Understanding Sales Tax in the Post-Wayfair World
In June 2018, the U.S. Supreme Court decided South Dakota v. Wayfair. The ruling essentially stated that (subject to limitations aimed to protect small businesses) an economic presence in a jurisdiction, such as making an online sale to a customer who resides in that jurisdiction, triggers the requirement to withhold and remit sales tax pursuant to that jurisdiction’s rules. Since then, businesses that operate in two or more of the nation’s 10,000-plus sales tax jurisdictions have been struggling to understand what they need to do to comply with the new definition of economic nexus.
The Court’s ruling was vastly different from its 1992 ruling in Quill Corp. v. North Dakota, which found that sales tax did not have to be collected unless the company had a physical presence in the state. Then again, Quill was decided when the Internet was in its infancy.
Wayfair did not expressly state a threshold for collecting sales tax, but the South Dakota statute in the case stipulates that any out-of-state business that makes $100,000 in sales or that have 200 or more sales in the state must collect sales tax. Although that is a good guideline, businesses need to remember that not all jurisdictions follow it, and many are creating new rules.
This creates problems for businesses for a number of reasons, including the following:
- Business registration. Every state has different rules about how businesses must register as taxing entities. In some states, it is enough to register at the state level, whereas in others, the business needs to register at the county and municipality level as well. Some jurisdictions may ask businesses to prove they do or do not meet its thresholds. Noncompliance with these requests can lead to steep penalties. Other jurisdictions have voluntary disclosure programs that can help limit exposure.
- Goods and service exemptions. There is no one standard for taxing goods and services. For example, clothing is not taxed in New Jersey, but in New York, a neighboring state, only clothing that costs more than $110 is taxed. There is a never-ending list of discrepancies between jurisdictions, and this list can change quickly.
- Effective dates. Just as there is no universal list of which goods and services are taxed, there is no one list of effective dates. A new effective date takes effect every time a jurisdiction decides to tax a good or service, exempt one from taxation or impose a new dollar limit.
The Wayfair ruling is not going away, so businesses need to take several steps to analyze their exposure. Businesses need to —
- perform a detailed analysis of the business’s annual sales and number of transactions in every jurisdiction in which it operates;
- determine which goods and services are taxable in each of those jurisdictions;
- figure out when and where to register, what penalties it may incur and whether registering will make it subject to other taxes, such as franchise taxes; and
- determine how it will manage sales tax compliance going forward.
Increasingly, online aggregate retailers such as Amazon and Walmart are withholding and remitting sales tax on behalf of their sellers. The new ruling creates an even larger incentive to use an aggregate selling platform. In the wake of the decision, new platforms and services are popping up to help businesses comply.
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