On June 21, 2018, the U.S. Supreme Court reached a majority decision in South Dakota v. Wayfair to overturn a longstanding rule regarding the taxation of purchases made from out-of-state sellers. As an outcome, it is no longer necessary for states to restrict their sales tax collection requirements to sellers with a physical presence in the state, such as an office or a resident salesperson. Instead, sellers may now be required to charge the established sales tax in every state where they have customers, even if the seller deals with most customers online, by mail or over the phone.
This decision, which ultimately ruled that a “physical presence test” is a false interpretation of the U.S. Constitution’s Commerce Clause, will affect all sellers of sales-taxable services and goods, including for-profit and nonprofit entities. The Wayfair decision will have an impact on every nonprofit organization across the U.S., ranging from increased costs for services to a greater need for due diligence. Though nonprofits are exempt from paying sales tax on goods used in their operations, they may now have to collect taxes on goods and services sold to the organization’s target customers.
Nonprofit Considerations in Light of Wayfair
For organizations that sell goods and services as part of their mission, it is important to become familiar with the economic thresholds defined by different states when selling to in-state customers. If your nonprofit’s total sales come in below a particular state’s threshold, your organization will not incur any additional tax responsibilities as a result of the Wayfair decision. The thresholds, which are generally reasonable, exist mainly to protect smaller businesses, but there has been no specific instruction by the Supreme Court as to how states should define their thresholds and requirements.
As states consider regulations and legislation, they will first need to review their current laws, and then make changes in accordance with the ruling. Most will be able to collect additional sales taxes from sellers.
Before this happens, however, nonprofits should be cognizant of the inevitable complexities that will come with navigating an array of rules from 46 state tax jurisdictions. This is where the importance of due diligence comes into play; otherwise, nonprofits may incur significant costs from noncompliance. By reviewing sales operations on a state-by-state basis, nonprofits can understand the new sales tax requirements under the Wayfair ruling.
Questions to Ask Internally
As your organization conducts an internal review of your sales operations and customer base, certain questions will be critical to the process since laws will differ.
- What are our total annual sales in each state?
- In which states do our customers reside?
- Are the items we are selling taxable, or do some of the states consider our goods and services tax-exempt?
- What is each state’s threshold for charging sales tax?
- Do our total annual sales surpass the threshold presently defined by each state?
- Do we have the capabilities in our accounting processes to charge the correct sales tax in each state, bill the tax on invoices and collect and remit the tax to the state?
In addition, nonprofits should determine a process for monitoring the management of the sales operations so that they can maintain compliance in each state and avoid penalties. Depending on sales volume, the reporting process can be challenging, so some nonprofit directors may choose to consult with a third party. Regular reconciling and scheduled audits will go a long way in ensuring compliance.
After reviewing the internal operations and state requirements, nonprofits can navigate the implications of the Wayfair decision. While the rules are still being determined, nonprofits must be aware of incurring extra costs as they attempt to comply with the current laws and economic thresholds.