Physical presence in a state no longer determines the sales tax that’s due. What does this mean for retail businesses?
Sales tax is not always a straightforward topic for today’s retailers, especially with online retail booming and all of the uncertainties in the market due to differing state economic nexus laws.
According to a Deloitte poll, 75 percent of retailers said that their business isn’t or is only somewhat prepared to adequately calculate, collect, and remit sales tax after the South Dakota v. Wayfair case last year. This ruling overturned the precedent that physical presence is required in a state for a retailer to collect sales tax from that state’s purchasers. A third of respondents in the survey said that decisions regarding taxability would be their biggest compliance challenge after Wayfair.
The Wayfair ruling definitively removed the physical presence requirement for state sales tax to be imposed and there are other important compliance considerations for retailers moving forward. Let’s take a look at what the Wayfair case was all about and how it will continue impacting retail businesses in the future.
What happened in the Wayfair case?
In June 2018, South Dakota won a suit brought against the e-commerce giant Wayfair that had escalated to the Supreme Court. The case was centered around the argument of whether or not businesses have to be physically present in a state in order to collect and remit state sales tax.
The court’s ruling overturned a 1992 Supreme Court decision that had interpreted the language “substantial nexus” as a physical presence requirement for a state to impose sales tax on retailers. The new Wayfair ruling determined that an “economic” presence in a state creates sales tax nexus, not just a physical presence.
The outcome essentially eliminated physical presence as a requirement for sales tax in South Dakota, as long as the seller meets the following economic criteria:
- Gross revenue from tangible personal property sales, products transferred electronically, or services delivered into the state is more than $100,000.
- Tangible personal property was sold, any product was transferred electronically, or services were delivered into the state in 200 or more separate transactions.
In short, as long as these revenue and transaction thresholds are met, retailers are obligated to collect and remit state sales tax if they do not have a physical presence in South Dakota.
This is a significant ruling, as there are a massive number of internet retailers that sell within states where they have no physical locations. The court found that the law in South Dakota “minimizes the burden on interstate commerce,” according to the Tax Foundation, and other states will likely follow suit, or the broader economic nexus laws they already have in place will stay standing.
How does this impact retailers?
Because of Wayfair, online retailers will likely be required to collect and remit sales tax in more states than they did before the ruling. More careful attention will need to be paid moving forward to ensure that these businesses are collecting and remitting all necessary sales tax on these transactions, which can become complicated.
Deloitte outlines actions that retailers can take to ensure they’re aligned with the changes brought by Wayfair. Key among these are:
- Identifying and prioritizing all of the jurisdictions where the retailer’s business takes place
- Making sure that practices are aligned with the statutory regimes within those jurisdictions
- Updating policies to align with any new tax-filing procedures and requirements
- Coming up with strategies to become and continue to be compliant
- Considering other indirect tax impacts that may arise because of these changes
Other steps you can take include educating stakeholders, identifying any new technology and IT system requirements, and developing a plan to deal with any gaps and increased exposures in the business.
It’s also important to continue to monitor any changes in state regulations to ensure that you’re not putting your business at risk for liabilities related to uncollected or unreported tax. While economic nexus laws haven’t been applied retroactively to online retailers, it’s time to ensure you’re compliant moving forward.
Your best bet? Talk to a tax professional to come up with the right action plan. This will ensure that you’re not missing anything crucial for your tax liability as state sales tax laws may continue to change. Get in touch with the team at Provident CPA & Business Advisors to discuss your options and your plan for the future.