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Changing Sales and Use Tax Environment for Remote Sellers

On June 21, 2018, the U.S. Supreme Court issued an opinion favoring South Dakota’s expanded sales tax regulations against Wayfair. Prior to this court hearing, businesses were not required to collect and remit sales tax to a state unless there was a “physical presence” in that state - a nexus tax collection responsibility. This typically involved maintaining an office or warehouse before nexus regulations were enforced. This requirement also allowed out-of-state online retailers the advantage of avoiding sales tax collections. As a result, the states have reported a $23 billion loss in sales and use tax revenue each year. To keep up with the impact of changes in consumer purchasing and the way businesses operate, states have taken aggressive measures to expand the definition of a “physical presence.” These measures impose additional requirements for the collection and remittance of sales tax that vary for every state.

South Dakota’s challenged nexus policy requires remote sellers to collect sales tax if their gross sales exceeded $100,000 or 200 separate sales transactions in South Dakota. The court ruling accepted the “virtual or economic” nexus policy without the “physical presence” requirement, thus changing the Nexus environment for many states. Other states are looking at the Wayfair case and imposing similar nexus guidelines.

If businesses do not collect the sales tax, individuals are expected to remit the use tax annually. Yet, there is no means for states to regulate the collection of use tax. Consequently, some states have enacted complex tax reporting requirements for remote sellers. These laws require businesses to report potential use tax liability and transaction data to the state. States are using this data to pursue consumers for the use tax liability.

It is more challenging than ever for business owners to stay up-to-date on complying with the ever-changing sales and use tax regulations. There are more than 60,000 different sales tax districts and 11,000 local jurisdictions across the United States that are enforcing different tax rates, filing due dates, frequency of filing and even regulations of which sales are exempt. What is taxable in one district may not be taxable in another. Additionally, there are different guidelines for reporting use tax obligation. The complexity of understanding and navigating changes in the sales and use tax regulations have become burdensome on remote seller businesses. Additionally, not complying with these changing regulations can result in substantial penalties and interest.

As E-commerce sales increase for your business, consider the potential nexus issues that may be impacting your operations. Consult with Donovan, Klimczak and Company for advisory and compliance services with your potential Nexus situations.

Please contact us with any questions about how this affects your specific tax planning.

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Corporations: File 2017 form 1120 and 1120S if extended
Corporations: File third quarter estimated tax for C-Corporations
Partnerships: File 2017 form 1065 or 1065-B if extended
Individuals: File third quarter estimated tax
Individuals: City third quarter estimated payment due

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