Manufacturers, distributors and wholesalers may not be the main focus of last week’s U.S. Supreme Court decision regarding the collection of sales tax by “remote” online and catalog sellers, but they shouldn’t wait to check their own tax-collection responsibilities, which can vary widely among states for business-to-business sales, experts say.
“We have concerns, as each state has their own requirements,” says Brian Fricano, CEO of online distributor Sustainable Supply.
In South Dakota v. Wayfair Inc., the high court overturned a long-standing ruling that had allowed states and local jurisdictions to require remote sellers—namely online and catalog merchants—to collect and remit sales tax if they had an in-state physical presence or nexus, such as a distribution center or sales office. Instead, the taxing bodies are free to require sales tax processing by any seller with a “substantial” economic presence in their state.
There is still much work to be done among states to clarify their rules, including the annual revenue thresholds that require tax collection, but sellers of all types should review their tax-collection policies and prepare for coming changes, says Stephen P. Kranz, a partner at Washington, D.C., law firm McDermott Will & Emery LLP who specializes in tax laws. “The next six to nine months will be jam-packed with activity,” he says.
One common expectation, he adds, is that other states with laws similar to South Dakota’s will begin to require sales tax collection by sellers that have been exempt because they lacked a physical presence. Including South Dakota, there are 16 states with laws regulating online sales tax collection.
South Dakota is one of 24 states that are members of the Streamlined Sales and Use Tax Agreement, which has devised common tax-collection policies designed to make it easier for merchants to collect sales tax in those states. Going forward, last week’s court decision “clearly has implications for sellers selling into Streamlined states” that have rules similar to South Dakota’s, Kranz says.
Kranz notes that his firm has seen a strong uptick in interest since last week’s court decision among corporations wanting to prepare for what’s next. Although the urgency for now “requires immediate action on the retail side,” he notes that many companies have wholesale as well as retail operations and need to confirm their ability to manage tax-exemption certificates provided by business customers as well as process tax on sales made directly to consumers.
“It would be a good use of time now to evaluate where they’re able to meet tax-exemption certificate requirements,” Kranz says, noting that some states, such as Texas and Florida, have strict requirements for registering certificates. Tax exemptions are available to businesses for when they purchase goods that they plan to re-sell. Under typical audits in such states, sellers must be able to show the tax-exempt certificates for any customer that wasn’t charged sales tax.
But each state has its own set of rules. Fricano of Sustainable Supply says states can vary widely in their definitions of what’s tax exempt. “We have concerns with managing tax-exemption certificates, as each state has its own requirements regarding what is, and what is not, tax exempt,” he says.
States also differ in their reporting requirements. “From a reporting standpoint, the two states where we collect sales tax have different means to report sales from customers who have provided tax-exempt certificates,” Fricano says.
For example, he notes that Wisconsin requires merchants to report only the gross sales of tax-exempt purchases, while Colorado requires merchants to break out their tax-exempt sales to government agencies separately from tax-exempt sales to business customers who purchase goods for resale.
Sellers can also deal with confusion regarding which of their products are considered tax-exempt for any individual customer. Once a customer has provided a tax-exemption certificate, most merchants don’t question the buyer about whether all the goods they order are considered exempt under their certificate, Fricano says.
But that can lead to problems. “If B2B buyers are using their tax exemptions improperly on goods that should be taxable, they run the risk of penalties if they’re caught during an audit,” Fricano says.
And as merchants take on more responsibility for collecting sales tax, he adds, he’s concerned that states may give merchants more responsibilities in managing tax exemptions. “I wouldn’t be surprised if some states have or will enact laws that will require the merchant to determine if their customers are using their tax exemptions appropriately,” he says.
Although that may be only conjecture for now, it’s a fair bet that states will step up pressure to accurately manage exemptions, Kranz says. “Right now everything is focused on the retail side, but we will likely see more enforcement of tax exemption policies,” he says.
Several software vendors—including Avalara, CCH, OneSource Indirect Tax, Oracle NetSuite, Savos, Thomson Reuters, and Vertex—provide tools for managing tax-exempt certificates.
Sign up for a complimentary subscription to B2BecNews, a twice-weekly newsletter that covers technology and business trends in the growing B2B e-commerce industry. B2BecNews is published by Vertical Web Media LLC, which also publishes DigitalCommerce360.com, Internet Retailer and Internet Health Management. Follow B2BecNews editor Paul Demery on Twitter @pdemery.
Follow us on LinkedIn and be the first to know when new B2BecNews content is published.