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What The New Sales Tax Ruling Means For Online Retailers

KPMG
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When it comes to collecting sales taxes, the question is no longer where online retailers have a physical presence, but where their customers do.

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A recent U.S. Supreme Court ruling concluded that the physical presence of a business was an “unsound and incorrect” standard for determining state sales tax collection in South Dakota, and placed equal weight on the “economic presence” of a business—its volume of sales to the state’s customers.

The June 21 ruling, South Dakota v. Wayfair, overturned Quill Corp. v. North Dakota, which exempted any business without a physical presence in a state from collecting sales and use taxes there.

The court’s ruling could have massive implications for online retailers across numerous states—a dozen of which already have state tax laws or regulations similar to South Dakota’s.

Learn more about how this Supreme Court ruling could affect your business.

So how can online retailers prepare for the potential additional tax obligations? A six-step approach can ensure they have a thorough understanding of their current practices while also clearly mapping out the next steps to protect their business and stay in compliance:

  1. Review your nexus footprint. Before anything else, companies should make sure they’re fully aware of the states in which they have a physical presence or representational nexus, and make sure they are up to date on sales tax collections and remissions. They should then review current and projected sales activity to see in which states they could have tax obligations, given the new ruling. This should be a recurring exercise, not a one-time review.
  2. Consider the overall business implications. The overturning of Quill could potentially impact many areas of a company’s operations, such as the pricing and marketing of its products—which could cost U.S. customers an average of 8.6 percent more. Internally, additional sales tax could also affect procurement, legal, sales, and information technology. All stakeholders must be fully aware of these implications.
  3. Make taxability determinations. Companies must evaluate and determine the taxability of each of their products and services—and in each jurisdiction in which they now have a collection obligation. And while they’re at it, they can review the accuracy of their tax determinations in jurisdictions in which they’re already collecting. They should explore how they’re bundling taxable products and nontaxable services as well as there may be an advantageous way to separating the products and services for billing and sales tax purposes.
  4. Review and consider technology needs. Given that the demands for transaction tax processing, compliance, and accounting will likely rise, companies should make sure their technologies for handling these operations are scalable. Some companies may decide to outsource certain portions of the compliance process, while others may decide to upgrade a legacy tax engine or invest in a new tax engine altogether.
  5. Develop a robust system for filing compliance and new state registrations. The post-Quill world will likely mean increased sales tax compliance obligations for many companies. Resources will be required not only to register in new states but also to file all of the required returns and remittances within the time required by each state. To do this, companies will need a system that can gather and reconcile data from all of their sales channels and translate it into paper or online returns for each jurisdiction.
  6. Bolster audit and compliance support. A rise in the number of jurisdictions in which a company files sales tax returns will potentially mean an increase in audits. These require compiling a hefty amount of documentation for selected transactions. Companies should also determine the appropriate liability amount for their financial statements as a result of the changes in their sales tax nexus.

In addition to following these steps, companies must closely monitor changes in state tax legislation—so they know which states adopt economic presence standards, as well as how they may relate to taxability of goods and services, rate changes, exemptions and filing requirements.

Learn more about how your company can prepare for the impact of the South Dakota v. Wayfair ruling.

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