Game Changing Impact Of Tax Reform
In the wake of the Supreme Court’s decision in South Dakota v. Wayfair, there is a new focus on state and local tax compliance and tax reform. Businesses must take a detailed look at their sales tax responsibility and re-evaluate if they are doing it correctly.
The Quill decision of 1992 barred states from requiring sales tax collection from sellers in a state where they did not have a physical presence. In 2016, the state of South Dakota passed legislation that challenged the physical presence requirement of Quill. Through numerous state court proceedings, South Dakota v. Wayfair landed at the US Supreme Court, and earlier this summer, the court agreed with South Dakota. The Wayfair ruling holds that physical presence is no longer required for a state to impose sales and use tax.
Why This is Important
This ruling now opens the door for states to collect sales tax from out-of-state sellers, even when no in-state physical presence is maintained. This is game-changing, especially for those selling remotely, through online retail spaces or across state borders.
The Wayfair ruling has basically disrupted the way businesses determine their sales tax responsibilities. Because of this ruling, all businesses operating across state lines will need to seriously evaluate their sales tax responsibility and collection procedures.
Most states have specified a date in 2018 as the new rule’s starting period. This means if you met a particular state’s new sales tax collection or reporting requirements in 2017 or at some point in 2018, you need to begin following their sales tax collection and compliance rules. That’s why it is important to know the rules for each state, as they vary.
What Businesses Need to Do
Sellers are responsible for keeping detailed records tracking sales made, the amount of taxable transactions and the amount of non-taxable or exempt transactions.
Most states have a specified number of transactions for a threshold. However, there is some gray area surrounding what counts. Most states have used the term “sales” without specifying if sales to resellers count towards their established thresholds. For the time being, the best approach is to assume sales types count.
As a remote seller, you are required to collect all necessary and applicable taxes for most states. This includes local taxes.
Here are a few other things to keep in mind:
Economic Thresholds: Review your sales by ship-to state to understand where you’re doing business. Also, know the current thresholds are in each state where sales are made.
Physical Presence: Determine where your business has a physical presence. This could be through employees, inventory and even third-party inventory warehouses like Amazon. If you have existing physical presence in a state and are not currently collecting tax there, speak with your tax advisor regarding voluntary disclosure programs that may be available.
Don’t do it alone: Talk to your business advisor about next steps for your business. They can help you determine the best way to handle compliance with the new thresholds and rules created.
The impact of the Wayfair ruling will continue to have a ripple effect on businesses and state sales tax compliance. It’s important to begin the conversation now and consider how this ruling will impact your business, as well as how to avoid the consequences of non-compliance.