A landmark ruling by the U.S. Supreme Court in 2018 dramatically expanded the ability of states to impose sales tax collection obligations on out-of-state organizations that sell goods and services within their boundaries. Since then, state legislatures and municipalities have scrambled to pass laws targeting organizations that lack a physical presence in their jurisdictions.
Some of these laws could ensnare nonprofits that make taxable sales to those states — even if similar sales aren’t taxable in their home states. Ticket sales, online auctions, cloud-based transactions (for example, webinars, telemedicine and app sales) all might fall within another state’s definition of taxable sales, as well as more obvious sales such as those of CDs and hard-copy publications.
The current landscape
The Supreme Court case (South Dakota v. Wayfair, Inc.) involved a South Dakota law that requires out-of-state retailers that made at least 200 sales, or sales totaling at least $100,000, in the state to collect and remit a 4.5% sales tax. Under previous law, if you, for example, sold T-shirts via your website to out-of-state supporters, you needn’t have worried about sales tax obligations. The court upheld the tax, though.
According to the National Conference of State Legislatures, as of October 1, 42 states and the District of Columbia have required sales tax collection by out-of-state (or “remote”) sellers. The laws generally cover sales of tangible goods but also might include sales of digital products such as e-books.
Certain states offer limited or broad exemptions to qualifying nonprofits, but others don’t. (Nonprofits generally are exempt from sales taxes when making out-of-state purchases.) Yet many organizations have yet to take measures to ensure compliance in those states.
Some nonprofits may look at the typical trigger of 200 sales or $100,000 in sales, focus on the $100,000 figure and think they don’t have to worry. But 200 $1 sales would trigger obligations. Others might not even consider sales taxes because they know they have no obligations in their home states. However, affected organizations that don’t collect sales taxes from purchasers could end up on the hook — not only for the taxes but also for fines, penalties and interest.
The most significant impact for nonprofits so far may be in the publishing area. States want to tax subscription revenues for professional journals and newsletters, together with related adverting income, based on the addresses where the materials are mailed.
Your next steps
Your organization can’t afford to ignore the implications of the Wayfair decision. If you haven’t already, it’s time to take these steps:
- Determine your exposure to sales taxes outside your home state. Which of your goods and services are sold to out-of-state buyers? Which jurisdictions are they sold to? Do they have economic nexus laws or regulations?
- Determine which goods and services sold are taxable out of state. You’ll need to examine the applicable laws for each jurisdiction where you sell to identify which goods and services are considered taxable. Items that are taxable in one state may not be in another. You also must determine if you qualify for exemptions in any of the implicated jurisdictions.
- Compare your sales activity in each jurisdiction with the respective threshold. Jurisdictions can use different threshold tests. For example, a state could measure sales based on gross sales receipts, the number of transactions, or a combination of the two tests.
- Register as required. You must register as a vendor in those jurisdictions where your sales activity triggers tax responsibilities. Most require such registration as a prerequisite to obtaining a sales tax account.
- Establish policies and procedures to ensure compliance. You likely will need to develop or adjust several policies and procedures. For example, nonprofits with out-of-state sales must have processes for capturing the information necessary to determine which jurisdictions sales must be allocated to and for charging the correct sales tax on invoices to different areas. Tracking sales can become complicated for nonprofits when they’re dealing with items like gala tickets and membership dues that have both sales and donation components.
You may need to create sales tax liability accounts and modify your tax accrual processes. Document retention policies should be developed to retain the supporting documentation. And you will want to institute procedures to make timely compliance filings in all relevant jurisdictions.
The Wayfair ruling means new layers of complex and varied compliance requirements for nonprofits that sell outside of their home states. Your CPA can help you set up the processes and procedures now to meet your sales tax obligations going forward.