It has been nearly three years since a major U.S. Supreme Court decision was handed down that changed sales and use tax rules for businesses selling products and services remotely. Known as South Dakota v. Wayfair, Inc. — or simply as the Wayfair case, for short — the ruling removes the physical presence requirement for sales tax nexus.
As a result, states can now require businesses to collect sales tax on goods and services sold in the state even if the business has no physical presence in the state. The ruling primarily affects online businesses and companies that sell via mail or telephone order (sometimes referred to as MOTO businesses).
It is surprising to see the number of companies that have yet to adapt to the ruling, especially companies that sell online. Many companies have heard of Wayfair but have done nothing about it.
Here are some of the most common questions clients have about how they can keep up with their sales and use tax obligations.
Q: How does a company know where to file sales and use tax?
A: To know if it has a filing responsibility, a company needs to understand state law and how it applies to the company’s activities in the state.
Wayfair expanded states’ ability to require out-of-state companies to collect the state’s sales tax. Now, states can require out-of-state companies to collect the state’s sales tax if the company has sufficient “economic presence” in the state.
The most common economic threshold for a sales tax requirement is $100,000 in sales or 200 transactions in a state. The traditional parameters, however, such as whether a company has an employee presence or physical locations in the state, still apply. Complicating the situation, each state has its own parameters for determining when sales and use tax needs to be collected.
Q: How can companies be sure they’re calculating sales and use tax correctly?
A: Calculating sales and use tax requires an analysis of state law and an understanding of the state’s sourcing rules. Depending on the state, some transactions are taxed all the time while some are circumstantially exempt.
Typically, a state will source a sale to the jurisdiction where the good is sold or delivered. Identifying that particular jurisdiction, however, can be tricky. While most states have a tax rate lookup system that enables companies to search for the correct jurisdiction and rate, it can be daunting when a company has thousands of customers with different addresses. Complete accuracy would require a check of every single transaction.
Alternatively, a company can invest in sales tax automation software. Whether that software produces the correct result depends on whether the correct information was input at the start.
Q: What are the greatest challenges for companies that want to handle sales and use tax compliance in-house?
A: These companies face three main challenges: personnel, cost and risk. Calculating sales tax in-house requires at least one individual who is more than just knowledgeable about sales taxes. Companies that invest in such a person risk that person moving on and taking their knowledge with them. Also, calculating sales tax isn’t really a full-time job. Returns are typically due around the 20th of the month, so there’s a lot of downtime for an inhouse sales tax expert.
There can also be ongoing technology costs associated with handling sales and use tax inhouse, such as compliance and research software. Finally, if the person handling sales tax doesn’t rise to the level of “expert,” there’s increased risk that the decisions made will turn out to be incorrect, which will lead to taxes, penalties and interest upon audit.
Q: What tools can companies use to help with sales and use tax compliance?
A: Software can help, but the more the software is asked to do, the more expensive it gets. Also, the software needs to be set up correctly and checked often to ensure its accuracy, and this requires an expert.
Another option is to outsource the function or employ a hybrid solution. For example, a company could work with a sales tax expert on a quarterly basis to make sure filings are occurring in the right states, tax is being charged when it should be, and tax is being calculated correctly and for the right jurisdiction.
Although sales tax is often the smallest item on the invoice, companies should take it seriously. States will be motivated to go after out-of-state companies that haven’t been filing when they should have.
Contact us if you’d like assistance getting a handle on your sales and use tax obligations.