I want to thank Joseph F Bigane, III, CPA, MST for the following article on the resent supreme court rules on sales taxes. Joe is one of the most knowledgeable person on this topic and he wrote this article for particularly for small businesses.
SALES TAX AFTER THE SUPREME COURT WAYFAIR CASE
On June 21, 2018 the world of collecting sales tax in jurisdictions all over the United States changed forever. The US Supreme Court held that it was no longer required that a seller must have a physical presence in a jurisdiction in order for that state (or subdivision thereof) to impose an obligation on sellers to collect the jurisdiction’s sales tax. The dust has not yet settled and many jurisdictions are still determining how and when they will impose this duty. Further, different states have different taxes, which for this article will all be referred to as “sales tax.” Finally, the rules of South Dakota, the state in the Wayfair case, established a floor of $100,000 or more than 199 transactions in the prior year as the minimum activity in the state in order for the duty to collect to be imposed. Other states may have different minimums but it is anticipated that they will not be smaller.
Having to collect a State’s sales tax is referred to as having “nexus.” This is not a new term. Before the Wayfair decision, nexus was achieved by having some form of physical presence in the State. Wayfair did not change that; it merely expanded it to include the concept of economic nexus – doing enough business in the state over the internet or by other, non-physical means to exceed a determined floor. If the business had physical presence nexus before this decision then it has been exposed to the obligation to collect sales tax for a time period predating Wayfair. Such a situation should be discussed with a professional that can help you “get squared away.”
Remote sellers who now have nexus in states outside their home states are going to have to consider the following issues:
- determine how much sales dollars was earned in each state in your last fiscal year and
your current fiscal year
- sales are made to the location to which physical goods are shipped, not
to where they are billed
- sales of services have special rules, but generally will be sourced to where
they are received or, if point of receipt unknown, where they are billed
- revenue subject to sales tax will vary by state. It may or may not include:
- freight and shipping
- determine if each state taxes your particular goods and/or services are the
goods/services that you sell exempt by state law
- are the goods/services that you sell exempt to some or all of your buyers
- if your buyers are exempt, you will need to obtain from them the appropriate
state exemption certificate
- do you sell by drop shipment
- these sales will now be counted to determine if you exceed a state’s
floor and either tax or an exemption certificate will need to be collected
Unfortunately, the states do not at this time have a common set of laws stating what is and what is not taxable or exempt. So, sales into one state may be taxed while sales into a different state may not. Some states tax most services (SD, NM) while other states have a list of “enumerated services” which they tax. Here, too, there may be wide differences in the definition of what a service does or does not entail. If you sell or license software you will need to determine if the state considers it canned or custom or both.
While there is no fifty state determination at this point, nor is there any serious indication that the federal Congress will intervene to provide a national solution, there are many states which are setting up their rules to be applicable as of October 1, 2018 or January 1, 2019. So, you do not have the luxury of putting this issue off. Collecting sales tax is an administrative burden but the money is collected from your customer and does not come out of your bottom line. If you fail to properly collect and remit taxes, and the state(s) ultimately find and audit you, then the money (tax, penalties and interest) will come out of your bottom line.
So now is the time to talk to your professionals and determine in what states you will have to register as a tax collector and how you will determine the amount of tax you will need to collect for each transaction. While a certain number of states are members of the Streamlined Sales Tax Agreement and can provide a simplified method for registering and filing, it may still be necessary for you to invest in sales tax software to determine the correct amount to charge for each transaction.