The Evolving Landscape of Sales and Use Tax – an Update on Wayfair

The U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair, Inc. changed the rules for when states can impose sales tax collection requirements on remote sellers (see our previous post on the topic). As a result of the decision, states may now impose sales tax collection requirements on sellers who are making sales into jurisdictions where they lack physical presence. The fact that the business has an economic connection with the state (“economic nexus,” as it is known) is sufficient.

Why is this important to me?

Although sales tax is a pass-through tax, it is important to remember that the ultimate responsibility to remit the required amount to the state rests with the seller. Where a seller fails to properly collect sales tax from customers, it will be left holding the bill for the uncollected taxes, in addition to any penalties assessed. Failing to comply with the new requirements poses a significant risk for all remote sellers.

General State Response

As one would expect, states are generally eager to take advantage of this new opportunity to increase their sales tax collections. At this point, the majority of states that impose sales tax have an economic nexus policy of some sort.

In its decision, the Supreme Court highlighted various features of South Dakota’s sales tax system that make it easier for out-of-state sellers to comply. One feature is the presence of bright-line thresholds to ensure that sellers who transact only a limited amount of business are not required to collect sales tax.  In keeping with the Supreme Court ruling, states with an economic nexus policy have included some threshold (in terms of dollar amounts or numbers of sales) that must be crossed before an out-of-state seller will be subject to the sales tax collection requirements. These thresholds vary among the states, as do the dates when the economic nexus rules go into effect. In addition, some states currently offer remote sellers the option to comply with notice and reporting rules rather than collecting the sales tax. These rules require remote sellers to file reports with the state regarding the sales made where sales tax was not collected (“reporting”) and to inform buyers of their obligations to pay use tax on their purchases (“notice”).

How has Maryland responded?

The Maryland General Assembly approved emergency regulations to begin imposing sales tax collection obligations on remote sellers. An out-of-state vendor without a physical presence in Maryland is required to register with the Comptroller of Maryland and to collect and remit Maryland sales tax on retail sales of tangible personal property or taxable services for delivery into Maryland when, during the previous calendar year or the current calendar year, the vendor meets one of the following criteria:

  • Gross revenue from the sale of tangible personal property or taxable services delivered into Maryland exceeds $100,000; or
  • Sales of tangible personal property or taxable services for delivery into Maryland in 200 or more separate transactions.

The regulations are effective October 1, 2018. Since the regulations take effect mid-year, the first period when they will be applied is Q4 of 2018 (October 1, 2018- December 31, 2018). If one of the criteria is met during that time, the seller will need to begin fulfilling its sales tax collection duties by the first day of the following month.

What’s next?

Businesses that make remote sales into states where they have not been collecting sales tax will need to closely analyze their activities to determine if they have crossed any of the states’ thresholds, as well as whether notice & reporting is an alternative for those particular states. As a seller’s business activities expand and change, it will need to track whether it has crossed any of the thresholds that trigger additional compliance requirements. As a business considers its activities, it is important to keep in mind that some states impose a sales tax on certain services. Also, some of the states count sales that are exempt from sales tax when determining whether the thresholds have been crossed.

Maryland residents that make purchases online or from other remote sellers will likely find that they are being charged sales tax by vendors that were previously exempt.

For additional information and to discuss how these new policies may affect you and your business, please contact your Hertzbach Tax Advisor at 410-363-3200 or email us at info@hertzbach.com.

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