As budgets across federal, state, and local governments continue to be scrutinized, it’s becoming even more critical for these agencies to collect as much revenue as possible to operate efficiently and avoid budgetary issues. State and local tax departments are no exception, as they increasingly are becoming more aggressive to get their “piece of the pie.” One area that these localities have been focusing on is the arena of sales and use taxes. The Government Accountability Office estimated that state and local governments could have collected $13 billion more in sales tax from online sellers in 2017 alone had it been required. While the landmark Supreme Court case of 1992 in Quill Corp v. North Dakota ruled that sellers only had to collect state sales taxes if they had a physical presence within that specific state, the ruling of South Dakota v. Wayfair has reversed this, meaning states can now require online sellers to collect sales taxes. Going forward, how will this affect your business?
Impact: Out of State Sales
At first glance, the businesses that are most impacted by this ruling are the large online retailers such as Amazon, Overstock, and Wayfair. These are online retailers that make large quantity sales in all 50 states daily. While these are the obvious and big player examples of companies that are affected by this court ruling, the impact will trickle down to businesses of all sizes. Arguably, this ruling could impact small retailers the most, as a high degree of administrative burden will be incurred, as well as understanding the sales and use tax complexities across all state and local tax agencies. It will be critical for businesses to stay ahead of this large change, and to go over your multi-state operations and how this will impact you going forward with your trusted AGP advisor. Developing a game plan now could help alleviate numerous tax notices, deficiencies, and unwanted communications with state and local tax departments.
Why South Dakota? Why Now?
Two of the biggest questions from this ruling are: 1) Why does South Dakota care so much? and 2) Why is this happening now? To begin, South Dakota is one of a handful of states that does not impose an income tax at the state level. With no income tax collection, the challenges for South Dakota and the other states are to collect revenue in other ways, with sales and use tax being at the top of this list. It is reported that states lose between $8-33 billion annually because of the old “physical presence” standard for requiring sales tax collection. South Dakota alone claims that they lose $48-58 million each year because of the physical presence ruling. In 2016, South Dakota declared a fiscal emergency because of its inability to collect sales tax from “non physical presence” sales. From here, numerous local and state courts ruled on the issue, with the U.S. Supreme Court deciding to take the case and rule on it in June 2018. While state and local tax departments have been seeking additional revenue via sales and use tax for a few decades now, the Wayfair decision will open the door for billions of dollars of additional revenue.
As a Business Owner, What Should I do Next?
As with almost any new law or tax change, the impact applied to your unique situation and business structure will vary greatly. While consulting with your trusted AGP advisor is recommended to begin, there are several facets of this court case that are still being sorted out. States are still discussing and figuring out how to apply this federal ruling to their own state. Many states are leaning towards a threshold of $100,000 in sales or 200 transactions, but not all states will be uniform in these amounts. Some are suggesting as low as $10,000 in sales or as high as $500,000. States will also have to provide state-funded sales tax software to assist the taxpayer with these new changes. Additionally, many states will not be applying this retroactively, but will require the taxpayer to obtain a sales tax permit in that specific state and begin collecting sales tax on January 1, 2019.
If your business conducts out of state sales, contact me today to discuss your questions and ensure you’re up to speed with the recent changes.