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By Che Odom
The U.S. Supreme Court created work for accountants with its decision to allow states to tax online sales made by companies that lack an in-state presence.
An onslaught of new sales taxes—some applied retroactively—by dozens of states and hundreds of counties will necessitate accounting and compliance challenges that could be particularly difficult for smaller sellers.
“Most retailers are filing sales-tax returns at least in their home state so there will be an explosion of accounting procedures to track the various counties’ sales-tax liabilities, deposits, etc.,” Greg Stanislawski, managing principal at California-based CliftonLarsonAllen LLP, told Bloomberg Tax.
The high court issued a 5-4 ruling June 21 in South Dakota v. Wayfair that threw out its divisive 1992 rule in Quill Corp. v. North Dakota. Quill , which states such as the petitioning South Dakota for years have tried to kill through lawsuits and regulation, prohibited states from imposing sales-tax-collection obligations on vendors lacking an in-state physical presence.
Justice Kennedy, writing for the majority, called Quill “flawed,” adding that it put “both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers.”
The case involved the state of South Dakota’s assessment of sales tax on retailers—Boston-based Wayfair Inc., Utah’s Overstock.com Inc., and Newegg Inc., headquartered in California—for peddling wares into its borders.
Until now, businesses that merely made online sales into a state didn’t have to collect and remit local sales taxes. That will likely change.
“The impact of the Court’s ruling on companies in terms of time, technology, and expense is likely going to be substantial,” Jeffrey C. LeSage, Americas vice chairman of tax of KPMG LLP, told Bloomberg Tax. “Businesses will now need to prepare to closely examine and retrofit their operations.”
Sales tax charges must be tracked and often states require remittance of sales tax on an accrual basis, which means when it is charged not when collected, Harold Hecht, director and practice leader of state and local taxes for Mazars USA LLP, told Bloomberg Tax.
“This will certainly be a burden to smaller sellers that do not have the resources, cash flow to pay these taxes upfront, and may not have the sophisticated software or staffing to properly monitor collection and remittance,” he said.
Smaller sellers that were exclusively wholesalers have just begun to use “Amazon-type channels for direct-to-consumer sales, and many of these will now have significant compliance burdens,” he said.
Tracking the sales taxes must be done not only at the state level, but also the local level, which will require diligence on the part of in-house accountants who may need to set up new accounts to hold the new taxes on the balance sheet, Stanislawski said.
Most e-retailers don’t realize they face obligations to collect and remit sales taxes in hundreds of counties around the country.
“Most of the states have multiple country sales-tax returns, however, a small growing e-commerce company might be forced into the sales-tax returns compliance of a large national e-retailer,” Stanislawski said.
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