The U.S. Supreme Court made sweeping changes to sales tax laws when it ruled in June that states can require businesses to collect online sales tax on purchases even if the business does not have a physical presence in the state. Before the ruling, businesses were required to collect sales tax in states only where they have a physical operation.
Even though small businesses with an e-commerce operation now face a bigger incremental compliance obligation, smaller brick-and-mortar operations that have always been required to collect sales tax are hailing the decision as providing long-overdue competitive equity.
The ruling is also a boost for Tennessee. In 2017, the Tennessee Department of Revenue estimated that the state could earn an additional $200 million each year by requiring out-of-state retailers making more than $500,000 a year from Tennessee residents to pay state sales tax.
Upsides for retailers
There’s time to adapt. It often takes a while for states to make the necessary changes to enable the collection of a new tax. While some states have been preparing their processes in anticipation, most will have work to do before enacting any major changes. Lawmakers in Tennessee, for example, are expected to take up the issue in their next session. In the meantime, it’s best to start now putting together all the tools you’ll need to be compliant.
Some states will have thresholds above which the tax will be triggered. If your activity in a particular area is below a predetermined dollar or transaction level, you may be exempt.
The Streamlined Sales and Use Tax Agreement. Twenty-four states currently participate in this agreement, which in addition to standardizing some of the supporting tax calculation and submission protocols also provides for free sales tax compliance software for retailers under certain circumstances.
What to watch for
Though the Supreme Court’s decision has been made, there are areas that small online retailers will still need to keep an eye on:
Retroactivity: Some states may be tempted to look to collect these taxes not only going forward, but retroactively.
Federal standardization: Policy makers grasp how challenging it will be to stay on top of the multitude of state and local sales tax rules. As such, the Supreme Court ruling may prompt Congress to finally enact a standardized federal policy — though this may be politically unlikely for now.
Potential impact on general business taxes: Some states don’t levy income taxes on businesses without a brick-and-mortar location within their borders. This decision may spur these states to reconsider that stance given the opportunity for incremental revenue.
Though some effects of this ruling are unknown, business owners can take steps to prepare. Assess the impact and evaluate where your main out-of-state sales come from. This will give you a sense of where you may want to focus your compliance attention.
If you have questions about sales tax compliance, please contact us at KraftCPAs. We’ll be glad to help.