BP Blogs

LIKE WHAT YOU READ? Share this article :

How The Wayfair V South Dakota Ruling Will Impact Your Business

|

If your business makes substantial sales to customers outside your home state, your sales tax risk has just increased. Due to the Supreme Court’s recent decision in Wayfair v South Dakota, states have a new way to enforce sales tax collection on out-of-state sellers. The decision broadened the interpretation of when a business has the required minimum connection, or nexus, with a state that allows the state to require sales tax collection and filing.

Businesses that are not compliant with the new changes may be putting themselves at risk for an unexpected sales tax assessment if audited. These changes will have an impact on retailers, wholesalers, manufacturers and even some service providers such as the tech industry.

On June 21, 2018, the U.S. Supreme court overturned the previous requirement that a business have a physical presence in a state (payroll, inventory, sales representatives, etc.) to create sales tax nexus. Now, in addition to physical presence, nexus can be created by a business merely having some level of sales into the state (often called economic nexus). South Dakota’s economic nexus threshold, which was upheld by the court, required out-of-state sellers to collect and remit sales tax on taxable sales if the seller has either annual sales of $100,000 per year or more or 200 separate transactions in the state.

Since then a significant number of states have adopted similar economic nexus policies to enforce sales tax collection on remote sellers without a physical presence in that state. While states vary on enforcement dates and sales/transactions thresholds, many are adopting the same thresholds as South Dakota.

There are several steps that businesses can take now to ensure they are compliant with the new changes and reduce their potential exposure if audited:

  • Ensure your accounting or e-commerce software can adequately track sales by delivery address and product codes. These will be needed to determine if nexus exists and any product exemptions.
  • Identify states where your business has created economic nexus. Also consider any local tax jurisdictions if applicable.
  • Review taxability of your product/service as these may vary from state to state. In addition if you make exempt sales (such as sales for resale) ensure you are collecting the appropriate documentation from customers to support these exemptions.
  • Consider whether to register prospectively or whether any voluntary disclosure programs may be available if prior tax liability exists.
  • Consider how the business will handle additional sales tax filing requirements. There are several automation options available if the business does not want to prepare these in-house.
  • Start collecting the applicable sales tax rates once the company is registered in a given state.

Finally, when deciding when to register with the state to collect sales tax, businesses should also consider whether any additional taxes may apply, such as income or franchise, based on their activities.

We can help you analyze the Wayfair case’s impact on your business and discuss available options to address any issues.