Even if you’re not a sales tax buff, chances are you’ve seen a lot of press coverage of the Supreme Court Case, South Dakota v. Wayfair, Inc. Many states have enacted legislation that dictate how remote sellers will need to collect and remit sales tax. These rules are pending the outcome of the case. The Court’s decision is expected to come out June 25. However, the time to start thinking and talking about the implications of the case for your clients’ businesses is now.
How Will the Court Rule?
What the Justices will decide is still up in the air. Many tax experts shifted their predictions regarding the outcome of the case after gauging the justices’ questions and reactions during oral arguments.
If South Dakota wins and that state’s economic nexus legislation is ruled constitutional, tax collection is expected to be widespread. Accountants will have to figure out how to help their clients set up systems and processes to start collecting tax depending on their sales into a state. Some of the legislation stipulates that the law is effective the DAY of the decision. However, it is likely that states will provide guidance regarding an effective date.
If Wayfair wins and the Quill decision is upheld, use tax notice and reporting requirements and other new approaches for remote seller sales tax collection will continue picking up steam among the states.
Regardless of the outcome of the case, your clients will have to do something.
If Quill Is Killed
If South Dakota wins, states that have passed economic nexus provisions similar to South Dakota’s provisions will be able to enforce them. There are 18 states (and counting) that have already passed economic nexus legislation. It’s important to review each state’s provisions to determine when effective dates for the legislation are likely to occur. Many of the provisions state something along the lines of, “Effective on the day the Supreme Court decides on South Dakota v. Wayfair.” Others have a future effective date that is unlikely to be moved forward.
Even if a state has announced its effective date as the day of the decision, there might be a grace period. For example, Indiana’s effective date aligns with the SCOTUS (Supreme Court of the United States) decision, but the Indiana Department of Revenue realizes that people will need to time to comply and plans to develop a fair and reasonable approach if Quill is overturned.
Many states have set future effective dates. These range from July 1, 2018 in Kentucky to 2019 effective dates in Georgia. We will be monitoring how each state plans to proceed after the decision is released and will be updating our Remote Seller Nexus chart as dates are released.
Simply put, a court ruling in favor of South Dakota will likely mean your clients will need to be registered in more states. As a result, you will need to increase your understanding of those additional states’ sales tax laws.
If your clients are smaller companies and there’s a threshold in the state’s economic nexus legislation, you will need to figure out a way to track transactions by both dollar amount and number of transactions by ship-to state. Exceeding a threshold will require registration in that state. Businesses will need to determine if they exceed the thresholds, which are typically $100,000 in sales or 200 transactions in the last year in the respective state. It is based on total sales – not taxable sales.
It is advisable to start the financial analysis in the states that have passed legislation to know where you might have to act. Adequate tracking technology and knowledge of the state’s registration process will help you to be prepared.
If the thresholds are exceeded, then the next step is to determine if there are taxable sales. If there are, then registration is necessary. But if not, then it might not be needed. Knowing the tax rules relevant to each client in each new state where registration is needed will ease the process.
You need to research what types of exemptions, tax rates, delivery charges, and any other industry-specific tax rules might apply to your clients. Also make sure that exemption certificates are being collected from customers claiming any sort of exemption – resale, manufacturing, exempt organization, and government agencies.
It’s still up in the air how states without economic nexus legislation might react if the Supreme Court decides that physical presence is no longer a standard. Some states might determine they don’t need economic nexus and will use a different tactic to require sellers to collect sales tax.
If Wayfair Prevails
If the Supreme Court rules in favor of Wayfair, I can guarantee that the states will pass one of three requirements for remote sellers:
- Notice and reporting requirements
- Marketplace facilitator requirements
- Economic nexus with alternative notice and reporting
Many of the marketplace facilitator requirements have very low reporting thresholds. For example, Washington has a threshold of $10,000 of sales into the state. Sellers and marketplace facilitators that exceed the threshold can either choose to collect – in essence accepting economic nexus – or comply with notice and reporting requirements.
Prepare for more states to pass notice and reporting requirements with low thresholds, similar to requirements in Washington and Pennsylvania, that will have high penalties for noncompliance. The challenge with the notice and reporting requirements is that if the seller makes sales through a marketplace, there is little they can do to comply. This then forces them to collect or face penalties for noncompliance.
We are also seeing the primary marketplace facilitators turning over third-party seller data to the states in lieu of registration. In addition, it is important to remember that even if a marketplace seller begins collecting, the remote seller may still have a collection responsibility for sales made off the marketplace, as the threshold applies for all sales and not just ones where another party isn’t collecting on the seller’s behalf.
To comply with the notice and reporting requirement, sellers will have to figure out how to track sales by customer and by state in order to accumulate the information required for the annual notices sent out to customers and reports sent to the states.
Part of the preparation for compliance with notice and reporting requirements is understanding the implications of “tattling” on your clients’ customers. This type of legislation requires non-collecting sellers to submit an annual customer information report to the state. The state uses the information to notify individual consumers of their use tax obligation if it hasn’t already been remitted.
Customer goodwill is something to consider. Customers likely don’t want to deal with the state – they’d rather pay a tax with their purchase and avoid putting use tax on their individual returns – or receive a notice from the state!
Automation for Every Situation
No matter how the Supreme Court decides, automation for sales tax will be key.
The time is now to evaluate your clients’ tax calculation and compliance tools. Their automation system needs to be working for them, not against them – especially as states iron out their rules post South Dakota v. Wayfair.
You might have to find new or additional tools that meet the needs of your client based on variables like their selling platform or their industry. States will continue to grow more aggressive in collecting sales tax, and an efficient and effective automation system will be your clients’ best defense against hefty fines.
These are issues we are talking to our clients about as we prepare for the decision. What else are you talking to your clients about? Where do you think you will be challenged?
UPDATE: On June 21, 2018, the Supreme Court issued its decision in South Dakota v. Wayfair. In a 5-4 decision, the Court ruled in favor of South Dakota and overturned Quill’s physical presence rule. For an update of how you and your clients should proceed, check out this new article by Diane Yetter: Wayfair Is Decided: What’s Next?