On June 21, 2018, the Supreme Court of the United States announced a ruling that redefined the meaning of nexus for remote sellers in South Dakota. The South Dakota v. Wayfair, Inc. decision will likely have a big effect on how companies that sell remotely manage their sales tax compliance. Before we get into these ramifications, let’s take a step back.
Nexus and The Rise of Ecommerce
Since 1992, the term nexus had been defined as sufficient physical presence in a state, requiring a company to register, collect, and remit (give the state the collected tax) sales tax within the state. Physical presence was defined as having a temporary or permanent presence of employees, owning property (warehouses, etc.), or renting property. When these conditions occurred, a company was required to register and collect and remit sales tax within that state.
It’s no surprise that the way companies sell — and consumers purchase — goods and services has changed greatly in the 26 years since nexus was originally defined. The inception and growth of the internet led to the rise of ecommerce and the increased ability for companies to sell across state lines. These changes blurred the lines of tax collection. One consequence was that consumers could purchase an item online without paying sales tax, yet if they purchased the same item at a local store, sales tax was applied. Because of this, some local businesses experienced a decline in sales as the online sales of their competitors increased.
South Dakota Changes the Game for Remote Sellers
Now that we have some background, let’s return to the South Dakota v. Wayfair, Inc. ruling in June. The Supreme Court’s decision gave states the ability to require companies selling goods or services into their states to collect sales tax on those transactions. Since this decision, a growing list of states have followed South Dakota’s lead and announced thresholds that, if surpassed, require sales tax collection and remittance. Most states have followed in South Dakota’s steps and have set their yearly thresholds as over $100,000 in transaction value or more than 200 transactions. The current list of state laws, effective dates, and requirements can be found here.
Suddenly, companies that once had a solid grasp on their tax compliance are scrambling to figure out whether there are additional states where they either are liable or will be liable for sales tax. As outlined above, rates and rules are continually updated, making it difficult for most businesses to be equipped to stay on top of tax law changes.
2018 Sales Tax Changes Report
Tax Tech May Be The Answer
Your tax tech could mean the difference between staying compliant, and staying in a constant state of turmoil. This ruling indicates that the rules around taxes, remote sellers and ecommerce are never going to stay the same. As businesses become more digitally dependent, taxation will always be playing catch up. However, the way you adapt shouldn’t have to.
Cloud-based tax automation solutions fill this gap by acting as an outsourced tax department that connects directly to your ERP. At Smartbridge, we’ve seen businesses on Oracle JD Edwards and NetSuite redirect energy and resources away from sales tax compliance issues because they have the right systems in place.
You may not have thought about sales tax as an avenue for digital transformation, but manual management is no longer necessary, nor sufficient. It’s not a matter of if there is a risk of audit, it’s when!
Watch our webinar, 10 Sales Tax Rules to Live By, to explore tax automation more.
Thanks to Avalara for contributing to the Smartbridge Blog!
Also published on Medium.