South Dakota v Wayfair: What it Means for Use Tax and Procurement Practices

Charles Maniace
July 23, 2018

There is no shortage of advice on what remote commerce sellers should do in light of the South Dakota v. Wayfair decision and the immediate tsunami of states acting to impose immediate (or relatively soon) tax collection and remittance obligations. In fact, smart sellers may have been planning ahead for this eventuality by evaluating (and monitoring) the states in which they have likely exposure. But have you considered whether your vendors will have the ability to accurately charge sales and use tax on your business purchases? Are you prepared to aggressively validate tax charges on your invoices to ensure you don’t pay any more tax than you have to but pay exactly as much tax as you need to?

How Does the South Dakota v Wayfair Ruling Effect Procurement and Use Tax?

Nothing the Supreme Court did in Wayfair changes the fact that sales and use tax liability is joint and several in most jurisdictions. This means if the seller neglect to collect and remit tax, or do so incorrectly, the obligation falls on the purchaser to self-assess and remit any tax that the seller failed to collect. For many businesses, use tax exposure can be substantial. Companies adopting best practices in tax compliance will have processes in place to ensure their A/P transactions are taxed correctly and when they are not, they take the necessary remedial steps. According to Americas’ SAP Users Group (ASUG), the “time to verify the accuracy of tax charged on vendor invoices” was the single biggest challenge when managing tax compliance on purchases.

As states move with lightning speed to enact economic/virtual nexus standards, more sellers will take at least some steps to collect tax in these states. However, the business reality is that purchasers cannot count on these sellers directing the necessary energy to get tax right. Not everybody is as diligent as those who attended the recent Sovos post-Wayfair decision Q&A webcast. Rather, what we will likely see is a number of sellers trying to get their hands around this situation and in so doing, taking any number of missteps, whether that be trying to maintain rates and rules databases themselves, stretching an existing solution beyond its capability, or selecting an automation provider that is not the right fit.

All of these scenarios will lead to mistakes, and mistakes in the world of sales tax compliance can be costly. Purchasers must be on their guard to make sure they are being charged the right amount of tax. Overpaying tax burns through cash that could otherwise be used to grow your business and underpaying tax leads to audit risk. Auditors also frequently review both sales and use tax transactions as part of the same audit, but as states begin to realize the power of technology in analyzing enormous volumes of data, audits are bound to become more frequent and comprehensive.

If you are a business currently collecting out-of-state use tax, will you have to move to collect sales tax instead? How might that change for a business?

In most states (Arizona and Colorado being exceptions), transactions originating in one state but delivered to a customer in another are subject to seller’s use tax. Further, while most states’ use tax rates and rules match those that apply to sales tax, there are, in some states, situations where localities imposing a sales tax have different (Alabama) or non-existent (New Mexico) use tax rates.

There is nothing in the Wayfair decision that expressly changes this reality and nothing appears to be happening right now indicating a movement to align sales and use tax rates in those states that have disparate treatment. In fact, just the opposite seems to be occurring. In the last few weeks, Louisiana (a notoriously complex state for sales tax compliance) has adopted a unique set of simplified tax rules that apply only to remote sellers effective July 1. Likewise, Alabama (another complex state) is planning to make their existing (voluntary) simplified seller’s use tax program mandatory effective October 1.

Take Action
Download the ASUG white paper, “Risky Business, How to Beat the Inefficiencies of Tax Compliance on Purchases,” to learn:

  • The clear and present risks associated with an increase in audit frequency and scrutiny on sales tax, and in particular, use tax, on purchases.
  • Current processes and technology your peers are using across the procure-to-pay process for tax compliance with varying results.
  • The necessary steps to reduce risks and burdens of tax compliance on purchases across your organization

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Author

Charles Maniace

Charles Maniace is Vice President – Regulatory Analysis & Design at Sovos. An attorney by trade, Chuck leads a team of attorneys responsible for all the tax and regulatory content that keeps Sovos clients continually compliant. Over his 14 year career in tax and regulatory automation, he has given talks and presentations on a variety of topics including The Taxation of High Tech Transactions, The Taxation of Remote Commerce, The Regulatory Implications of Brexit, The Rise of E-Audits, Form 1042-S Best Practices and Penalty Abatement Practices for Information Returns. Chuck is a member of the Massachusetts Bar and holds a B.S. in Business Economics from Bentley College, a J.D. from Boston University School of Law, and an LL.M in Taxation from Boston University School of Law.
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