The South Dakota v. Wayfair ruling is a landmark case affecting sales tax collection requirements for businesses in the United States. In South Dakota v. Wayfair, the Supreme Court sided with the State of South Dakota. This ruling changed everything related to out-of-state sales tax collection. Prior to this ruling, a company could focus on the “physical presence” test when assessing sales tax collection requirements. The Supreme Court decision opened the door for states to adopt an “economic presence” test to determine if a company must collect sales tax. Most states are quickly going through this open door and have adopted the “economic presence” concept. Thirty-eight states have adopted, or are in the process of adopting, an economic presence test as of 2/8/19.
Is this Law Just for Online Retailers?
Media coverage focused on the online retailer. Wayfair is an online retailer, so it seems like this law is directed towards online retailers. It certainly came about because of online retailers but it is dangerous to think it only affects big online companies. The new law affects any business that sells tangible products and ships them out of state! You need to pay attention to this law if you answer yes to this simple, two-part test.
- Do you sell a product?
- Do you ship the product out of state?
If you responded Yes to both questions, please READ On!!
I don’t sell to end users. Does this affect my company?
See the two questions above. Do you sell a product? Do you ship out of state? If you answer “Yes”, then the new law affects you. If your company does not sell to end users, it may still be required to register with the state, and it may need to collect resale certificates. Consider yourself lucky. This is relatively easy to do. Collecting resale certificates will limit the company’s sales tax exposure. Not collecting resale certificates dramatically increases a company’s risk in this area.
I’m a Manufacturer, What Do I Need to Do?
So, you make a product and ship it out of state. What now? Below are some items to consider.
- Run a “sales by state” report for the last 12 months. Base the report on “Ship to state.” Note that the “bill to” address does not matter. Review this report and identify any state with sales greater than $100,000 or 200 or more transactions. The $100,000 sales and 200 transaction thresholds come right from the Wayfair case. These are the limits for most states that have enacted economic presence rules. Some have a higher limit. None had a limit below $100,000 as of 2/8/19.
- Research the sales tax and registration requirements for any state with sales greater than $100,000 (or >200 transactions) over the past twelve months. In most cases you will want to have this done by a State and Local Tax (SALT) expert.
- Based on the above research, it is recommended that the company register in states that it is required to do so. Since state registrations are complex, it is recommended that you have a state tax (SALT) expert complete the filings.
- Signing up in a state will generally require a company to collect a resale certificate or charge sales tax. A company must have a valid resale certificate on file from the customer or charge tax. The initial request for resale certificates is a big project and requires a lot of planning, coordination and follow up.
- Train and educate your staff on the new rules and requirements. Once a company has decided to register with a state the company should schedule training of staff. This is a critical step in the process. The staff need to know when to ask for a resale certificate, what is taxable, what is not taxable, what the tax rate is, etc. They will need some general training on how to deal with questions from customers.
- Watch for other taxes. Some states have unusual taxes that are like a sales tax. Oregon has an excise tax and Ohio has a CAT tax. Both based on gross revenue. Keep in mind that states have “other” taxes that a company may not be aware of. Your SALT expert can help in this area.
- Determine what is taxed. Some states tax services such as installation, shipping and handling, etc. Remind yourself that every state is different. If your home state does not tax installation, the state you just signed up for might, so exercise caution in this area.
- Determine who will prepare and file the sales tax returns. Will the company do it in house or use a service such as Avalara, Vertex and TaxJar? Your State and Local Tax (SALT) advisor can help you decide. Even if there is no tax collected, it’s important to file a zero return. This will start the statute of limitations with a state and limits how far back they can audit and assess tax.
- Be happy that this ruling does not apply to state income tax! State filing requirements for sales tax and income tax have always had differences. A Wayfair-related sales tax registration does not mean a company must file state income tax returns in that state.
DHJJ’s Summary on What This Ruling Means for You
As a manufacturer, the Wayfair ruling may not be a top priority. Many manufacturers do not sell to end users but almost all of them ship out of state. I think it is very important to run a “Sales by State” report based on the ship to state. Identify the states with annual sales greater than $100,000 and set up a meeting with a SALT expert. Work with them to develop a game plan. It is best to do this sooner rather than later and get the plan in place during 2019. We expect states to be somewhat accommodating in 2019, but we don’t expect them to be as friendly in future years. They might give you a break in 2019. They will not be understanding 2 or 3 years from now. Don’t put your head in the sand on this issue. Protect your company from future liability by acting in 2019.
Please contact DHJJ if your company needs assistance in developing a State and Local Tax (SALT) plan and strategy.