It’s a new world for online sellers now that the U.S. Supreme Court repealed the long-standing rule that a state can only tax businesses with a physical presence in the state. Although states have tried to increase sales tax collections from out-of-state sellers for years, remote businesses have largely been protected from state taxing authorities by the physical presence rule.It’s a new day and time. With its decision on South Dakota v. Wayfair Inc., on June 21, 2018, the Court determined the physical presence rule was “unsound and incorrect,” and “economic and virtual” contacts between a business and a state were sufficient grounds for nexus – the connection between a state and a business that triggers a tax collection obligation.
This is a game changer. While some states (New Hampshire, for example) are preparing to fight this new standard, others are eager to take advantage of it:
• Hawaii and Vermont started enforcing their economic nexus laws on July 1, 2018.
• Alabama and Illinois start enforcement Oct. 1, followed by Connecticut on Dec. 1.
• Economic nexus will take effect in Georgia and Iowa on Jan. 1, 2019.
• Several other states, including Louisiana and Minnesota, are still determining the full impact of the ruling on their statutes.
• Alabama and Illinois start enforcement Oct. 1, followed by Connecticut on Dec. 1.
• Economic nexus will take effect in Georgia and Iowa on Jan. 1, 2019.
• Several other states, including Louisiana and Minnesota, are still determining the full impact of the ruling on their statutes.
With the nexus landscape for remote retailers in flux, businesses need to have a system in place to monitor changes in state nexus laws and be ready to comply with new collection requirements.
Monitor Changing Nexus Laws
For retailers doing business in multiple states, the mere monitoring of changing laws can be an enormous task. While some state departments of revenue quickly posted information about the Wayfair ruling and its impact on state nexus laws, others have not. That means there are still a lot of unknowns.
For retailers doing business in multiple states, the mere monitoring of changing laws can be an enormous task. While some state departments of revenue quickly posted information about the Wayfair ruling and its impact on state nexus laws, others have not. That means there are still a lot of unknowns.
For example, businesses need to worry about more than just existing laws. Within days of the ruling, Wisconsin announced it would enforce an economic nexus policy it had yet to create, the New Jersey legislature sent an economic nexus measure to the governor’s desk, and Nebraska Governor Pete Ricketts announced lawmakers would reconsider an economic nexus measure previously withdrawn from consideration because it was believed to be unconstitutional.
Furthermore, economic nexus laws aren’t the only game in town. In their efforts to increase remote sales tax collections, states developed cookie nexus laws in which remote businesses establish a tax collection obligation via applications and web cookies placed on in-state computers and devices. States also developed laws that tax online marketplace transactions, and use tax notice and reporting requirements for non-collecting sellers. It’s currently unclear how the June 21 Supreme Court ruling will impact these policies, if at all, but regardless of the outcome, they should be monitored.
In short, the fallout from the Court’s decision is likely to continue for some time. Businesses not already collecting in all states are likely turning to their accountants and tax advisors for expert advice about where they should register, when they should register and how registering to sell in a particular state could impact other areas, such as income tax.
Registering in New Jurisdictions
Once a business determines it’s reached an economic nexus threshold in a new jurisdiction and has an obligation to collect, it must register to do so with the state tax authority. Under no circumstances should it collect and remit tax in a new jurisdiction before registering to do business there.
Once a business determines it’s reached an economic nexus threshold in a new jurisdiction and has an obligation to collect, it must register to do so with the state tax authority. Under no circumstances should it collect and remit tax in a new jurisdiction before registering to do business there.
This should be a straightforward process, but as is often the case when tax is involved, it can be surprisingly complex. Online applications may be required in some jurisdictions, while a paper application may be required in others. More than one license and permit may be required in each jurisdiction; and in some states, it may be necessary to register with local tax authorities, as well as with the state taxing authority.
As a result, registering in a new jurisdiction is likely to be a multi-step process that involves multiple departments, including state and local tax departments, and the secretary of state. To complete the process, businesses will need to furnish a variety of information, including expected annual sales. Once completed, licenses and permits in many jurisdictions need to be periodically renewed.
Let the Collection Begin
Only after fulfilling all registration requirements in a new jurisdiction may a business legally collect and remit sales and use tax. At this point, businesses need to track changes in sales and use tax rates, product taxability, regulations, and a few other areas. These often correspond to the start of a new quarter, but in some states, they can occur at any time.
Only after fulfilling all registration requirements in a new jurisdiction may a business legally collect and remit sales and use tax. At this point, businesses need to track changes in sales and use tax rates, product taxability, regulations, and a few other areas. These often correspond to the start of a new quarter, but in some states, they can occur at any time.
Sales tax holidays are another consideration. Approximately 17 states offer at least one sales tax holiday, exempting from state and/or local sales tax specific items, such as clothing, school supplies, emergency-preparedness supplies and guns. Sellers need to know when and where tax-free periods occur and comply accordingly.
Managing exemption and resale certificates is another essential task once a retailer starts doing business in a new jurisdiction. If sales tax wasn’t collected, as required, on a taxable transaction at the point of sale, tax authorities will want that exempt transaction validated with a certificate.
The Takeaway
Sales and use tax compliance has always been challenging, especially for companies doing business in multiple jurisdictions. It is rapidly becoming more so as states expand their taxing authority in the wake of the Wayfair decision.
Sales and use tax compliance has always been challenging, especially for companies doing business in multiple jurisdictions. It is rapidly becoming more so as states expand their taxing authority in the wake of the Wayfair decision.
You can help your clients who sell online to successfully negotiate this rapidly changing nexus landscape by helping them understand new and emerging nexus laws, and register in new jurisdictions as needed.
Learn more about South Dakota v. Wayfair and its potential impact on business here.
