by: Tony Pimentel
Wayfair sold products to South Dakota residents, however, it did not collect sales tax as it did not have a physical presence in South Dakota. Under the physical presence test, it did not have to do so. South Dakota could have subpoenaed the required data and collected the use tax from its citizens, but it decided it was much easier to file suit to force Wayfair to collect the tax. The Supreme Court sided with South Dakota and ordered Wayfair to collect the tax based on the enabling statute.
Assuming all states pass enabling legislation based on the South Dakota statute, a business now must estimate its exposure for future sales starting June 21, 2018, the day of the decision. This assumes that new enabling statutes will be retroactive to the date of the decision. If a company has financial statements prepared yearly for outside vendors, banks or tax returns, the estimate is required in order for the accountants to decide if it is material enough to be recorded in a footnote as a contingent liability.
Here is a simple protocol to estimate the exposure for a given time period:
Now you have a dollar estimate, but the far more important factor is the time involved in complying with the ongoing collection process. For states that exceed the estimated minimums, choose the largest in dollar amount and go through the process of determining the actual time and rates involved by contacting the state agency in charge of collecting taxes and find out what tools they provide to allow a seller to determine from who and how much has to be collected. It may involve filing four separate returns and payments if there is no provision for unified collection and assessment. Then, record the time for the additional work involved in looking up the rates and inserting them in the software as additional invoice items. Time to record an invoice will probably be double as the sales tax rates will need to be checked if rates have changed since they were originally input.
So now you have an estimate – what do you do now? Depending on the amount, you can comply now or wait to see if Congress will correct the situation, or if the case will be overturned by a new court that results from the appointment of new judges. If you have any questions as to how this case may apply to your business, please give us a call.