Sales tax engagement letter: nexus, registrations and returns by state

Sales tax is not one return. It is a set of state and local accounts, each with its own rates, forms and filing calendar. A letter that says “we will handle your sales tax” leaves every one of those questions open.

The scope grew in 2018. In South Dakota v. Wayfair, the Supreme Court overruled the physical presence rule of Quill, so a state can require an out-of-state seller to collect its tax (South Dakota v. Wayfair, Inc., U.S. Supreme Court (2018)). The South Dakota law at issue applied to sellers delivering more than $100,000 of goods or services into the state, or making 200 or more separate sales there, each year (South Dakota v. Wayfair, Inc., U.S. Supreme Court (2018)).

Thresholds move after the case, too. South Dakota’s current statute keeps only the revenue test: gross revenue from sales into the state above $100,000 in the previous or current calendar year (South Dakota Codified Laws 10-64-2, remote sellers). That is why the letter should say thresholds are checked against each state’s rule in force on the date of the study.

Put one row per state in a schedule attached to the letter. New states join the table by written notice, at the per-state fee. The example rows show how to fill it in.

The core split of duties fits in one sentence. The seller charges the tax at the point of sale and remits the money. Your firm prepares and files the returns from the data the seller gives you, by the due date, if the data arrives by the cutoff.

Errors often start upstream. Product taxability is the setting that tells the seller’s billing or e-commerce system whether each item is taxable in each state. If it is wrong, the return is wrong, and no review of totals will catch it. Keep that setting with the seller, or price a taxability review as a separate service.

An exemption certificate is the form a buyer gives to show that a sale is exempt, such as a resale certificate from a retailer. The seller collects and keeps them. If you review them for completeness and expiry, say so as a named service.

Set a cutoff, for example five business days after each period ends, and list the reports. Name the format too, such as the export from the seller’s billing system, so the data arrives the same way each time. Then say what happens when it is late. A state return has a fixed due date, and a late file from the seller can make the return late. The letter should say you will file on what you have, or file late and leave the penalty with the seller. Pick one and write it down.

• Sales by ship-to state and local jurisdiction, split between taxable and exempt.
• Tax collected by jurisdiction, from the same system.
• Marketplace facilitator reports, for sales made through an online marketplace.
• Refunds, returns and credits issued during the period.
• Purchases on which the seller owes use tax, such as equipment bought tax-free out of state.
• New exemption certificates received, if certificate review is in scope.

A voluntary disclosure agreement is a deal in which a seller comes forward to a state about past uncollected tax, usually in exchange for a limited lookback period and reduced penalties. Your firm can approach the state without naming the seller at first. The seller chooses whether to sign each agreement, because it commits the seller to pay.

Penalties need a written rule. Your firm bears a penalty caused only by its own late filing. The seller bears penalties from late data, late funding, or tax it failed to collect. For each state where you deal with the department directly, have the seller sign that state’s power of attorney form.

For CPA firms, the AICPA tax standards apply to state work as well as federal, since they cover all members providing tax services (AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024)). When preparing a return, a member may rely in good faith on the client’s information without verifying it, but must ask when it looks wrong or incomplete (AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024)). Write that reliance into the letter.

• South Dakota v. Wayfair, Inc., U.S. Supreme Court (2018): The Court overruled the physical presence rule; the South Dakota law covered sellers with more than $100,000 of sales or 200 or more transactions into the state each year.
• South Dakota Codified Laws 10-64-2, remote sellers: A seller without physical presence remits South Dakota sales tax if its gross revenue from sales into the state exceeds $100,000 in the previous or current calendar year.
• AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024): The standards apply to all members providing tax services; a member preparing a return may rely in good faith on client information but should inquire when it appears incorrect or incomplete.