Right now, states are just beginning to respond to the implications of June’s US Supreme Court sales tax case, South Dakota v. Wayfair. A quick refresher: Up until this point, online businesses were only required to collect state, local, and district taxes from consumers who resided in the states where they had offices, warehouses, or some other form of “physical presence.” If a business sold products or services to other states, those consumers would generally be required to pay use taxes on those purchases to their states’ department of revenue services.
There are lots of implications from this decision, but the most immediate one that you’ve likely heard about? Online businesses will soon be facing a chaotic tax environment if current state and federal regulations remain unchanged. Although the full implications of Wayfair could take months or years of state and federal legislative developments to unfold, one thing is for sure. You should be taking steps now to prepare for any sales-tax-related issues that could impact your operations.
Here are 4 actionable steps you and your business should be taking immediately to get started protecting yourself and your business as the Supreme Court widens its reach of sales tax responsibilities for ecommerce businesses.
First: Important Things to Know About Sales Tax Before You Make Changes
The US Supreme Court had developed a long-standing precedent over the course of several cases dealing with mail-order catalog businesses. This had a couple of notable implications: Not only did some view it to disadvantage for brick-and-mortar businesses that struggle to competitively match lower prices online, but also it created roughly $8 billion to $33 billion in lost tax revenue from states from unpaid use taxes. (Yes, that much.)
The Supreme Court’s 5-4 decision in Wayfair did away with this precedent. It instead upheld a South Dakota law requiring out-of-state businesses—or “remote sellers”—to collect and remit sales taxes if they deliver more than $100,000 worth of goods into the state or process at least 200 transactions that involve the delivery of goods into the state. In doing so, it opened the door for states to step in and introduce their own regulations for requiring remote sellers to collect and remit state, local, and district taxes.
What’s Next for the Rest of the States, Then?
Unfortunately for businesses, not all states are on the same page regarding next steps. Some, including Mississippi, Louisiana, and North Dakota, are preparing to enforce sales tax regulations similar to the one at issue in Wayfair. Other states are still analyzing their options, while New Hampshire’s legislature decided to schedule a special session in July to consider passing preventive measures limiting how other state departments of revenue can tax New Hampshire-based businesses.
4 Steps You Can Take Right Now to Prepare
1. Determine which states you’ll have a tax nexus in.
Because of Wayfair, online businesses will now have to account for a broad array of sales tax considerations when processing orders. Unfortunately, this task isn’t so simple since tax collection policies vary widely from state to state.
To determine which states you’ll need to collect sales tax from, you’ll need to understand the various bases that state departments of revenue use when analyzing a company’s potential sales tax liability. These thresholds—or “nexuses”—include:
- Economic Nexus: States with economic nexus regulations require remote sellers to collect and remit sales tax if they generate either a certain level of minimum annual income in those states or a minimum number of transactions in those states. South Dakota’s economic presence sales tax law, which was at issue in Wayfair, is one example of this.
- Marketplace Nexus: States with marketplace nexus regulations require online marketplaces to collect and remit sales tax if they provide the ecommerce infrastructure, marketing, customer service, and payment processing support required to help third-party sellers process sales on them.
- Click-Through Nexus: States with click-through nexus regulations require businesses to pay sales taxes in each state where any of its online affiliate marketers or referral partners are based.
- Physical Nexus: Just as before Wayfair, states can still request businesses that have offices, warehouses, employees, real estate, or other forms of “physical presence” in their states to collect sales, district, and local taxes from their residents. Depending on the state, businesses may be required to calculate state, district, and local taxes based on the business’s location or the purchaser’s residence or location. If you are an Amazon FBA seller, using Amazon’s fulfillment centers could subject you to physical nexus liability in the states where those warehouses sit as well.
Of course, some states have no sales taxes, while such states as Alaska and Oregon only entail local taxes. And even with these nexuses in place, it’s possible that your particular products and services could be exempt from sales tax treatment! One good source for initial research is The Sales Tax Institute’s Remote Seller Nexus Chart, which is continually updated to show the latest sales tax-related announcements and legislation affecting remote sellers, marketplace websites, and affiliate marketers.
2. Obtain all necessary sales tax permits.
If you find that your business needs to collect and remit sales tax, you’ll need to register your company with each state you’re transacting in. When you do, you’ll receive a state tax ID number and be required to file your sales taxes quarterly, monthly, or annually throughout the year.
To ensure compliance, you’ll need to file these forms and note any pertinent deductions online through each state revenue department or tax office’s respective website. Failing to timely meet your file requirements for each state—or, even worse, attempting to evade your sales tax obligations—could subject your business to late fees, interest fees, state tax liens, audits, assessments, civil penalties, or criminal penalties.
You can access each state tax office’s website at the American Institute of CPAS (AICPA)’s directory of state departments of revenue services to learn more about their registration, collection, and sales tax payment and reporting requirements.
3. Ensure that your online sales channels are ready to support sales tax calculations and reporting.
Once you have a better idea of which states you’ll need to collect sales tax for, you’ll need to make immediate adjustments to the checkout section of your website or to your invoicing program’s tax settings.
If you run a custom-built website or payment portal, you should get in contact with your webmaster or developer immediately to integrate support for different sales tax rates.
If you work off of such common ecommerce platforms as Magento, WooCommerce, and Shopify, you can either manually configure tax settings for orders or integrate your website with a robust tax calculation and reporting plugin or application programming interface (API). The most commonly used plugins and APIs for US sales taxes include TaxJar and Avalara AvaTax. Although these are paid programs, they can save you a lot of time and headaches by automating sales tax calculations, mandatory reports, and timely sales tax state filings. They can also apply these same features to such commonly used accounting programs as QuickBooks and Xero when generating client invoices.
4. Review your reporting responsibilities.
For some states, you’ll additionally need to submit annual reports to purchasers and state agencies addressing certain sales tax matters.
In Connecticut, for example, affiliates and other referral businesses are required to send quarterly notices to sellers alerting them of potential sales tax liability for Connecticut purchases, but also detailed annual reports to the state’s Department of Revenue Services that identify the sellers they worked with. Georgia, on the other hand, allows remote sellers to forego collecting sales taxes in lieu of submitting sales and use tax bills to resident purchasers.
The Sales Tax Institute’s Remote Sellers Nexus Chart also tracks new state reporting requirements, and you can also find more information about reporting requirements on the websites of each state’s revenue department or tax office. Many of the same commercial tools that can help with calculating tax rates on your website can also be used to prepare and automate your state tax filings.
This article has been prepared for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney or accountant to obtain advice with respect to any particular issue or problem.