The Supreme Court’s Wayfair Inc. decision clearly has a far-reaching in the world of sales tax collection, so how exactly will it impact you and your business clients?
Bill Sheridan, Chief Communications Officer for the Maryland Association of CPAs and the Business Learning Institute, as well as the host of the Podcast, Future-Proof and Scott Peterson, VP of U.S. Tax Policy and Government Relations for Avalara, recently discussed this topic and more. Due to Wayfair, businesses face new sales tax requirements, some of which require compliance by October 2018. Read on to see what the major changes are and how you can help your clients navigate this new level of compliance.
Sheridan: The U.S. Supreme Court’s decision in South Dakota v. Wayfair has major implications for U.S. companies and their sales tax requirements. Can you give us a quick rundown of what precedent this decision overturned and why it’s so important?
Peterson: Previously, the Court ruled that a business must have a physical presence in a state in order for that state to require the business to pay sales tax on the goods sold to its residents. As online shopping grew, states asked the Court to reconsider this position. In Wayfair, the Court struck down the previous ruling, so now a seller can be required to remit remote sales tax if it meets specified sales thresholds in a state through online or remote sales.
Sheridan: So, more businesses will find themselves collecting and remitting sales tax?
Peterson: Correct. From the “smallest” small business all the way up to medium and large companies, every entity will need to begin tracking and collecting sales tax in ways they likely have not done before. As sales grow, businesses will need to establish a system to track the location for each sale; once the sales threshold is met in a state, the business will be required to comply with that state’s sales tax requirements.
Sheridan: Can you tell us more about the sales thresholds?
Peterson: As thresholds are established or become known, at the very least, accountants should have a running spreadsheet of each state’s sales threshold or de minimis. For states that have already adopted thresholds, the most common is $100,000 in sales to that state. So, if you're a seller that sells less than $100,000 in South Dakota, for example, that state’s law doesn't apply. Again, it’s important for all kinds of remote sellers to track their state-by-state sales.
Sheridan: No doubt there are other key considerations to helping determine a client’s likely sales tax obligations?
Peterson: Yes, here are four important ones:
1. Businesses and their accountants need to identify, by state, if their goods or services are considered taxable. As accountants know, state and local sales taxes, or SALT, vary greatly by state. Accountants can then total the revenue from applicable sales toward the threshold.
2. If a threshold is met, accountants need to help their clients identify the local level’s tax requirements. Almost everywhere, there are going to be multiple rates – whether by state, county or city. Just about every state has local governments with its own sales tax requirement.
3. Once all of the tax obligations are defined and identified, accountants will need to help their clients navigate the registration process for every state where they now have nexus.
4. Clients must be able to correctly apply the appropriate sales tax to any future sale once it has passed the sales threshold in the state.
Sheridan: That’s a lot of work. What do you recommend?
Peterson: It certainly can be, but we recommend tackling this in a logical manner. First, we recommend an initial review with an accountant to determine how significant a business’ new nexus is going to be. For example, we’ve seen that a business with nexus in at least four states has more work cut out for its team than it could possibly handle on its own. It will most likely need to establish an ongoing partnership with a financial professional.
Second, companies with larger volumes of sales to multiple states will need to implement a quality technical solution to automatically detect the appropriate sales tax to apply based on the shipping address. The way SALT has developed over the years, zip codes are no longer sufficient – the process needs to be much more granular.
Sheridan: By when will they need to ensure compliance?
Peterson: Most states that have enacted legislation in reaction to Wayfair established compliance deadlines ranging from Oct. 1, 2018, to Jan. 1, 2019. We also have to keep in mind that approximately half of the states currently have no new sales lax law.
Most states’ legislatures are now out of session and will be picking up the issue when they return in the spring. Many experts expect that when they enact new requirements, those mandates will probably kick in around July 1, 2019.