In June, the U.S. Supreme Court handed down its ruling in South Dakota v. Wayfair, allowing state and local governments to require online merchants to collect sales tax, even if they don’t have a physical presence in that state. The ruling reverses the high court’s 1992 decision in Quill Corp. v. North Dakota, which had prevented states from requiring sales tax collection by merchants without an in-state physical presence.
Why is the Wayfair ruling important to e-commerce?
Times have changed. Companies will now need to calculate and remit sales tax for all states—not just the ones where they have a physical presence. They will also need to monitor their sales, either by dollar value or number of transactions, to determine if they need to collect and remit sales tax. They will have to do additional monthly reporting they didn’t previously have to do.
This places a substantial burden on organizations already running lean tax departments—and it can be especially challenging for small and midsized retailers that don’t have the financial resources to hire internal tax experts to ensure they comply with the new requirements.
What are some of the challenges Wayfair poses to retailers?
Each state has its own laws, which means the dollar thresholds or transaction minimums may differ. Retailers need to be able to adjust their processes to stay compliant in every state.
And it’s not far-fetched to think that the need for additional tax monitoring and filing will stop at the state level. For home-rule states—where nexus is defined at a more granular, local level—cities and counties levy their own sales tax. It’s possible that local jurisdictions could impose the same rule requiring a retailer to charge tax or fees over a certain dollar amount or more than a certain number of transactions.
Additionally, for companies selling in states where they are not currently collecting sales and use tax, they need to consider and prepare for the possibility that their cost of goods or services could suddenly become more expensive.
What are some strategies businesses can implement to overcome these challenges?
To address the new rules under Wayfair efficiently and cost-effectively, retailers should partner with a vendor that can help them automate their tax processes. Generally speaking, tax automation plays a crucial role in ensuring accuracy, reducing compliance risks and increasing efficiency within most retail tax functions. For retailers that don’t have the internal staff to handle these new requirements, tax automation is the ideal solution.
What should retailers look for when shopping for a tax automation tool?
Given the fluid nature of retail tax rules, it is imperative that retailers select the most effective form of sales tax software. The tool’s ability to scale is extremely important, but there are a number of other factors that tax executives should consider, such as accuracy, recognizing when a customer is tax exempt, staying up to date on rule changes and being easy to use.
The tool should also allow retailers to monitor their transaction footprints in any jurisdiction, either by dollar or number of transactions, and alert retailers when, where and how much tax they’re required to collect.
And finally, companies looking to quickly implement compliance processes in the wake of the Wayfair ruling may find that cloud solutions are the quickest option.
A conversation with Peter Olanday, practice leader, consulting, retail practice at Vertex