Last summer, the U.S. Supreme Court ruled that out-of-state vendors are liable to collect and remit sales tax in the landmark case of South Dakota vs. Wayfair. States now could legally compel sellers to administer sales taxes whether the seller has physical presences in those states or not.
Consequently, the case has widespread ramifications on interstate commerce, e-commerce, mailing and fulfillment service providers, digital service providers, and buyers and sellers across multitudes of other categories. Companies now must identify and comply with state and local tax policies across the services for what cases where their products and services are sold.
Evidently, states have rectified or begun drafting the legal framework to take advantage of this taxation opportunity. For example, California recently enacted the administrative sales economic nexus statute for remote sellers exceeding $500,000 at the beginning of this second quarter. Ultimately, this Supreme Court introduces two substantial cost drivers into the Procurement space that buyers and sellers have to consider.
A Significant Increase in Compliance ObligationsBecause this decision allows states to require businesses to register, track, collect, and remit sales and use taxes, buyers and sellers will face increasing requirements for reporting and compliance on their transactions. Therefore, vendors will need to reassess their sales tax collection compliances specific to each state’s economic nexus requirements. Furthermore, vendors may now need to register and file sales tax returns in certain states where they ship or deliver goods. This adds complexity to an already delicate space.
To minimize concerns and issues, vendors should inspect their internal controls and documentation capabilities. The optimal operation will depend on whether or not vendors can sufficiently account for the changes that will respond to this ruling. To counteract, companies may turn to program development to automatically track their inter-state commerce and transactions. This would include tracking their usage, spend, exemptions, and other factors that could change how sales taxes will be implemented across their goods and services. Because of the ruling, state governments can now build their sales tax system on the transactions and sales volume that goes in and out of their state. Likewise, vendors must monitor their usage history closely to answer and comply with these new regulations.
Because each state can have a uniquely specific application process and vastly different exemption requirements, companies may need to engage third-party firms who have sales tax expertise. This would result in contracting costs to leverage their best practices and streamlined approaches. Likewise, the need to monitor the effects of this ruling may require leveraging an external technology solution. This would come with regular expenditure or a substantial upfront cost as demand for these services increase.
An overhead cost that many vendors will have to consider is the resource cost in filing for resale exemption certificates in cases where their customer base resides in states where those vendors do not have a physical presence. To claim sales tax exemptions on their purchases, buyers must apply for and obtain certificates for exemption. Because of the ruling, buyers must issue these sales tax exemption certificates across their supply base to comply with the laws of the land and ensure no gaps in their strategic sourcing initiatives.
A Resulting Passover of Costs onto BuyersBuyers must prepare for the inevitable increase in cost throughout their purchasing decisions as this tax change opens up more opportunities for regulatory actions. Buyers will need to consider the agreements that they have in place and examine closely for clauses that could exempt them from the pass-off of additional costs due to taxation. Because of the unique economic nexus requirement per state, this endeavor would mean buyers must consider not just their national accounts but also their regional and local vendors as well. It is crucial that buyers do their due diligence to ensure that their dues are paid accurately and as anticipated.
One noticeable point of contention we see in procurement is the legal language of how to handle the issue of these sales tax in proposed agreements. Contract negotiations will likely center on whether or not vendors are able to pass on any following sales taxes levied to buyers. Procurement should work with Legal to ensure that they can curtail these efforts during negotiations.
Buyers are likely to see noticeable increases in cost as states enact and enforce the complementary laws gradually that capitalize on this Supreme Court decision. Although there are some exemptions to this ruling, a majority of companies will be legally obligated to apply these costs to their supply chain, and ultimately, their sourcing initiatives. Long-term procurement results will be affected by these changes in the tax laws. In light of the potential, added costs, buyers must pay even closer attention to their usage history to confirm that sales tax is not being paid erroneously and that full compliance is made at the end of the day. A deeper understanding of North Dakota vs. Wayfair, as well as the correct monitoring of state-level law changes, will be vital to adapting your supply chain to these new regulations.