July 31, 2018
By: Karen T. Syrylo, CPA
States no longer need to restrict their sales tax collection requirements to only sellers that have a physical presence in the state, according to the June 21, 2018 decision by the U.S. Supreme Court in South Dakota v. Wayfair. The ruling can apply to all sellers of sales-taxable goods and services, no matter whether the seller is a nonprofit entity or a for-profit business. The result is that sellers that deal with their customers only through the Internet, phone and mail can be required to charge sales tax in many states where they have customers.
The Court’s decision overturned the long-standing rule outlined in two prior Supreme Court decisions that had said that a seller must have physical presence, such as an office or salesperson, in a state before the state could require the seller to charge the sales tax on sales to in-state customers. The Court’s majority ruled that the physical presence test is an incorrect interpretation of the Commerce Clause of the U.S. Constitution.
In the Wayfair decision, the Court spoke favorably of the components of the South Dakota sales tax statute at issue in the case; this included that the tax responsibility applied to sellers with $100,000 of sales to, or 200 transactions with, in-state customers, thus allowing for a reasonable threshold and protections for very small businesses. But the Court gave no specific instruction on exactly what would or would not be acceptable in the states’ requirements.
All states are in the process of reviewing and updating their laws to be in concert with this ruling so that the states can collect additional sales tax dollars from additional sellers. Some states already have laws in place that mostly or totally fall in line with the South Dakota standard that the Supreme Court addressed, although some states’ standards are significantly different, e.g. several apply a $10,000 sales threshold rather than the $100,000. We expect to see additional legislation and regulations
Issues for nonprofit entities
Nationwide, most nonprofit entities that enjoy exemption from paying sales tax on items they purchase for use in their nonprofit operations are still subject to charging and remitting sales tax on items they sell to customers or members. Of course, there are some exceptions, and as with most things in state taxes, these vary from state to state. The Supreme Court’s ruling does not impact what products and services are subject to sales tax in any state or other rules regarding exemptions and taxability; it only changes who can now be required to charge and collect the tax.
Examples of taxable tangible goods include books, CDs, DVDs, magazines and papers; notable exemptions include, in some states, “educational” materials and news periodicals. Some states require sales tax on items delivered electronically such as books and computer software. And, a growing number of states impose sales tax on some services such as information services and data services.
It will be important for nonprofit entities that sell sales-taxable goods and services to review their sales operations for possible new sales tax requirements under the Supreme Court’s recent ruling. This must be done on a state-by-state basis due to the fact that the laws differ.
Questions that need to be asked:
- In which states are our customers?
- Do we sell items that are taxable, or do some or all of those states consider our sold items/services to be exempt?
- How much is our total annual sales volume in each state?
- How many transactions do we conduct in each state each year?
- What is each state’s threshold for requiring sales tax to be charged, e.g. sales dollar amount or number of transactions?
- In the states where we meet the state threshold, do we have exempt customers from whom we will need to receive exemption certificates in order to legally avoid charging the sales tax?
- What accounting and processing mechanisms do we need to have in place to identify taxable transactions, bill the tax on our invoices, collect the tax from our customers, and remit the tax to the states?
- What processes do we need to have in place to monitor our operations and the state law changes, in order to stay compliant and avoid penalties?
GRF’s experienced tax professionals can assist you with this analysis to make sure you are compliant with the changing sales tax landscape and do what is legally required. Contact either of GRF’s tax experts below with any questions you may have about your organizations.
Richard J. Locastro
Nonprofit Tax Partner, Director of Nonprofit Tax
Nonprofit Tax Principal
About the author
Karen T. Syrylo, CPA is a sole practitioner having spent much of her career with “Big 4” international accounting firms where she was a state and local tax services group partner. Throughout her career, Karen has been at the forefront of leading state and local tax issues. She has specialized in multi-state tax consulting services for over 35 years, working with clients in a wide variety of industries and with headquarters from around the world, on matters of multistate tax planning and analysis, and tax audit defense and appeals. Karen is a frequent author and speaker on multistate tax topics. She was voted as one of Maryland’s Top CPAs by peers and clients in Baltimore Smart CEO Magazine’s annual survey, and has been recognized as one of Maryland’s Top 100 Women by The Maryland Daily Record.