We all know taxes aren’t exactly simple, and with a recent decision by the Supreme Court, things have gotten even more complex. In its South Dakota v. Wayfair, Inc. decision, the Supreme Court overturned a previous ruling that originally determined that states could only collect sales tax from businesses that had brick-and-mortar locations in those states. With its Wayfair ruling, the Supreme Court has said that distinction is no longer in place, making business a bit tricker when it comes to tax time, but not to fear! Read on to learn what small business retailers need to know about the Wayfair decision, and what to do about it.
How Will My Business Be Affected?
That’s a good question, and the bad news is that there’s no easy answer. The good news is that we have some guidance based on how the Supreme Court’s ruling specifically affects South Dakota. First (and this should be true of all new state laws regarding the matter), this ruling regarding sales tax will not be applied retroactively, so if that was a concern you had, not to worry.
Secondly, the Wayfair decision does not affect retailers that only conduct “limited business” in South Dakota. The rules for what constitutes “limited business” will vary by state, but in South Dakota, any out-of-state retailer that reaches 200 taxable sales in a calendar year or earns $100,000 in gross income from South Dakota customers will have to pay sales tax. This gives us some hard numbers to go off of.
What Does this Mean for Every Other State?
Really, how the Wayfair decision will affect your business will depend on the laws your state passes, and unless you live in South Dakota, we’re just not sure what those laws are just yet. We do know that nearly half (23) of all states are full members of the Streamlined Sales and Use Tax Agreement, while several other states have adopted substantial portions of the agreement, which should make it easier to do business with customers in those states.
We also know that you may be required to send monthly sales tax payments and reports based on the states where your customers live, but the exact specifics—obviously—will depend on the states in question.
What Should I Do About the Wayfair Decision?
As the Wayfair decision will create a number of new tax obligations for companies (and not just internet sellers), one of the most important things to do is to perform a diagnostic review of your company’s sales and financial process with regards to sales tax. You’ll need to assess your current situation as a baseline to determine what the current processes are, the people involved, and the data/systems used to process sales, purchase, and financial transactions that may have transactional tax consequences. Here’s how.
A solid diagnostic review will include examining your organization’s information sources, identifying key contacts (order entry, tax, purchasing, and sales personnel), and interviewing key stakeholders. You’ll need the assistance of your tax and accounting departments in obtaining access to tax returns, financial systems, general ledgers, sample invoices, and exemption documentation to complete your analysis. You will also need workshops with process owners from tax, sales, billing, purchasing, and finance to flush out pain points and walk through examples. Be sure to gather related documentation—or create it if it doesn’t currently exist—such as current system configuration, processes, data, etc.
Nor are those the only things you’ll need to do for your diagnostic review and report. You’ll also need to…
- Obtain information about business activities to acquire an overall understanding of potential transaction tax issues and to identify internal control weaknesses.
- Determine and document which tax decision drivers are necessary to make appropriate tax decisions for the organization’s operations.
- Review and analyze the transaction tax administrative function to determine whether the appropriate amount of tax is collected from customers and remitted on a timely basis to the states, and whether sufficient documentation is on file to support non-taxable and exempt sales.
- Review the use tax accrual system to ensure that the appropriate amount of use tax is self-assessed on applicable purchases of goods that are used in the business.
- Analyze the business activities in various states to determine if transaction taxes are being collected and remitted in all jurisdictions where nexus exists.
- Just a reminder that “nexus” used to be related to the physical location of brick-and-mortar stores, but the Wayfair decision means that’s no longer the case.
- Review resale and exemption certificate administration to determine if exempt sales are adequately documented.
- Analyze the accounts payable function to determine if transaction taxes have been overpaid, resulting in potential refunds or credits.
There’s no messing around or “close enough” when it comes to getting your company’s taxes done correctly with regards to the Wayfair decision. Nor is there anything to be gained by waiting. Depending on what states you do business in, your company may soon be required to send monthly sales tax checks, and you don’t want to get behind on those.
Luckily, Surety has a wide network of senior-level financial consultants (specializing in JD Edwards, Lawson, SAP, and Workday) that will be able to help you understand what your company’s sales tax obligations are post-Wayfair decision.