State and Local Tax
By: Nick Lepley, CPA
South Dakota v. Wayfair
Is your dealership in compliance with state & local tax rules? Better yet, do you have an opportunity to save tax dollars? It's important that you understand the evolution we’ve recently seen in this area for dealerships. And it all starts with the case of South Dakota taking to court the popular online home goods retailer, Wayfair. The Supreme Court overturned a long-standing ruling in the last year that originally applied in this case, and the major change has to do with the physical presence of a retailer in a state, regarding taxation.
In the past, dealerships sold parts and services to out-of-state customers via the internet. You’re probably doing the same right now. But- that old ruling, which was overturned in June 2018, established there had to be a physical presence in a state to collect sales tax.
With this new ruling from the Wayfair case, physical presence is no longer necessary to trigger the need to charge, collect, and remit sales tax. Now an “economic” or “virtual” presence can create nexus, in other words, a responsibility to pay taxes. “Economic” refers to a certain dollar amount of sales, and “virtual” contacts mean you have a certain number of transactions in the state through the internet.
Other Nexus Issues
There are more than 10,000 different sales tax jurisdictions in the United States. States have always been on the lookout for ways to generate additional tax funds for the various projects and services they provide to their residents. You need to identify what your out-of-state sales are immediately, now that online sales are being pulled into the mix. Someone in your accounting department should be able to run a sales-by-state report for each department and look at the gross sales receipts to compare to the new state thresholds and determine if you have nexus. If your in-house accounting department can’t do more than run the report- you should have an accountant step in for a nexus study.
A state nexus study will help you identify how you need to address this taxation issue. A tax professional will look at all your online out-of-state gross sales and then look at each state’s economic and virtual contact thresholds. When a tax professional looks at that, they can determine if there is audit exposure. We can determine what state and local jurisdictions your dealership may be subject to and then show you what your path to compliance is. We would also determine what sales would be taxable versus exempt and what exemption certificate information may be needed to protect you from a sales tax audit.
Generally, states have what is called a “resale” exemption. It means if you are selling your products to another company that will be reselling it to the end consumer, it would be considered exempt from the collection of sales taxes. States typically require the dealership to collect information from the resale company and other information related to the sale. You then must either file it with the state or keep a copy on file, in case you get audited in the future.
And if you’re thinking about expanding your geographic reach through online retail, you should investigate generating some revenue projections to determine what thresholds you may exceed. If you do this ahead of time, you can make sure you’re registered with the state you’re looking to sell in, and you can collect taxes after your first sale if you believe you will exceed that threshold. Most states are using a set dollar amount or transaction count. For South Dakota, they settled on $100,000 in online sales or 200 transactions into the state as their triggering points.
You could be creating a large tax liability for your dealership if you don’t pay attention to this issue. If you’re not collecting sales tax from the end consumer when you should be, and you’re audited by the state, your dealership will be responsible for paying that sales tax plus penalties and interest.
To learn more about this, please watch our full webinar on the subject.