Ruling brings major change to out-of-state sales tax collection

For many years, businesses had to have physical presence or nexus in a state to be legally required to collect and remit sales tax on transactions. E-commerce has essentially skirted that law and states have argued that they’re losing out on tax revenue they’re due. They challenged the court cases that set the physical presence standard — Quill Corp. v. North Dakota and National Bellas Hess v. Department of Revenue of Illinois — to little avail. Finally, with the recent South Dakota v. Wayfair Inc. decision, states have gotten the ruling they were hoping for. And it means significant changes for businesses that do out-of-state business, whether online or not.

Smart Business spoke with Nicholas Schatte, tax manager at Clarus Partners, about the Wayfair decision and how it affects businesses of all types and sizes.

What is the decision the Supreme Court reached in the Wayfair case?

The Supreme Court, in a 5-4 decision, overruled the standards set forth in Quill and Bellas Hess. Now, a physical presence is no longer a prerequisite for states to compel a business to collect and remit sales tax. All applicable transactions can be taxed.

As it stands, the Supreme Court sent the decision back to South Dakota’s Supreme Court to be evaluated for any reason that it might be unconstitutional. It’s expected that the law will be found constitutional and states will implement their laws prospectively, most likely between July 1, 2018 and January 1, 2019, but some states may attempt to collect the tax retroactively.

How does the decision affect businesses?

While much of the attention is focused on online retailers, it’s going to impact any business selling products into a state where the business isn’t currently collecting tax, such as wholesalers and manufacturers. Businesses will soon have an obligation to register with states’ departments of revenue, and start collecting and remitting sales tax. It will require businesses to collect sales tax in a lot more states than they are currently.

Brick-and-mortar businesses that also transact with out-of-state customers through a complementary e-commerce portal should pay close attention. They might not have concerned themselves with collecting sales tax on those transactions, but will need a mechanism in place to do so now.

Some businesses might not have software that’s sophisticated enough to comply with all states’ tax laws. Businesses previously could collect tax at whatever rate was imposed where the store was located. Now they’ll need to know the rate and tax treatments for potentially 45 states and numerous local jurisdictions, which is difficult and costly to do manually.

Even if businesses aren’t making taxable sales, they still have documentation requirements to prove that their sales aren’t taxable in a state. Legislation in some states might require businesses to file if they have a certain amount in sales in that state, not just taxable sales, and may be compelled to register and prove that they had no obligation to collect tax. That complicates businesses’ record keeping and adds to their administrative requirements. Other states require that sellers collect tax or report untaxed sales made in the state to both the purchaser and the tax authority. Some impose substantial penalties for failing to file the reports or collect the tax.

What should affected businesses do now?

As soon as possible, businesses need to analyze where they’re making sales, how many sales they’re making and the dollar amount of sales in each state. They could need to register in the states where they are currently not and start collecting tax.

Businesses should also determine how they’ll comply with the law — by upgrading their software system, or more manual methods — and how they’ll remit tax. Will they prepare the returns themselves, or hire a firm or service provider to help with compliance?

Service providers can do more extensive reviews to see where a business needs to file returns, if at all. Businesses might not track activities close enough, which might expose them to liabilities. If that’s the case, there are ways to resolve the outstanding liabilities they have, but didn’t know about until a review was performed.

Insights Accounting is brought to you by Clarus Partners