The initial dust raised by the Supreme Court’s recent ruling in South Dakota vs. Wayfair has started to settle, and businesses are now faced with the task of reviewing the people, processes, and software that they rely on for sales tax compliance.
The Supreme Court’s decision set a new standard for nexus, which is based on a threshold of goods sold rather than physical presence in a state. This standard has become known as “economic nexus.”
At the time of the ruling, about two-dozen states had laws that required out-of-state sellers to collect and remit sales tax without a physical presence. Within 48 hours of the Supreme Court decision, legislators from nearly every state had contacted the Tax Foundation to discuss possible changes to their laws that would allow them to start collecting tax on internet purchases.
As more states use the decision as an opportunity to tax out-of-state sellers, businesses that sell into multiple states will encounter a much higher level of complexity in their sales tax compliance efforts. What steps do you need to take now to keep pace with the evolving state and local sales tax rules?
Quantify Your Exposure to State Sales Tax
Your first order of business should be to quantify your business’ current sales tax exposure. Do you know what jurisdictions you are selling into and which of those governments have economic nexus laws?
Check out this CRInsight for more details about specific policies that will be affected by the Supreme Court’s decision and how it could impact your organization
Moving forward, assume that you will be subject to sales tax collection in every state where your business has established economic nexus. With states and localities now all over the map on this issue (both literally and figuratively), you will need to examine your current state and projected growth and implement a sales tax system that manages compliance with existing laws and adapts to changes as they occur. In order to modify your systems to analyze every transaction in this level of detail, you will need an implementation plan that relies on training in-house resources, upgrading software, and consulting with external sales tax advisors.
Consider How to Automate the Process
A higher level of automation likely will be required for any business that is still manually compiling and updating sales tax tables. Ideally, you will want a system that accounts for where the goods are being delivered, the applicable state and local tax laws, as well as the filing and payment requirements for each jurisdiction.
Also, your system will need to recognize thresholds like those set by South Dakota. Your business and remit sales taxes in the jurisdiction until you meet those requirements, but it will need to track every transaction in the jurisdiction from the first order.
In short, there are plenty of opportunities for automation in this process. Keep in mind, though, that successful automation requires a significant investment of upfront time, energy, and money to program the system properly at the outset.
For a more in-depth review of the questions your system will need to answer, please download our Sales Tax System Compliance Checklist.
Balance In-House and Outsourced Resources
If you’re a small to mid-sized company that has only collected and paid sales tax in a handful of jurisdictions until now, you may not have the people or the technology you need to comply with sales tax obligations in a raft of new state and local jurisdictions. Your business may be best served by partnering with a consultant who has multi-state sales tax experience. In addition to an initial assessment of your current sales tax compliance systems, an experienced advisor will be able to deliver a roadmap to help keep you in compliance with requirements in each jurisdiction.
When working with an outside resource, always keep an eye toward identifying the parts of the process that can be handled in-house once it’s up and running. To facilitate this transition, make sure your consulting agreement includes provisions for training your people as well as evaluating and upgrading technology that will help you administer the functions that you plan to manage in-house. Once you have a system that can reliably identify the jurisdictions your business sells into and its sales tax obligations in those places, the day-to-day operations may be more effectively managed in-house.
Once it’s up and running, your business needs to monitor results to make sure the system complies with existing laws, and that it adapts appropriately to modify for internal and external changes such as new laws, customer status updates, and new filing requirements. Internally, you may start selling into new states or selling products subject to different rates. If a state has threshold laws like South Dakota’s, your system will need to track your sales in that state from the first instance in order to know when you incur an obligation to collect and remit sales tax.
Externally, laws and filing requirements can change in the jurisdictions where you deliver products. The Supreme Court’s decision has opened the door for the imposition of sales tax collection requirements on out-of-state sellers, but it hasn’t created a uniform set of rules. States and localities will probably work to enact or revise laws to reflect South Dakota’s threshold, but the numbers or the criteria may still vary from state to state. The U.S. Congress could still act to legislate a uniform threshold that all jurisdictions would have to observe.
For help in understanding how the Wayfair ruling applies to your business and the states where you deliver products, please contact CRI.