The U.S. Supreme Court recently heard oral arguments in South Dakota v. Wayfair, a case that could dramatically expand the requirements for collecting and remitting sales tax for many online retailers. At the crux of the case is the potential reversal of the “physical presence” requirement established in a 1992 case, Quill v. North Dakota, opening the potential for companies to have to collect and remit sales tax in up to 45 states, even if they don’t have a physical presence in those states.
Meeting the threshold of physical presence is normally defined as having a sales office, plant or physical operations within a state. The South Dakota statue requires collecting and remitting sales tax by remote (no physical presence) sellers when simply selling into the state via a web site. If a seller makes $100,000 or more in gross sales or 200 or more separate transactions into South Dakota during the year – then sales tax must be charged and collected.
A decision is expected by the end of the current Court term in June, so senior finance executives cannot afford to wait for the outcome to begin reviewing their compliance practices and evaluating their technology requirements. Court watchers expect the ruling to be close. “However, regardless of the outcome, there is likely to be increased pressure to collect state sales and use taxes,” says Michael Bernard, Chief Tax Officer-Transaction Tax, Vertex Inc., a leading provider of tax technology and services.
The cost of goods and services could suddenly become five to eight percent more expensive for companies selling items in states where they are not currently collecting sales and use tax. “If organizations don’t properly record, prepare, and remit state sales and use taxes, it becomes a cash flow issue,” according to Bernard. And if they don’t manage the transition well, “it can become a customer satisfaction issue as well.”
Tax technology, whether cloud, hosted or on-premise can help to automate tax processes. However, companies looking to improve compliance processes quickly may find that cloud solutions are the quickest option.
Regardless of the outcome of the Supreme Court decision, organizations need to evaluate their systems, processes, and staffing in light of potential changes in sales and use tax collection. Bernard adds: “Even if South Dakota v. Wayfair is not overturned, states are probably going to become much more aggressive in their efforts to collect sales and use taxes as they eye solutions to budget shortfalls.”
Who should be involved in your organization’s preparations? The CIO, CFO, tax department, legal advisors, accounting and sales teams, and audit committee need to be in the loop early in the process.
“Since invoicing is a critical step in the order to cash cycle, invoices need to be done right the first time and that includes charging the proper amount of sales tax. It will be important to have someone who has invoicing systems expertise,” Bernard notes. The invoicing challenge can be exacerbated by the fact that invoicing systems can reside in accounting as part of a centralized system or they can they can be distributed in various business units based on geography, product, or other factors. The invoicing challenge is critical because many purchasers, upon receiving an incorrect invoice, simply withhold payment – which can cause serious cash flow and customer experience issues if invoicing errors are widespread.
Alerting customers to tax changes is another challenge CFOs need to address. In states where companies are not currently collecting and remitting state sales and use tax, they will need to notify customers that they’re going to begin charging sales tax on their goods and services.
Bernard notes that a good first step for all CFOs right now is to become aware of which states account for the bulk of their sales and to turn their attention to those states first, as non-compliance in high-volume states presents the greatest risk. CFOs should also begin to think about whether a change in the law would also require additional resources in their tax department – in technology, personnel or both.
CFOs should examine all areas where they may have additional reporting requirements. Bernard adds: “CFOs should look at those states where they might have an additional reporting requirement if Quill is overturned and begin analyzing their current data to ensure they capture the proper fields to report sales and use tax in those states.”
He recommends viewing this process as an additional regulatory reporting requirement, with all the accompanying diligence and accuracy. “Audit committees are increasingly intolerant of mistakes and expect external reporting and proper and accurate accounting to be executed with precision. “Regardless of the Court’s decision, both internal (attest auditors) and external audits (from a state department of revenue) will focus more intently on sales tax compliance.
Lastly, Bernard notes that organizations involved in mergers and acquisitions need to be aware of state sales and use tax collection requirements of the companies they are acquiring or selling to prevent unforeseen compliance challenges down the line.