Much of the discussion about the Supreme Court’s decision in South Dakota v. Wayfair has focused on how the ruling affects Internet retailers. In reality, the economic nexus standard embraced by the Supreme Court will likely have some impact on all retailers and could also result in additional compliance requirements on non-retail businesses like wholesalers, manufacturers and distributors.
Assessing your risk for nexus
Businesses anywhere in the chain of commerce — from the initial manufacture of a product to the final purchase by an end user — should determine their exposure to state sales taxes and other filing obligations. For help with this process, consider using Plante Moran’s sales tax compliance risk calculator. If you determine your organization is at risk, work with your tax advisor to get help with:
- Comparing your sales in each state to the relevant thresholds in order to determine where you’re subject to sales tax collection requirements.
- Identifying when each state adopted remote seller nexus rules that made your activities subject to tax.
- Determining your current exposure in each state where you have an obligation, as well as potential future exposure based on sales trends in states where you haven’t yet crossed a threshold.
Registering to collect sales tax
Once you identify the states where your business has an obligation, the next step will be to register with those states to collect sales tax. However, before you start the registration process you need to determine if your business has an existing sales tax obligation under the pre-Wayfair physical presence rules.
When you register, most states will send a “nexus questionnaire” asking about past activities in the state. The form will include questions such as:
- Have you made deliveries in company vehicles?
- Do you have employees travelling to the state?
- Do you have inventory in the state (including items on consignment)?
- Did you attend a trade show in the state, and if so did you make any sales there?
- Do you advertise in the state?
- Do you have independent contractors in the state?
- Do you have any physical presence in the state?
This form is attempting to determine if your business had a physical presence in the state that might have triggered a sales tax obligation even before the economic nexus test became law. If the answer to any of the questions on the form is “yes,” your business may be liable for sales taxes as well as penalties and interest for the duration of the time it had a physical presence in the state.
Many states offer amnesty programs and Voluntary Disclosure Agreements (VDAs) providing penalty waivers that help businesses get into compliance with the law and meet obligations going forward. However, these options are generally not available once a business has started the registration process –– which is why it’s important to determine pre-Wayfair obligations before registering with a state to collect sales tax.
Further complicating the post-Wayfair compliance process is the effort by some states to impose sales tax obligations on “marketplace facilitators” like eBay, Etsy or Amazon. If your business sells through one of these sites, you will still have responsibilities to verify that the facilitator is collecting and remitting the proper amount of tax on your transactions. Failure to do so could result in liability for the taxes owed. In addition, your business may still have to register with the state and comply with tax rules on non-marketplace transactions.
Software alone is not enough
The software industry has developed a wide variety of products that can help your business manage sales tax collection. Many of the best solutions connect directly to your enterprise resource planning (ERP) systems to extract relevant data and perform sales tax calculations. These resources can make the compliance process easier in those states where you know you have an obligation, but they usually fall short when it comes to deciding where to file and keeping up with law changes in order to ensure ongoing compliance.
Most businesses operating in multiple states will need to supplement their software solution with ongoing tax advice from an experienced state and local tax specialist. An advisor can help map out your sales and use tax position with nexus evaluations and taxability determinations. They can identify voluntary disclosure opportunities and penalty mitigation programs to help clean up past sales tax mistakes, and they can keep you abreast of changes in tax law that could trigger new obligations in the future.
Most businesses operating in multiple states will need to supplement their software solution with ongoing tax advice from an experienced state and local tax specialist.
To learn more about how your business can integrate knowledgeable, experienced professional advice with your sales tax software solution, please contact Plante Moran.