Following the United States Supreme Court’s 2018 decision in South Dakota v. Wayfair, the majority of states have enacted economic nexus laws requiring out-of-state vendors who exceed certain dollar and/or transaction thresholds to register and collect sales tax.
As vendors are coming into compliance with these economic nexus laws, many vendors are sending requests to customers to pay sales tax or provide proof that their purchases are exempt. These requests are commonly known as XYZ Letters.
Receiving these vendor letters can throw a wrench in your daily tax operations. Here’s what you need know about these requests and how you should respond.
What Is an XYZ Letter?
An XYZ Letter is a form letter sent from a vendor to a customer to address sales tax on prior transactions. The general format was originated by California auditors several years ago but has since become the standard format for vendor letters to customers.
You are likely receiving these letters for one of the following reasons:
- Compliance requirements post-Wayfair under economic nexus and physical nexus, including:
- Voluntary disclosure of past obligations
- Preparations to begin charging sales tax in specific states
- The vendor is under audit, and sending the XYZ letter as part of the abatement process
- The vendor is updating their exemption certificates
How Should You Respond to an XYZ Letter?
The XYZ Letter typically asks you to identify whether your purchases fall into one of the following categories:
What is your obligation to respond? What is your obligation if they back-bill sales tax? Are these obligations legal, ethical, or just good business practices?
The failure to respond may leave the vendor exposed to potential liability; however, addressing these letters requires time and expertise to respond appropriately. Most of our clients respond in good faith and recognize the importance of their vendor relationships. Additionally, companies may be contractually obligated to pay sales tax according to the terms of their existing agreements.
Companies are willing to pay their fair share of tax, unless they determine that taxes have already been paid, or that an exemption is available. Global Tax Management (GTM) can help you determine your tax obligation if you receive an XYZ letter, and help you navigate other tax challenges in the ever-changing and complex landscape we live in today. For more information, please contact me at jcunningham@gtmtax.com.
