by Leo Jakobson | July 24, 2018

A recent decision by the U.S. Supreme Court means incentive programs with merchandise award components may be facing a far more complex tax situation then they did before the ruling.

In South Dakota v. Wayfair, Inc., the court held that sellers must collect sales tax for every state in which a buyer is located. In the past, states only had the authority to collect sales tax on goods and services from retailers with a substantial physical presence in that state. In practice, this meant that Internet retailers did not have to collect the sales tax on each purchase that brick-and-mortar retailers do. 

While large Internet retailers like Amazon already collect sales tax for every state and locality in the nation, they do so voluntarily. Buyers or other recipients of a good or service for which sales tax was not collected by the seller have technically always been responsible for paying that tax themselves to the state in which they live.

"In the incentive marketplace, the employer or other customer would like a 'turn key' incentive program and would not want to be responsible for collecting, reporting, and remitting sales or use taxes," says George Delta, general counsel and executive director of the Incentive Federation Inc. (IFI). "The onus on performing these functions is bound to end up falling on incentive firms. Therefore, incentive firms that have not begun doing so already need to start adding the cost of sales and use tax compliance into their programs. As with traditional retailers, the administrative compliance costs are bound to hurt smaller incentive firms more than larger ones."

Delta adds that the diverse set of companies that provide and handle awards in the incentive and promotional products industry, "makes determining the responsibility for collecting and reporting such taxes more challenging."

Among the questions Delta says remain unanswered are:

1) Will manufacturers who drop ship be responsible for reporting and collecting taxes, or will that fall to the incentive house running the program?

2) Will the incentive house or end-user client paying for the merchandise be responsible for taxes?

3) Will national marketing companies or incentive rep firm be responsible for tax collection on merchandise bought by a client and then distributed across the country?