Stephen Day, principal, VPTax
Supreme Court case “South Dakota v. Wayfair, Inc.” As a retailer selling online, even mentioning this might make you shudder. The reason? Taxes. For years, only businesses with a physical presence, a warehouse or storefront, in a state could be required by that state to collect and remit sales tax. This was a boon to companies selling online. But the Wayfair ruling ended that physical presence, or nexus, requirement and changed the e-commerce landscape.
Previous estimates of lost tax revenue from exempting online retailers from collecting sales tax were as high as $33 billion each year, an amount someone will be expected to pay. We sometimes think of the states’ enforcement activities as a tax increase. They are not. The tax is already legally owed by your customers to the states. But if online sellers don’t collect the tax from the customers, it becomes the responsibility of the sellers. This idea was solidified by the Wayfair decision.
Evolving tax laws
Naturally, states are in the process of crafting legislation around this decision. Tax law has never been easy, but now sales tax regulations are changing on a weekly basis, and it is becoming almost impossible for businesses to keep up. Consider the following events from the past few weeks:
- Nevada passed a law to adopt the $100,000 in sales or 200 transaction threshold effective for enforcement October 1, 2018.
- Colorado announced online retailers will be required to obtain a state sales tax license (deadline November 30, 2018).
- Massachusetts officially announced that the state will be enforcing its post-Wayfair regulations.
- Illinois released additional guidelines for remote sellers that goes into effect on October 1.
Part of the problem is a total lack of uniformity. The Supreme Court decided South Dakota’s thresholds are constitutional, but that doesn’t mean other states have to follow these rules. Each state will set their own thresholds, enforcement dates and product taxability. And, for now, these rules will stick because it’s unlikely the Supreme Court will revisit the topic any time soon. The bottom line is there are 46 legislatures (if you include the government of Washington, D.C.) for companies to monitor on a continuous basis.
What you don’t know CAN hurt you: Introducing Sleeper States
Unfortunately, making sense of this hodge-podge of tax regulations isn’t the scariest part. While there are many states who have set thresholds, spelled out regulations, and announced when these laws will take effect, there are other states—sleeper states—that haven’t yet made any decisions or drafted legislation pertaining to this case. Even if you have a good grasp of this new sales tax landscape, one of these sleeper states could wake up and enact sales tax laws that could go into effect at any time.
Sorting out the new regulations is fairly straightforward. They’re easier to keep track of because they’re already on the radar. But the sleeper states aren’t on anyone’s radar. They could enact laws now, later, or potentially never. Which is why these are precisely the ones to fear. You can’t plan for changes you don’t know about, changes that could be crippling for your business.
What you can do
The most important thing is to be vigilant, knowing that these risks to your bottom line are real and that ignoring them could cost you dearly. Then, as you create your tax strategy, it helps to break it down into two parts: the existing regulations and the sleeper states, or, the known and the unknown.
For the new regulations, the known, the strategy is fairly straightforward; though, because of the number of states involved, sorting through all the details could be daunting. Nevertheless, here are the steps to take when considering the first part of this new challenge:
- Assess your exposure.
- Resolve any past exposure you may have on a state-by-state basis.
- Begin collecting, filing, and remitting the taxes as required by each state in which you do business, remembering that if you don’t, the customer’s tax liability becomes yours.
For the second part, the sleeper states, you must keep a close watch and may need additional expertise. Dealing with the unknown can often require professionals with the experience and judgement to perform a detailed assessment and address a number of possible scenarios. This includes examining historical audit activity, establishing communication channels with state auditors and legislators, discovering a company’s potential liability, reviewing each state’s amnesty posture, and so on.
The Wayfair decision doesn’t have to be a nightmare, but companies might need additional resources so they can spend time on more important things, like the next product launch.
VPTax is a tax preparation and advisory firm.
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