Cheat Sheet: How Sales Tax Requirements Could Change This Year
What’s Going On?
On April 17, 2018, the U.S. Supreme Court (“SCOTUS”) heard a landmark sales tax case (South Dakota v. Wayfair, Inc. et al.) that could change the entire landscape for businesses. In this case, SCOTUS will decide whether states can require businesses with no physical presence in the state to collect sales tax from in-state purchasers. The decision is expected to be issued this June.
If SCOTUS decides to overturn Quill Corporation v. North Dakota and remove the physical presence standard that remote sellers have relied upon for nearly half a century, this could allow states to impose sales tax collection on all sellers.
Live Webinar: Sales & Use Tax Showdown at the Supreme Court: What It Means to Your Business
Tuesday, April 24, 2018, 1:00-2:00 p.m. ET
How could pending court cases and legislation impact your company? Get answers from Cherry Bekaert sales tax experts who were inside the Supreme Court hearing the arguments firsthand.
How Did We Get Here?
For 50 years, businesses have relied on the physical presence standard that sellers are not required to collect a state’s sales tax if they have no physical presence in the taxing state. This standard was established by the landmark case National Bellas Hess, and upheld in the 1992 case Quill Corporation v. North Dakota, under which sellers are not required to collect a state’s sales tax if they have no physical presence in the taxing state.
Colorado tried to poke a hole in this physical presence wall when it enacted a sales tax notice and reporting law in 2014. This new law requires sellers to notify purchasers of their sales tax liability and provide Colorado with detail regarding all of their Colorado customers’ taxable purchases.
This new Colorado law was the subject of SCOTUS’s 2015 decision in Direct Marketing Association v. Brohl. SCOTUS upheld Colorado’s notice and reporting requirement, concluding that it did not violate Quill because it did not impose a tax collection requirement on remote sellers but merely a reporting requirement.
Perhaps the most significant aspect of the DMA case was Justice Kennedy’s concurring opinion that it may be time for SCOTUS to reconsider Quill’s physical presence standard.
What’s the Current Environment?
States were quick to respond to the DMA decision and Justice Kennedy’s statement. As a result, a wave of legislation imposing DMA-like sales tax reporting and notice requirements has swept across the U.S. As of this writing, 11 states now impose this type of reporting requirement. Some states, like Washington and Pennsylvania, have imposed thresholds as low as $10,000 requiring remote sellers to either adhere to onerous notice and reporting requirements, elect to collect tax instead, or face stiff penalties with mandatory minimum penalties of $20,000 or more.
In addition to enacting these SCOTUS-sanctioned reporting requirements, states began more aggressively pushing the sales tax nexus envelope, with “kill Quill” economic nexus legislation and regulations designed to force a case up the appeal chain to SCOTUS. So far, 14 states have enacted sales tax economic nexus provisions, most of which are at various stages of appeal in those states’ courts. With Wayfair, states now have the SCOTUS case they were seeking.
So, for better or worse, SCOTUS may soon resolve a battle that has been waged between businesses and states for half a century.
Because several states already have economic nexus statutes in place, and still more are in the works, the states are expected to move quickly to enforce these rules if SCOTUS overturns the physical presence standard. Amazon, the largest online seller in the U.S., has already agreed to collect tax in all states. Also, last year, several states (through the Multistate Tax Commission) offered a limited-time amnesty to online sellers using online marketplaces like Amazon. As a result, the states are likely to be very aggressive in their pursuit of online sellers. If you add the recent trend of states imposing sales tax on electronically delivered software, digital products and software-as-a-service (“SaaS”), the Wayfair decision will impact both online retailers and technology-driven businesses that may not traditionally have considered themselves to be “retailers.”
Though many hope that Congress will act to create exceptions for small businesses, the reality is that the states likely will move more quickly than Congress in this area, leaving both large and small businesses exposed.
How Should Your Business Prepare for This Onslaught?
This change in the laws imposes a daunting burden on businesses, as there are over 7,000 state and local taxing jurisdictions in the U.S., each with a different tax rate. Further, each state (and sometimes each locality) has its own definition of what is versus isn’t taxable.
Businesses should evaluate their current systems and processes to determine whether they are ready to begin collecting and remitting sales tax across the U.S. and develop a plan to address any gaps. Businesses should consider the following questions:
• Have you evaluated which of your products and services may be taxable in each state?
• Is your billing system equipped to apply taxability determinations and tax rates during the customer invoicing process?
• Are your accounting systems equipped to account for sales taxes collected and payable, as well as capture transaction-level sales and tax data for tax returns and audits?
• Have you considered how things like shipping and handling, discounts, coupons rebates and customer returns will be handled?
• Do you have sufficient manpower to file the required sales tax returns?
• What processes are in place to ensure that you’re using the current tax rates?
Start by Attending This Free Webinar
When arguments were presented before the Supreme Court on Tuesday, April 17, Cherry Bekaert was there to hear firsthand the key issues and proposed reporting requirements. We will host a complimentary webinar on Tuesday, April 24 to share this information with you. Our experts will help determine the impact these rulings could have on your business, as well as how your company can prepare for sales tax nexus changes. Register for this free webinar today.