You’ve probably heard the word whispered at the water cooler … Wayfair. You weren’t quite sure what it meant, but it filled you with an unnamed dread.
We’d like to demystify the new law and help you understand how it might impact your business.
Since taxes began, states have been trying to make sure they got their fair share. For income taxes, there are complicated nexus rules and apportionment schemes to slice the pie equitably. But for sales tax, at least since 1992, the rules were simple: If you didn’t have a physical presence in a state, you didn’t have to collect and remit sales tax on sales to customers in that state.
The 1992 Supreme Court’s Quill ruling set a bright-line test. States have hated it because it limited their ability to force sellers to collect the tax. Since Quill, states have tried to come up with ways to expand the collection requirements.
One of the most prominent ways was the Amazon law. This law asserts that when a business or individual sends business to your company and collects a fee, the transaction constitutes a physical presence and the state can collect taxes. Another law forces sellers who weren’t collecting sales tax to send a report listing each sale and buyer to the state so they can enforce use tax.
While both of these methods became popular, it wasn’t enough. South Dakota decided to challenge Quill directly by bringing the concept of economic nexus from income tax to sales tax. Their law said if a seller sold $100,000 worth of goods, or had at least 200 sales transactions in their state, it constituted a physical presence and the seller had to collect and remit use tax.
Wayfair Challenge and Ruling
This was clearly illegal under Quill and was immediately challenged by Wayfair (an online furniture company) and several other big retailers.
The case made its way to the Supreme Court where the Court asked Congress to simplify and standardize these rules. Twenty-six years later, in July 2018, the Court grew impatient with Congress and ruled in favor of South Dakota, allowing the law to stand.
Many states have since followed suit with similar laws, and more will likely follow. Small businesses that have never had to deal with multi-state sales tax now have to consider it.
So what should you do?
First, determine if you have a “Wayfair” problem. Look at your sales by state and identify states where you exceed the threshold. This is also a good time to look at your activities closely to see if you have any filing requirements you’ve been overlooking.
Second, let us help you navigate these rough waters. You don’t want to rush out and register for sales tax in several new states without considering the consequences. We can help you limit your liability exposure from previous years through the use of voluntary compliance programs some states offer.
This could affect more than sales tax.
Once you’re registered with a state, that state may expect an income tax return even if no taxable income is apportioned to that state. That can come with franchise and minimum taxes, as well as annual reports. You may need to hire registered agents in the new states and register with the Secretary of State.
If you add a lot of states to your sales tax collection regime, the additional compliance costs can be burdensome. Fortunately, there are businesses who specialize in these issues. They can integrate your online sales platforms; identify the site of the sale and the appropriate tax rate; collect and remit the tax; and file the appropriate forms. They can also help you register in the new states.
Hantzmon Wiebel can help you determine what needs to be done and walk you through the process. We have connections with companies who specialize in this field. If we can’t answer all of your questions, our contacts can. Fill out the form below to find out what you need to do for the complicated world of multi-state sales tax.
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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.