8 Post-Wayfair Sales Tax Steps for Retailers
The South Dakota v. Wayfair Supreme Court decision changed the sales tax collection landscape for American retailers and remote sellers.
Now, retailers who have economic nexus in a state — even if they don’t have a physical presence there — may be required to register for sales tax in that state.
That’s because the ruling cleared the way for other states to enact and enforce similar legislation. However, the decision did not establish universal economic threshold levels or safe harbor rules, which has resulted in states using a variety of different thresholds. For example, South Dakota’s economic nexus is a minimum of $100,000 in annual sales or 200 transactions, whereas Pennsylvania has a notice and reporting standard of only $10,000 in annual sales.
Similarly, enforcement dates of these new laws vary. Many states had enactment dates of October, November and December 1, 2018; however, there are states still enacting economic nexus statutes with enforcement dates throughout 2019.
States that already had a nexus law in place or that took effect immediately after Wayfair include: Hawaii, Maine, Massachusetts, Mississippi, New York, Ohio, Rhode Island, and Vermont.
What do remote sellers and other retailers need to do? Voluntary disclosure agreements (VDA) and automation technology may help. Here are eight steps to help your finance and accounting department get up to speed:
1. Review your sales transaction records
Pull your sales revenue and transaction records by state for 2017 and 2018. Then, compare those records with the economic presence threshold that is in place in each state. If you cross the threshold, review the state’s published enforcement date to determine if you are able to start complying by that date. The sooner you are able to register and comply, the more likely the sales tax will be paid by your customer rather than you having to pay it retroactively.
2. Consider the opportunity costs of non-compliance
For states where the threshold is exceeded, make a business decision regarding registration and collection. If a company exceeds the transaction threshold but has minimal sales, the cost of compliance may exceed the amount of potential tax exposure.
3. Before registering, review your historical footprint to mitigate risk
If your sales record review reveals that you had previous physical presence nexus in one or more of those states, you may be eligible to participate in a state’s voluntary disclosure program (e.g., Indiana’s VDA). However, if you register in a new state before exploring past exposure, you may lose VDA eligibility. Furthermore, if you receive a nexus questionnaire from a state after registering and come to learn that you had nexus there in the past, the state could go back to the date nexus was established to assess past-due tax, penalty, and interest.
4. Analyze past exposure for other tax types (e.g., income, franchise, and/or gross receipts)
While economic nexus was not a valid concept for sales tax purposes until the Wayfair decision, economic nexus has been a valid concept for other tax types in many states for decades. As a result, merely registering for sales taxes in a new state could trigger a nexus questionnaire for one of those other tax types and expose a retailer to potentially significant risks.
In addition, while many states have laws imposing income tax nexus over businesses with income from sources in the state, states have generally been hesitant to enforce these laws without first publishing sales thresholds that they consider substantial.
For example, starting in 2011, California law imposes income tax nexus over any company with in-state sales exceeding $500,000. Now as a result of the Wayfair case, states without published thresholds may become more confident that these laws are enforceable with or without published thresholds. Developments in this area should be closely monitored.
5. Use software automation technology to help with collections
Determine how you will collect the correct sales tax in each new state and local jurisdiction and develop a plan for filing timely sales and use tax returns. Sales tax automation strategies are available to help you with the compliance process.
6. Secure certificates from customers who claim sales tax exemptions
Because remote sellers may have an obligation to register for sales tax in many states, auditors will likely put an increased emphasis on collecting exemption documentation as states begin auditing remote sellers.
7. Be aware of purchase-side considerations
Because a retailer’s suppliers may be required to register for sales tax in more states post-Wayfair, they may be requesting more resale exemption certificates from you. In the past, these suppliers may not have requested such a certificate because they were not registered for sales tax in that state.
8. Pursue manufacturing exemptions
If your company manufacturers some or all of the goods that you sell, out-of-state vendors have likely not been charging you sales tax, but that may soon change on the items you purchase from them. However, if these purchases qualify for a manufacturing exemption, make sure that you provide an appropriate exemption certificate to prevent your company from overpaying sales tax.
How we can help
Keeping up with the varying sales economic thresholds of multiple states may keep your finance and accounting departments bogged down in compliance.
CLA’s state and local tax professionals stay on top of changing legislation so you don’t have to. We can help ease the compliance requirements in three ways:
- Through a post-Wayfair sales tax nexus assessment
- By performing a historical nexus study to establish your overall state nexus profile
- We can also file sales tax returns on your behalf.
- Steven Claflin
- Muthu Periakaruppan