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LUTZ BUSINESS INSIGHTS
Sales tax and reporting requirement updates
Stacy watson, tax & consulting shareholder
Wayfair Case from 2018
Until 2018, the laws on sales tax stipulated that it was only applicable to companies with a physical presence inside the particular state. Simply put, companies were only required to collect taxes on e-commerce goods sold to another state if they had a physical presence in that state. This precedent was set in the 1992 Supreme Court case of Quill v. North Dakota.
Since then, e-commerce has significantly expanded, and companies are now making many sales beyond the borders of their states. For the company itself, this translates to a lot of revenue for which they do not have to collect sales tax. For consumers, it means that the goods are available at relatively lower prices as compared to items sold by in-state companies that are required to pay tax. And for the traditional business, it has translated to them losing their clients to out-of-state companies that sell more affordable products.
States were beginning to realize that they were losing out on a high amount of revenue in the form of sales tax by allowing e-commerce businesses to sell within their borders. It is within this context that the South Dakota v. Wayfair 2018 case was decided in the US Supreme Court.
In the matter, it was decided that states could now require out-of-state businesses to collect sales tax on sales into a state, whether or not they have a physical presence in that state. The court also decided that the sales would have to reach a minimum threshold for sales tax collection requirement to apply, to avoid interfering with interstate commerce. Thus, sales within a state below the thresholds are not necessarily subject to sales tax collection by out of state companies.
What Companies Should Consider Following the Supreme Court Decision
Many states are looking to begin applying the Supreme Court decision within their territories, especially because they are bound to generate even more revenue than they did before the Wayfair case. Companies need to review each state’s statutes to ensure you can protect your profits while still following the law to avoid paying penalties.
Here are a few things to consider following the Supreme Court ruling:
First, what do you sell within that state? Depending on the rules applicable, some states do not tax certain goods, whether or not they are sold by a company within their borders. If sales tax does not apply to your products, you may not be required to register within that state.
Next, review how much you sell to a particular state. The Supreme Court decision was careful to point out that sales tax should only apply if the sales surpass a certain threshold, otherwise the taxes would be imposed unfairly and would discourage businesses from operating within that state. For example, you should be making more than 200 transactions within a year, in that specific state.
Also, what are the physical and economic standards within that state? In other words, ensure that there is a nexus between that state and your business, and see whether your company meets the required standards.
How to Pay your Sales Tax
If you check all the boxes above, you need to get registered as a tax payer within that state. You can easily do it online. Be sure to indicate the number of transactions you expect to have, say within 12 months. Depending on the kind of revenue you are bringing in, you will then be advised on whether to file your tax returns annually, quarterly, or monthly. Lastly, review your operations and check if any other registration is required.
Is there software to help a company file sales tax?
Websites such as tax jar and avalara can provide your company with software to ease the filing process by providing you with all the information you need. On Taxjar, for example, you can file your returns by following a few simple steps. The software also sends you payment reminders and helps you avoid late payment penalties. In addition, you can obtain tax reports for the different jurisdictions in which your business is located.
Ensure that the responsible party in your company for sales tax has all this information well in advance. And finally, if your company had filed tax returns in the past, be aware that you may now be required to file for other taxes.
Paying taxes is a duty that all businesses need to fulfill, and you should not be left behind. Make sure that your company is in full compliance with sales tax laws in every state you operate within. It is crucial that you to look into all the above issues and make all necessary adjustments when filing your taxes.
Lutz can help you ensure that your company complies with all the applicable state regulations. If you are looking to learn more about sales tax and reporting requirements, or if you have any questions, please contact us today.
ABOUT THE AUTHOR
STACY WATSON + TAX & CONSULTING SHAREHOLDER
Stacy Watson is a Tax and Consulting Shareholder at Lutz with over 20 years of experience in taxation. She has in-depth experience in providing state and local, income, franchise, sales, use and escheat taxes.
AFFILIATIONS AND CREDENTIALS
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA in Accounting, Creighton University, Omaha, NE
- Junior Achievement Heartland Family Services, Past Member
- St. Stephen the Martyr, Various Boards
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