Tax | | Jul 11, 2018
On June 21 of this year, the Supreme Court’s ruling in South Dakota v. Wayfair basically upended the way state sales tax has been collected and remitted for the past 26 years. Much has been written about this ruling, and as might be expected, you, our clients, have a lot of questions about how to navigate this new sales tax labyrinth.
In this space, we will go some way to answering those questions. Our goal is to give you a good grounding on this topic. Then, if you deem it appropriate, we will put you in touch with Prager Metis Business Advisors to answer questions unique to your business and get your action plan in motion.
In the meantime, because the sales tax issue has its own vocabulary, before we get to the Q&A below, let’s quickly define a few terms:
Nexus: You will see this term in most articles on this topic. Simply put, if you have “nexus” in a state, it means you sell goods to consumers and have a “taxable presence” there.
Physical Nexus Presence: You have a physical nexus presence in any state where you operate a store and/or office and sell goods to consumers.
Remote Seller: While this most often refers to e-commerce (see: Amazon), any sale you generate not in a store—through a catalog, a newspaper ad, a television spot, etc.—is a “remote” sale.
Economic Nexus Presence: You have “economic nexus” in any state where you make sales to consumers, whether you have a physical presence there or not.
And now to the questions that you, our clients, are asking us about this issue.
So, in its simplest terms, what has the South Dakota v. Wayfair ruling changed?
Simply put, as of June 21, 2018, states can now demand that all companies that sell goods to their consumers, whether over a counter or over the internet, must now collect sales tax and then remit it back to the state. Before this decision, you only had to worry about sales tax in a state if you had a physical nexus presence there. If you were a remote seller with only an economic nexus presence in a state, you pretty much avoided collecting and remitting sales tax. No more.
What should be my first steps in figuring out what my company should do to be in compliance with the new ruling?
Well, we, of course, would encourage you to reach out to us to tackle this issue, from the first step to last. As a first step, we would begin by simply looking at a map of the U.S. and checking the states where you sell your goods. We would differentiate between those states where you have physical nexus and already pay sales tax and those where you have only an economic nexus and do not. The economic nexus states are those that need our attention.
Will all the states immediately start collecting sales tax?
No, depending on what you read, predictions are it will take up to a year for all states to follow South Dakota’s lead. However, over 20 states currently have economic nexus laws in place, and several have enforcement date of July 1, 2018. Recently several states have announced enforcement dates of October 1, 2018.
While each one has a different trigger date to get started collecting the new sales taxes, these states already have economic nexus rules ready to go and could be up and running in just a few months. Those states are Alabama, Connecticut, Georgia, Hawaii, Iowa, Illinois, Indiana, Kentucky, Louisiana, Massachusetts, Maine, Mississippi, North Dakota, Ohio, Pennsylvania, Rhode Island, Tennessee, Vermont, Washington, Wyoming, and South Dakota, of course.
What are the economic nexus guidelines for South Dakota?
The South Dakota guidelines for economic nexus are these: If your company does at least $100,000 in sales and/or 200-plus transactions in South Dakota annually, you have economic nexus there and must collect sales tax for each sale you make and remit that amount back to South Dakota.
Will all states adopt the “South Dakota model” when creating nexus guidelines?
Although states may use this model as a starting point, it has not been universally adopted. Among those “ready-to-go” states listed above, their guidelines range from $10,000 to $500,000 in sales. Many do use the 200-transaction number, but some do not, and many have no transaction guideline at all. And, of course, it is impossible to predict what the economic nexus guidelines will be for those states just beginning the process of creating guidelines.
This sounds daunting, to say the least. Once I determine where I have economic nexus, what should I do next?
For the moment, we would work with you to focus on those states listed above that will most likely be in the lead on getting these laws in place. But, we will also keep careful track of each new state that comes on board in the coming months/years and alert you to any action you should take.
In any of those ready-to-go states where you do remote selling, we will help you calculate, based on each state’s guidelines, whether you do and/or will have economic nexus there. Perhaps obvious, but we must also determine what each state’s sales tax rate is and—sorry to do this—if it is the same in all counties of a state. Sometimes it is not.
This also sounds like an accounting nightmare, one that will involve additional costs to my business, true?
True and true. As to the accounting nightmare, you can be certain we will be scouting out all of the latest software, some designed, and as we speak some being designed, to solve the complexity of meeting the new state sales tax requirements. You might also choose to outsource this one accounting task to a company with expertise in this area.
But the reality is that, yes, your company will incur a cost to comply with these and also future new state sales tax guidelines. We, of course, will work with you to keep those costs to a minimum.
Here’s the proverbial bottom line: When it comes to state sales tax, or just about anything else, knowledge truly is power, and it can make the daunting much more doable.