By Michael Bernard & Nancy Manzano, Vertex Inc.
Nearly every company selling goods or services to US consumers will be impacted by the US Supreme Court’s recent ruling in South Dakota v. Wayfair, which overturned the long-standing physical presence requirement for sales and use tax collection.
It is now clear that in a post-Wayfair world, when it comes to sales tax nexus, a virtual storefront is no different from a physical one.
The decision has sparked a flurry of activity across US states, with the most immediate responses coming from states that already have South Dakota-style statutes, reminding sellers of their requirements to collect and remit sales tax.
The sales tax landscape in the US is undergoing dramatic transformation and the compliance burden is escalating for domestic and international businesses alike.
This includes retailers selling via marketplaces, as marketplace merchants will be responsible for their sales tax obligations in states that don’t have marketplace facilitators. Multinational companies with non-US tax departments will also need to pay close attention to the changing regulations to ensure their US subsidiaries are properly supported.
States that don’t have existing statutes requiring remote sellers to collect and remit sales tax will likely look to pass legislation during their next legislative sessions.
To ensure their rules will survive future taxpayer challenges, those statutes will need to closely resemble South Dakota’s nexus statute, which requires out-of-state sellers to collect and remit sales tax if annual sales exceed $100,000 or if they have 200 or more transactions during the same period.
Companies currently remitting and collecting sales tax in just a handful of states or those with no physical presence in the US will now be faced with a multitude of varying rules and rates with different effective dates and nuances in the threshold measurement period.
Instant changes, retroactive application
About half of the states that impose sales tax already had some form of economic nexus statues in place before the ruling and some have taken immediate action to enforce it.
A few have thresholds that differ from those in South Dakota and some have implemented laws that will apply to transactions made prior to the Wayfair ruling.
For example, Massachusetts set the threshold that triggers sales tax collection requirement at $500,000 and 100 transactions, rather than “or.” The law is retroactive and applies back to October 2017 when the state’s law 830 CMR 64H.1.7 took effect.
Less than a week after the court announced its decision, Hawaii announced that Act 41 would take effect on July 1, 2018, requiring retailers selling into the state to collect and remit General Excise Tax regardless of physical presence.
Hawaii set the same threshold as South Dakota, but the state reminded taxpayers that the law applies retroactively to taxable years beginning after December 31, 2017. A few weeks later, the state changed their position on retroactivity and has now stated that no tax is due on sales prior to July 1, 2018.
Rhode Island’s legislation, enacted in August 2017, requires out-of-state retailers to collect and remit Rhode Island sales and use tax or provide use tax obligation notices to Rhode Island customers who have made cumulative annual purchases of $100 or more. However, guidance provided by the state doesn’t clarify if the law applies to sales made prior to the Supreme Court’s ruling.
Kentucky’s House Bill 487 and Vermont’s remote seller provisions of 2016 Act 134 requiring out-of-state sellers to collect and remit sales tax also went into effect July 1, 2018. These statues adopted similar thresholds to those at issue in the Wayfair case.
A number of states announced law changes that will be applicable later this year, giving businesses more time to prepare.
New Jersey lawmakers, for example, have amended a recently introduced remote seller bill to include marketplace provisions and push back the bill’s effective date to October 1, 2018. The bill’s minimum thresholds are substantially similar to those set by South Dakota.
The Wayfair decision made it possible for Alabama to enforce the January 2016 economic nexus rule 810-6-2-.90.03, which will be applied prospectively for sales made on or after October 1, 2018. North Dakota and Wisconsin’s sales tax collection requirements are based on the same thresholds as South Dakota’s law and will also be effective October 1, 2018.
The regulatory turmoil will not be over quickly. Determining the impact of the Wayfair ruling and applying the new standard will likely be the focus of many state legislatures as they reconvene in the coming months.
The Texas Comptroller, for example, said the state’s lawmakers need time to review rules that might need to be updated and estimated early 2019 as the target effective date, adding that the new law would not be retroactive.
States such as Wyoming, Mississippi, California, Louisiana and even South Dakota are still analyzing the Wayfair decision and have yet to offer guidance.
New Hampshire, one of several states with no sales tax, is considering legislation to prevent other states from forcing New Hampshire businesses to collect sales and use taxes and protect the state’s “low-tax economy.”
Most businesses will likely voluntarily collect and remit tax in the states where they have economic threshold nexus.
If a retailer is not ready on the date the states require returns to be filed, they should at least estimate their obligation and try to collect in some manner to reduce the potential uncollected liability.
A number of states are likely to give taxpayers an opportunity to comply and avoid retroactive penalties with different incentives. In fact, New Jersey’s pending remote seller legislation bill, if passed, would require the state to offer a 90-day amnesty period to incentivize taxpayers to come clean.
How to prepare
To prepare for increased collection and remittance responsibilities, merchants should review invoicing processes and gather data on gross revenues and the number of transactions, prioritizing states where the company has the greatest economic presence.
Businesses will need a plan to register to collect and remit sales tax via either a marketplace or a technology solution that can support US tax, as manually managing the increasing complexity for potentially thousands of jurisdictions will become a nearly impossible task.
Automating end-to-end sales and use tax processes gives companies the confidence that they are following the most up-to-date rules and minimizes the risk of non-compliance. Tax technology that can take care of calculations, filing and remittance, as well as product taxability nuances in various states and local municipalities, allows tax departments to focus on delivering more strategic value to the business.
–Michael Bernard is Chief Tax Officer – Transaction Tax at Vertex Inc. He can be reached at Michael.Bernard@vertexinc.com.
-Nancy Manzano is a Director in the Chief Tax Office at Vertex Inc. Her email is Nancy.Manzano@vertexinc.com.