October 4, 2019
Sales Tax and Compliance
You know, sales tax has turned into the Wild West not just for internet retailers, but also for brick-and-mortar stores, manufacturers, and wholesalers alike. With over 10,000 sales tax jurisdictions in the United States, almost any company selling across state lines needs to be analyzing its sales tax compliance. The question is: What are you and your clients doing about collecting sales tax for sales across state lines?
Companies that do business across state lines are beginning to wade through the complexities of the standard set by the South Dakota v. Wayfair, Inc., decision.
As a seller, you’ll now be subject to the tax laws of each state you sell goods or services in, a complete reversal of the previous rules. Adding to the complexity, each state has different thresholds and rules by industry and product. This likely means that no two companies will be affected in the same manner.
Where Economic Nexus is Headed Post Wayfair
As most states are expected to outline similar rules for how they charge and enforce sales tax before the end of 2019, it’s critical to understand the implications for your business now—especially if you’re a service provider or you operate remotely. Determine whether wayfair nexus rules are applicable. Be aware of sales dollar and transaction volume activity. Consider your jurisdictions and whether there are prior period obligations and/or effective …
And prior to the ruling, the sales tax compliance burden could be controlled by limiting activities in certain states, and sellers without a physical presence in a state didn’t need to incorporate sales tax into their transactions. Now, sellers need to consider the potential tax implications of each state they do business in.
In the 1980s and 1990s, states attempted to get companies to collect sales tax on transactions into the state. These companies were predominantly located out of state and were making sales via mail or telephone calls. The companies were not collecting sales tax on the transactions. The states were less than pleased. One state, North Dakota, passed a law requiring any company engaging in “regular or systematic” solicitation in the state to become registered for and collect sales tax. In 1992, the U.S. Supreme Court held a company needed to have a physical presence (employees, property, or offices) in a state before the state could require the company to collect sales tax. This landmark case was Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
And if a business does not have any taxable sales in a state, if it has nexus, the business must still register for a sales tax license and file a return showing no taxable sales were made. Step 4: Calculate Tax Rates When a company determines its products or services are taxable, it must collect sales tax.
Next, a business must determine whether the products and services the business sells are taxable. Each state has different rules pertaining to the taxability of the products and services sold to residents of the state. Even if a business does not have any taxable sales in a state, if it has nexus, the business must still register for a sales tax license and file a return showing no taxable sales were made.
There’s little doubt your e-commerce clients will feel the impact of the Wayfair decision, but as the states either introduce or dust off their economic nexus rules for remote sellers, one area where the state rules diverge is their measure of economic thresholds.
Measuring the Economic Nexus Threshold
The economic nexus allows the states that embrace it to compel vendors from other states to collect their state sales taxes; previously, they could not be similarly compelled under the physical presence standard.The recent U.S. Supreme Court decision in the South Dakota v. Wayfair case opened the door for states to broaden the reach of their sales tax net. The new focus on in-state revenues versus in-state physical presence means many retailers that previously were not compelled to collect remote state sales taxes must now do so.
We all know when a company determines its products or services are taxable, it must collect a sales tax on each purchase. In most cases, the state, county, and city jurisdictions will all impose a different tax rate for taxable items. Therefore, a business must be aware of the jurisdiction rules of each state and local authority. For instance, a company should determine whether a state imposes tax on where the sale took place (origin jurisdictions) or where the product was delivered (destination jurisdictions).
And a business should maintain internal records tracking the sales made, the amount of taxable transactions, and the amount of non-taxable or exempt transactions. Each state has their own statutory requirement for how long records need to be retained, and we recommend 4-7 years. Furthermore, a business must keep in its records any exemption certificates a purchaser has supplied as proof the customer’s purchases were not subject to sales tax. This will be important if the business is audited.
The Online Sales Simplicity and Small Business Relief Act of 2018 would protect small remote sellers and prevent retroactive taxation. The Protecting Businesses from Burdensome Compliance Costs Act of 2018 would require states that want to tax remote sales to have a statewide uniform tax …You know, sales tax has turned into the Wild West not just for internet retailers, but also for brick-and-mortar stores, manufacturers, and wholesalers alike. With over 10,000 sales tax jurisdictions in the United States, almost any company selling across state lines needs to be analyzing its sales tax compliance. The question is: What are you and your clients doing about collecting sales tax for sales across state lines?