By now, most businesses have hopefully heard of the Wayfair decision rendered by the U.S. Supreme Court. For those who have not, or who might have dismissed the decision as not applicable, the Wayfair decision basically rewrote the definition of nexus for sales tax purposes.
Prior to this decision, a business needed to have some minimal physical connection to a state before it was required to collect sales tax. Today, the physical connection component for sales tax nexus is gone. It has been replaced with an economic connection that subjects every remote business with at least $100,000 of sales or 200 transactions in a particular state to sales tax reporting in that state.
On its face, the new nexus standard seems pretty straightforward, but that is not the case. Issues abound with regard to the implementation of the new standard on both the business side and the government side. One of the most significant issues for states is the question of how to administer and enforce the new standard for remote businesses. Currently, states largely rely on voluntary compliance by remote sellers to register and begin collecting and remitting sales tax on taxable sales to businesses located within the state. Easy enough, right?
Unfortunately for the states, voluntary compliance is not an easy decision for remote sellers, especially those who lack the financial and/or human resources to comply with the new rules. Businesses are struggling to understand the sales tax rules on a multistate basis. They are also dealing with the cost of purchasing and implementing a software solution as well as the lack of internal resources to bill, collect, and remit sales tax.
Businesses that utilize the services of a marketplace facilitator such as Amazon have another layer of complexity when dealing with the new reality of sales tax nexus. While marketplace facilitators offer businesses a broader reach, they have created other issues for sales tax purposes. One of the biggest hurdles businesses face is receiving the proper information from marketplace facilitators in order to comply with sales tax reporting requirements. While some facilitators have lessened the burden on remote sellers by charging and collecting the sales tax at the time of purchase, others have not. Recently, states have begun to address the issue by mandating that marketplace facilitators collect and remit the sales tax on behalf of the remote seller, further easing the burden on the remote seller. It is important to note that this is a relatively recent development in the evolution of sales tax collection from remote sellers and requires a state-by-state determination of roles and responsibilities by both parties.
There is no “one size fits all” approach to dealing with the new remote seller nexus and sales tax laws. Businesses need to protect themselves and, at a minimum, should evaluate their level of business activity in states to determine whether they meet the dollar or transactional limits that trigger a filing responsibility. Businesses with sales tax nexus in other states should review their internal controls to assess current compliance practices and gaps in reporting or the ability to report.
Be forewarned: the window to respond to the new sales tax standard is closing. States are beginning to focus their efforts on remote sellers that are not in compliance with their filing responsibilities, and they are adapting their current discovery and enforcement practices to identify those non-compliant businesses. Businesses should develop a proactive approach to sales tax compliance as soon as possible. Whether that means handling sales tax compliance manually using internal resources, implementing a software solution, or outsourcing the function to a third-party service provider depends on the business. Regardless, the time to act is now, while there may still be some leniency on the part of states in allowing businesses to assess and respond to the new reality.
Thomas M. Frascella is a director with Kreischer Miller. Contact him at Email.
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