On June 21, 2018, the U.S. Supreme Court overturned in a 5-4 ruling a 1992 precedent that barred states from requiring an out-of-state seller with no physical presence to collect sales tax on a sale to a resident of the state. In overturning Quill Corp. v. North Dakota
, states stand to collect potentially billions of dollars in sales taxes from remote sellers who meet certain minimum standards.
While there is still much uncertainty about how individual states will be addressing the sales tax issue, one primary challenge for retailers of all types will be addressing technology implications of compliance requirements.
Small to medium-sized retailers, especially, will be challenged by the compliance changes in state sales tax. Part of the hurdle for online sellers is determining in every state which of its goods and services are subject to sales tax. There is still ambiguity about how certain products would be taxed. Gray areas include the sales of cloud computing products and services, videos that are downloaded or streamed or other various forms of digital products, and whether a seller has widely distributed apps and software cookies.
While it can be costly, sales tax software to automate the process of tax calculation and collection for each state is readily available. Several software vendors provide tools designed to help retailers manage a wide variety of sales tax rates, including exemption certificates. They include Avalara, Vertex, Thomson Reuters, CCH, NetSuite, and Sovos.
Tax software packages typically allow companies to research and confirm tax rates as well as verify tax rates and compliance requirements for particular product categories shipped to particular zip codes in each state. They’re also designed to automatically apply the correct tax rate, and especially important, any tax exemptions to each transaction in a customer’s invoice. In this way, both the seller and buyer has an electronic record of the tax charged for each transaction, including records of tax exemptions that can be used in tax audits.
However, ultimately, most retailers can expect to do a bit of retrofitting when it comes to their technology system of choice to support the new requirements. They’ll need to start planning now to adjust their tax compliance and accounting approaches and infrastructure. Technology systems will need to be capable of determining taxability, identifying tax rates, tracking delivery locations and providing the information necessary to file returns in multiple jurisdictions.
, national tax leader, Industry, noted that when evaluating tax software options, it’s important to choose one that maintains a comprehensive database of sales tax rates because they change frequently. “Look for one that is easier than not to integrate with your billing system to avoid any delays in invoicing,” he explained.
It’s also important that the tax software provides good tracking for reporting purposes, Murphy explained. “It should be easy to get the information out of the system and onto a tax return,” he said. “It should maintain an audit trail so that it’s easy to demonstrate a step-by-step process for how the tax is being collected, accounted for and paid.”
Given all the complexities of sales tax compliance requirements from multiple states, plug and play software that doesn’t require significant customization is an ideal option for many retailers. Murphy noted that the largest online retailers in the U.S. (including ones that sell solely online as well as ones that have both brick and mortar locations and a large online presence) have invested heavily in sales tax software for remote sales. Yet small to mid-sized remote sellers have anxiously awaited the outcome of Wayfair
because of the substantial expense of implementing and maintaining sales tax software for their online point-of-sale systems.
“Ideally, small to mid-size retailers would want to choose plug and play tax software options because they don’t have the resources to do all the customization or maintenance of the customization,” Murphy said. “You really would want to have a system that’s more plug and play and easier to use with updates coming directly from the software provider. Systems need to account for specific retail transactions such as returns, credit memos and gift cards which make accounting for revenue trickier as well as the sales tax application.”
While there’s likely not a one-size-fit all solution for retailers, here are some key steps retailers can take when evaluating their technology strategy for sales tax compliance.
- Review invoicing processes and gather data on gross revenues and the number of transactions, prioritizing states where the retailer has the greatest economic presence.
- Evaluate the potential business implications, including additional costs related to technology updates and the increased compliance requirements, and discuss the results with key internal stakeholders.
- Determine current invoicing methods that may comingle taxable and nontaxable products. There may be new products and services that will not be taxed in certain states.
- Assess current technology and staff resources to ensure that they can adequately support the increased tax analysis, compliance, document retention and audit activity that will occur as a result of state sales tax changes.
- Define an overall strategy for analyzing and maintaining sales tax compliance. Consider using third-party providers to provide guidance and support for tax compliance activity.
- Take into account how sales tax changes will be monitored. What processes will be in place to evaluate changes in tax rates, state laws and procedural issues in multiple jurisdictions across the U.S.?
While there is still uncertainty regarding some implications of the Wayfair
Supreme Court decision affecting state sales tax, technology infrastructure and the resources needed to support it are critical issues that retailers should be evaluating in the short term. The time is now to evaluate current systems and resources, identify key issues including any needs for customization, and address core challenges such as the need for customization and maintenance.
National Tax Leader, Industry & Administration
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