Your clients who sell products in different states may be facing big sales tax compliance changes right now, so here’s what you need to know.
Because the Supreme Court transformed a long-established sales tax law in the Wayfair Inc. ruling, it means states can enforce sales tax collection from remote sellers as well as from in-state businesses. Prior to the ruling, states were largely limited to taxing businesses with a physical presence in the state.
Today, more than 30 states adopted economic nexus since the Wayfair decision, so merchants must determine where they have economic nexus: enough economic activity in a state to trigger the obligation to collect and remit tax. For example, $100,000 in sales or 200 transactions in the current or preceding calendar year. As such, businesses and the tax and accounting pros advising them must keep up with registration and remittance requirements.
It’s not an easy task. On Jan. 1 2019 alone, economic nexus laws took effect in Georgia, Iowa, Nebraska, Utah, West Virginia and the District of Columbia.
Wayfair's Impact in the States
According to a National Conference of State Legislatures’ report, sales and use taxes experienced the largest annual increase recently among state-level taxes. This was primarily because of states becoming authorized to tax remote sales. Kentucky, for example, reported an estimated revenue increase of $192.5 million for fiscal 2019 overall, while changes resulting from the Wayfair decision are expected to add an additional $3.2 billion to the state’s sales and use tax base.
Louisiana and Illinois also reported the largest increases. Louisiana’s $466 million increase was a result of the additional sales tax rate extension. Similarly, Illinois projected an increase of $150 million in sales and use tax revenues due to remote sales tax collection.
The impact of the Wayfair ruling is likely to be felt even more in highly populated states. Specifically, California, New York, and Texas have all adopted economic nexus:
Beginning April 1, 2019, retailers outside of California will have to register with the state and collect tax if their taxable sales of tangible personal property in California exceed $100,000 during the preceding or current calendar year, or they make sales into California in 200 or more separate transactions.
In New York, a person with more than $300,000 in gross receipts from sales of tangible personal property and more than 100 separate transactions in the state in the preceding four quarters is required to register as a vendor immediately. Significantly, New York’s own state capitol, Albany, has not announced a start date.
Starting Oct. 1, 2019, collection requirements kick in for remote retailers with more than $500,000 from sales of tangible personal property in Texas in the preceding 12 calendar months. The initial “12 calendar month” period is July 1, 2018, through June 30, 2019. Businesses must begin collecting the tax no later than the first day of the fourth month after the month in which the safe harbor amount was exceeded.
The situation in Pennsylvania is also worth noting: Under current law, a remote seller that makes taxable sales totaling just $10,000 or more to Pennsylvania customers in the previous calendar year had to have elected by March 1, 2018, to either register to collect and remit the state’s sales tax or comply with Pennsylvania’s notice and reporting requirements.
Starting July 1, 2019, remote retailers with more than $100,000 in gross sales in Pennsylvania will no longer be able to opt out of the collection requirement. Pennsylvania is also the first non-Streamlined Sales Tax (SST) state to certify sales tax solution providers.
In many cases, SST states cover the cost of automated sales tax solutions provided by a certified service provider. This includes sales tax calculations, returns preparation and filing.
What Else You Need to Know About the Impact of Wayfair
Before a seller can collect sales tax, it must obtain a sales tax permit (a.k.a. seller permit, reseller permit, transaction privilege tax license or vendor’s license) from the state tax authority. It’s up to vendors to learn what that entails, register the business and renew the sales tax permit as required — and to comply with sales tax laws.
Wayfair’s impact is causing sellers to re-examine staffing, technology, and all other resources needed for the new sales tax compliance landscape. Companies need to consider where their employees conduct business, the location of inventory, and what products they sell in various states, with an eye on what’s tax-exempt in each state. Many businesses are looking at undertaking a nexus analysis.
One resource for vendors, of course, is a consulting and tax-advisory firm like yours, which runs the potentially legally binding risk of faulty or negligent advising. Accounting and consulting firms may quickly find themselves liable for damages, interest and the state tax itself.
What else can you do for your firm and your clients? There are many paths to take, but you can start by rewriting your engagement letters to define the scope of tax consulting.
Next, inform your interstate retail clients of the importance of vetting third parties, such as software providers, whose solutions impact the state licensing and registration. Finally, contact your clients to learn which may be affected by Wayfair legislation.
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.