If your business has customers across state lines, you better double-check whether your sales tax system is up to date. The Supreme Court struck down a major out-of-state sales tax exemption which will dramatically increase the number of businesses that need to collect taxes from their customers.
This ruling will impact nearly the entire country, since 45 out of 50 states charge some sort of sales tax, according to the Sales Tax Institute. Let’s explore how the tax laws have changed over the past few months, and what your business should do to prepare.
Sales Taxes, Before and After
Whether or not your business is supposed to collect sales tax for a state depends on if you have established economic nexus, meaning a connection to a region. Before the Supreme Court ruling, if you had a physical presence in an area, like a store or warehouse, sales tax laws would apply. If you didn’t, you received an out-of-state sales tax exemption.
But as more of the economy moves online, state governments and brick-and-mortar businesses argued this old system no longer made sense. Online businesses could be a major player in an area and have economic nexus without any physical locations.
According to CNN, in the summer of 2018, the Supreme Court reviewed this situation in a case between the South Dakota state government and an online retailer. They decided that state governments were entitled to collect sales taxes from businesses selling from out of state, even if the business does not have a physical presence.
State Government Reactions
The Supreme Court ruling was a chance for state governments to collect more tax dollars and you better believe it’s an opportunity they aren’t going to miss. Throughout 2018 and 2019, state governments passed new requirements for when out-of-state businesses would need to start collecting sales taxes from their customers.
Avalara, a tax software company, has published a list of new state requirements. You can see when each state’s new tax laws launched or will launch, as well as the number of sales your business needs to make for the rules to apply.
Governments aren’t chasing after a small business that has only made a few $50 sales. You only collect taxes when you have a minimum number of sales in a state each year. For example, Georgia does not require you to collect taxes for out-of-state sales unless your business made more than $250,000 in sales or had 200 or more sales transactions in Georgia.
Preparing for the New Sales Tax Standards
If you think the new sales tax standards will impact your business, here’s how you can prepare:
1. Identify Where Your Sales Are Coming From
Figure out all the states where your business has customers. Tally up how much you’re making in total sales as well as the total number of transactions for every state.
2. Review All the State Laws
In any state you make sales, check whether they have updated their tax laws since the Supreme Court ruling. They may have launched new requirements for online or out-of-state businesses. See whether your business made enough sales to be required to collect taxes. Remember, the thresholds are going to be quite high — most likely at least $100,000 in sales or over 100 transactions at a minimum.
If a state hasn’t announced any new sales tax laws just yet, be sure to keep an eye on it. Governments are still reacting to the new ruling.
3. Register and Start Collecting Sales Taxes
If you’ve determined that you need to collect tax for a state, you should register with the state for a sales tax license. Then, make sure to collect taxes from your customers on future sales. For each state, check how often you need to file a return and send in your taxes.
4. Use Sales Tax Software
Keeping track of all the sales tax requirements can be a nightmare. Every state has different exemptions, minimums, filing dates and penalties. Setting up sales tax software can make your life easier. You input all your sales and their locations through the program and it will tell you how much you owe and when.
The Supreme Court gave online retailers a wake-up call, but it’s one that should make sure all businesses pay their fair share of taxes. With this major change, make sure to add reviewing the new laws to your 2019 tax preparation checklist.