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Managing your business can be a challenge, particularly when you have to react to changes in laws and regulations. A recent Supreme Court ruling on sales tax is changing the way online retailers must operate moving forward. Fear not: with proper planning, your company can manage the change in online sales taxes and operate profitably.
Who Pays Sales Tax?
Sales tax is imposed by a government entity, typically a state, city, county, or district. The tax is calculated based on the location of the sale of goods and services, and retailers have an obligation to collect sales tax from their purchasers and remit that collection the appropriate government entity.
In the US, the majority of states impose sales tax on the sale of goods and certain enumerated services. There are a handful of states that broadly tax all goods and services. In total, there are well over 60,000 sales tax laws to keep straight when determining what goods and services are and are not taxable. To complicate the matter further, some transactions are exempt from sales tax due to their nature. Some examples include:
- Necessity goods: goods, such as food, medicine, and clothing, may be assessed a lower sales tax rate or exempt from sales tax entirely.
- Goods purchased for resale: Items carried as inventory and later resold may be exempt from sales tax. Note an important distinction from necessities: when the item carried as inventory is actually sold to a customer, the purchaser pay sales tax. While your business doesn’t pay sales tax in this instance, you must not to forget to collect sales tax from your customer on the final transaction.
- Purchasers who are exempt: Sales tax exemptions are provided to purchases by certain enumerated entities, such as government institutions, non-profit organizations, charitable groups, and religious institutions.
If your business sells products and services that do not meet these limited exemptions and you are a remote seller, you may have to charge and collect sales taxes due to a Supreme Court decision that has changed the sales tax landscape.
In summary, the Wayfair ruling, described below, could present many challenges to online retailers, including:
- The need to calculate state and local sales tax on transactions
- Generate tax filings
- Collect tax payments
- Transmitting those payments to multiple state and local government agencies
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What the Court Decided
On June 21, the Supreme Court decision in South Dakota v. Wayfair, Inc., overturned the long-standing case of Quill Corp. v. North Dakota, which held that states could not enforce the obligation to collect sales tax against businesses that do not have a sufficient physical presence or connection to that state, also known as nexus.
Your online business in Colorado, for example, did not need to collect state sales tax on sales to South Dakota residents, if your business did not have a physical presence in or connection to South Dakota.
The Supreme Court’s decision means that states are no longer barred from imposing a sales tax obligation on online businesses that sell to their residents. The state of South Dakota can now require a Colorado-based online business to collect state internet sales taxes on sales to South Dakota residents.
Even though Quill has been overturned, in order to require sales tax to be collected to their residents, each state will have to pass legislation to require online sales tax collection, and states may choose the minimum thresholds that apply before the tax must be collected.
The law in South Dakota, which led to the Wayfair lawsuit, requires any business with more than $100,000 in sales annually into South Dakota to collect state sales tax.
The same South Dakota law applies when companies conduct more than 200 sales in a year in the state.
Sales below these two thresholds are not obligated to collect and remit the South Dakota internet sales tax without further nexus.
In making its decision, the Supreme Court specifically took into account the potential cost and complexity of managing this sales tax process. The ruling very explicitly noted that the Court granted South Dakota its petition because there were inherent protections of small businesses within their law. One can make the presumption based on this, that the Court should not support a state law that makes compliance overly complex for small business.
Regardless of this, however, you can be sure that many more states, if they have not already done so, will quickly pass similar laws to require remote sellers to collect internet sales tax on online transactions, given the additional “lost” revenue it will provide to the states.
The Bigger Challenge
The Supreme Court’s decision creates a big challenge to online businesses, because 45 states currently impose a sales tax on purchases in their states. An online business may now be responsible for collecting and remitting sales tax on sales made to residents of 45 different states, each with different sales tax rates and forms.
Here is what that means to an online retailer:
- Calculating the sales tax: A remote online seller will have to track the current sales tax rates for dozens of states and hundreds of locals, depending on where they do business. Every time a sale is made, the seller will need to determine the purchaser’s city and state of residence (based on mailing address) and use that information to calculate the sales tax due on each sale.
- Communicating the change: A business will have to change their website, product offerings, and marketing information to reflect the new sales tax that must be charged. Customers need to know the rate of sales tax charged for their state and what the cost of each purchase is with sales tax included.
- Collection: Sales tax collection is similar to managing payroll tax collection in that both taxes are collected by a business and subsequently passed on to a government entity. You will need systems in place to collect the tax, as well as a separate bank account to deposit to and pay the taxes from.
- Reporting: Once you collect sales taxes for a state, you’ll have to report your total sales in the state, as well as all locals and the amount of tax you collected at each level. Your business may have to submit sales tax payments and tax reporting once a month, or more frequently at both the state and local level.
While you may have been doing this already for one state, imagine how complex the process becomes for multiple states, each which may have a slightly different process, tax rates, and forms.
What to Do Now
The process of collecting internet sales tax from online sales in multiple states is complex and each state will release separate guidance to determine how they will manage this process. As a business owner, you face some unknowns when it comes to state sales tax, but you can take action to get ahead of this problem.
You can find existing software solutions, such as the QuickBooks Online automated sales tax application, to assist. This system helps business owners in three ways:
- Tracks and provides updates for thousands of tax law changes that may apply to your business, including sales tax rates.
- Provides customized sales tax rates automatically added to your invoices based on what you sell, where you are located, and where you ship your product.
- Avoids tax payment and reporting late fees with payment reminders.
This software can help you manage the nuances of sales tax laws, reduce your risk of error, and minimize the likelihood of a sales tax audit.
If you’re not using the services of an accountant for your business, this shift in the tax scheme makes it even more important to work with a CPA who can prepare your business tax return. Find a good accountant who can help you navigate this issue.
Communicate the Wayfair implications to your staff and explain that the full impact of the change isn’t known just yet. Be prepared, however, to create a plan to collect the sales taxes once each state passes laws and issues guidance on their change in process.
Like many big changes in business, this new requirement presents a big opportunity to online companies that take time to plan for the change.
If you put an automated or other system in place to manage the change in the remote seller rules, you can significantly reduce the amount of manual time needed to address the change at calculation or in audit, and spend more time on tasks that help you grow your business.
Invest the time needed to plan for this change and help your company stay on track.
Sales tax tracking without the headache.
Don’t stress the tax rules. There are thousands of tax laws that may apply to your business. We keep track of them all and update them as they change.