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National Restaurant Association - Restaurants gear up for sales-tax changes in wake of Supreme Court decision

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Restaurants gear up for sales-tax changes in wake of Supreme Court decision

Restaurants and other businesses are preparing for changes in the wake of a U.S. Supreme Court decision that will expand state’s ability to tax sales within their boundaries.

The high court’s June decision in South Dakota vs. Wayfair cleared the way for other states to pass so-called “economic nexus” statutes to capture taxes on sales made within a state by out-of-state businesses.

South Dakota collected taxes from online furniture retailer Wayfair and other out-of-state companies once companies reached a certain sales revenue threshold within the state. South Dakota successfully made the case that companies should pay because they realize an economic benefit by selling products in a state.

Before the decision, states had largely been able to collect sales taxes only on sales by a company that had a physical presence in the state or that hired people in the state to solicit business.

Since the Wayfair decision, nearly 30 states have passed laws, issued regulations or published guidance to collect sales taxes from Internet sellers or require out-of-state sellers to report sales revenue to a state. The issue is critical to states, which derive about 30 percent of their revenues from sales and use taxes.

What it could mean for restaurants:

  • Huge potential compliance costs. If restaurants are forced to file sales tax returns in multiple jurisdictions, compliance could get complicated. The laws could hit small and mid-sized companies engaged in ecommerce. A restaurant that sells branded T-shirts and caps, for example, would have to track whether hats and T-shirts are taxable in one state but not another. A restaurant in one jurisdiction that delivers food to other jurisdictions could end up having to file multiple returns. 
  • Higher taxes. Any product a restaurant sells across state lines could be taxed – even if it’s a restaurant with just a single location. “Wayfair potentially affects the tax collection of any product or service that travels across state borders, whether for sale or for purchase,” said Matt Talcoff, a Boston-based tax partner with the accounting firm RSM.
  • Implications for purchases. Restaurants typically accrue “use taxes” when they purchase restaurant supplies coming from out of state. Their suppliers could now decide whether to impose sales taxes on purchases.

Restaurant companies should consult with their tax advisors to understand the implications of the new laws and prepare for compliance. With dozens of new rules and laws taking effect through early 2019, businesses are only just now beginning to understand the impact of these “economic nexus” laws. Laws aimed at Internet sellers are hitting other businesses as well, restaurants included.

Many companies are retooling their online commerce and ordering platforms to include new jurisdiction-based rates and taxability data. Business groups are advocating for sensible state laws, including allowing businesses to participate in a Streamlined Sales and Use Tax Agreement (SSUTA) system rather than requiring state-by-state registrations, and restrict multi-state audits.

Some lawmakers in Congress are backing bills to overturn the Supreme Court’s decision but there’s been no final action -- and the 2018 midterm elections could alter the landscape in Congress even further. 

Sponsored content provided by RSM, a National Restaurant Association partner. RSM provides audit, tax and consulting services to middle-market companies.

More insights from RSM:


What the 2017 tax law means for your restaurant business
The 2017 tax reform law may offer restaurant operators new opportunities to save, according to RSM. 

A tip on tips: Remember the FICA reimbursement credit
You may be eligible to claim a credit for a portion of taxes paid on employees' tips, RSM advises.

5 reasons to use the Work Opportunity Tax Credit
If you haven't used the WOTC, now is a good time to take a look, says RSM.

Taxpayers can deduct 50 percent of their business meal spending, IRS confirms
6 questions about business-meal spending.

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