COVID-19 caused many brick-and-mortar entities to strengthen or create their online presence, forcing them to address sales tax complexities they did not have to contend with when sales were local.
Understanding Sales Tax Thresholds
The internet sales tax requirement is the direct result of the Supreme Court’s ruling in South Dakota v. Wayfair Inc. (138 S. Ct. 2080 (2018)). Wayfair overturned prior rulings and stipulated that even businesses without a physical presence in a state had to collect sales tax on transactions in any state in which it has (1) more than 200 transactions or (2) $100,000 in in-state sales.
The thresholds set in Wayfair were based on South Dakota law. In practice, however, these thresholds are not clear-cut. Every taxing jurisdiction, including states, counties and municipalities, can require sales tax to be collected and remitted. These thresholds for requiring sales tax to be paid vary with each jurisdiction. This means the amount of sales revenue, number of sales, and which goods and services are taxable differ in each jurisdiction. For example, one state may impose a 5% sales tax on a particular good or service and the local municipality may impose an additional 1%, while a neighboring state has no sales tax on that particular good or service, but the local municipality imposes a 2% tax. In the former example, the business would be responsible for collecting and remitting a 6% sales tax, and in the latter, they would be responsible only for 2%.
Conducting a Jurisdictional Analysis
These tax requirements can get complicated. The only way for businesses to be compliant and avoid owing large amounts in back taxes or penalties is to do a jurisdiction-by-jurisdiction analysis.
Online sellers need to answer the following questions:
- Can you identify every state and jurisdiction in which you operate? This category includes not only where you are shipping, but where your inventory is stored.
- Can you easily separate your sales by product or service and jurisdiction? Each jurisdiction can have different thresholds for collecting sales tax.
- Can you monitor changes in the sales tax laws and regulations in every jurisdiction in which you do business? This process includes monitoring effective dates of any changes.
- Are you eligible for a sales tax exemption in any of the jurisdictions in which you operate?
- Do you need to register for other state taxes?
Companies should decide how to manage sales tax compliance and monitor for changes in rates and goods and services that are newly taxed. For most companies, this means choosing the right software for their needs and working with a CPA firm specializing in sales tax.
Companies should determine how and when to become compliant. This can be achieved in several ways, including registering through the state’s voluntary compliance program. This decision is complicated because the wrong choice can result in higher penalties.
The concept of a sales tax nexus is especially challenging for businesses new to online operations. With future trends predicting online sales increasing, it makes sense to understand all the rules.
Contact one of our tax partners to discuss your online sales tax requirements.