On June 21, 2018, the U.S. Supreme Court ruled in favor of South Dakota in the widely-watched South Dakota v. Wayfair case. This ruling overturned the long-held precedent of Quill Corp. v. North Dakota, which stood for the proposition that a state could not impose a collection requirement on a retailer unless that retailer had a physical presence in the state.
Not surprisingly, this decision sent shockwaves through the business community as the physical presence standard of Quill had been the long-standing rule. It is important to remember that while online businesses may have been the target of the Wayfair decision, all retailers will be affected by the decision. The Wayfair decision now means that states could constitutionally impose a collection responsibility on retailers with no physical presence in the state by establishing threshold amounts for sales activity in the state. Therefore, if businesses meet those sales volume or number of transactions thresholds, they are required to charge and remit sales tax.
Unfortunately, one of the negative ramifications of the Wayfair decision has been the heavy administrative burden placed on businesses, especially those smaller to mid-market businesses. The process of collecting, reporting and paying sales tax can be complicated and costly. Once businesses determine if their products and services are taxable in a particular locality, they must put significant resources toward sales tax compliance, administration and technology systems, among other things. To further complicate matters, there are between 10,000-12,000 sales tax jurisdictions in the U.S. and each jurisdiction has its own set of rules, registration processes and filing requirements.
Understandably, the post-Wayfair tax landscape can prove difficult for any retailer to navigate, which is why we recommend working with your tax professional to smooth the transition. Below are answers to some fundamental questions businesses may have about how the Wayfair decision impacts your business and how to fulfill your sales tax obligations.
- Where do I start? At first this may seem like a daunting task. This is why it is recommended to break down the implementation process into smaller steps instead of tackling everything at once. First and foremost, work with your tax professional to establish where you have sales tax nexus and whether your products or services are taxable.
From there, your business can register with the appropriate jurisdictions. It’s important to remember that registering for sales and use can also require registering to do business with the Secretary of State office, which can then implicate an income/franchise tax filing requirement. That’s because the department assumes if you are filing for sales tax, you are doing business in that state and therefore should be paying income taxes. However, just because a company is subject to sales tax does not mean it’s automatically subject to income tax, so it’s crucial you know what your company is, or is not, responsible for. Nevertheless, some states have now developed remote seller registrations that allow companies without a physical presence in the state to bypass the Secretary of State’s office. This helps to streamline the registration process and alleviate compliance challenges.
- Which states have adopted thresholds? So far, 42 states have adopted thresholds for sales activity. However, these thresholds differ from state to state. For example, South Dakota, the state at the center of the Wayfair decision, requires companies to register with the South Dakota Department of Revenue if sales surpass $100,000 or 200 separate transactions in a given year. Most states have adopted laws similar to South Dakota. Meanwhile, California requires out-of-state retailers to register with the California Department of Tax and Fee Administration if the company’s annual sales into California exceed $500,000. As it relates to Massachusetts and Rhode Island, both have enacted economic presence rules. Although Massachusetts has a higher economic standard ($500,000 and 100 transactions), its guidelines were generally effective October 1, 2017. While Rhode Island adopted a standard similar to Wayfair ($100,000 or 200 transactions), its guidelines were generally effective in August 2017. Both Massachusetts and Rhode Island had pre-existing laws on their books and they advised they would continue to be enforced post Wayfair.
We have been closely following the latest developments as states have transited toward adopting sales thresholds. As a result, we have developed efficiencies in analyzing your company’s financial information to determine where you may have sales tax nexus.
- How often do I need to reevaluate where my company has nexus? To be fully compliant, businesses would need to reevaluate their financial situation on a monthly basis. The number of states enacting thresholds continues to increase and the company’s sales volume or transactions in a given state could also go up at any time, requiring the business to pay sales tax in a state in which it previously did not have nexus. If a monthly evaluation isn’t practical for your company, we suggest conducting a thorough review at least quarterly or semiannually.
- Should I use taxable or total sales to calculate nexus? Generally speaking, one should look at total sales to determine nexus, regardless of whether it is taxable or not. The purpose of these thresholds is to protect small businesses with limited resources from unfair burdens. In other words, if the company’s total sales are too low, you will be exempt from collecting sales tax. To calculate nexus, first evaluate your gross annual sales. Then determine whether your sales are taxable, and on what portion collections are required, if any.
As we approach the one-year anniversary of the landmark Wayfair decision, there are still many unknown variables and the tax landscape continues to rapidly evolve. Working closely with a tax professional will ensure your business stays atop of these changes and is prepared to adapt accordingly.
If you have any questions or need assistance evaluating your company’s nexus and/or whether your company’s products or services are subject to sales tax, please contact us.
Tarra Curran is a Leader of the State and Local Tax Practice in New England. She can be reached at firstname.lastname@example.org or 401.626.3240.
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