The U.S. Supreme Court Case, South Dakota v. Wayfair Inc., overturned the physical presence standard for sales tax that had been in place since 1992 in Quill Corp. v. North Dakota, and replaced it with an economic standard. The guidelines established by South Dakota’s Supreme Court, which are anticipated to be adopted by states across the U.S., require out-of-state retailers to collect and remit sales tax if the retailer has delivered more than $100,000 of goods or services into South Dakota or engaged in more than 200 transactions for the delivery of goods or services to South Dakota. Companies that meet just one of the two guidelines have established nexus for state sales tax purposes.
Currently, there are more than 30 states that have enacted sales tax legislation similar to South Dakota’s, though Ohio is not among them. It’s expected that most of the remaining states will enact similar statutes. CSH’s Keri Boergert talks about what businesses will need to do because of the Wayfair decision.
(Q) How does a business know whether it needs to comply with the laws coming out of the Wayfair decision?
(A) Many companies are interested in the case and are reaching out to law and accounting firms to understand the potential impact on their businesses. State and local tax experts can help companies perform an analysis to determine whether additional compliance is needed.
One of the first steps in determining whether the company faces additional compliance requirements is looking at the amount of sales and the volume of transactions the company has historically had in each state. Most states are following the guidance set forth in Wayfair.
In Wayfair, the court ensured that the obligation to remit sales tax would not be applied retroactively. Therefore, even though a company might review its sales and transaction footprint historically, the application should be applied prospectively according to each state’s effective date.
(Q) How does this decision affect businesses?
(A) Wayfair is causing significant compliance requirements for businesses that have never even set foot in a state. The number of sales tax returns could increase as more states adopt the new thresholds. This could change a company’s tax filing burden from one home state to dozens of states.
It’s a much different experience filing in one state versus 25. Every state has different filing requirements — annual, quarterly or monthly. This adds layers of compliance and tracking that might not have previously existed for a company.
Many businesses may not even be equipped to deal with the changes and may have to consider special software that integrates with their accounting system to analyze transactions. Considering an outside state and local expert is the best course of action to provide software guidance and determine when to file.
(Q) What are the consequences of not complying with new laws?
(A) If a company has created sales tax nexus and therefore has a collection and filing responsibility and does not comply, the company will take on the risk for the sales tax liability. As with other state taxes, there is always a risk of examination by state agencies and if examined, the company will not only be liable for any potential tax due but will also face penalties and interest. Depending on the magnitude of the potential exposure, the sales tax liability could put a business at serious risk.
(Q) What else should businesses know about this decision?
(A) Online retailers, distributors and remote sellers that traditionally may not have had a physical presence in a state will most likely be impacted. However, other industries, such as manufacturing, may be impacted because of increased collection and retention of exemption certificate responsibilities.
The move from a physical to an economic presence for sales tax collection is a sweeping change that has the potential to affect many businesses. Now is the time for companies to take a hard look at their business footprint and engage with experts to assess the potential impact.
Interview originally published in the January 2019 issue of Smart Business Cleveland.