Based on the Supreme Court's Wayfair decision, there are some critical, key differences in the way states will collect sales tax from businesses that sell goods versus businesses that provide services. Are you up to date on these changes and can you advise your clients on how to remain compliant?
This topic was recently addressed in Future-Proof, a podcast presented by Bill Sheridan, chief communications officer for the Maryland Association of CPAs and the Business Learning Institute. In this episode, he interviewed Scott Peterson, vice president of U.S. Tax Policy and Government Relations for Avalara.
Here is an excerpt from the podcast:
Sheridan: The U.S. Supreme Court’s decision in South Dakota v. Wayfair has major implications for the sales tax obligation of U.S. companies. Will these changes impact all types of businesses equally?
Peterson: It’s going to depend on the volume of sales a business makes to different states, and whether the business sells goods or provides services. While all states can now collect sales tax on remote sales to their residents, businesses could have different sales tax requirements for each state. States have established, or will establish, a sales threshold or de minimis for determining nexus. The most common threshold is $100,000 in sales. However, a threshold for a state will only apply to taxable goods or services, or non-exempt goods or services, for that state.
Sheridan: That’s interesting. Can you share more information about the different ways states regulate a sales tax on goods versus services?
Peterson: A sales tax on goods has been around the longest and is generally the more commonly regulated of the two, and although different states have their own approach to what may be exempt, most goods are generally taxable. Services, meanwhile, have only become common in recent years and are currently less likely to have specific sales tax regulations. Services are generally not taxed unless the service is specifically noted as taxable by the state.
As every accountant knows, there are always exceptions when it comes to State and Local Sales Taxes, or SALT. For example, in South Dakota, New Mexico, Hawaii and West Virginia, all services are considered taxable unless an exemption is noted, which is more in line with the sales tax treatment of goods.
Sheridan: This sounds quite complicated to figure out. Is it?
Peterson: It can be, but luckily, any business with robust remote sales revenues can turn to its tax pro or accountant who can guide their clients through the process of uncovering potential new sales tax obligations with a straightforward, three-phased approach:
1. What states have recent sales been made to?
2. Are the goods or services taxable in those states?
3. For states where the goods or services are taxable, what is the total amount of sales to the state?
The total can then be used to compare the total sales to each state’s threshold. More than anything else, it’s important to discuss with your clients that the states they sell to, the tax applicability by state and the sales relative to each state’s threshold will need to be monitored here on out.
Sheridan: Are there other major considerations for service-based businesses vs. goods-based businesses?
Peterson: Yes. For businesses that have goods or services that are exempt in a particular state, there is still work to be done. Accountants will need to help their clients properly document their exempt sales, according to the specific requirements of the state. Given the way most states structure their sales tax laws, the need to document exempt sales will likely impact more businesses offering services compared to selling goods.
Business purveyors of goods and services, alike will need to register in each state in which they surpass the sales threshold. This is no easy feat, but is an excellent way for an accountant to provide value and assistance to his or her clients amidst all the new sales tax changes.
Finally, moving forward, businesses with a robust sales volume will likely need to establish a system to detect and collect the appropriate amount of sales tax. With state-by-state or county-by-county complexities, a business will need to scale its collection and remittance.
Sheridan: When is the deadline for ensuring clients are compliant?
Peterson: The short answer is soon. Most of the states that have already enacted legislation in reaction to Wayfair have compliance deadlines ranging from Oct. 1, 2018, to Jan. 1, 2019. Three states – Hawaii, Vermont and Kentucky – enacted new sales tax laws that went into effect July 1, although Kentucky recently extended the deadline for compliance to Oct. 1.
For states with governing bodies already out-of-session, many experts, including all of us at Avalara, expect that once they are back in session, the mandates they establish will likely require compliance by July 1 of 2019.