It has been several months since the U.S. Supreme Court rendered its historic decision in the South Dakota v. Wayfair Inc. case and taxpayers are still grappling with its implications.
Prior to the Wayfair decision, a business had to have physical contact with a state before becoming subject to its sales tax collection and reporting requirements. As a result of Wayfair, physical presence was no longer required to establish a substantial contact with a taxing state for sales tax. The new sales tax nexus standard is now commonly referred to as economic nexus.
“The reality is that the U.S. Supreme Court changed the sales tax compliance landscape overnight, because states were very quick to get on board and adopt an economic nexus standard that was identical to the South Dakota standard at issue in Wayfair,” says Thomas M. Frascella, J.D., director of tax strategies at Kreischer Miller.
Smart Business spoke with Frascella about the Wayfair decision and how the change is affecting both businesses and states’ sales tax collection practices.
What has changed because of the Wayfair decision and who is affected?
As a result of the Wayfair decision, approximately 36 states now consider a remote seller to be subject to a state’s sales tax rules when the remote seller has either a specific number of transactions with residents in that state or a specified dollar amount of sales in that state. Generally, $100,000 of sales or 200 transactions will subject an out-of-state business to a sales tax collection responsibility in states adopting an economic nexus standard.
The decision affects many businesses, especially those that operate from a single location but use multiple channels, such as marketplace facilitators or internal e-commerce platforms, to generate sales. Often these businesses do not have either the personnel or financial resources to comply with these new requirements and must now navigate this new reality. Although there have been attempts at the federal level to pass legislation to minimize the impact to small businesses by narrowing the nexus generating activities, these attempts have failed and businesses remain subject to the requirements of each and every state.
How are businesses responding to the law change?
Businesses will now need to determine how to move forward. Some may decide to take a wait-and-see approach to the matter and do nothing, opting instead to see how aggressive states become in identifying and pursuing remote businesses for sales tax. Other businesses will be more proactive in managing their new filing requirements and begin to explore solutions. These solutions will most certainly require some type of technology investment to enable a business to charge the proper sales tax, as well as collect and remit that tax to the appropriate state and local taxing jurisdictions.
Businesses should take the time to understand the states where they have met or exceeded state economic nexus thresholds for sales tax purposes to determine if they have an issue. It will also allow a business to assess their potential exposure if they have nexus and decide to do nothing.
How are states’ collection practices changing?
States are likely developing discovery tactics and collection practices to identify out-of-state businesses with sales tax nexus. Once a state identifies an out-of-state business that should have been collecting and remitting sales tax, it will pursue recovery of past due sales tax with penalty and interest, which could be difficult for a business to recover from customers.
Many states are operating in a deficit and need to find new sources of revenue. It is no longer a ‘if they find me,’ but rather a ‘when they find me’ scenario. No business should consider themselves too small to pursue. Businesses need to develop an action plan to avoid being caught holding the liability for a tax that could have been passed along to customers in the normal course of business.
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