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The Wayfair decision, Arizona update
Impact on sales tax filing
Kelly P. Lynch, CPA
It’s been almost a year since the Supreme Court overturned Quill v. North Dakota in the Wayfair decision. Although this originally spawned from the retail/e-commerce industry, the impact of Wayfair is felt by many industries. As tax professionals, we’ve been busy working with clients from various industries beyond the online arena and figuring out the best approach to address the sales tax quandary left in the wake of this landmark ruling.
It’s important to address this sooner rather than later. Otherwise, as a business owner, you may find yourself dealing with past sales tax liabilities if a state were to conduct an audit. Getting hit with a sales tax liability from prior years can be detrimental as a business cannot go back to its customers and ask for remittance.
The South Dakota v. Wayfair case has its roots from the North Dakota v. Quill case in 1992. Quill sold office equipment via a catalog and had no physical location, no employees and no inventory in North Dakota. The State argued that Quill did have a physical presence, but the Supreme Court disagreed. South Dakota v. Wayfair changed the rules regarding “physical presence.” As a result, out-of-state businesses that have no presence in South Dakota must now register, collect and remit sales tax – provided they exceed a minimum threshold (either $100,000 in sales or 200+ transactions over a 12-month period).
States following suit
Thanks to the Wayfair decision, many states are passing similar laws with similar thresholds to collect additional sales tax revenue. In fact, last October, a dozen or so states adopted economic nexus provisions like South Dakota to cash in from the holiday season. Other states are expected to follow suit this year. Arizona Governor Doug Ducey is expected to sign the economic nexus bill that will be effective October 1, 2019. This would require remote sellers to pay transaction privilege tax (TPT) on retail sales of property if their gross proceeds with Arizona customers is more than $200,000 for 2019, $150,000 for 2020 and $100,000 for 2021 and beyond. A marketplace facilitator – e.g. Amazon – would be required to pay TPT on retail sales of property if their gross proceeds with Arizona customers is more than $100,000. As far as our neighbor to the west, effective April 1, 2019, California adopted a threshold of $500,000 of sales or 200 transactions.
Sales tax compliance
First, you need to determine if you have any exposure to these new laws. If you do business in multiple states, you will need to review each state’s threshold because each will have different rules. Implementing sales tax compliance in a post-Wayfair environment involves several steps. It’s not as simple as just registering your business(es) in each state without careful analysis:
- Run sales reports to review volume and quantity of transactions.
- With this information, develop a sales tax decision matrix.
- Establish a sales tax compliance process.
- In developing a matrix, determine the taxability of products and services.
Another thing to keep in mind – compliance costs can be expensive; however, it may not be practical to register when the cost of compliance outweighs the risk of exposure. As an example, if your average sale is $15 and you have 200 transactions, that is $3,000 in sales. Assume the sales tax rate is 8%. The sales tax liability is $240 per year. The exposure is not great, so it probably does not make sense to register.
Talk to your CPA
There are several third-party providers that can manage sales tax compliance if you do need to make changes. As always, you can also reach out to your Henry+Horne tax advisor if you need help navigating these steps.