Last year’s Wayfair decision dramatically shifted the sales tax landscape in the United States and companies of all sizes are facing sales tax compliance obligations that are more complex than ever. As of October 1, 2019, so-called “economic nexus” rules apply in all states that impose a sales tax other than Missouri, Florida, and Louisiana. Missouri and Florida considered nexus bills in the past legislative session and are expected to take up the issue again next year, and Louisiana’s policy will go into effect at some point before July 2020. What this means is that in each of these states, a company may need to register and collect sales tax if it passes a specified threshold, regardless of whether the company has a physical presence like storefronts, warehouses, or sales personnel in the state.
So how do you determine if you have a complex sales tax obligation?
Understanding Nexus Thresholds
Many states have adopted the nexus threshold used in South Dakota: $100,000 in gross receipts or 200 transactions in-state. This is the standard that the Supreme Court considered in the Wayfair case. However, some states have imposed a higher standard, and some have chosen not to use a transaction threshold. Companies that pass this threshold within a set amount of time have to register with the state and begin collecting sales or use tax and filing returns.
Even though many states use the same threshold for determining economic nexus, it is really just a surface-level similarity, because states differ in how they actually measure these thresholds. Some use all of a company’s gross receipts; some look just at gross receipts from taxable transactions. Some include sales for resale, while others do not. Some measure on a calendar-year basis, while others use a rolling twelve-month measuring period.
The Impact of Wayfair
Many large companies are already registered and collecting sales tax in every state, so the effect of these changing policies is mainly on the procurement side. For procurement, companies must ensure that the sales tax they’re paying on purchases is calculated correctly and that they’re accruing use tax when necessary.
But for small or mid-size companies and regional companies that may have a restricted physical footprint, Wayfair potentially has a much bigger impact. This is especially true for companies that are expanding into e-commerce and selling online to all 50 states. For these companies, their sales tax compliance obligation may have changed practically overnight from filing returns in one or two states to filing 40+ different state returns, in addition to monitoring rules and rates in potentially thousands of local jurisdictions. Companies now need to be thinking about where their customers are located rather than where their business assets are located. The last thing any company wants is for sales tax complexity to limit the ability to enter new markets and sell products and services online.
Apart from looking at where customers are located and where the company has nexus, what a company is selling can also impact how complex its sales tax obligation will be. Most of our sales tax laws grew out of a framework of manufacturing and selling tangible personal property at retail, and they have struggled to keep up with the service and digital economy. Companies that sell digital goods and services, especially if they bundle different types of products and services together, will confront challenging questions around taxability. In states that measure nexus thresholds based on taxable transactions, taxability decisions could affect nexus as well.
States have also been aggressively pursuing marketplace facilitator policies, under which companies like Amazon or eBay are responsible for collecting tax on third-party sales facilitated through their platforms. These are new policies that are still being worked out and there are a lot of open questions. Tax obligations for multichannel sellers and marketplace facilitators can get complex quite quickly, and are rapidly changing.
Companies need to be keeping track of where they have an obligation to collect tax, where a marketplace facilitator might be collecting on their behalf, product taxability, transaction records, customer exemptions, and whether there are any additional filing or documentation requirements to ensure that a marketplace facilitator is not over- or under-collecting tax. Companies also need to ensure that they’re able to support these tax collection and reporting decisions potentially years later.
Want to learn more about how to handle a complex sales tax obligation in a post-Wayfair world? Watch our webinar, “Simplifying Sales Tax Complexity: Making the Business Case for Automation.”