The world changed dramatically for online seller when the U.S. Supreme Court in June decided that internet retailers can be required to collect sales taxes even in states where they have no physical presence.
This overturned the Court’s 1967 Bellas Hess and 1992 Quill decisions - essentially acknowledging the realities of our now fully digital economy.
As a result of the ruling, millions more online shoppers will likely be required to start paying state sales taxes when they make purchases, because many online retailers, marketplace providers and international sellers will now need to start collecting and remitting those taxes.
Equally important, complying with the Court’s ruling will likely have a substantial impact on companies in terms of time, technology, and expense. Businesses will now need to closely examine and retrofit their operations to determine where they have to collect tax, whether their goods are taxable, and how they are going to handle the new tax computation, filing, and remittance obligations.
What does all that mean in terms of day-to-day operations? Well, first of all, companies will need to be ready to modify their current indirect tax compliance and accounting approaches and infrastructure. They’ll likely need a system capable of tracking delivery locations, determining taxability, identifying tax rates, ensuring appropriate accounting, and providing the information required to file returns in several jurisdictions.
Determining the right fit will take some time and careful consideration, and there won’t be an easy “one size fits all” approach. Each business is unique, so each business will need to determine its own approach to sales tax compliance.
A Post-Wayfair Action Plan
Here’s a list of next steps that may help companies prepare for the new state tax landscape:
1. Review business activities to determine where filing obligations may now exist.
2. Review the potential business implications, including additional costs related to technology updates and the increased compliance requirements, and discuss the results with key internal stakeholders.
3. Analyze the potential taxability of products and services in jurisdictions where they could now be required to collect the taxes, including current invoicing methods that may bundle taxable and nontaxable products.
4. Determine whether current technology and personnel resources can support increased tax-related analysis, compliance, document retention, and audit activity.
5. Develop a plan for maintaining sales tax compliance, including the potential use of third-party service providers.
6. Consider how the company will monitor sales tax changes (such as tax rates, law changes, and procedural issues) in relevant jurisdictions.
How soon could this happen?
Every jurisdiction may not begin requiring tax collection immediately, but some states and municipalities could move within the next 60 to 90 days.
So far, some 15 states have enacted a law or adopted a regulation with a nexus standard, similar to South Dakota’s, that would require sellers who have some volume of receipts or number of transactions in the state to collect tax on sales into the state even if they lack a physical presence there. These standards take effect on various dates, and some are the subject of prior, still unresolved litigation at the state level.
Another group of states have existing “doing business” statutes that are broad enough to encompass an economic nexus approach, but they were not enforced in that broad manner because of the Quill standard. We would expect those states to provide guidance to taxpayers and perhaps seek legislation or a rulemaking before attempting to apply the Wayfair approach.
Finally, other states would seem to require state legislative or regulatory action prior to imposing an economic nexus approach.
As the changes take place, retailers and the states should also keep an eye on possible Congressional efforts to pass legislation that sets a national standard to reflect the new reality of online and remote commerce. This issue has been before Congress for at least three decades, with no consensus reached or approach developed, but it’s possible that the Court’s Wayfair decision may add some urgency to the discussion.
Josh Hennessey is a State and Local Tax partner in the KPMG Houston office.