Do You Know Your Sales Tax Obligations Under the Wayfair Ruling?

Do You Know Your Sales Tax Obligations Under the Wayfair Ruling?

Is your business currently collecting and filing sales tax returns in all jurisdictions where you have sales to customers? If not, the impact of the now two-year-old Wayfair ruling by the Supreme Court may require a thoughtful analysis. This article looks at what the Wayfair ruling is, what businesses are impacted by it and how. If your business is impacted by the ruling, we discuss what you can do to ensure that you are fulfilling your tax collection, reporting and remittance obligations in each state where you have sales to customers.

The factors that determine your sales tax responsibilities are complex and they vary by state. This is why you may need the guidance of tax professionals. You may also need to adjust your sales systems and processes, preferably to those that automate your tax collection and reporting.

Impact of the Wayfair Ruling

It is not an exaggeration to say that the Wayfair Ruling by the Supreme Court in June 2018 upended the world of sales and use tax collection across the United States.

In South Dakota v. Wayfair, the Supreme Court ruled that states are allowed to mandate that businesses that do not have a physical presence in a state must collect and remit sales taxes on transactions in the state. “Economic Nexus” is the technical term for the new type of taxation allowed by the Wayfair case. Previously, only companies that had a physical presence in a state were liable to collect sales and use taxes, this is known as “Physical Nexus”

The word nexus is a Latin, meaning to bind, join or tie. Since ancient Roman times, it has evolved to mean “a connected series or group.”

Not every transaction creates a sales tax collection obligation. In South Dakota only merchants or businesses that have more than 200 transactions or $100,000 of in-state sales on an annual basis are affected by it. Each state has their own sales transaction and dollar value threshold which when exceeded triggers a collection and filing requirement.

What Businesses Are Affected?

We can broadly categorize affected businesses this way:

• Retail Businesses and eCommerce Sellers. All brick-and-mortar retailers with an eCommerce arm and pure eCommerce operators are affected by the ruling. Before the Wayfair ruling, companies only had to collect sales taxes on eCommerce if they had a physical presence in a state, known as physical nexus. The Wayfair ruling broadened the tax base by allowing states to enforce sales tax collection for sellers who only have economic nexus to the state without a physical connection. These out of state sellers may be liable to sales tax collection and remittances requirements.
• Digital Goods and Service Providers Including Software as a Service (SaaS) Vendors. If your business provides digital goods and services including SaaS or cloud services to end users, you may be required to collect and remit additional sales taxes.
• In-bound companies. Inbound companies are businesses that have no permanent establishment (PE) in the US but are selling their products and services in the US. Inbound companies also may now have to collect and remit US sales taxes to the various jurisdictions in which their customers, clients and consumers reside.

Where Are You Liable for Sales Taxes and to What Extent?

The short answer is: It depends. That is what makes it so complicated!

Your tax collection and remittance responsibilities depend on a number of factors including:

• What you are selling. Different rules and tax rates apply in different states for various products and services if your businesses is liable for sales tax collection.
• Where your sales revenues come from and how widespread your sales revenue streams are across the nation.
• The dollar value of sales you make into each different tax jurisdiction. Let us call this “State” for convenience. But it may be a smaller tax jurisdiction within a state.
• State tax laws and regulations. The economic nexus or our connection to each state depends on tax laws of each state. What tax rates apply and over what total sales threshold sales taxes kick in depends on state laws. Some states have made your life a bit easier by mandating a state level flat sales tax rate. But this is not the case everywhere.
• Sales and use tax thresholds in each state or tax jurisdiction. You are not required to pay each state in which you have a couple of sales transactions with small values. Each state has determined thresholds in dollar terms and in the number of transactions that make you liable for tax collection above those limits.
• State budget deficits under the COVID-19 pandemic. Yes, that too needs to be factored in. Most states are facing big budget deficits due to the COVID-19 pandemic. We can reasonably expect states with sales taxes to consider lowering their thresholds or changing their tax rates. And states that don’t have sales taxes may wake up to the fact that they too can get a boon from laws that helps them benefit from the Wayfair ruling.

Determining the “Economic Nexus”

A nexus can be defined as “a connection to”. In a previous case—North Dakota v Quill—Supreme Court held that a state was permitted to impose sales taxes on out of state company if the state could show a “nexus,” between the seller’s business and the state. The nexus was defined in terms of physical presence in the state. If a company does not have an office, a warehouse or employees in a state, that company would not be bound by sales tax law of that state.

Then the world changed. Internet sales and eCommerce grew. So did computing capabilities that enabled online businesses calculate multiple tax rates across the nation. There is strong suspicion that these factors may have influenced the June 2018 decision of South Dakota v. Wayfair when the Supreme Court overruled Quill.

A physical presence in a state was no longer necessary to establish nexus. Instead, a retailer’s economic nexus can be established by two benchmarks:

(1) The value of sales the retailer made to residents in the state; and
(2) How many individual transactions took place with that state residents

The obligation to pay state taxes are triggered if a company’s sales totaled $100,000 or more annually, or if the business conducted 200 or more different transactions annually with the state’s customers. The Court held that these two benchmarks together would create a sufficient nexus for a state to impose sales tax on an out of state retailer.

Many other states have since modelled their sales tax laws considering the same two factors—dollar amount of sales and the number of transactions—to determine the tax liability of out-of-state companies. While some states adopted laws that are very similar to South Dakota’s, others used it as a template, adopting their own benchmarks.

Welcome to the crazy quilt! Now you can imagine why sales tax liabilities are such a conundrum for companies that are affected.

Sales Tax and Nexus Studies

The Wayfair ruling complicated the sales tax collection, remittance and filing regimens for many businesses. Sales taxes became complicated overnight. A new term, economic nexus studies, was born.

Let us ask you some questions:

• How well does your business understand the state-specific tax rules that are applicable to your industry?
• Are you able to properly determine your tax collection and remittance responsibilities for various goods and services across various jurisdictions?
• Does your business have the expertise to understand and comply with the reporting obligations and the nuances across various tax jurisdictions from which you derive sales?

Most businesses do not have in-house expertise necessary to decide whether, when, where they must collect and pay sales taxes. How much is also subjective because it depends on the number of sales into a state and the total value of those sales. This is why specialized sales tax expertise is important.

Your business needs the help of tax professionals who understand not just your business but also the various tax regimens, tax rates, reporting requirements and nuances that apply to this process. And then there are the penalties for noncompliance. This is another instance in which what you don’t know can hurt you.

Your tax advisor will be able to tell you:

• Which of the items—products or services that you sell—are taxable by the states
• In which locations you have sales tax collection obligations
• What are the applicable tax rates
• When and where the above three factors have changed since last filing
• State-wise filing and reporting requirements, deadlines and penalties for non-compliance
• Whether there are exemptions that apply to your business

Past data offers your tax advisor a basic template to conduct nexus studies that help determine your liabilities. You and your tax advisor can then work forward from there.

Automating Your Collection and Reporting Systems

Whatever level of genius your tax professional possesses, he or she is going to ask you to deliver your sales data. They would ask for sales data from across the country, by state, by location, by value and the number of transactions into each state before they can offer you any meaningful advice.

This is where your sales data collection system and its capacity for delivering granular level details comes into the picture.

How good is your sales tax collection and reporting system?

When you make purchases on Amazon, you can see how Amazon collects sales taxes from each tiny transaction. Does your business currently have systems that can capture that level of detail from your routine sales transactions across each state?

For most businesses, especially small and medium enterprises and recent startups, the answer would be a resounding “No!” This is why automation of sales collection and reporting systems matter.

Automated sales tax collection and reporting systems

If you have customers across states and do not have an automated system you may have a challenging time figuring out your sales tax liability across jurisdictions. Without convenient access to these values, and the number of transactions involved you may not know where you are liable to collect taxes. There is no way for your tax advisor to determine your tax liability either. Without such automation, the opportunities for error increase and along with risk of penalties for non-compliance.

If your business does not have an automated sales tax collection and reporting mechanism that can deliver this level of granular detail, you should consider the benefits of putting one in place. A sales tax automation system will help you collect the right amount of tax from your customers at point of sale, will help you file tax returns, and remit tax to the jurisdictions. The return on investment for these systems are impressive.

Scalable, flexible automated systems for sales data

Automated sales revenue systems must also be scalable and flexible. Otherwise, you may need to rebuild your process each the company starts doing business in a new state or states.

How Proseer Can Help with Your Sales Tax Conundrum

We offer you tax advice and services founded on experience and insights. This is the basis for the guidance we offer on proactive tax planning. We conduct nexus studies to help you determine where you have a filing requirement, we can quantify tax exposure for prior periods, and help you get setup to collect, report, and remit tax systematically going forward.

Proactive Tax Planning

The bottom line is this: The Wayfair ruling has increased the complexity of sales tax compliance for businesses. To wade through these complexities without getting mired in them, many businesses need proactive tax planning. This is especially critical because we know the law in this area is new. State sales tax rates, laws, and regulations are constantly evolving.

Conducting Nexus Studies

Nexus studies help determine where and to what extent you are liable for sales taxes in each state. We perform nexus studies across various jurisdictions and offer recommendations so that you can meet all your tax collection, reporting and remittance responsibilities.

Tax Advice Founded on Experience, Insight and Technology

You need a tax advisor with experience, insight, and access to appropriate technology to deal effectively with these challenges. At AccountFWD, we are ready to learn more about your business, help you understand and quantify the potential impacts and translate the various state-specific nuances for your advantage.

As tax professionals, we remain alert to future developments in state tax laws and regulatory changes across the nation. We will share these insights with you, recommend the necessary changes and help you implement them.

Building Sales Tax Automation Workflows

For companies that need help with their sales and tax collection systems, AccountFWD can design and build sales tax automation workflows. To do so, we will work with you to learn about your business and needs, analyze your business revenue and sales processes and design solutions that best suit your business scale as well as your budget.

Our priority is offering the latest available, affordable, customer friendly technology solutions. We will then guide you as you implement process automations and work with you in testing the robustness of your new systems. Our goal is to ensure that automated processes deliver the necessary results for your business.

Collectively, these services will help your business meet the sales and use tax challenges and meet your tax collection, filing and remittance responsibilities smoothly, without a hitch.

For More Information

At Proseer, we guide entrepreneurs and businesses on effectively meeting their sales tax responsibilities. If you have questions about our sales tax advisory services, nexus studies or automation of sales tax collection and reporting systems, send us a note, or give us a call 954-686-8687.