What Does the Supreme Court’s Recent Decision in the “Wayfair” Case Mean and Will It Impact Your Business?
On June 21, 2018, the Supreme Court of the United States issued a landmark opinion related to sales and use tax in the case of South Dakota v. Wayfair. This decision overturned the physical presence standard that has been in place for over 50 years first established under National Bellas Hess Inc. v. Department of Revenue of Illinois (1967) and upheld more recently by Quill Corp. v. North Dakota (1992).
Since 1967, and until the Wayfair decision, a state could only enforce a requirement for a taxpayer (“seller”) to collect and remit sales tax if they had a physical presence within the state (often referred to as “substantial nexus”). If the seller had no physical presence in that state, the seller was generally not required to collect any sales tax and the burden was on the buyer to report and pay the sales or use tax.
Nexus describes the amount and degree of a taxpayer’s connection with a state before the taxpayer becomes subject to the state’s taxing jurisdiction. Generally, for a state to have taxing jurisdiction over a taxpayer, it needs to establish substantial nexus. For sales tax purposes, this required a physical presence in the past. But, as a result of Wayfair, a taxing state may establish an economic nexus even if there is no physical presence.
States exercise their power to tax through statutes, case law, regulation and policy. Generally, state statutes are broadly written and include phrases such as “doing business in” or “deriving income from” to describe an activity that will trigger nexus and thus a filing obligation. Statutes tend to vary from state to state.
In recent years, many states have become more aggressive in enacting various statutes that require out-of-state sellers to collect and remit sales tax. Over half of the states that impose a general state-wide sales tax have addressed a form of economic nexus, where nexus is generally established based on a certain threshold of economic activity in a state, rather than just a physical presence.
The South Dakota statute requires any out-of-state seller with a significant “economic presence” to collect and remit sales tax on any South Dakota taxable sales. This means that if a seller, regardless of location, exceeds certain thresholds during a period of time, it will fall under the jurisdiction of South Dakota’s sales tax regulations. An economic nexus will have been created if during the current calendar year or prior calendar year a business exceeds $100,000 of taxable goods or services delivered, or 200 separate transactions in South Dakota.
Post Wayfair Regulations:
Nexus statutes may vary from state to state, but the Supreme Court looked favorably upon the South Dakota statute in Wayfair because it did not put an unreasonable burden on sellers due to the thresholds ($100,000 of taxable sales or 200 transactions). In addition, the application of the statute was not retroactive.
While this does not mean that every state will conform to South Dakota’s law, many will most likely adopt similar legislation considering this favorable view from the court and the opportunity to collect additional revenues for the state. Currently, 25 states have already passed legislation related to sales tax that establishes an economic nexus if sellers exceed certain thresholds for taxable sales and transaction volume. Other states have enacted statutes with differing thresholds and many of the new laws have other seller compliance requirements as well.
Sales and Use Tax Compliance:
If your business has any online or out-of-state sales, now is the time to review your sales and use tax compliance requirements. Many states have chosen an October 1, 2018, effective date for their economic nexus statutes. If you should be collecting and remitting sales taxes in a state and you are not doing so, you may be subjecting your business to potential exposure for back sales taxes, penalties and interest.
These new sales tax nexus standards could require you to do one or more of the following:
- Register with the respective state tax department.
- Collect sales tax from customers within that state and remit it to the respective state.
- Provide customer/sales data to the respective state.
A business is located wholly in New York State that has no connection to New Jersey except taxable online sales which exceed the New Jersey thresholds of $100,000 or 200 or more transactions to New Jersey customers during the current or prior calendar year. Pursuant to the new nexus standards, this business would now be required to register, collect and remit New Jersey sales tax.
How we can Help:
Dannible & McKee, LLP can assist you in determining how the Wayfair decision will impact your business and provide you with a detailed state by state analysis for each state in which you are transacting business and what steps to take if you are not currently compliant as a result of the Wayfair decision. Again, failure to comply with the recent individual state changes can result in exposure for back sales taxes, penalties and interest.
If you would like to discuss the impact of the Wayfair decision on your business, please contact John F. Martin, CPA/PFS, CFP® or the current Tax Partner on your account at Dannible & McKee, LLP.