How does the June 21, 2018 Supreme Court ruling of Wayfair v South Dakota impact sales tax nexus for e-commerce business owners?
The Ruling for South Dakota Nexus
The supreme court ruled in favor of South Dakota’s 2016 law requiring a business to charge sales tax on the following:
- $100,000 of annual gross revenue from the sale of tangible property, electronic products or services delivered into South Dakota; or
- 200 separate transactions per year in which there is a sale of tangible property, electronic products, or services delivered into South Dakota.
Nexus and Sales Tax Prior to The Ruling
Based on the 1992 supreme court case Quill vs North Dakota, the states had limited nexus requirements triggered by things such as a physical location, warehouses, salespeople, or company trucks.
Despite the unique state-by-state rules, this was still a great rule of thumb to follow in terms of where companies had nexus and which states they were required to register for sales tax. However, this has changed per the Wayfair vs South Dakota supreme court ruling.
Post-Ruling Nexus and Sales Tax
Economic presence is the new nexus standard, providing the states an opportunity to require businesses to charge sales tax on remote sales.
This landmark decision will have states scrambling to put into place new and improved nexus laws and to determine what their sales tax exposure is. A remote seller should focus on the states they have the greatest economic presence or sales transactions.
How are the states embracing this new nexus policy? Some states already have thresholds in place. As a result, many businesses have to register in the states that meet these requirements.
How to proactively prepare for the new sales tax and nexus rules
It is hard to predict the timing and how exactly this method will work. However, here are a few considerations and steps you can take in the meantime.
Do you already have a location in a state? If so, you may want to reexamine the sales tax nexus rules in that state and begin registration for sales tax, if applicable. Have you done an economic presence analysis of where you are shipping your products? You will need to acquire this data and analyze it on a more consistent basis so you can proactively determine where and when you need to register.
Do you know how you will collect the sales taxes in various states? For e-commerce sellers that have Amazon and/or Shopify, you will need to do an analysis to determine if the sales tax exposure is of materiality to warrant registering and collecting sales tax in the applicable jurisdictions. For other online sales channels and marketplaces, you will need to determine how you will manage the tens of thousands of rates you may need to collect, based on destination versus origin-based taxation. Even if you provide a software platform or a service with some hardware components, you may still need to think about collecting sales taxes through your customer billing platform.
What if you fail to comply with state and local sales and use taxing authorities? If sales tax is not charged and remitted timely the costs to your business can escalate quickly as your business will likely be liable for the uncollected taxes. Additional penalty and interest on non filed returns, incorrect rates charged, and potential criminal or civil penalties imposed on owners/officers of the company may also be imposed.The best way to mitigate risk is by reviewing your sales periodically for sales tax nexus. Depending on the state, the registration process can take time and an untimely registration can cause delays, due to the number of applications the state is receiving.
Additionally, states provide tools to assist taxpayers in remitting outstanding sales taxes. A voluntary disclosure agreement is when a state allows you to come forward admitting your error and, requesting penalty to be waived. They may offer amnesty programs for a specific period of time that give you the opportunity to report tax without penalties.
Have you considered outsourcing your sales taxes, or appointing someone to ‘own’ the necessary tracking, analysis, registering, collecting, remitting, and filing? There are a lot of what-ifs and timing considerations, in terms of when to start registering/collecting and the frequency you will need to file. Also, much of this comes back to how you manage your accounting data, and can also have a direct impact on your need to apportion your income and file income taxes to various states.
At HPC, we have a whole team of tax professionals to help our clients navigate through their complex state and local tax requirements. We can handle all the registrations and help ensure you are properly collecting and remitting. Our technology-driven model and team of dedicated accountants and advisors can empower you with accounting data that is timely, accurate, and meaningful for the purposes of discussing and making important business decisions for state and local tax compliance.