It’s hard to believe that we are approaching the second anniversary of the U.S. Supreme Court’s ruling in South Dakota v Wayfair, the most significant development in state and local taxation in decades. Since its release on June 28, 2018, the decision has had far-reaching implications across state lines. To date, every sales taxing state, except Florida and Missouri, has passed some variation of the South Dakota law (200 in-state transactions or $100,000 of in-state sales) which was the genesis of the ruling, or has begun administering existing economic nexus rules already on their books. The question many taxpayers have is: When will the states begin enforcing these new laws? The answer is likely very soon.
End of the Grace Period
States, in general, have been slow over the past two years to enforce their Wayfair economic nexus sales tax laws. Many state provisions included enforcement dates months into the future or grace periods until the enactments went into effect. While these enforcement dates have come to pass, numerous states were still encouraging remote sellers to register and become compliant with the regulations instead of engaging in sweeping tax examinations. Several states partnered with certified sales tax service companies as a way of urging compliance at reduced costs and delaying audits of noncompliant vendors.
With the onset of the COVID-19 pandemic and the tremendous loss of state revenues it is likely that the Wayfair-law grace period is coming to an end. The fiscal constraints of many states has legislatures searching for ways to re-fill their coffers. Historically, sales taxes have been one of the highest state revenue drivers, thereby making these Wayfair statutes all the more appealing for politicians. Instead of directly levying taxes on constituents hard-pressed by layoffs and work reductions, sales taxes function as a consumption tax. The more stuff you buy, the more tax you pay. The concept is more palatable for voters struggling in hard times.
Sellers, for their part, have been given ample opportunity to assess their sales tax nexus and compliance obligations. In the two years since the Wayfair decision, states have made a concerted effort to educate businesses of these laws. Taxing authorities have issued guidance detailing vendor responsibilities and some states have even sent mailings to those companies that potentially have economic nexus. Moreover, online marketplace facilitators, such as Amazon and eBay, have started collecting sales tax in virtually all states.
What You Need to Do
As state tax agencies accelerate the enforcement and audits of their Wayfair provisions, businesses should consider the following to ensure compliance.
1. Determine where your business has nexus. Evaluate your physical presence and sales into the various states, and learn about the nexus rules where you might have a tax connection.
2. Understand the filing requirements of each jurisdiction. Once nexus is determined you should review state rules to become acquainted with the filing specifics and frequency.
3. File sales tax returns correctly. Too often companies get in trouble or complicate the audit process when they have errors either in their calculations or reporting.
4. Review your tax-exempt sales compliance. Collect and retain exemption certificates and keep them up to date.
5. Perform an internal audit risk assessment. Conducting a pre-audit or reverse audit before you get an audit notice lets you find and correct errors.
As states move into the enforcement phase of their Wayfair laws, sellers need to be proactive in their approach to sales tax. If you have questions regarding the effect of the Wayfair decision on your business and would like an audit risk assessment, please contact Alan Goldenberg, Principal State and Local Taxation and Tax Controversy, at 212-897-6421 or via email at firstname.lastname@example.org, or your Friedman professional.