The U.S. Supreme Court has spoken, but its June Wayfair decision requires the South Dakota Supreme Court to weigh in on the constitutionality of the state’s new rules. In the immortal words of baseball legend Yogi Berra: “It ain’t over till it’s over.”
A recently published Tax Notes article offers some color commentary on the state of play in the legal arena and unpacks the implications for sales tax teams. The authors are three Vertex experts: Michael Bernard, chief tax officer of transaction tax; Nancy Manzano, director in the chief tax office; and George Salis, principal economist and tax policy adviser.
About 40 states have so far pounced on the South Dakota v. Wayfair ruling, which sets aside the physical presence test for remote sales tax nexus, to adjust their own sales and use tax strategies and requirements or adopted similar economic nexus thresholds. Among other factors making post-Wayfair compliance challenging for online sellers:
- The potential for different economic presence thresholds in local jurisdictions within “home-rule” states like Colorado and Louisiana;
- Uncertainty around the sales tax treatment of inbound foreign transactions;
- Economic pressures on states, pushing them to “introduce and begin enforcing new sales tax rules quickly and possibly prematurely;”
- Legal challenges from taxpayers arguing that new economic thresholds are too low; and
- Congressional involvement. Several bills have been proposed since June, including one that would prevent states from requiring online sellers to collect and remit sales tax – essentially reversing Wayfair.
Faced with so much uncertainty, what should sales tax organisations do? The article lays out a range of options, as well as three recommendations to help companies identify the optimal compliance approach while limiting the risks:
- Be aware. Recognise that the South Dakota Supreme Court’s decision will affect states’ post-Wayfair sales tax rules. Keep an eye on any legislative challenges to new federal and state tax rules, as well as any new sales tax bills at the federal level.
- Consult with outside experts. Gather input from your external audit providers and outside legal firms.
- Be ready. If you haven’t previously submitted state sales tax returns, now is the time to ramp up this capability. Look for technologies that can help you gather gross revenue by state; prioritise states where you have the greatest economic presence; evaluate the impact on the financial statement; and review your invoice processing and controls.
Businesses are still waiting to hear Wayfair’s fat lady sing. But the hard work of planning and ensuring compliance is just beginning.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.