Every small and mid-sized business selling goods over the internet needs to reevaluate how they handle sales tax after the Wayfair ruling by the Supreme Court. It is, quite literally, a taxing problem.
A brief history lesson is in order. Decided in June, the case settled a long-standing issue of state sales tax collection regarding online sales. As MarketWatch reported on June 22, 2018:
The case centered on whether a business is required to collect sales tax in the state of a purchaser, and if sales alone is sufficient to create “nexus” (the ability of a state to subject a business to its taxes). Wayfair challenged the State of South Dakota law requiring any entity with a minimum of $100,000 in sales or 200 individual transactions within the state to collect sales tax.
The Supreme Court sided with the state, overturning the previous nexus standard which established that a company needed to have physical nexus in a state in order to be liable for the collection of that state’s sales tax. Online and other out-of-state retailers are now required to collect sales tax once their sales in South Dakota exceed $100,000 or they have at least 200 individual sales transactions in the state.
Other states are sure to follow suit and enact laws establishing nexus based on low-threshold sales.
Other states certainly have. Within nine weeks of the ruling, more than half the states had passed such legislation. States are quickly enacting laws to start collecting from this new-found revenue source. For instance, in Pennsylvania the nexus level is a mere $10,000 in annual sales. (It reminds one of the old joke: Why did Bonnie and Clyde rob banks? Because that’s where the money was. )
In all seriousness though, there is no question that states had been hurting from the loss of this potential tax revenue. This change presents revenue opportunities for them in a way that politically is fairly painless, since it affects only out-of-state residents paying the tax on the merchandise sold in their states.
In my opinion, it’s also a necessary leveling of the playing field for traditional brick and mortar retailers. They’ve been at a tax disadvantage that is now remedied.
Naturally, this is just the latest, newest minefield of myriad tax structures and compliance issues that companies need to carefully navigate. We’ve helped many of our business clients figure out the most effective ways to deal with this changing landscape already.
Here are four main takeaways if your business is selling online:
- Location, Location, Location
Are there particular states that the bulk of your sales derive from? What is the status of their tax-collection efforts? Think about the impact will have on your pricing strategies. You may need to adjust pricing to make your product’s effective cost competitive.
- Going Low
I mentioned Pennsylvania’s very low $10,000 threshold. We see many states in this competition to the bottom. Only the smallest of small companies will be exempt from collection in the vast majority of states.
- Budget for System Upgrades
Check whether your billing systems and associated software packages are capable of handling and reporting on sales tax in multiple states. The fact that a buyer’s address will determine what tax rate is assessed is now one more factor that goes into your decision-making and purchasing.
- Beware Incoming Income Taxes
Many states have in the past required a brick-and-mortar presence in order to assess and collect business income tax. Post-Wayfair, that landscape might well be changing. Business owners will need to keep this on their radar and as part of their ongoing SWOT analyses.
- Location, Location, Location
As CFO Daily News notes, “Sales and use tax was once all about location. But since the physical presence limitation was killed across the board with the Supreme Court’s Wayfair ruling, it’s a whole new world for taxation.”
If your business is potentially impacted, speak to a qualified tax and accounting professional to ensure your place in this new regulatory world is a secure one.