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Wayfair And Your State Sales Tax Obligations
Wayfair is shorthand for South Dakota v. Wayfair, a lawsuit filed against online retailers Wayfair, Newegg, and Overstock.com. South Dakota sued to force the three out-of-state retailers and other “remote sellers” to collect and remit sales taxes on sales made to its residents.
The case went all the way to the U.S. Supreme Court. And when it ruled on it in 2018, the Court for the first time found that a company’s connections to a state do not have to be physical to trigger a sales tax obligation. The Court ruled that simply having enough ties through business transactions, revenue, or other activities gives remote sellers nexus, making them liable to collect sales tax.
How nexus gets you noticed
The ruling opened the door for states across the U.S. to pass laws to collect sales taxes from remote sellers generating sales in their states. Here’s a quick rundown of how some key states for startups reacted to the decision.
Does Wayfair change the way I handle state sales taxes?
The Wayfair ruling means the number of state tax authorities you’re likely to have to deal with will increase. You will also have to put accounting and financial systems in place to track and report on the revenue your business generates in each state, calculate the right tax rates for each state, collect, and remit sales taxes.
But what it actually means for your tax exposure and cash flow isn’t all that clear at first blush. That’s because of two things:
- The ruling applies only to the South Dakota case. That means some states’ new laws could be challenged in the courts.
- Each state has its own criteria and thresholds for determining nexus. Some base it on how much revenue a business generates in their state; some look at the number of transactions. And some use a combination of the two as well as other factors.
Depending on where your business operates, you may not meet the threshold in one state, but find yourself on the hook to collect sales tax in another.
There’s another wrinkle. You could find yourself having to pay back taxes in states that apply their sales tax collection mandates retroactively. Some states are giving grace periods for unpaid sales taxes, but the clock is ticking.
One thing is certain. Complying with the quilt work of state rules, from registering for sales permits to knowing which thresholds apply in each state — not to mention remembering when the various new sales tax requirements go into effect — could be a full-time undertaking.
What you can do now
Our advice: come clean, come up with a plan, and get professional help. If you don’t have them already, put robust recordkeeping, accounting, and tax compliance systems in place to make sure you are on good financial footing going forward.
Next, get prepared to handle potential liabilities you may be on the hook for. The last thing you want is to get slapped with penalties for non-compliance on top of any back taxes you owe. At the very least, you’ll need to comb through your records to track and account for old transactions, and tally up what you might owe. Trying to make sense of it all on your own could get ugly very fast. It could also waste time, and ultimately cost you more if you wind up having to bring in someone to unravel the mess afterward.
Arming yourself with the right financial infrastructure plus guidance from a trusted accountant, tax expert, or outsourced CFO is mission-critical. They can help with both tactical advice and strategic planning, freeing you up to focus on day-to-day challenges — like making the right hires, growing your business, and lining up funding.
About Early Growth
For over 10 years, Early Growth has provided early-stage companies CFO Consulting Services, Accounting for Startups, Taxes, and 409a Valuation. We saw a need in the marketplace for a service that would allow founders to still focus on business while building a healthy financial story. Our Outsourced CFO, Outsourced Accounting, and R&D Credits services have helped many companies grow.