When the Supreme Court decided South Dakota v. Wayfair in 2018, small business owners everywhere may not have known what was to come. And what was to come was a gigantic headache for those who do business with customers in many states. Unfortunately, many on the hook for handling this new requirement don't even know it's their onerous responsibility.
What happened was this: the Supreme Court rejected the physical presence test for sales tax, whereby remote companies previously didn't have to collect or pay sales tax in states where they weren't physically located. The decision was meant to bring a certain tax symmetry to online and in-person retailers. Now, e-retailers have to collect sales tax for potentially any state in which they do business, or apply for an exemption. For businesses that use third party digital platforms to sell goods, such "market facilitators" must sort out the taxes for those sellers.
Many states jumped at the chance to collect extra taxes they were due for these online sales. Businesses that sell their goods using outside facilitators will find compliance more straightforward; but small business owners who sell directly will bear the brunt of this complex new compliance obligation. The time spent sorting out the price of tax in Ohio for a tiny sale certainly means less time devoted to growing your business. Worse yet: sometimes, the sales tax varies throughout the state or jurisdiction.
For small business owners, this is more than just an inconvenience. Many are hoping this rule just goes away once the powers that be realize the effects are catastrophic. But until then, most will need to find a way to cope with the current situation. Below are five tips to get through the hassle of it all.
1. Get to know the rules.
First, small business owners should understand the new rules that states put in place following the Wayfair decision. Although each state can have different regulations, many are currently imposing collection on companies that have either more than $100,000 in sales or over 200 transactions in their state.
2. Get familiar with the responsible party rules.
Sales and use taxes are considered trust fund taxes--similar to payroll taxes--and, as such, even conducting business as a corporation does not necessarily protect a responsible person from personal liability for unpaid tax amounts. A responsible person can be an owner, a controller, an officer, an employee, etc.--anyone responsible for the payment of taxes for the business.
3. Review the out-of-state transactions.
Make sure you review the company's out-of-state transactions to determine in which state there might be a new reporting or collecting responsibility. This involves taking a close look at the software currently being used. Is it providing the information the company needs in order to make these determinations? Is a new system needed to ensure that these liabilities are not being overlooked?
4. Realize that you might be in for paperwork either way.
As states are identified in which a new reporting liability potentially exists, be sure to register and begin collecting and submitting taxes as required, or collect exemption paperwork for wholesale sales in that state. You may also be required to interact with one of many new state revenue departments.
5. Know what you don't know.
Finally, decide if the tasks related to determining and monitoring out-of-state sales can be handled in-house. Consider whether it's more cost effective to hire an expert. Check with local accounting firms or CPAs and find someone experienced in this area who can provide guidance in either setting up a system for you or providing ongoing support to make sure liabilities are being appropriately handled.
Small business owners are still in the weeds at this point. But those who can implement the advice above will hopefully avoid the added aggravation of an audit.