This year there are two interesting things are going to affect a substantial portion of our client base. One is the new tax law that went into effect on January 1, 2018, for which there will be substantial changes in the preparation of your individual income tax return for 2018. Most clients are both aware and engaged in discussions regarding its affect. What is probably more important, but getting less client conversation is the effect of the Supreme Court decision in the Wayfair case, which was decided in June 2018.
South Dakota passed a law several years ago requiring out of state sellers of tangible goods to collect and remit sales tax if they hit an annual threshold of either 100 transactions or $100,000 of total sales. Prior to the Supreme Court decision, prior law required you to have one of three economic nexus positions in order for the state to be able to enforce collection of their taxes. They were actual sales in the state, payroll, or a physical presence, such as rent or sales people. The South Dakota law was attempting to expand the definition of sales to include tangible personal property as sales delivered by common carrier such as the post office, UPS, Federal Express, etc.
In June the Supreme Court sided with South Dakota and as such the flood gates have opened and the requirement for collection and reporting in other states has become an important and necessary review for a lot of our clients. The reason for the importance of this is that the regulations can sneak up on you, each state is scrambling to adopt rules similar to South Dakota, as they would therefore be covered by the Wayfair decision, and to put into place both the mechanism for registration of companies as well as enforcement. This is scary to us as your CPAs and should at least trigger some type of an internal review of your books, as well as awareness should you determine that this is not applicable to you now but could be, should circumstances change.
Let us take PA as an example. Anyone who is located in PA, and sells tangible personal property is registered and either charges each of their customer’s sales tax or obtains an exemption certificate. If you fail to collect the sales tax and/or the exemption certificate that you obtain is not complete or filled out properly, your company is liable for the tax. Now apply those same conditions to all of the other states, if you meet their threshold. Further because this was a court ruling, the statute of limitations applies based on each state’s laws. In most states the potential look back for sales tax is six to ten years. So your exposure if you met that state’s threshold in one of the last, up to ten years, then you could be liable for the tax that you did not collect or remit for the last ten years.
This is a scary proposition, and is designed just for that, to scare you into compliance. A lot of states that have adopted provisions similar to South Dakota, have included in their legislation a provision that if you comply with the state laws (and a lot of the current dates are either October 1, 2018 or January 1, 2019) then they promise not to apply liability incurred prior to that date on examination. So what we are left with is a study of the tangible personal property and the sales value associated with that sale, by the address to which it was mailed, or shipped. The requirement to register in applicable states is immediate as some of the dates start as early as next week and also comes with the requirement to file corporate taxes in those states as well. States cannot tax the profit of those sales that are attributable under the Wayfair decision (there is federal law that prohibits that) but any other tax not measured by gross income could be due, such as a capital stock tax.
What we are asking you to do, is to review your own activity and see if there is any other states that you have or could have 100 transactions or $ 100,000 of sales value. As you do this, keep in mind certain additional other items:
There is an immediate need to make this determination. While it remains somewhat unclear, we are assuming that the threshold includes either taxable sales or exempt sales.
If you have exempt sales, there will still be a requirement of registration and then the compliance kicks in making sure that we either withhold or have the proper exemption certificates on file.
There are several third party software companies that can supply both analysis as well as assistance in registration, collection and remittance, so there are solutions out there that are both accessible and can quickly get you up and running.
What is important is that if it is determined this may apply to you, that you reach out to our office to discuss your particular set of circumstances. We at this point have reached a degree of comfort of knowing who this may apply to and who would be excluded.