If sales and use tax compliance wasn’t challenging enough, it became even more so with the decision in South Dakota v. Wayfair Inc. – making your role as your clients’ trusted advisor that much more important.
For years, remote businesses were largely protected from state taxing authorities by the physical presence rule, but that’s now a thing of the past. With the South Dakota v. Wayfair Inc. decision on June 21, 2018, the Supreme Court determined the physical presence rule was “unsound and incorrect,” and “economic and virtual” contacts between a business and a state were sufficient grounds for nexus – the connection between a state and a business that triggers a tax collection obligation.
Seeing that all of us likely have clients who do sales remotely, this is a true game changer. Moreover, if you’re not up-to-date on the state nexus laws – which can change at the drop of a hat – you are not only doing yourself an injustice, but also putting your clients at risk.
While some states (New Hampshire, for example) are preparing to fight this new standard, others are eager to take advantage of it:
- Hawaii and Vermont started enforcing their economic nexus laws July 1, 2018
- Alabama and Illinois start enforcement Oct. 1, followed by Connecticut on Dec. 1
- Economic nexus will take effect in Georgia and Iowa on Jan. 1, 2019
- Several other states, including Louisiana and Minnesota, are still determining the full impact of the ruling on their statutes
With the nexus landscape for remote retailers in flux, your clients’ businesses need to have a system in place to monitor changes in state nexus laws and be ready to comply with new collection requirements.
Monitor Changing Nexus Laws
For retailers doing business in multiple states, the mere monitoring of changing laws can be an enormous task. While some state departments of revenue quickly posted information about the Wayfair ruling and its impact on state nexus laws, others have not. That means there are still a lot of unknowns.
For example, businesses need to worry about more than just existing laws. Within days of the ruling, Wisconsin announced it would enforce an economic nexus policy it had yet to create, the New Jersey Legislature sent an economic nexus measure to the governor’s desk and Nebraska Governor Pete Ricketts announced lawmakers would reconsider an economic nexus measure previously withdrawn from consideration because it was believed to be unconstitutional.
Furthermore, economic nexus laws aren’t the only game in town. In their efforts to increase remote sales tax collections, states developed cookie nexus laws in which remote businesses establish a tax collection obligation via applications and web cookies placed on in-state computers and devices. States also developed laws that tax online marketplace transactions, and use tax notice and reporting requirements for non-collecting sellers.
It’s currently unclear how the June 21 Supreme Court ruling will impact these policies, if at all, but regardless the outcome, they should be monitored. In short, the fallout from the Court’s decision is likely to continue for some time.
Businesses not already collecting in all states are likely turning to their accountants and tax advisors for expert advice about where and when they should register, and how registering to sell in a state could impact other areas, such as income tax.
Registering in New Jurisdictions
Once a business determines it’s reached an economic nexus threshold in a new jurisdiction and has an obligation to collect, it must register to do so with the state tax authority. Under no circumstances should it collect and remit tax in a new jurisdiction before registering to do business there.
This should be a straightforward process, but as is often the case when tax is involved, it can be surprisingly complex. Online applications may be required in some jurisdictions, while a paper application may be required in others.
More than one license and permit may be required in each jurisdiction, and in some states, it may be necessary to register with local tax authorities, as well as the state taxing authority. As a result, registering in a new jurisdiction is likely to be a multi-step process that involves multiple departments, including state and local tax departments, and the secretary of state.
To complete the process, businesses will need to furnish a variety of information, including expected annual sales. Once completed, licenses and permits in many jurisdictions need to be periodically renewed.
Let the Collection Begin
Only after fulfilling all registration requirements in a new jurisdiction may a business legally collect and remit sales and use tax. At this point, businesses need to track changes in sales and use tax rates, product taxability, regulations, and a few other areas. These often correspond to the start of a new quarter, but in some states, they can occur at any time.
Sales tax holidays are another consideration. Approximately 17 states offer at least one sales tax holiday, exempting from state and/or local sales tax specific items, such as clothing, school supplies, emergency-preparedness supplies and guns. Sellers need to know when and where tax-free periods occur and comply accordingly.
Managing exemption and resale certificates is another essential task once a retailer starts doing business in a new jurisdiction. If sales tax wasn’t collected, as required, on a taxable transaction at the point of sale, tax authorities will want that exempt transaction validated with a certificate.
As you can see, this Wayfair decision makes sales and use tax compliance downright overwhelming, where your clients selling online must rely on you to get them the advice and guidance they need to successfully negotiate this rapidly changing nexus landscape. You’ll have to help them comprehend the new and emerging nexus laws, register in the new jurisdictions that apply to them, and make important decisions every step of the way.
So, get started now before you’re too far behind! Learn more about South Dakota v. Wayfair and its potential impact on business here.
About Gail Cole
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts and endeavors to make complex sales tax laws more digestible for both experts and laypeople.