Certified Service Provider programs for remote sales tax compliance
A developed phenomenon seems to be spreading among states. In recent months, three have passed laws requiring their tax departments to establish a Certified Service Provider (CSP) program to simplify sales tax compliance for out-of-state sellers. A fourth state got their CSP program up and running.
Streamlined Sales Tax (SST) states were the first to develop a CSP program. It’s an integral part of the Streamlined Sales and Use Tax Governing Board’s mission: “to provide a road map for states who want to simplify and modernize sales and use tax administration … in order to substantially reduce the burden of tax compliance.”
As defined by the SST, a CSP “is an agent certified … to perform all the seller’s sales and use tax functions, other than the seller’s obligation to remit tax on its own purchases. A CSP is designed to allow a business to outsource most of its sales tax administration responsibilities.”
For small businesses with one location in one state, outsourcing sales tax management may seem like overkill. For companies that sell into multiple states, however, it’s quickly becoming essential. Just over a year ago, no state could compel out-of-state sellers to collect and remit sales tax. By the end of 2019, most states will.
Any business can hire a sales tax software company to manage sales tax compliance in any state. Businesses that qualify as a “voluntary seller” in one or more of the 24 SST member states can obtain the services of a CSP at no cost because SST member states pay for the CSP software and services. Six sales tax software companies are SST CSPs as of this writing, including Avalara.
To qualify as a volunteer seller, a business must have no fixed place of business for more than 30 days in the state, less than $50,000 of property or payroll in the state, less than 25 percent of total property in the state, and meet additional criteria during the 12-month period immediately preceding the date of registration.
Why would states pay sales tax software costs for businesses?
The Streamlined Sales and Use Tax Agreement was created in 2000 at a time when states lacked the authority to tax remote sales. To encourage remote sellers to voluntarily collect and remit sales tax, SST states simplified sales and use tax administration and offered to pay the costs of automating and outsourcing sales tax management.
This paid off in the long run. On June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc., overruling the physical presence rule and enabling states to tax remote sales. The decision was based, in part, on the fact that South Dakota is a member of SST and has standardized taxes “to reduce administrative and compliance costs.” Furthermore, the court noted that South Dakota “also provides sellers access to sales tax administration software paid for by the state. Sellers who choose to use such software are immune from audit liability.”
CSP programs in non-SST states
The Wayfair decision didn’t grant states unlimited authority to tax sales by out-of-state sellers — it merely removed the physical presence rule that limited them to imposing a sales tax collection obligation on businesses with a physical presence in the state. The court found a remote seller’s “economic and virtual contacts” with a state to be a sufficient basis for nexus.
Consequently, the numerous states that have adopted economic nexus in the wake of Wayfair have generally stuck close to South Dakota’s model. All allow an exception for small sellers, though the small seller thresholds vary in each state. Most enforce economic nexus on a prospective basis only. However, only 23 of the 42 economic nexus states are SST states. (SST member Kansas is the last holdout, and it’s expected to tax remote sales starting October 1, 2019.)
It would take time for the remaining states to join SST, assuming they want to. One thing they can do, if they decide to, is help ease the burden of remote seller sales tax compliance by establishing a CSP program modeled off the SST CSP program.
Pennsylvania was the first state to develop its own CSP program. The Pennsylvania Department of Revenue currently contracts with four companies, including Avalara, “to perform sellers’ sales tax functions at free or reduced cost.” You can learn more about the Pennsylvania CSP program here.
Three other states are working to establish a CSP program: Connecticut, Illinois, and New Mexico. Of these, Illinois provides the most information.
Illinois Senate Bill 690 notes that Certified Service Providers and Certified Automated Systems (CAS) “simplify use and occupation tax compliance for out-of-state sellers” and improve the accuracy of tax collection and remittance. Thus, it requires the state to provide CSP and CAS services to retailers “without charge” in order to “substantially eliminate the burden on those remote retailers to collect and remit” state and local use and occupation taxes.
The measure defines a CSP as “an agent certified by the Department to perform the remote retailer’s use and occupation tax functions.” CAS is defined as “an automated software system that is certified by the State as meeting all performance and tax calculation standards required by Department rules.”
The Illinois Department of Revenue must establish standards for the certification of a CSP and CAS by December 31, 2019. It’s permitted to work in conjunction with other states to achieve this.
Additionally, by July 1, 2020, the department must:
- Provide uniform minimum standards for companies wishing to be designated a CSP, along with an expedited certification process for companies already certified in at least 5 other states
- Provide uniform minimum standards for CAS, along with an expedited certification process for automated systems already certified in at least 5 other states
- Establish a certification process to review the systems of companies seeking CSP or CAS status
- Contract with each company that qualifies as a CSP or will be using a CAS to establish the responsibilities of the CSP, remote sellers that contract with CSPs, or users of a CAS; provide protection and confidentiality of tax information; and compensate for timely filing and remittance
Illinois currently allows vendors that file and remit sales or use tax on time to retain 1.75 percent of the tax paid. In the event a remote vendor contracts with a CSP, the CSP (and not the retailer) may retain that 1.75 percent so long as it collects and remits the tax owed on a timely basis.
The state will not hold remote retailers that use a CSP or CAS — or the CSP or CAS — liable if they charge and collect the incorrect amount of use or occupation tax after relying on erroneous data provided by the state. Additionally, CSPs and remote retailers that use a CAS are protected from class action related to the overpayment of retailers’ occupation tax if, at the time of sale, they relied on information provided by the Department.
Connecticut House Bill 7424 tasks the Commissioner of Revenue with consulting with the Streamlined Sales Tax Governing Board to develop a list of certified service providers that can facilitate sales tax collection and remittance to the state.
Additionally, the commissioner must develop a plan to implement the use of CSPs for the collection, remittance, and reporting of sales and use taxes, and determine what it would cost retailers to use a CSP. The commissioner is also authorized to require retailers to use a CSP.
The plan must be submitted to the joint standing committee of the General Assembly no later than February 5, 2020.
New Mexico House Bill 6 authorizes the Secretary of Taxation to establish standards for the certification of CSPs that offer software-based systems to enable taxpayers to properly determine the taxability of gross receipts from particular transactions. For the definition of a CSP, it relies on the definition used by the Streamlined Sales Tax Governing Board.
Next steps for sellers
If you’re a retailer required to collect and remit sales tax in multiple states, now may be a good time to consider outsourcing sales tax management to an automated sales tax service provider certified by more than half the states: Avalara. Learn more.
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