of the curve, it’s essential to understand current and forthcoming business impacts of country-specific e-invoicing mandates, and to plan for technology adoption to comply with new invoicing regimes and benefit from new efficiencies inherent in this digital transformation.”

As a result, A/P pros must ensure their systems are capable of generating and receiving compliant electronic invoices. This involves understanding the specific requirements of each country where you do business and integrating necessary technologies to automate and streamline e-invoicing processes.