Sales tax always has been, and always will be, an integral part of compliance for wineries, especially for those shipping direct-to-consumer (DtC). In recent years the standards for determining who is obligated to collect sales tax and at what rates has changed due to evolving legislation like the Supreme Court case South Dakota v. Wayfair.
When a winery wants to ship wine DtC to a particular state, it must obtain a shipping license or permit for that state. This becomes more complicated if the state requires a winery to “voluntarily” accept a sales tax obligation in order to receive the DtC shipping license. Since DtC shipping circumvents retail stores—where sales tax would normally be collected, the state can still ensure their revenue with this requirement.
Multiple layers of tax compliance
Collecting sales tax can be complicated. Each state has the power to determine its own laws and regulations in terms of sales and excise tax rates, exemptions, and remittance. The 21st Amendment gives states even more power to tax and regulate alcohol at their discretion. Depending on the state, wine may be taxed at a different rate than all other items such as food and general merchandise, or not subject to sales tax at all.
Wineries are generally required to collect local tax in addition to the base state rate in every state where they are registered for a sales tax license or permit. Once a seller is registered for sales tax with a state, that seller is required to continue submitting returns indefinitely, even when no sales tax is due, until the state expressly releases the retailer from responsibility.
In order to be compliant, wineries must keep up with state and local rates across all relevant jurisdictions, which can be broken down to county, city or even street level. In 2019, Sovos processed over 900 sales tax rate changes in the United States, where there are already more than 12,000 economic nexus laws on the books.
Assessing the proper sales and excise tax rates can be complicated when selling into multiple states. For example, in California the sales tax rate is 7.25 percent plus local rates (which in California as of May 2019 is calculated based on the destination address when goods are delivered to the end consumer) and the excise tax rate is $0.20 per gallon for still wine and $0.30 per gallon for sparkling wine. In New York the sales tax is 4 percent plus local rates and the excise tax is $0.30 per gallon. This is the contrast in rates when comparing just two states; every additional destination state can create an exponentially more complicated web of rates and rules to comply with, making it extremely difficult to manage manually.
What is economic nexus and does it affect DtC wine shippers?
Economic nexus requires businesses selling in a particular state to collect and pay tax on the income generated in that state, regardless of physical presence. Each state’s nexus obligations are now based on sales revenue and transaction volume thresholds.
Standards for economic nexus vary by effective date, transaction count threshold, revenue threshold and measurement period depending on the state. This adds even more complexity to the already complicated rules and regulations surrounding sales tax for DtC wine shippers.
This can cause difficulty determining in which states you are responsible for collecting sales tax. For example, in California as of April 25, 2019 remote sellers regardless of transaction volume, that make more than $500,000 in revenue in the preceding or current calendar year meet the economic nexus thresholds and are responsible for collecting sales tax. But, in New York the rules are much more complicated. As a remote seller in New York, if you have more than 100 transactions and $500,000 in revenue in the four preceding sales tax quarters you are responsible for sales tax collection, effective as of June 24, 2019 with a retroactive date of June 21, 2018. In addition to applying nexus laws, many states are also discussing the possibility of retroactive enforcement.
How to manage the varying sales tax obligations and reporting thresholds
Keeping track which states require sales tax obligation as a condition of obtaining a DtC shipping license, the varying sales and excise tax rates, and the new economic nexus standards can be very difficult to manage. It’s important to understand the revenue and transaction thresholds in each state as well as the effective dates and measurement periods to ensure you are collecting sales tax and properly reporting in every state where you meet the obligation standards.
Determining when your winery is responsible for collecting sales tax in a particular state, and then determining the correct sales and excise tax rates in the jurisdiction of the order’s final destination can be extremely complicated without an automated software solution. If economic nexus or sales and excise tax rates are not properly assessed and reported, it can lead to penalties, fines, or even loss of licensure. Making sure you are collecting the correct rates based off of destination with real-time sales tax determination and compliance checks will keep your winery protected.
Want to learn more about how to manage sales tax determination and reporting? Check out our latest white paper on real-time sales tax determination and compliance checks.