The U.S. Supreme Court’s decision last week in South Dakota v. Wayfair (please see our previous Tax Alert on the subject) is one of the biggest, if not the biggest, state tax cases in the past 25 years. The high court’s decision allowing South Dakota the ability to require that sales tax be paid on online retail sales – even when a company does not have a physical presence in the state – has a wide range of implications for online retailers who sell on an interstate commerce basis.
The decision has left many online retailers scrambling to figure out how they will deal with what is likely to be a slew of legislation by states following a path similar to that in South Dakota. For wholesale companies, it remains to be seen if states will require registrations and filings for businesses that meet nexus thresholds for sales tax.
Changes to Come
It is likely that many states will try as soon as possible to pass legislation that will require online retailers start collecting sales tax when certain requirements are met, such as when a certain arbitrary dollar level of sales or a certain arbitrary number of transactions in the state are exceeded.
We expect that a number of states will impose collection requirements immediately while other states may allow taxpayers a grace period to get the proper systems in place to start collecting, as well as allowing states to get their systems ready for what could be a large number of new taxpayers filing and reporting sales tax.
Actions to Start Taking Now
Whatever happens in the future, online retailers should consider focusing on the following plan of attack as soon as possible:
Online retailers should start internal discussions and discussions with their tax advisors on a policy for reporting sales taxes on a multi-state basis: For example, some companies may choose to start filing and collecting sales tax on a state-by-state basis as soon as a state passes its law and makes the change effective, while other companies may choose to start filing and reporting as of a certain date (e.g. Jan. 1, 2019). Either way, companies should take the steps necessary to determine their policy for filing and collecting. If a decision is made to file as of a certain date, they should understand what, if any, exposure exists for non-filing periods.
Online retailers should take the steps necessary to understand whether their products are taxable or not taxable in states: For example, some states may tax food products while other states, such as California, are generally exempt from taxing the sale of food. In some states digital products such as music downloaded remotely, books downloaded from Amazon or Apple and video games are taxable (e.g. Washington State) while in states such as California, digital products are generally exempt. Understanding in which states an online retailer’s products are taxable vs. nontaxable is an analysis that should be performed sooner rather than later.
Online retailers should focus now on whether they have the proper sales tax collection technology in place for collecting sales tax on a multi-state basis: If an online retailer sells products as a third-party merchant on e-commerce platforms such as Amazon or Shopify, then these retailers should speak with their third-party reps to ensure that they understand how to “turn on” sales tax collection on a state-by-state basis. Third-party sales tax software companies such as Avalara and Vertex often provide streamlined technology that offers online retailers the ability to attach or “bolt” these programs to their online e-commerce and point of sale systems.
Looking to the Future
Given the amount of uncertainty at this point, there does not appear to be any reason to start filing in states until legislation is passed on a state-by-state basis. It remains to be seen whether states will simplify the reporting process for online retailers or whether they will impose similar reporting requirements as they do for any other company that files in the state. Keeping track of new legislation on a state-by-state basis will be a daunting task for those online retailers that do not have the internal infrastructure to manage the process; however it will be important to either designate someone internally to lead this process or rely on external advisors to guide companies through the reporting and filing process. Companies can ensure that they get ahead of this by following the steps above as soon as possible.
As more information becomes available, we will provide updates to this tax alert as they occur. If you have any questions regarding the above information and its implications, please reach out to Akash Sehgal or Frances Ellington.
Akash Sehgal leads GHJ’s Tax Practice and has a deep expertise in multistate income and franchise tax, sales and use tax and credits and incentives. He has more than 20 years of tax experience, and prior to joining GHJ in 2012, Akash worked at two Big Four firms in Los Angeles and Seattle.
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