Economic Nexus and the Future of Sales Tax: The Impact of the South Dakota vs. Wayfair, Inc. Ruling

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Stacy DoseStrategic Alliance ManagerOctober 30, 2018

Agenda

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South Dakota vs. Wayfair, Inc. Ruling

Economic Nexus

“What should I do?”

Automating Sales Tax Compliance

Q&A

South Dakota asked the U.S. Supreme Court to overturn its long-standing physical presence rule (Quill Corp. v. North Dakota) for determining when a state can make remote sellers collect sales tax.

The Supreme Court ruled in favor of South Dakota on June 21, 2018.

South Dakota is granted authority to impose sales tax obligations on out-of-state transactions.

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What was South Dakota vs. Wayfair, Inc. about?

Affected: Remote sellers not currently registered with the state who meet threshold requirements

• Annual sales in excess of $100,000 or 200 transactions into South Dakota

Effective date: November 1, 2018

Most impactful is that the “physical presence” rule has been overturned.

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South Dakota vs. Wayfair, Inc. ruling details

If I’m already registered in South Dakota, does this court decision apply to me?

• This ruling will not affect any company already registered and collecting in South Dakota.

Does the ruling only apply to online transactions?

• No. The ruling applies to online and offline sales.

Does the economic nexus rule apply to non-taxable transactions?

• The ruling does not change what is or isn’t taxable.

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South Dakota vs. Wayfair, Inc. ruling details

The ruling adds economic nexus to the existing list of nexus-creating activities.

South Dakota’s law applies to taxable sales made to consumers. It:

• Does not change what is tax exempt• Will apply to service providers (not just

tangible personal property) as South Dakota taxes many services

• Will apply to manufacturers and wholesalers who sell direct to consumers

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South Dakota vs. Wayfair, Inc. ruling details

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States enforcing economic nexus starting:

July 1, 2018 – Hawaii, Maine, Vermont

September 1, 2018 – MississippiSeptember 30, 2018 - Michigan

October 1, 2018 – Alabama, Illinois, Indiana, Kentucky, Maryland, Minnesota, New Jersey, North Dakota, Washington, Wisconsin

November 1, 2018 – North Carolina, South Dakota

December 1, 2018 – Colorado, Connecticut

January 1, 2019 – Georgia, Iowa, Louisiana, Nebraska, Utah

All of these states have different statutory start dates and thresholds. See our online grid for updates.

Prepare your clients for this new wave of changes (map update as of 10/2/18)States in action post-ruling

Economic Nexus

Sales and gross receipts taxes make up 47% of total state revenue

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Total state government tax collectionsStates rely on sales tax revenue

Selective sales taxes 16.6%

General sales and gross receipts taxes 30.5%

States are losing $13B from uncollected tax on ecommerce sales*

Source: US Census Bureau: Finance – Survey of State Government Tax Collections at 2016 State Government Tax Tables* Government Accountability Office report, November 2017 – SALES TAXES: States Could Gain Revenue from Expanded Authority, but Businesses Are Likely to Experience Compliance Costs

$24 Bfrom uncollected tax on ecommerce sales

States are losing

Online sales hurt state revenue

Source: US Census Bureau: Finance – Survey of State Government Tax Collections at www.census.gov/govs/statetaxNational Retail Federation - https://nrf.com/blog/nrf-ceo-calls-congress-address-sales-tax-fairness-new-campaign-launches

W H AT I S I T ?

ECONOMIC NEXUS

Economic nexus is a tax collection obligation imposed on sellers based on their level of economic activity within a state.

Unlike physical presence, it is based entirely on sales revenue, transaction volume, or both.

Like most sales tax laws, economic nexus criteria vary by state. All aim to level the playing field between non-collecting out-of-state sellers and brick-and-mortar businesses.

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©Avalara. Confidential and proprietary.

The nexus challengeMultistate locations Maintenance /

service / repairs

Hosted data centers

Licenses / royalties / fees

Direct / online sales

Trade showsManufacturer’s

repsInvestors / board

meetings

Marketing / web advertising

Owned / leased property

Field sales / service staff

Inventory location

Affiliates

Economic nexus

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“What should I do?”

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1. Don’t panic.

2. Contact your SALT CPA or attorney tax advisor – seek counsel on all nexus related requirements and laws.

• Don’t have one? Avalara has an extensive directory of tax experts and SALT CPAs who could work with you

3. If no SALT CPA or advisor, leverage Avalara Tax Advisory Services (TAS) - work directly with TAS to:

• Determine where you have nexus• Get ongoing monitoring services to see when new nexus is

established• Register in new jurisdictions• Navigate tasks related to establishing new nexus

Get expert counsel to determine how you’re impactedWhat should I do? When do I register?

Expert videos and blog

(All images on this page have live links)

Economic Nexus guideFAQ guide

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Hub: https://www.avalara.com/us/en/learn/sales-tax/South-Dakota-Wayfair.htmlResources to reference

Automating Sales Tax Compliance

Yearly employee costs of compliance* $67,000—$400,000

©Avalara. Confidential and proprietary.

Why do companies use 3rd parties for tax compliance?

25%

75%

Auditor is NOT LIKELY to find mistakes

Auditor is LIKELY to find mistakes **

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*Aberdeen Research, The Costs of Compliance **Wakefield Research, Sales and Use Tax Compliance, 2017

Tax calculations

Nexus

Product taxability

Exemption certificates

Audit readiness

State & local tax prep and filing

Jurisdiction assignment

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“Any efforts spent on sales and use tax compliance and related activities are non-revenue generating.”

When it comes to tax compliance, rates are just the tip of the iceberg…

Automate certificate managementEasily access tax data and documentsHandles prep, filing, and remittance

Find jurisdictions using full address, not ZIP codesUses built-in rules, ongoing updates

Addressing the challenges

©Avalara. Confidential and proprietary.

Avalara Sales Tax Suite

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1Nexus

Product taxability

Jurisdiction assignment

Exemption certificates

State and local tax prep and filing

Audit readiness

Add jurisdictions with one click

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Avalara Sales Tax Suite

©Avalara. Confidential and proprietary.

End-to-end sales tax automation

CertCaptureexemption management

Customer info

Returns managed filing

Research tax rates,boundaries,

and rules

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AvaTaxtax calculation

ERP, ecommerce, POS, billingYour systems

6.7 billion transactions

CertificatesRequestTransaction

info Taxes Returns, remittances

Research filing rules, forms

Your customers

18 million exemption certificates

Government

$28.9 billion in taxes prepared for remittance

Over 20,000 customers use Avalara to get tax compliance right

©Avalara. Confidential and proprietary. 23

Integrated600+ integrations into ERP, POS, ecommerce, billing, and CRM systems

EfficientBorn and managed in the cloud: real-time updates to sales tax rules and rates

AccurateEnd-to-end tax compliance solution: calculation, tax document management, and returns

Q&A

Get started today

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Contact your account manager or me directly.Stacy Dose(612) 741-2427 stacy.dose@avalara.com