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Sales Tax Planning: What You Need to Know about the Wayfair Supreme Court Decision

For internet retailers, the June 21 U.S. Supreme Court ruling on South Dakota v. Wayfair has significant implications, including the added burden of sales tax compliance. As a result of this ruling, many internet shoppers will notice their favorite retailers collecting sales tax on their purchases. Smaller “mom-and-pop” retailers will be faced with a new administrative burden complying with sales tax policies throughout the U.S.

Key questions emerging from this court decision:

If my company is not currently collecting sales tax, when do we begin?

At present, this ruling applies to South Dakota, and as of early August 2018 it is not requiring out-of-state sellers to comply. Based on the information on the South Dakota DOR website, the state is requesting that retailers voluntarily remit sales tax. As stated on the site, “The South Dakota Department of Revenue is partnering with other states and the business community to ensure the transition is as smooth as possible once the law takes effect.”

When will the changes go into effect for states that have enacted polices that require internet sellers to collect sales tax?

This will vary state-by-state. Some states have policies planned to go into effect October 1, 2018, and other states have an effective date of January 1, 2019. Understanding the differing state requirements will be a new activity for most online retailers.

What other states have laws similar to the South Dakota law?

As of August of 2018, more than a dozen states had some type of economic nexus rule in their state. The list includes Alabama, Georgia, Indiana, Michigan, Minnesota, Massachusetts, Mississippi, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Washington, and Wyoming. More states are expected to move in this direction, so please talk to your tax professional about this evolving situation.

Will the states take a retroactive approach and try to collect the tax in prior years that are open under the statute of limitations?

This does not seem likely since the South Dakota policy specified that it was not retroactive and the concurring Supreme Court justices looked favorably on this aspect of the economic nexus policy. It is reasonable to expect other states’ laws will be similar to South Dakota and will be enacted in a pragmatic manner that encourages voluntary compliance at the beginning.

Does Wayfair only apply to sales tax?

No. The Wayfair decision can be applied to any tax other than income tax. State tax regimes vary tremendously, so understanding how states interpret Wayfair in terms of taxes such as gross receipts taxes, franchise taxes, capital taxes, and occupation taxes will be an important issue to monitor as the states react to Wayfair.

What steps should my business take to prepare for this new tax compliance requirement?

There are several steps to take, and given the October 1 compliance dates for some states, online retailers would do well to begin laying the groundwork for state sales tax collection as soon as possible:

  1. Review business activities throughout the U.S. to identify where filing obligations may now exist. In other words, consider a nexus study, either with internal resources or with a service provider. More on nexus studies is available in Frazier & Deeter’s video library here.
  2. Using the South Dakota nexus threshold of $100,000 in sales and 200 transactions, evaluate sales in every state in the prior year to determine where the company may have to comply with sales tax. This may not be the threshold every state enacts, but given the evolving nature of this new rule, the South Dakota thresholds offer a good basis for planning.
  3. Examine the taxability of tangible property and services in jurisdictions that may now require collection of taxes. Consider how your contracts and invoicing procedures may need to change to unbundle taxable and nontaxable items.
  4. Determine whether current technology and personnel resources have the ability to support the increased sales tax–related analysis, compliance, record retention and accounting/audit activity.
  5. Develop and implement a plan for maintaining sales tax compliance, including the possible use of third–party service providers.
  6. Consider how the company will monitor changing sales tax changes (such as tax rates, law changes and procedural issues) in relevant jurisdictions.

This Supreme Court decision paves the way for a new source of revenue for the states, which are no doubt happy to have it. For many online retailers, however, compliance will require substantial changes to procedures to enable the companies to collect state sales tax.


 

If you have additional questions, please contact John Corn, Principal in Frazier & Deeter’s State and Local Tax Practice.

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