Wayfair a Year Later
In June 2018, the U.S. Supreme Court handed down a historic sales tax decision in South Dakota v. Wayfair, Inc. The Wayfair case overturns physical presence standards (i.e. property or employees in a state) that were upheld in previous cases, such as Quill Corp. v. North Dakota (1992) and National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967). These earlier cases required businesses to have a physical presence in a state in order to impose sales and use tax collection obligations. A year after Wayfair, almost all states now assess sales and use tax based on economic nexus legislation.
What did the Supreme Court uphold in South Dakota v. Wayfair, Inc.?
In 2016, South Dakota passed an economic presence statute that required out-of-state sellers to collect and remit sales tax as if the seller had a specified level of activity in the state. This new standard applied if the seller met either of the following criteria in the previous or current calendar year:
- Sold more than $100,000 of goods or services in South Dakota
- Had 200 or more separate sales transactions (i.e. invoices) in South Dakota
Where do the states stand since the decision?
As of July 1, 2019, almost all states that levy sales and use tax have enacted economic nexus legislation similar to South Dakota. However, some states have economic nexus effective as early as July 1, 2018. Physical presence still applies, and a company may still need to file a sales/use tax return, even if sales are under the economic nexus thresholds. Kansas Department of Revenue recently announced its intention to require sales tax collection from all remote retailers, no matter how small, effective October 1, 2019. That means the smallest of businesses would be subject to all of Kansas’ tax collection and audit power if they make even one sale in the state.
Do taxable and/or nontaxable sales determine the sales/transaction threshold? Are there penalties for not fling?
Taxable sales are what normally trigger economic nexus, but criteria could vary by state. For example, some states only include “retail” sales and not “resale” sales in calculating the threshold. There are also several states that include marketplace sales in addition to taxable, retail or gross sales. Finally, some states may require zero dollar returns to be filed even if there are no taxable sales. The state may also charge a late filing penalty for not filing a report.
Do the new sales tax nexus rules also apply to income/franchise tax filings?
No. Currently, Public Law 86-272 does not allow states to tax out-of-state companies on income made from solicitations of orders if the orders are approved and filed in another state. However, don’t be surprised if this is challenged, given the increase in e-commerce.
How will my business be affected?
The outcome of South Dakota v. Wayfair, Inc. could impact your business in several ways. Here are some things to consider:
- Review sales/item thresholds by state based on the economic nexus chart referred to below and states in which you have physical presence.
- Be aware of sales tax statutes in states in which you provide services or to which you send product.
- Do you sell through any third-party marketplaces such as Amazon or eBay?
- Do you use Fulfillment by Amazon? If so, in which states is Amazon storing inventory?
- Do you have any “click through” agreements with parties to generate sales in other states?
- Do you maintain exemption certificates in all states or just the states in which you are currently registered?
- Are you a remote seller selling property in states that have enacted notice reporting requirements?
- Could you benefit from a sales tax technology system that would help charge the correct sales tax rate to your customers and ease the filing of returns?
- What states do your employees or sales representatives visit, and what activities do they perform there?
- Have you considered other potential taxes (i.e. income, franchise, gross receipts, etc.) that you may be liable for if you need to register for sales tax?
Have you ever performed a nexus study? Visit our Economic Nexus Chart here.
For more information, please contact a member of the Herbein tax team, or email us at firstname.lastname@example.org.
Article written by Christel Wenrich.