By Rex A. Collins CPA, CVA
HBK Dealership Industry Group
On June 21, 2018, the U.S. Supreme Court overturned a 1992 decision and a more than 50-year standard, ruling that states can force out of state dealers to charge, collect and remit sales taxes on goods and services sold to customers inside their states. The decision was driven by internet sales, but applies to all businesses, and has generated a tsunami of state and other jurisdictional legislation that is having a profound impact—among the most severe impact—on our industry.
In a 5-4 decision the Supreme Court ruled in Wayfair v. South Dakota that the “sales tax nexus” standard previously articulated by the Court in Quill v. North Dakota was “unsound and incorrect.” The Quill ruling held that a state cannot require an out-of-state seller with no physical presence in the state to collect and remit sales taxes on goods shipped to customers there. The Wayfair decision has added the concept of economic nexus to the rules relating to physical nexus; accordingly, dealers who do business with customers from another state could be responsible for taxes in that state despite not having a physical presence in that state.
Each state—and locale—will set its own standard.
When we first wrote about this as the Supreme Court made its ruling, we proposed that “each state—and locality—will set its own standard.” It was an easy call, as it was estimated that an additional $53 billion in sales taxes would now be remitted and all states are always looking for ways to increase revenues. Now just a year and a half later, most states have implemented so-called “economic nexus legislation” governing when and how much companies doing business in their states will have to pay. In many locales, the legislation goes beyond sales tax to require companies—and owners of companies qualified as pass-through entities—to file income tax returns while they keep up with registrations, licensing fees and other required payments.
In South Dakota, for example, the economic nexus threshold for owing sales taxes is $100,000 of gross sales or 200-plus transactions over any 365-day look-back period. Exceed either and you are required to register, charge, collect and submit the 4.5 percent South Dakota sales tax. (See chart for state-by-state thresholds). Of note, North Dakota implemented the same requirements as its namesake to the south on the very day of the Supreme Court ruling.
As states implement these laws, they’re being more aggressive. Alaska doesn’t have a sales tax but is considering allowing its cities to impose sales taxes on out-of-state sellers. Implementing economic nexus solely at the local level Kansas has eliminated the idea of a threshold in their new law. As of October 1, 2019, businesses selling into the state are being charged sales tax from the very first dollar of sales (it should be noted that the longevity of this law is yet to be seen since the Kansas Attorney General has renounced
Kansas’s provision, the Department of Revenue, however, insists on its validity). In the spirit of upping the ante with taxes on out-of-state merchandisers other than sales taxes, New York issued regulations this fall requiring businesses with a physical or “economic” presence in the state to file and pay income taxes—and New York is not alone in that initiative.
Physical presence and exempt sales
Don’t let the out-of-state sales tax laws allow you to think differently about physical presence. Physical presence—an officer, an employee, a warehouse, an affiliate, inventory storage, drop shipping—still triggers the need for filing for sales taxes and registration. The difference is in how it is defined. For example, if you send a technician to do a repair in another state that has an income tax you will owe income taxes there. The issue can get highly complex: figure, for example, a dealer renting construction equipment being used by the customer in multiple states. The presence of that equipment creates a “physical presence,” and therefore an economic nexus obligation in each of those states.
While sales of exempted equipment, such as agricultural equipment, remain sales tax exempt, they will count toward a threshold. Consider the dealer who after selling $90,000 of agriculture equipment tax exempt into Michigan—Michigan employs the $100,000 gross sales threshold—sells a taxable item, say an ATV, there for $20,000. The initial tax-exempt amount was applied to the threshold and the dealer had to pay the economic nexus tax on the $20,000 because this transaction put the dealer over the threshold. Generally, rules about exemptions are being tightened; dealers need to know the rules for every state where they sell tax-exempt equipment. There are currently five states who have a taxable sales threshold, and not a gross sales threshold, those states are: North Dakota, New Mexico, Oklahoma, Rhode Island, and Utah. It is yet to be seen if these states will maintain their taxable vs gross sales threshold or if more states will adopt a taxable sales threshold in the future.
How to contend
The amount of legislation and tax data that many dealers are having to track is staggering. Currently, the DMS providers are finding it difficult to capture and keep current on this onslaught of state and local jurisdictional tax data. For now, dealers can limit their exposure with thorough documentation. Clearly establish on your sales documents where the client takes possession of the product—that is, where the transfer of ownership takes place.
Shipping presents its own challenges. Ideally, use a third-party carrier to deliver your products. That keeps you from having a physical presence in that state. However, if you use your own rolling stock to deliver equipment, have the driver:
• Take an affidavit to be signed by the customer noting where and when the customer takes possession.
• Take a cell phone photo of the equipment at the location, ensuring that the photo includes the location.
• Stop at a gas station or local store and buy something, anything, so that you have a receipt proving they were there.
To help your dealership get and remain in compliance with such an entangling mass of rules, develop answers to the following questions:
– Do you know your business footprint, where you do business?
– What tools do you use to identify states where registration and compliance is required?
– Do you know the taxable status of your products in your customers’ states?
– Do you need to separate goods from services on your sales invoices?
– Do you need to collect exemption or resale certificates in states where historically you have not been required to do so?
If there is any good news about the economic nexus laws, it is that the states and other jurisdictions cannot charge sales taxes retroactively—only from the June 2018 date of the Supreme Court ruling forward.
There appears to be no slowing of the tsunami of tax regulations on out-of-state vendors—and not understanding your obligations can be devastating. Ask the Indiana dealer who incorrectly remitted $250,000 to Illinois for taxes that should have been remitted to Indiana, then lacked the standing to get it back. Or the multiple Indiana dealers getting a half million dollar assessments for deliveries into Kentucky and Ohio. Or the Pennsylvania dealer with a $110,000 assessment. Or the North Carolina dealer who paid$1.5 million in taxes to various states for rental equipment being used there. Dealers’ only defense is to know their obligations and ensure they recover those costs in their billing.
Rex Collins is a Principal at HBK CPAs and Consultants. He directs HBK’s National Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at firstname.lastname@example.org, or by phone at 317-504-7900.