The US Supreme Court ruling in South Dakota v. Wayfair, Inc. et al gave rapid rise to the new sales and use tax obligations for online sellers. The rule treats a virtual storefront similar to a physical storefront. How did we get there and what should every business be doing to reduce risk?
The way Americans buy goods and services has changed dramatically since the 1992 Quill decision. The ability to see the volume of items available combined with fast shipping and greater security around online transactions has completely changed buying behavior. These developments created an opening for the Wayfair case. While physical presence tests still apply, the Wayfair case dramatically expands the number of businesses subject to sales and use tax obligations.
The Wayfair case redefined sales tax nexus as a certain amount of sales and/or transactions in a state or jurisdiction. This is now referred to as economic nexus. Having been in the center of the Wayfair case, South Dakota set their threshold for requiring out-of-state businesses to collect sales and use tax at $100,000 in sales for 200 transactions into the state. Not wanting to miss out on revenue from these taxes, other states moved quickly to adopt their own thresholds and begin collecting taxes on out-of-state sellers. In 2018, 15 states had new nexus laws. As of January 2020, all but two of 45 states that have a sales tax and Washington D.C. have implemented sales tax policies for economic nexus.
Roadmap to Compliance
If you think you may have sales tax obligations in multiple states, start gathering insights by identifying exposure with a streamlined nexus study. A nexus study will help your business understand in which jurisdictions you may be required to collect and remit sales tax. You’ll also want to review whether your different revenue streams are subject to sales tax collection. For example, Software-as-a-Service (SaaS) is taxable in some states but not all states. In order to be required to collect sales tax you need to have nexus AND your revenue streams need to be taxable.
If you have nexus and taxable sales, you’ll need to establish a process to charge the sales tax, file the applicable returns, and remit the taxes to the proper authorities. There are a lot of moving parts, but here’s an outline:
Sales Tax Compliance Filing Checklist
Register with the applicable Departments of Revenue
Charge the necessary tax either through your normal invoicing process or purchase 3rd-party sales tax calculation software
Identify all sources and formats of sales tax data
Develop and maintain a tax calendar that identifies where you are registered and the filing frequency of each return
Prepare the returns and remit them either electronically or via mail/overnight
Remit payment to the various jurisdictions
Handle notices from the state and local jurisdictions
Document the sales & use tax process
Now that we’ve discussed how economic nexus came about and how it has quickly become prevalent across the country, let’s discuss solutions. Sales tax automation originated over 40 years ago and has come a long way, particularly in the last few years. These automation options are available for even the smallest of businesses to help ease the burden of sales tax. However, sales tax has become more complicated since 2018, and it’s more important than ever to keep a close eye on it. Automation is a technology tool, not a “set it and forget it” catch-all for sales tax compliance.
Sales tax compliance is complicated and multi-layered, requiring management to peel back the onion by jurisdiction, activity, and tax type before making key decisions about your business and how best to comply. Technology alone lacks the indispensable insights and advice management needs to make these decisions and properly manage sales tax from registration and remittance and audit to penalty resolution, but when paired with an outsourced compliance partner, it can provide valuable and time-saving data.
When it comes to sales tax compliance, it pays to work with sales tax experts whose focus is on providing a service. Contact TaxConnex to learn about our services in providing a sales tax compliance service that will take the burden off you.