The criteria and precedent used to determine sales tax liability has changed. The prior rules and criteria still apply, however, the decision in South Dakota v. Wayfair Inc. (Wayfair) has invited new means of establishing sales tax liabilities nationwide. Even if your business has not experienced any significant internal change, the external landscape has experienced a drastic shift. It is important to maintain an understanding on how this shift may have impacted your business.
It is time to review your sales tax nexus and related liability if your business has engaged in one of the following activities:
- Sold tangible or intangible goods into other states, in a wholesale or retail sale capacity
- Received nexus questionnaires from states within the last five years
- Owns, leases or rents real or personal property in multiple states
- Employed individuals in multiple states
- Entered into voluntary disclosure agreements in any state
Should any of the above items pertain to your business, please see this questionnaire. If in the meantime, you have any questions regarding the details of the Wayfair decision, nexus thresholds, and how these items will impact your business, then please contact us at your convenience and we would be happy to have a discussion.
Supreme Court Ruling
On June 21, 2018, the Supreme Court of the United States handed down a historic decision in the sales and use tax nexus case South Dakota v. Wayfair, Inc. The 5-4 ruling overturns the physical presence standard upheld in previous cases, such as Quill Corp. V. North Dakota (1992) and National Bella Hess Inc. V. Department of Revenue of Illinois (1967), where a business has to have a physical presence in the state for the state to impose sales and use tax collection obligations on the business.
Nexus
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. If a taxpayer has established sales and use tax nexus, then the state will require the taxpayer to register, collect and remit sales and use taxes on sales made to purchasers in that state.
States exercise their power to tax through statutes, case law, regulation or policy. Generally, state statutes are broadly written and include phrases such as “doing business in” or “deriving income from” to describe activity that will trigger nexus and thus a filing obligation. Statutes tend to vary from state to state.
In light of Wayfair, states have become more aggressive in enacting various statutes that require out-of-state sellers to collect and remit sales tax. The majority 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.
Click here for a brief summary of each state's nexus threshold.
Significance of the Wayfair Case
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 business delivered more than $100,000 of goods or services in South Dakota or engaged in 200 or more separate transactions in South Dakota in the current calendar year or the prior calendar year. The case was ultimately heard by the U.S. Supreme Court, which concluded that the physical presence rule of Quill is “unsound and incorrect”. By overturning Quill, the Court opened the possibility for states to impose sales tax collection obligations based on economic presence.
Taxpayer Considerations
The U.S. Supreme Court’s decision in Wayfair will affect companies that have economic presence in a state that meets that state’s nexus standard within the Court’s new ruling. It especially impacts online businesses where, in the past, the lack of a physical presence prohibited a state from imposing sales and use tax collection requirements on those businesses. Most immediately, out-of-state sellers that deliver goods or provide services into a so-called “economic presence” state will need to determine if the business exceeds the state’s specific economic sales or activity thresholds. At the time this letter was drafted, thirty-three states have enacted economic nexus models with varying enforcement dates. Other states are issuing nexus guidance suggesting economic nexus policies may be enacted. Sellers may need to conduct an analysis on each state that has adopted, or plans to adopt, economic nexus threshold requirements for sales and use tax collection to ensure they are in compliance with all jurisdictions (state and local) in which they have customers. Looking forward, it is reasonable to expect that states may use this ruling as a precedent to determine economics thresholds for state income tax purposes as well.
Now is the time to review your sales and use tax compliance requirements
The statute of limitations never runs out on a return not filed, and states have the ability to go back and audit prior year’s sales and use tax compliance. Without a protective filing in states where nexus has been established, even if it is simply a zero balance return, states could choose to assess penalties and interest.
Our well versed team is ready to review your business’s sales and use tax reporting requirements and any resulting potential change in tax liability. We look forward to having the opportunity to provide an analysis on how this shift has specifically impacted your business.