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COVID-19 update - Indirect tax, United States

Covid-19 is disrupting business across the world requiring tax authorities to implement rules and reliefs to support businesses through this period. We are pulling our global indirect tax resources together to create a single source of information, support and thought leadership.

What type of business is this information relevant for?

This type of relief is relevant for all businesses. Relief may be targeted to specific taxpayers, such as small businesses per certain criteria, according to the guidance issued by individual state and local taxing authorities.

VAT/GST reliefs – tax authority announcements

Over half of the US State and Local taxing authorities have offered sales/use tax filing extensions in response to COVID-19. The guidance from one taxing jurisdiction to another varies significantly:

  • Out of the 46 states + DC that impose sales/use tax at the state or local levels, 14 states have not announced any relief for sales/use tax filings and payments.
  • Numerous states require that returns be filed by the original deadline while payments may be deferred to a later date.
  • Many states are waiving penalties and interest for the extension period, but not all - some jurisdictions are only waiving penalties.
  • If filing deadlines are missed per extension guidelines, penalties and interest will be assessed.
  • Some taxing jurisdictions are only providing relief to certain business types or businesses with gross sales or liabilities under specific thresholds.
  • Many state/local extensions are automatic - 12 states currently require extension requests in writing or via application.
  • Relief periods differ for each jurisdiction – e.g. 30 days, 60 days, until month end in the original due date month - some relief periods vary based on the taxpayer filing frequency.
  • Most states have only announced relief for sales/use tax due for the months February through to April 2020. Some states are evaluating extensions on a month-by-month basis.
  • Few jurisdictions are offering sales/use tax relief for certain purchases of COVID-19 related Personal Protective Equipment and similar items (e.g. respirators, masks, face shields, sanitisers, gowns).

What ideas have you generated to support businesses?

Liquidity and cost reduction

  • E-invoicing is encouraged if the business has the ability to do so.
  • Progress billing is encouraged if business models allow - progress billing may offer viable payment options for customers which would increase and stabilise incoming revenue - progress billing may also provide a deferred realisation benefit.
  • Bad debt relief and sales/use tax recovery options may be available if customers have not paid for purchases.
  • A review of sales and use tax overpayments is a highly encouraged service during this period to help improve liquidity and cash flow – see more by clicking here.

Workforce dynamic

More business expenses may be incurred if employees are working from home. However, such expenses would be a claim on the federal and/or state income tax return(s) and are not a direct sales/use tax exemption for items at the time of purchase.

Supply and demand shock

  • If inventory needs to be destroyed (because it becomes obsolete, spoils, perishes, or for some other reason), indirect tax consequences may exist. Depending on the state, shrinkage or spoilage adjustments may be required, per individual state and local sales/use tax regulations. Exemptions may apply if the initial intention was to resale such items.
  • Cancelled contracts may result in refunds or credits to customer. In most cases vendors should be able to recoup this tax particularly if no goods or services have been supplied.
  • If contracts are cancelled mid-term, an annual contract with quarterly progress billings for example, tax should be accounted for based on what has actually been invoiced, assuming goods or services have been supplied for half of the year.
  • With long-term financial shortages in mind, states are heavily enforcing their new economic nexus regulations related to sales/use tax registration and filing obligations. Out of 46 states + DC, only two have not enacted economic nexus thresholds – Florida and Missouri. While the safety and well-being of communities is the priority for these states, both Florida and Missouri have discussed imposing economic nexus thresholds with an effective date later in 2020 in attempt to boost revenues. Other states are discussing cutting exemptions for certain products and/or services as a means to broaden the tax base and ultimately generate more revenue. With such changes and aggressive compliance actions on the horizon, we encourage companies with sales to US customers to continue considering their US sales/use tax obligations during this time so they are not caught by surprise with significant historical liability or US state/local tax audits.
    • US nexus and filing gap analysis is highly encouraged
    • Automation and tax technical assistance may be necessary to accommodate for exemption changes

Call to action

Taking advantage of the various US taxing jurisdiction sales/use tax extensions may provide short-term relief and aid in liquidity management. However, we’re not receiving extended-period commentary from the states, which causes reactive responses. Without the ability to plan in advance for long-term extensions allowing for better cash flow management, it’s extremely important for taxpayers to determine if the short-term benefits outweigh the additional time and expense that may be incurred for deferring sales/use tax return and/or payment submissions, where applicable.

As with most COVID-19 tax-related developments, the US sales/use tax relief guidance is changing frequently. More state/local guidance is anticipated in the coming weeks. For more information on the current US state and local response to COVID-19, please see our SALT COVID response landing page and reference our articles, State and local sales tax extensions and relief due to COVID-19 and State taxing authorities address COVID-19 filing and business changes. In addition, RSM US has created a COVID-19 resource center on our website to support businesses during these challenging times, and we hold a weekly webcast each Wednesday to address business continuity planning, tax and regulatory guidance, industry impact, the overall economy and other emerging trends. Businesses can sign up for the weekly webcast through this website: https://rsmus.com/events/coronavirus-webcast.html.

AUTHOR

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Andrienne Albritton                                                                       
Senior Manager
E: [email protected]  

 

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Mo Bell-Jacobs                                                                       
Senior Manager
E: [email protected]