Doing business in the United States is now harder for Kiwi businesses already operating there, or for those planning to tap into this market.
The catalyst for change came by way of the 2018 Supreme Court decision – South Dakota v. Wayfair (‘Wayfair’) which overturned a longstanding precedent requiring sellers to have a physical presence (eg, a shop, factory or office) in order for a state to collect sales tax. During the case, the Supreme Court not only acknowledged that the physical presence rule negatively impacted South Dakota’s tax revenues, but that it “is unfair and unjust to those competitors, both local and out-of-state, who must remit the tax”, recognising that market participants were no longer competing on an even playing field.
Now, all sellers in the state of South Dakota must collect and remit sales tax regardless of whether they have a physical presence or are simply trading via digital channels. The Wayfair decision has subsequently caused a domino effect across America and multiple states have either issued effective dates on prior passed legislation, or they have issued proposed rules in the form of legislation as to how sales and use tax will be enforced.
The good news is that specific relief is available in most circumstances when the sales are to customers that are themselves resellers. However, to qualify for this concession, the seller has a duty to record sales accurately and collect any necessary exemption or resale certificates.
The bad news is that some states have adopted a 1 July 2018 enforcement date, with most choosing 1 October 2018 or 1 January 2019. Also, the threshold as to when sales and use tax becomes relevant is quite low in most states. So, if you haven’t done so already, you may now need to take immediate action to become compliant.
The sales and use tax is not like New Zealand’s GST which is largely neutral on a B2B basis, as it can be recovered in most situations – this is a final cost to the purchasing party. If it is not correctly accounted for, it will become the seller’s liability.
You will need to determine when the thresholds are likely to be breached, requiring the collection and remittance of sales tax. And you will need to develop the compliance processes necessary to distinguish in which state the sales occur, whether the sales are taxable or not and what the local filing obligations are. If your business is operating in a state (or states) and has a registration, collection, and filing obligation, it is best to become compliant sooner than later in order to minimise the risk of penalties and interest.
Here are some questions we are commonly asked in terms of what the Wayfair decision means for businesses.
1 How do I determine which states I need to file in first?
Knowing what the thresholds and effective dates are in each state is critical in determining where you need to file and when.
First, you need to determine those states in which you have met the requirements for filing; the effective date of those states will dictate when you need to register and begin filing. For those states with effective dates that have passed, you may need to consider the potential exposure and remediation options for periods in which the thresholds were met but returns were not filed. It is also important to note that you may need to examine the taxability and sourcing of the products and/or services provided as the sales tax treatment may vary by state.
2 When do I need to start registering and filing?
While some states have used the legislation resulting from Wayfair as a template for their provisions, others have created their own standards; when viewed in the aggregate, the thresholds and effective dates applied by each state are currently inconsistent and non-uniform.
3 What is required in terms of documentation and exemption certificate requirements?
Maintaining accurate records is key for sellers, as this documentation is used to substantiate exempt transactions, particularly in the event of an audit. For accurate, cost-efficient sales tax collection, you need to:
(1) make a correct tax calculation at the time of sale
(2) report your sales and complete your filing on time
(3) maintain proper documentation on any sales made either to exempt entities or for an exempt use.
As a best practice, it is recommended that you begin collecting and maintaining the required certification for all exempt sales, as all states that impose a sales tax are likely to enact some form of thresholds.
4 What are the implications for manufacturers selling raw material as opposed to finished goods?
Nearly all manufacturers will be affected by the Wayfair decision. Even those manufacturers who don’t sell to end-users may be required to register for sales tax collection in states where the thresholds are met. States require certain documentation to be maintained by sellers, such as properly completed resale or customer-level exemption certificates, to substantiate an exemption. Without proper documentation, the transaction becomes a taxable transaction.
5 Does the Wayfair ruling apply to any software-as-a-service (SaaS) transactions?
Businesses selling SaaS, cloud-based, and other digital goods or services that historically had a small footprint due to the nature of their business may now be subject to additional sales and use tax collection and remittance requirements if the thresholds are met and the state imposes sales tax on these items.
Establishing the source of cloud-based and other digital goods for tax purposes has historically been a challenge for both states and sellers. The lack of physical delivery makes the location of delivery unclear, and states may determine the source of transactions in an inconsistent, non-uniform manner. For example, states may base the tax on where the seller resides; the address of the purchaser stated in the receipt or contract; or on the locations of both of the server and user(s), which may be in multiple states, thereby obliging the seller to render taxes in all of those states. In any case, it is critical to capture and maintain complete sales information used to make sourcing determinations in case of an audit.
6 Are there any income tax implications on the horizon?
While Wayfair specifically addressed whether specific states can require an out-of-state seller to collect sales tax when the seller lacks an in-state physical presence, there are some states that have had laws in place for years that apply to corporate income and franchise taxes. To the extent that companies relied on historical sales tax physical presence standards in determining their income and franchise tax filing footprint, there may be tax exposures in states where the threshold for income and franchise tax purposes is met but no filings are being made.
Additionally, while states have not yet provided significant guidance on income and franchise tax implications since the Wayfair decision was issued, states may feel emboldened to consider--and potentially enact-- legislation changes applicable to state income and franchise taxes.