Sales and Use Tax After the Wayfair Case: Answering Your Pressing Questions

In 2018, a major U.S. Supreme Court decision changed sales and use tax rules for businesses selling products and services remotely. South Dakota v. Wayfair, Inc. (also known simply as Wayfair) removes the physical presence requirement for sales tax nexus. This means states can now require businesses to collect sales tax on goods and services sold in the state if it merely has sufficient “economic presence” there, despite physical location.

The ruling primarily affects online entities that sell via mail or telephone order. While most of these companies have heard of Wayfair, however, many have not yet adapted to comply with the ruling. Here are some of the most common questions clients ask about keeping up with their sales and use tax obligations.

Q: How can I know whether my company must file sales and use tax in a particular state?

The most common economic threshold for a sales tax requirement is $100,000 in sales or 200 transactions in a state. The traditional parameters, however, such as whether a company has an employee presence or physical locations in the state, still apply.

Complicating the situation, each state has its own parameters for determining when sales and use tax needs to be collected. So the first step is learning that state’s law and how it applies to your company’s activities there.

Q: How can my company be sure its calculating sales and use tax correctly?

Calculating sales and use tax requires an analysis of state law and an understanding of the state’s sourcing rules. Depending on the state, some transactions are always taxed while others are circumstantially exempt.

Typically, a state will source a sale to the jurisdiction where the good is sold or delivered. Identifying that particular jurisdiction, however, can be tricky. While most states have a tax rate lookup system that enables companies to search for the correct jurisdiction and rate, it can be daunting when a company has thousands of customers with different addresses. Complete accuracy would require a check of every single transaction.

Alternatively, a company can invest in sales tax automation software. Whether that software produces the correct result depends on whether the correct information was input at the start.

Q: What if we want to handle sales and use tax compliance in house?

You’ll face three main challenges: personnel, cost and risk. Calculating sales and use tax in house requires at least one person with truly in-depth knowledge about sales taxes. Companies that invest in such a person risk that person moving on and taking their knowledge with them. Additionally, calculating sales tax isn’t really a full-time job. Returns are typically due around the 20th of the month, leaving a lot of downtime for an in-house expert.

There can also be ongoing technology costs, such as compliance and research software. Finally, if the person handling sales tax doesn’t rise to the level of “expert,” there’s increased risk that the decisions made will turn out to be incorrect. This will lead to taxes, penalties and interest upon audit.

Q: What tools can we use to help with sales and use tax compliance?

Software can help, but the more it’s asked to do, the more expensive it gets. The software must also be set up correctly and checked often to ensure its accuracy, and this requires an expert.

Another option is to outsource the function or employ a hybrid solution. For example, your company could work with a sales tax expert on a quarterly basis to make sure filings are occurring in the right states, tax is being charged when it should be, and tax is being calculated correctly and for the right jurisdiction.

Although sales tax is often the smallest item on the invoice, companies should take it seriously. States will be motivated to go after out-of-state companies that haven’t been filing when they should have.

Contact us if you’d like assistance getting a handle on your sales and use tax obligations.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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