Updated: Apr 10
I asked my friend, Austin Payne CPA to guest blog about an important sales tax development.
You may receive a notice like “Dear Online Seller, You Owe $25,000 In Sales Tax” from states into which you ship goods to online customers. On June 21, 2018, online businesses were put in for a spin cycle after the Supreme Court decided in South Dakota v. Wayfair, Inc. states can impose sales tax on out-of-state sellers who sell into a state without having a physical presence in that state (“remote sellers”), thereby overturning the precedent established by Quill Corp. v. North Dakota (1992). The Court cleared a path for states to legally collect sales taxes, but simultaneously created confusion when it comes to complying with the new legislative guidance.
Before I jump into Wayfair, I first want to set the backdrop, so you understand where we came from. On May 26, 1992, the Court decided in Quill Corp. v. North Dakota states could not impose sales tax on remote sellers and ruled in favor of Quill Corp. The argument was states could not impose sales tax on out-of-state sellers because they no “physical presence” in the state where their customers resided. The sellers simply shipped the goods and nothing more. Brick-and-mortar businesses loathed it and online businesses savored it. It was like giving candy to one child and giving vegetables to another. We all know how that plays out.
Fast forward to today where technology is ever-changing, costs are rising, and more businesses are transacting sales with online customers. States want their piece of the pie and South Dakota successfully challenged the Quill precedent. Since the Court’s Wayfair decision, states can now tax online businesses based on “economic nexus”.
You may ask “What is economic nexus?” In layman’s terms, states can charge sales tax on total sales made above certain threshold to customers in their states. Economic nexus therefore is created when an online sellers’ sales into that state exceeds the threshold. For example, a remote seller sells $150,000 worth of goods to customers residing in South Dakota. The remote seller is required to collect and remit sales tax because South Dakota’s economic nexus threshold is $100,000. These thresholds may differ by state.
This is an administrative nightmare for online sellers, many of which do not have budgets to comply with the new legislation. If that’s you, you may have to incorporate a sales tax table into your sales order system in order to charge the correct sales tax at the point of sale. Not all states, counties, or cities have the same rates; therefore, it is imperative to establish a process that accurately reflects the most current rates for different jurisdictions to properly collect sales taxes. Then online sellers must file returns and remit sales tax to the states. Online sellers will incur administrative costs for complying with these laws and will have to consider passing them on to their customers.
Here’s what you should do now: (1) speak with an e-commerce sales tax specialist to develop your compliance plan, which may require hiring additional staff or outsourcing the job to a third-party company and (2) read more about Wayfair and economic nexus here to improve your understanding.
Don’t navigate these new waters alone. Hire an expert captain to run the ship.
For further information about this, contact:
Austin Payne, CPA
Senior Tax Associate
Grant Thornton LLP
Phone: (954) 331-1112
If you like this blog, please share it and like it here on this site. And please comment if you will.
To help you build a winning accounting department, I created a free guide called Accounting Job Descriptions with Titles, Duties and Salaries. Use it in your job ads and recruiting. You can download it here: https://www.robertband.com/resources
Robert Band is a business finance expert, helping business owners optimize their accounting and finance operations for maximum efficiency and effectiveness. Remember, one tip could be worth millions and profits today become fortunes tomorrow. Contact Robert now.
Business Finance Expert