The U.S. Supreme Court’s landmark decision in the Wayfair case has far-reaching implications for consumers and businesses of all kinds, not only online retailers.
The June 21, 2018, ruling in South Dakota v. Wayfair Inc., upholds South Dakota’s tax law requiring remote sellers to collect and remit state sales tax if the seller exceeded $100,000 in sales to South Dakota residents or 200 transactions/sales in a given year into South Dakota. The U.S. Supreme Court in its decision effectively overturned its 1992 decision in Quill Corporation v. North Dakota and the National Bellas Hess v. Department of Revenue of Illinois decision, which had established the physical presence sales tax nexus standard that has generally been the law of the land for over 25 years.
Quill’s physical presence nexus standard vs. economic nexus
Under Quill, sales and use tax nexus (the minimum connection that would subject a seller to a state’s taxing jurisdiction) was created when a retailer established a “physical presence” in the taxing jurisdiction. What creates a physical presence? Generally, having an employee or property in the state; having employees visiting customers in the state (salespeople, trainers, technicians, etc.); having third party contractors and/or agents acting on your behalf in a state; delivering goods in company-owned vehicles; and/or having an intangible presence could constitute physical presence.
Over the past 10 years, states in search of additional revenues have sought to circumvent and/or challenge Quill’s physical presence standard with some success. As online retailers blossomed and internet-related sales increased, states began enacting laws aimed at attaching nexus to online retailers if they contracted with a third party who would receive a commission if it referred potential customers directly or indirectly, whether by a link on an internet website or otherwise to the seller’s website to make a purchase (i.e., click-through nexus Amazon laws).
After a wave of successful Amazon legislation and litigation, several states began to further trample over Quill’s physical presence precedent and began asserting economic nexus to remote (out-of-state) retailers with no physical presence in a taxing jurisdiction, which led to different treatment amongst the states, and in turn led to Wayfair.
Where were we right before Wayfair and where are we today?
Approximately 10 states had laws similar to South Dakota but delayed enforcing them until the Wayfair case was decided, and another 11 states had similar laws on their books that were to take effect beginning on or after July 1, 2018. Other states are expected to speed up legislative efforts to piggy-back off the Wayfair decision. Lawmakers in New Jersey were the latest trying to push through new sales tax legislative bills that mirror the South Dakota remote sellers sales tax law, which has an economic presence requirement.
What are the next steps for my business regarding state sales tax?
Businesses, not just online retailers, should review their sales reports and identify the states in which they have sales that exceed the economic nexus thresholds in the various jurisdictions. As of now, the lowest threshold in states with a remote seller law is $10,000 of in-state sales (Minnesota and Pennsylvania) with the remaining states having a sales threshold of $100,000 or more.
If you meet or exceed the threshold, you should register to collect and remit sales tax via the jurisdiction’s Department of Revenue website (practically all states now require registrations to be filed online). Depending on your volume of sales and the number of states with remote seller laws that apply to your business, you may want to consult with your tax advisors regarding the cost of compliance and possible strategies.
Do I have to register my business in every state where I have sales?
The majority of the states with remote seller laws require the registration and collection of sales tax if the seller’s gross revenue from the sales in the previous calendar year or current calendar year exceeds the economic nexus thresholds. So until that threshold is met or exceeded, registering for sales tax in a given state is not mandatory, but your activities and sales should be closely monitored.
Will this impact me from a state income tax perspective?
Although some states (e.g., California, New Jersey) have been adopting economic nexus thresholds as early as 2013, turning a blind eye to Quill’s physical presence standard, states still have to comply with Public Law 86-272 (15 U.S.C. §§ 381-384), which prohibits a state from imposing an income tax on a business whose only activity in the state is the solicitation of sales of tangible personal property. Bear in mind that this protection is specific to sellers of tangible personal property. It doesn’t apply to sellers of intangible goods such as SaaS and other types of internet services.
Moreover, many state legislators were mindful of passing economic nexus laws that were against the public interest or challenged Quill’s physical nexus standard, so they still required a physical presence to impose an income tax.
Contact me or another member of Kaufman Rossin’s tax team to learn more about the implications of the Wayfair state sales tax case on your business and how we can help.