The hot news in the sales tax world within the last week is, of course, the U.S. Supreme Court’s 6/21/18 ruling in South Dakota v. Wayfair, Inc. This ruling overturned the high court’s 1992 decision in Quill (Quill Corp v. North Dakota, 504 U.S. 298 (1992)), which set a standard requiring substantial physical presence before a state could enforce the sales tax collection responsibilities on a seller. It’s a standard that we’ve lived with for over 25 years. But in the decision for the majority in Wayfair Justice Anthony Kennedy, who served on the Court in 1992 and at the time voted in favor of the Quill decision, now indicated that “the internet’s prevalence and power have changed the dynamics of the national economy” since 1992’s ruling, and that for many reasons, it was time to revisit and overturn the ruling.
So, what does it mean for our clients? In this blog, we address a few of questions that have come up for us in the past few days.
Q: Since this case is about “economic nexus”, does that mean physical presence doesn’t matter anymore?
A: No. Physical presence does still matter. There is another U.S. Supreme Court case, (Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)), which introduced the concept of “substantial presence” as one of 4 prongs required in order for a state tax to be sustained as constitutional. Quill defined substantial presence to be a “significant physical presence”. Now, the Wayfair ruling indicates that not only does physical presence matter, economic nexus (the concept that a specific number of sales (i.e.; 200 transactions) or a dollar volume (i.e.; $100,000) can also be applied to determine if a company has created substantial presence. So, companies with nexus in a state because of employees, or inventory, or offices in the state still have nexus because they’d meet the substantial presence test under Complete Auto. But now, companies who may not have had a physical presence must apply the test for economic nexus – if a state has passed an economic nexus statute – to see if their sales volume alone passes the state’s minimum. If it does, the company is subject to collection and remittance of sales taxes.
Q: Do we need to start filing in the 45 states that have a sales tax immediately?
A: No, not immediately. But it’s time to do some analysis. As of today, this law applies to South Dakota, and presumably other states (like Alabama) who have similar laws already enacted. Approximately 18 other states have either enacted or are in the process of enacting similar laws with varying thresholds and enactment dates. Here is a current list, subject to change: AL, CT, GA, IA, IL, IN, KY, LA, MA, ME, MS, ND, OH, PA, RI, SC, TN, VT, WA and WY. But even South Dakota hasn’t indicated that companies need to start filing today! We are advising clients to review the past year’s volume of sales activity into any of these states (and even beyond) in order to get an accurate picture of their potential exposure and anticipated filing requirements. Can you wait a few weeks? Sure. A few months? Probably. A few years? Nope. We encourage this review to happen within the next quarter. Expect states to react quickly and pass economic nexus statutes as soon as possible. What have they got to lose?
Q: Does this case address retroactivity? Are we going to have to go back many years and pay prior years’ taxes?
A: No. At least not in South Dakota. South Dakota’s law specifically indicated that it was not retroactive. And the concurring Supreme Court justices liked that aspect. We would expect future legislation coming out of other states to closely mimic the South Dakota statute so as to stay within the parameters of constitutionality as set by this case. Will some states attempt to go retroactive? Hard to tell. But most indications at this time are that they will not.
Q: Does this case relate to internet sellers only?
A: It sounds like it does, but the answer is NO. This case touches even “traditional” sellers who do business across state lines. For some of them, reporting requirements may be just as onerous as internet retailers. While the case was aimed at the increasing revenue loss from internet sellers who did not collect sales tax from states in which they did not have physical presence nexus, there are similar scenarios in businesses such as those selling manufacturing equipment, large items of tangible property, software, and even SaaS.
Q: Wait – SaaS? If we are a SaaS company, could we be affected by this decision?
A: Absolutely! Many of our clients are in the traditional software or software-as-a-service (SaaS) industry. When we talk about multi-state tax exposure, I always start the conversation by explaining that the first question is always “Do you have nexus?” Then, the next question is “Is your product or service taxable in the state?” If answers to both are yes (and SaaS is taxable in many states, including NY, TX, MA, OH, to name just a few) then the company should collect and remit sales tax on that revenue stream. Even after this ruling, my analysis with clients will be similar. We will still ask the nexus question first. It’s just that more companies will end up at “Yes” quicker if they sell into states with an economic nexus threshold. Then, we will again ask the taxability question.
Obviously, these are just a few of the questions we’ve been fielding from our clients and contacts. There are more and we’ll continue to get those out there. Please stay tuned to this blog for more information. And, as always, please don’t hesitate to contact us for more specific questions!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
