Sales taxes: The way forward after Wayfair
GRAND FORKS, N.D. – Prairie Business readers who already sweat at the word “Wayfair” can turn the page.
Everyone else should keep reading.
That’s because Wayfair vs. South Dakota, which the U.S. Supreme Court decided last year, dramatically altered the tax environment in a way that requires corporate action.
But because the change came through a court case, it got less notice than it would have if Congress had passed and the president had signed a tax bill.
That’s a shame, because Wayfair deserves all the attention it can get. Here’s the bottom line: Wayfair substantially changed the sales-tax rules of interstate commerce. So, if a company sells online to customers in other states, that company must start considering Wayfair in its billing practices. And the penalties for failing to do so could be steep.
Companies in Minnesota and the Dakotas are no exception, said accountants consulted by Prairie Business. Some quick background on Wayfair can help explain why.
From Quill to Wayfair
In Quill Corp. vs. North Dakota, the U.S. Supreme Court’s earlier decision in 1992, the court ruled that only those companies with a physical presence in a state could be required to collect sales tax.
As Wikipedia notes, “the decision effectively allowed internet-driven e-commerce to be run tax-free in the United States.”
Thanks to Wayfair, a sheriff now is on scene to police that Wild West environment.
Sensing that a court majority had turned against Quill, South Dakota passed a law meant to challenge the 1992 ruling. The new law required out-of-state companies (such as Wayfair and Overstock.com) with more than 200 transactions in South Dakota or sales in the state of over $100,000 to collect sales tax.
The strategy paid off. In Wayfair vs. South Dakota, the Supreme Court overruled Quill and held that states could, in fact, routinely require out-of-state retailers to collect sales tax.
States now have started to do so. And companies must, by law, comply.
State by state
But complying is easier said than done. That’s because in the absence of federal legislation, companies must track the tax laws in all 50 states, especially the 45 states that levy a sales tax.
“There are a number of online businesses such as Amazon that already were collecting sales taxes, so Wayfair didn’t really change things for them,” said Randy Heller, an accountant and partner at Widmer Roel in Fargo, N.D.
“And there are other businesses that don’t have any out-of-state sales, so they’re saying, ‘This doesn’t affect me.’”
But virtually all businesses in between should at least take stock. And their first step should be determining whether their online sales meet the thresholds such as South Dakota’s, which other states rapidly are establishing, too.
At tinyurl.com/EideBaillyChart, accounting firm Eide Bailly tracks the changes on a chart. “We try to update it as best we can,” said David Casper, a Fargo accountant who is Eide Bailly’s manager in state and local taxation.
“That’s where I would start. You can get all of the beginning information there to say, ‘OK, I need to worry about these states.’”
South Dakota’s thresholds have been adopted by many states – but not all. Pennsylvania, for example, requires out-of-state companies to collect sales tax once their sales reach only $10,000, while in Massachusetts, the threshold is $500,000.
Note well, though, the other threshold in many states: the number of transactions. Because while a North Dakota jelly-maker won’t hit South Dakota’s $100,000 threshold by selling 300 jars in Sioux Falls, he or she will cross the “more than 200 transactions” threshold – and be required to collect South Dakota sales tax.
Once retailers have determined that they meet a state’s threshold, they’re on track to contact that state, employ software and/or take other steps to start collecting sales tax.
But first, they should do two things.
“Before our North Dakota merchant goes to register in another state, they should stop and determine whether they may have created a physical presence there over the years,” Casper said.
In other words, the company should find out whether it owes back taxes under the old Quill rules.
Understand, “physical presence” isn’t limited to buildings. Making sales at a trade show in the state, or storing inventory in a warehouse there, could have qualified as “physical presence” under Quill.
And if those or similar actions are in your company’s past, then you need to contact that state via a tax professional, “and the key words to use are ‘voluntary disclosure program,’” Casper said.
Your disclosure will generate goodwill and may lead to some penalties and interest being forgiven.
But why bother?
Because when you as a company register to pay sales tax under Wayfair, you’ll be asked by that state about your past actions. “Then if they determine you had physical presence, they’ll be asking you to file some returns,” Casper said.
“And whatever breaks you would have enjoyed through their Voluntary Disclosure Program will not be made available. We have to be really clear about that one, because it’s unfortunate when a company registers and then starts getting notices about taxes due.”
The second order of business is to be mindful of income-tax laws in the new state. Because one of Wayfair’s lesser-known twists is that it might affect some retailers’ income-tax filings, Heller of Widmer Roel said.
“Suppose I’m in North Dakota and selling online into Minnesota,” Heller said.
“North Dakota taxes all of my income, regardless of what state it’s generated in. But if 10 percent of my sales went to Minnesota, then Minnesota may tax me on 10 percent of my income.”
In such a case, North Dakota likely would give a credit by taxing the individual on only 90 percent of his or her income. But even so, the 10 percent that’s taxed by Minnesota would be meaningful because Minnesota’s rates tend to be higher than North Dakota’s.
“So, besides the administrative burden of paying in two states instead of one, you may wind up paying more,” Heller said.
“The point is, Wayfair has opened up a lot of different avenues and different scenarios for taxation, and it’s something that businesses are going to have to monitor on a continuous basis.”
Casper agreed. Business that must collect sales tax in other states can find software solutions, and accounting firms also stand ready to help.
But the bottom line is that businesses must pay attention, Casper said, because Wayfair marks a true sea-change in sales-tax law.
Editor, Prairie Business