What's Your Strategic Plan to Manage Post-Wayfair Sales Tax Obligations?
When the Supreme Court ruled last summer in the South Dakota v. Wayfair case, most companies did not foresee the avalanche that would soon follow. The Court ruled that states could impose economic nexus standards, and everything changed. To date, more than 30 states have passed legislation imposing economic nexus. Strategic planning to manage these momentous obligations is a must for every company selling in a multi-state environment. Yet, most companies have not planned for their new sales tax obligations and are unsure of how to even take on this daunting task.
See which States are Enforcing Sales Tax Nexus Requirements
In the past, a state could only impose sales tax where a company had nexus created through a physical presence in that state. Physical presence is created by offices, employees, warehouses, independent sales agents, inventory in warehouses, etc. Now, states can impose sales tax obligations when a company sells “enough” into a state, regardless if physical presence exists. The definition of “enough” varies from state to state. Many states deem $100,000 or 200 transactions sold into that state on an annual basis to be “enough”, but other states have different yard sticks to measure “enough”. A full list of nexus thresholds can be found here.
Once a company’s nexus footprint is defined, the next step is to look at the taxability of goods and services that are sold. Not every state imposes tax on the same items or on the same basis. For example, some states exempt clothing and shipping; while other states may tax clothing and exempt shipping; while others may tax both. It’s very common for a product or service to be taxable in one state, but not taxable in another. This is especially true in technology industries. digital goods, electronically downloaded software, SaaS, information services, and data processing. All states define these differently and tax them differently.
With your sales tax nexus footprint established, sales tax registration is needed. Prior to collecting tax, it is necessary to get a sales tax permit. Often times the applications are confusing, especially for out of state sellers. Registering for the wrong type of “sales tax” could create the wrong type account with the Department of Revenue which eventually will take time and energy to correct.
In the course of creating a nexus footprint, often companies find themselves in a position where they have identified a state in which they should have been collecting tax for the last several months (since economic nexus was imposed) or for the last several years (due to a physical presence in the state). In these cases, tax liabilities will exist. Strategic planning to deal with these liabilities can often minimize the impact. For example, many states offer a Voluntary Disclosure Agreement program (VDA). With a VDA, the look back period is shortened and penalties are waived. However, companies are not eligible to participate in VDAs if they are already registered or have begun collecting tax. The process of remediating and resolving past tax liabilities is complicated and can result in major exposure risks if not managed correctly.
Once a company gets to the point where they are registered to collect tax, they still need a process. Will tax automation software be bolted onto an accounting and billing system? Can tax be turned on in a shopping cart platform? Many companies that previously only had sales tax obligations in 1-2 states now find that their manual process of looking up rates as needed is no longer a viable option.
Exemption Certificate Management
With tax compliance in more and more states, the number of exempt customers will likely be growing at an exponential pace. Ensuring that your company has proper procedures to obtain, validate, renew, store, and retrieve multi-state exemption certificates is an essential part of the total sales tax compliance process. Lack of exemption certificates is often what triggers large assessments under audit.
Finally, with all these new sales tax obligations, sales tax returns need to be filed. Depending on the volume of tax collected, your company could be responsible for filing monthly returns. What was previously a small part of one person’s job description could suddenly require a multi-person staff. Companies are quickly finding themselves with a shortage of manpower to handle the compliance aspect.
With one 5-4 ruling by the Supreme Court, millions of companies across the nation are suddenly finding themselves in a world in which they were not prepared. Sales tax is hard; multi-state sales tax in a quickly changing world is extremely challenging. Companies not compliant with sales tax obligations face material risk that will affect the bottom line.
Ensuring that your company is compliant is absolutely necessary these days. Not only knowing where your company has sales tax obligations, but putting a plan together to be efficient with the process is essential.
Cherry Bekaert helps thousands of companies develop strategic plans, implement recommended courses of action, train staff on best practices, and even outsourcing. Now is not the time to go it alone. Sales tax is hard, but we make it easy. Cherry Bekaert provides high quality tax, management and accounting services to a diverse and successful client base. If you have questions or want more information: