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Sales Tax and the Evolving Landscape Under Wayfair

In light of the Supreme Court’s June 2018 decision in the Wayfair v South Dakota case, we do anticipate states becoming even more aggressive with pursuing e-commerce companies as well as other industries having multi-state activity. States and localities playing the budget balancing game will also further the initiative to tax businesses with activity in other states.

On June 21st, 2018 the Supreme Court ruled that states have the right to collect tax from online retailers even when a company does not have physical presence within the state. The decision repealed the 1992 Quill v North Dakota decision, which ruled that states could only charge sales tax in states where they meet the requirements of physical presence nexus.

As a result of the decision, the Supreme Court ruled that a business without physical presence in South Dakota will be deemed to have nexus within the state requiring them to collect and pay sales tax if it meets either of the two criteria of the small seller exemption. The small seller exception (exemption) criteria are:

1) Gross sales into South Dakota exceeding $100,000; or

2) 200 or more separate transactions into South Dakota.

Many states have already adopted their own specific small seller exemptions, some have followed South Dakota’s lead, while others are planning to issue guidance/legislation in the coming months.

After the Supreme Court’s decision, we expect states to become even more aggressive with their enforcement of sales and use tax registrations and filings. Auditors primarily dig in to a company’s financial records to make sure everything has been reported correctly. They’ll look carefully at any exempt sales to make sure the company has documentation showing the exemption is valid. An auditor will check expenses, both capital and recurring, to make sure everything that should have sales tax on it does, or the business paid the corresponding use tax if no sales tax was charged by the vendor.

We have seen an uptick in sales and use tax audits throughout New England. Some audits are purely random and others are triggered by specific factors (e.g.- specific industry, not being registered, open filing periods, etc.). If you are an e-commerce company, we can help you navigate the ever-changing state landscape. Companies in this space should closely monitor their sales by state and be aware of each state’s nuances and thresholds. Depending on the volume of activity, there are very cost effective on-line resources to help you with registrations and ongoing filings. Avalara, TaxConnex, and TaxJar are just a few of the resources available.

Further, we have seen a trend within Massachusetts of not only pursuing sellers of tangible goods, but also companies that are clearly in the service industry. if your service business has a component of selling tangible goods, you could be subject to sales tax on that portion of your sales. We recommend specifically delineating on your invoices, service activity vs. product activity. If you do resell products and are not taxed on the purchase of the items, you should fill out a reseller certificate to give to your vendors. You should also register for sales tax and file for the sales tax on any tangible property sold in your trade or business. If you are required to submit a reseller certificate – Form ST-4 you can find a copy at:

https://www.mass.gov/files/documents/2018/01/31/dor-sales-use-form-st-4.pdf

This certificate is to be used when the vendor intends to resell tangible property in the regular course of business.

During an audit, the Massachusetts Department of Revenue typically reviews purchases made for your business from other states and via the internet. This is considered “use tax” and is a highly-audited area currently, as an easy revenue raise. If you do not pay sales tax at the point of purchase on tangible property, you are obligated to pay “use tax” on those purchases. The “use tax” rate is identical to the Massachusetts sales tax rate. If you have a service business and do not sell tangible personal property as part of your business, we recommend registering for sales tax and paying in any use tax, if applicable. Should you have no sales or use tax owed, we recommend filing a zero dollar return each year.  By filing a zero annual return you avoid leaving the statute open and the clock begins on the three-year statute. If you have open periods of non-filed returns, the state can come back at any time in the future as the three-year statute would not have commenced.

The Wayfair case has opened the door for states to become more aggressive with companies that may not have a physical presence in their state. Whether you are an e-commerce company or a business generating sales throughout the country, it is important to be sensitive to the ever-changing state rules that may expose your company to tax. We anticipate Massachusetts to continue its aggressive pursuit on the sales and use tax front.

Please contact us if you have any questions or would like a more in-depth analysis of your sales or use tax filing requirements.

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