9 steps to figuring out what you have to collect and who you have to pay
The Supreme Court’s decision in South Dakota v. Wayfair (Wayfair) expanded the ability of states to require out-of-state retailers to collect and remit sales taxes on transactions in jurisdictions where the seller has no physical presence. In short, the court held that a state law requiring out-of-state sellers to collect and remit taxes based on an “economic nexus” with the state did not automatically violate the U.S. Constitution’s Commerce Clause.
The opinion remanded the case for further action without specifically ruling on the constitutionality of the South Dakota law. However, the justices highlighted several features of the law that they felt would keep it from imposing an undue burden on interstate commerce, including:
- A safe harbor threshold that limited the application of the law to sellers with more than just “limited business” in the state. In South Dakota’s case, the law does not require the seller to collect and remit taxes if it has less than $100,000 or 200 transactions in the state during the previous or current calendar year.
- A prohibition against retroactive enforcement.
- One state-level administration of all sales taxes within the state, and
- Access to sales tax administration software provided by the state.
Many states already had economic nexus statutes on the books before the Wayfair decision, and a host of others have worked to enact similar laws since the Supreme Court’s ruling. The terms of these laws can vary significantly from South Dakota’s. Because the factors listed by the court are only guidelines on what the justices believe would pass Constitutional muster, there is still considerable uncertainty over what requirements might be found unconstitutional if challenged.
A Nine Step Action Plan for Remote Sellers
With so many details still up in the air on this topic, many businesses are struggling to figure out how to comply with current requirements and adapt quickly to new rules as they are enacted. The following nine steps can help any business that sells products or services into multiple states meet current state tax obligations and manage changes effectively.
- Determine where, what, and to whom you sell.
- The reason for the “where” determination is fairly obvious, but keep in mind you should be tracking not just the destination state, but also local jurisdictions that may have additional sales tax requirements.
- Your system needs to know “what” you are selling in each jurisdiction because sales tax rates can vary from product to product, or may not be subject to tax at all.
- You need to track your customer information in order to know if a buyer qualifies for a sales tax exemption.
- Determine your activities that create physical and economic nexus. Remember, the Wayfair decision didn’t do away with previous sales tax laws based on physical nexus. Your system needs to allow for the possibility that either standard could trigger a collection requirement in a jurisdiction.
- Review the most recent 12-month period and prior year sales in each state. The first item in this list is designed to give you a current snapshot of your activities that may trigger economic nexus. A look back at recent periods is also required to make sure that you haven’t missed an obligation based on previous transactions.
- Determine the taxability of your products and services in each state. Once you know what you sell and where you sell it, you need to understand how each jurisdiction taxes your product.
- Monitor economic nexus. You need some type of system in place to track both the dollar volume of sales and number of transactions in each state where you sell. Even though sales tax collection obligations may not attach until you cross a threshold, you need to monitor the data from the start in order to know when your activity triggers economic nexus.
- Monitor changes in state sales and use tax laws. Many states are scrambling to enact or modify laws to align themselves with South Dakota’s requirements. Work closely with your tax advisor and any sales tax software provider to make sure you are aware of any changes in requirements that affect your obligations.
- Determine whether reporting requirements apply. Penalties for failure to comply with sales tax collection requirements can be significant. You need to know what rules apply before you bill your customer because the state will look to collect the amount from you even if you failed to collect it from the buyer.
- Review your marketing, selling, billing, and tax collection and payment practices. You need to look at the whole process from soup to nuts in order to confirm that you’re giving your buyers the correct information about what taxes apply and that you’re collecting and remitting them to the proper authorities.
- Evaluate your sales tax exemption certification process. Your business may not have paid close attention to exemptions in the past when you had no physical nexus in a jurisdiction. With more states looking to collect taxes based on economic nexus, you will need to be more vigilant in monitoring customers that claim an exemption. That includes tracking when exemption certificates you have on file may expire.
Talk to the Freed Maxick SALT Team
It may seem like a daunting challenge at the start, but careful planning and implementation of a Wayfair-compliant sales tax system can give your business the ability to monitor and adapt to changes more effectively for years to come.
Our state and local tax services team can help you with a review of your situation and a discussion of how best to comply with each state’s requirements. Call us at 716.847.2651 to discuss your situation or request a situation review here.