If you’re an executive at a business that sells across state lines, you’ve probably heard about the Supreme Court’s decision in South Dakota vs. Wayfair by now. The Court overturned the physical presence requirement for substantial nexus under the Commerce Clause. It’s been a little more than a year since that landmark decision, and the tax landscape has become significantly more challenging for previously protected sellers because of it. Complying with the myriad regulations that states have imposed can be particularly challenging for retailers, as highlighted in this recent editorial from the Wall Street Journal.
Stringent rules and aggressive auditing
Perhaps the farthest reaching case of a state imposing sales tax rules on remote sellers is Kansas. Starting on Oct. 1, out-of-state retailers with sales delivered into the state of Kansas are required to register, collect and remit Kansas sales tax with no minimum sales threshold. For example, an individual selling handmade crafts from another state would need to comply with Kansas sales tax rules for just one sale to a Kansas resident.
I’ve also written previously about how states are stepping up audit activity. The continued need for states to maximize their revenue sources cuts across all tax types, and sales and use tax is no exception. States continue to grapple with the rising cost of healthcare, chronic underfunding of pensions, and demand for infrastructure improvements, while at the same time contending with an ever-changing economy and the growth of online (versus in-store) purchases, which have both contributed to lower sales tax revenues. Companies of all sizes should prepare for an increase in the number of state tax audits.
Even at-large companies with in-house tax expertise, it’s challenging to ensure they’re in compliance across all the approximately 12,000 taxing jurisdictions in the United States where they may be required to collect, report, and remit sales taxes. It’s even harder for smaller companies that don’t have in-house tax functions—especially if they’re growing quickly and potentially triggering collection requirements with their increased activity. So what can retailers and finance leaders do?
Sales tax strategy basics
The most important thing is to get out ahead of any potential sales tax exposure. Whether or not you’re aware of it, your business may have triggered nexus in a state, requiring you to have already been collecting and remitting sales tax for business done there. A lot of companies are accruing unknown liabilities every day that they’re selling to customers in those states.
Here are four steps you can take to ensure your company isn’t going to get slapped with a surprise tax bill:
1. Immediately find out where you need to start collecting sales tax
You’ll need to perform a comprehensive nexus analysis to understand where you may have already triggered nexus. Pull together all of your sales transactions data for the past several years, and add up all the potentially taxable sales to customers in each state. Then look up each state’s statutes, regulations, and administrative guidance regarding economic nexus to determine if you’ve passed the threshold. There are a variety of other considerations to keep in mind, and some states look at things other than just sales to determine whether you need to comply with their sales tax requirements. I recommend working with a tax advisor or using nexus determination technologies out in the market.
2. Don’t overreact.
If completing a comprehensive nexus analysis sounds daunting, don’t jump to the conclusion that you might as well just start collecting sales tax everywhere to be safe. Collecting in all 45 states (and D.C.) that impose sales taxes likely isn’t necessary. Collecting unnecessarily can cost you sales (up to 29% according to a recent National Bureau of Economic Research study) and adds unneeded compliance expenses. It’s better to know with confidence where you should and shouldn’t be collecting, and follow an optimal path of compliance.
3. Put together a sustainable compliance plan.
You’ll need to register to legally collect sales taxes with each appropriate state, then file at the prescribed time interval (monthly or quarterly) and remit the collected taxes electronically or by check. Managing this process for more than a handful of jurisdictions gets complex fast. For example, just knowing when to register with a tax authority varies. Many states require businesses to immediately register after they exceed a sales threshold. Some businesses handle sales tax compliance in house, while others outsource the task.
4. Start collecting sales tax from customers
If you generate invoices using accounting software, that software may be able to calculate the proper sales taxes for each transaction based on where your customer is located. If you sell through an ecommerce platform, there are a variety of sales tax automation tools that will do those calculations at scale—but it’s important to note that those tools require you to tell the software where to apply sales tax in the first place, which is why step 1 is so critical.
Despite the rapid pace of change in sales tax laws, it doesn’t have to be difficult for you to minimize risk and ensure your business is compliant. As with most things, having a solid plan for managing sales tax is the key. Retailers who are proactive and don’t wait for tax collectors to come to them find that sales tax needn’t be painful at all.
Peter Michalowski is the national practice leader of the PwC state and local tax practiceFavorite