The days of internet sellers and buyers avoiding state sales tax ended on June 21, 2018, when the United States Supreme Court ruled 5-4 in South Dakota v. Wayfair. The ruling said states could collect and remit sales tax on businesses without a physical presence doing more than 200 transactions or $100,000 in in-state sales. As of early 2021, it’s of little surprise that 44 states have chosen to start collecting taxes. Four out of the six states not collecting do not have any sales tax to begin with.
Since the Wayfair decision, a lot has happened. Several pieces of legislation have been introduced over the past two years in response to the Wayfair ruling. The Protecting Businesses from Burdensome Compliance Cost Act (H.R. 379) was introduced in January of 2019 to “ease the burden for out-of-state vendors” working to comply with sales tax mandates in other states. Essentially the goal would be to overturn the South Dakota v. Wayfair ruling and prevent states from collecting sales and use tax if there is no physical presence.
Similar pieces of legislation with the same goal have been introduced with variations, but none have gained traction. For now, it looks like businesses and accountants need to familiarize themselves with the Wayfair decision, make sure they stay in compliance and understand the associated risks.
How the Wayfair decision impacts businesses
The first step of understanding how the Wayfair decision impacts a business is to understand its nexus footprint. A lot of companies struggle with the concept of nexus. The word nexus refers to the amount of presence a business has in a location. A business has a nexus in a state if it sells goods to customers that live in a particular state.
If a business is selling online to customers in the 44 states with an economic nexus, you need to be aware of each state’s tax threshold. For example, Alabama has an economic nexus law with a threshold amount of $250,000 in sales but no threshold on the number of transactions. New York has a larger threshold of $500,000 in sales but a much more restrictive transaction amount threshold of 100.
Business responsibility
Business owners selling products or services in other states need to know their compliance obligations for each state to avoid fines. Sellers need to do the following:
- Determine if the state has an economic nexus to adhere to.
- Understand the economic nexus thresholds in each state they do business with.
- Register as a seller in each state where you have an economic nexus.
- Collect sales taxes from customers.
- File and remit sales tax.
The risks of failing to comply
Businesses that fail to register and comply leave themselves open to possible catastrophic fines and backed taxes. Most states are not limited to the lookback period when auditing failed businesses in prior years. The state has the freedom to go back as far as it deems reasonable to assess tax, interest, and penalties. If a business does not have a complete sales record, the state will have to estimate the exposure for those periods. States are generally free to use whichever estimation technique they like, leaving businesses at their mercy.
In addition to an indefinite lookback period under an audit, potential criminal penalties are also a risk with sales tax noncompliance. Many states impose criminal penalties on individuals who knowingly fail to file sales tax returns in the state, and many states impose personal liability on corporate officers.
Best practices for CPAs to manage risks
- Engagement letter caveats — Use specific language calling out what you do not do when it comes to general counseling.
- Offering nexus studies — If unable to provide a nexus study, ensure your clients know and understand the Wayfair decision and make recommendations.
- Client screening — Due diligence is needed when taking on clients to ensure ethical considerations and your ability to serve the client.
- Understand the client’s sales cycle — Make the effort to get to know the client and understand if they are operating in other states as well as understanding the sales tax arena.
- Communications — Educate the client through newsletters and other communication material.
Accountants professional liability / errors & omissions insurance
New legislation like the Wayfair decision can be confusing, leading to unknowingly making errors that you’re still liable for. If a business owner gets in trouble, they may file a claim against their accountant or CPA for professional negligence.
McGowanPRO is the leading independent agency specializing in Accountants Professional Liability Insurance (Errors & Omissions). Education is your best defense when it comes to guarding against professional liability claims. That’s why we offer a number of free webinars to keep you up to date with the latest trends and compliance issues in the accounting industry.