How to navigate your complicated sales tax obligations
Complex sales tax obligations?
The Wayfair decision in 2018 dramatically shifted the sales tax landscape in the United States with companies of all sizes now facing sales tax compliance obligations that are more complex than ever. The “Economic Nexus” rules apply in nearly all states that impose a sales tax. Varying rules mean that in each state with economic nexus, a company may need to register and collect sales tax if it passes a specified threshold, regardless of whether the company has a physical presence like storefronts, warehouses, or sales personnel in the state.
So how do you determine if you have a complex sales tax obligation?
Understanding Nexus Thresholds
Based on South Dakota v. Wayfair’s case ruling, many states have adopted the nexus threshold used in South Dakota: $100,000 in gross receipts or 200 in-state transactions. However, some states have imposed a higher standard, and some have chosen not to use a transaction threshold.
Companies that pass this threshold within a set amount of time must register with the state and begin collecting sales or use tax and filing returns. Even though many states use the same threshold for determining economic nexus, it is merely a surface-level similarity, because states differ in how they measure these thresholds. Some states will leverage a company’s gross receipts, including exempt sales and services, to determine economic nexus; others consider only gross receipts from taxable transactions or based on retail sales.
Additional threshold requirements include a calendar year timeframe for evaluation, while other states use a rolling twelve-month measurement. Consequently, remote sellers must diligently track and monitor transactions in each state to actively measure whether an economic threshold is met or exceeded and file the required sales tax return in each state.
The Impact of Wayfair
Many large companies are already registered and collecting sales tax in every state, so the effect of these changing policies is mainly on the procurement side. Apart from tracking economic threshold requirements in each state where a company conducts business, there may be complications encountered when procuring goods and services.
Companies must ensure that they are paying the correct sales tax on purchases and accruing use tax when necessary. Many vendors do not have sufficient information to determine taxability accurately, including reseller exemption status, product usage, or state-specific letter rulings granted to their buyers. Subsequently, a buyer must be careful that tax is applied correctly based on state and local statutes and their current tax policy.
For small, mid-size, and regional companies that may have a limited physical footprint, Wayfair potentially has an even more significant impact, especially for companies expanding into ecommerce and selling online to all 50 states. For these companies, their sales tax compliance obligations may have changed practically overnight from filing returns in one or two states to filing 40+ different state returns, in addition to monitoring rules and rates in potentially thousands of local jurisdictions.
Smaller companies need to consider where their customers are located rather than the location of their business assets. The last thing any company wants is for sales tax complexity to limit the ability to enter new markets and sell products and services online.
Apart from looking at the customer location and where the company has nexus, what a company is selling can also impact the complexity of sales tax obligations. Most US sales tax laws grew out of a framework of manufacturing and selling tangible personal property for retail purposes. As such, tax jurisdictions have struggled to keep up with the service and digital economy. Companies that sell digital goods and services, especially if they bundle different types of products and services, will confront challenging questions around taxability. In states that measure nexus thresholds based on taxable transactions, taxability decisions could affect nexus as well.
States have also been aggressively pursuing marketplace facilitator policies, under which companies like Amazon or eBay are responsible for collecting tax on third-party sales facilitated through their platforms. These are new policies that are still evolving, and there are a lot of open questions. Tax obligations for multichannel sellers and marketplace facilitators can get complicated quite quickly and are rapidly changing.
Even before COVID-19, companies tracked place of supply regulations for tax collection, product taxability, transaction records, customer exemptions, and more. Further complicating compliance, companies selling via a marketplace facilitator were potentially required to complete additional filing or documentation requirements by each facilitator in various states where they were doing business.
However, especially in a COVID-19 world, Standard Operating Procedure may have changed. Companies may be making deliveries in new cities/states or shipping goods to new customers in new geographies. Purchasing from new suppliers means applying for and tracking resale exemption certificate forms to prove an exemption from tax on that particular date during an audit.
Country-wide stay-at-home orders further complicates the expansion of ecommerce transactions and a company’s associated taxability footprint. Due to COVID-19, states will soon actively pursue a re-evaluation of economic nexus, including tax consequences determined through the inclusion of remote employees in specific states. One remote employee can potentially trigger nexus for a company, thereby possibly changing sales and use tax compliance requirements and how transactions should be taxed.
Tackling complex sales tax obligations, like economic nexus thresholds, doesn’t need to overwhelm your company. Using data available to your team through your ERP or your tax automation solution, like ONESOURCE Indirect Tax, can be a great way to monitor where you have any new activity to track to Wayfair thresholds by states, exemption certificates, and business specific product use for accurate tax results every time. And if you need additional help to perform a comprehensive nexus study, your friends at Thomson Reuters can help with that too!
This blog post was written by creators from Thomson Reuters. Learn more about them at ThomsonReuters.com