For remote retailers, marketplace providers and many other sellers, the world changed dramatically on June 21 when the U.S. Supreme Court decided that internet retailers can be required to collect sales taxes in states even where they have no physical presence. This overturned the court’s 1967 Bellas Hess and 1992 Quill decisions — essentially acknowledging the realities of our now fully digital economy.
As a result of the ruling in South Dakota vs. Wayfair Inc., millions of additional online shoppers will likely be required to start paying state sales taxes when they make purchases, because many online retailers, marketplace providers and international sellers will now need to start collecting and remitting those taxes.
Equally important, complying with the court’s ruling will likely have a substantial impact on companies in terms of time, technology and expense. Businesses in Minnesota and across the U.S. will now need to closely examine and retrofit their operations to determine where they have to collect tax, whether their goods are taxable, and how they are going to handle the new tax computation, filing and remittance obligations.
What does all that mean in terms of day-to-day operations? Well, first, companies will need to be ready to modify their existing indirect tax compliance and accounting approaches and infrastructure. They will likely need a system capable of tracking delivery locations, determining taxability, identifying tax rates, ensuring appropriate accounting and providing the information required to file returns in several jurisdictions.
Determining the right fit will take some time and careful consideration, and there won’t be an easy “one size fits all” approach. Each business is unique, so each business will need to determine its own approach to sales tax compliance.
A post-Wayfair action plan
The following list could act as a road map for next steps that may help companies prepare for the new state tax landscape:
1. Review business activities to determine where filing obligations may now exist.
2. Review the potential business implications, including additional costs related to technology updates and the increased compliance requirements, and discuss the results with key internal stakeholders.
3. Analyze the potential taxability of products and services in jurisdictions where they could now be required to collect the taxes, including current invoicing methods that may bundle taxable and nontaxable products.
4. Determine whether current technology and personnel resources can support increased tax-related analysis, compliance, document retention and audit activity.
5. Develop a plan for maintaining sales tax compliance, including the potential use of third-party service providers.
6. Consider how the company will monitor sales tax changes (such as tax rates, law changes and procedural issues) in relevant jurisdictions.
How soon could the tax man cometh?
Every jurisdiction may not begin requiring tax collection immediately; however a few states and municipalities started collection responsibilities as early as July 1 with many others set to begin Oct. 1 and Jan. 1, 2019. Regardless of the current legislative framework, it’s reasonable to expect over the next year that nearly every state with a sales tax is likely to adopt a nexus standard of some sort or take some other approach to requiring sellers without a physical presence to collect tax.
Here’s the outlook for Minnesota:
On May 30, 2017, Minnesota became the first state to enact legislation that creates a sales-and-use tax-collection requirement for marketplace providers and retailers. Minnesota could enforce its marketplace provider sales tax collection requirement on the earlier of either July 1, 2019; when the Supreme Court modified its decision on Quill Corp. v. North Dakota; or when federal law authorized out-of-state vendors to collect and report sales tax. Because the Supreme Court has now overturned the physical presence requirement in Quill, Minnesota may begin enforcing its requirement on marketplace sellers to collect sales tax before July 1, 2019.
Beginning Oct. 1, Minnesota will require that remote sellers that sell goods or services into the state from other states must register and begin collecting sales tax in Minnesota. Minnesota has a Small Seller Exception, which does not require remote sellers to collect sales tax until their sales during a period of 12 consecutive months total either 100 or more retail sales shipped to Minnesota or 10 or more retail sales shipped to Minnesota that total more than $100,000.
So far, some 20 states have enacted a law adopting regulations with a nexus standard; similar to South Dakota’s, that would require sellers who have some volume of receipts or number of transactions in the state to collect tax on sales into the state even if they lack a physical presence there. These standards take effect on various dates, and some are the subject of prior, still unresolved litigation at the state level.
Another group of states have existing “doing business” statutes that are broad enough to encompass an economic nexus approach, but they were not enforced in that broad manner because of the Quill standard. We would expect those states to provide guidance to taxpayers and perhaps seek legislation or a rule-making before attempting to apply the Wayfair approach.
Finally, other states would seem to require state legislative or regulatory action before imposing an economic-nexus approach.
As the changes take place, retailers and the states should also keep an eye on possible congressional efforts to pass legislation that sets a national standard to reflect the new reality of online and remote commerce. This issue has been before Congress for at least three decades, with no consensus reached or approach developed, but it’s possible that the Supreme Court’s Wayfair decision may add some urgency to the discussion.
Nicole Kirk and Jamie Louwagie are managing directors for indirect tax at Minneapolis’ KPMG LLP. This article represents the views of the authors only.