Here we are, about 18 months after one of the biggest jolts to the sales tax landscape. On June 21, 2018, state sales tax completely changed when the U.S. Supreme Court established precedent for economic nexus through South Dakota v. Wayfair, Inc.
In the highly anticipated ruling, the Court ruled 5-4 in favor of overturning its 1992 Quill decision, which required sellers to have substantial physical presence before a state could enforce the sales tax collection responsibilities.
Writing for the Court’s majority, Justice Anthony Kennedy indicated, “The Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court’s decisions in Quill Corp v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), should be, and now are, overruled.”
In his dissenting opinion to the ruling, Chief Justice Roberts indicated, “The Court…breezily disregards the costs that its decision will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers.” He added, “The burden will fall disproportionately on small businesses.” And that’s where we shake out. Most of our clients fall into the category where the ruling will prove to be burdensome in terms of complexity, compliance and cost.
With hindsight being 20/20, which justice was right? Well, both probably. As we look back on the last 18 months, Justice Kennedy was probably right that something needed to change with respect to the physical presence standards set under Quill. But Chief Justice Roberts was also correct in that this has all proven to be baffling and expensive for many retailers – particularly smaller ones, as he addressed. We are seeing this continued consternation in our clients as the ramifications of the ruling continue to play out for companies across the country.
How Did The Decision Affect Sellers’ Sales Tax Compliance?
The short answer is that companies will now need to consider:
- Whether they have physical presence (or “boots on the ground”) nexus in a given state.
- Whether their sales activity in a state exceeds certain “economic nexus” thresholds (such as the South Dakota threshold of $100,000 of sales or 200 annual transactions).
If either instance of nexus is established, they will need to register with the state and collect and remit sales taxes. It’s also important to note that, while this case related to online retailers, the ruling is not limited to e-tailers. It affects anyone selling into the state. If you’ve been putting off that nexus study, it’s time to revisit it.
How Is Economic Nexus Determined From State To State?
After the Supreme Court’s ruling, dozens of states were quick to establish their own economic nexus thresholds. In fact, it’s shaped the way that we collect sales tax today. This case opened the door for states to create new economic nexus legislation.
More than 40 states now have economic nexus laws in place. Most have thresholds modeled after South Dakota ($100,000 in sales or 200 transactions), although:
- Some have higher thresholds (such as California, New York and Texas)
- Some need both criteria to be met (like Connecticut and New York)
- Some only have sales thresholds (including Arizona, Colorado, Oklahoma and Washington)
Retroactivity In Economic Nexus: Do You Really Have To Go Back?
While most state statutes dealing with economic nexus are written to not require companies to go back retroactively, there is still the likelihood of retroactive exposure in many different scenarios. As your company thinks about compliance with economic nexus and they consider registering in the state, here are some considerations:
- Retroactive physical presence can be a problem. Consider, in addition to economic nexus, whether the company has had employees in the state, inventory in the state or offices in state in prior periods. If so, there is likely some retroactive exposure. What could have created this problem?
- Salespeople regularly visiting states
- Inventory stored there due to participation in Fulfillment by Amazon or similar programs
- Third party contractors working on the company’s behalf engaging in installation, training or other services
- If that’s the case, what should they do?
- Ignore any retroactive issues? (We don’t recommend it)
- Fill out the registration form using the date nexus truly started, but be prepared to pay penalties and interest for late filings?
- Consider voluntarily coming forward in voluntary disclosure and likely getting penalties waived, a reduced lookback and some control over the situation? (This is what most of our clients are doing)
Also keep in mind that while most states’ laws did not require taxpayers to go back retroactively, many states had effective dates in late 2018 and early 2019. That means that companies just now taking a look at this COULD have to go back retroactively to 2018 or early 2019 to catch up. So, even though the laws aren’t technically retroactive, they can certainly feel like it!
For more on this discussion, see our blog post about common economic nexus myths, where we discuss the concept of retroactivity in myth #1.
Develop A Plan For Sales Tax Compliance
Having a sales tax compliance plan is key. Clients are hitting economic nexus thresholds in big ways and filing in many states, when you’re used to filing in one or two, is cumbersome but no longer uncommon.
Consider that compliance varies by state. Due dates vary (from monthly to quarterly and annually), and the method of filing varies by state as well. Many companies are considering the following options as they decide how to handle the compliance burden.
- Continue to have a bookkeeper or internal person handle reporting (this is not a great option, particularly as the number of states increases)
- Consider automated solutions which bolt on to existing systems and can deal with compliance at various levels, from calculation and withholding to tax return preparation (this is often a good option for companies selling simple items for which there is little question about taxability)
- Some degree of outsourced sales tax return preparation model, which employs technology alongside a human touch (this is the approach many of our clients are looking for, and we assist with that!)
The Addition Of Marketplace Facilitator Rules In Sales Tax Compliance
The interplay between selling from a company website directly to consumers versus selling from a marketplace facilitator (e.g. Amazon or eBay) can add to the confusion surrounding economic nexus and sales tax compliance. Here’s a quick summary of how most states approach marketplace facilitators:
- If you sell direct to consumers, collecting is your responsibility.
- If you sell through Amazon or other “marketplaces,” it currently is still your responsibility to register in most states, but many states have passed marketplace facilitator legislation. This pushes the responsibility to the marketplace facilitator rather than the internet retailer. Note that most states have already passed legislation related to this, but as with most things multi-state, the dates and qualifications vary.
- Interesting “gap periods” may occur for companies as a result.
- Keep in mind that even though a marketplace facilitator may now be required to take care of the sales tax collection for you (as a seller), if you still sell via your website or other platforms, you have to report those sales as well if you meet the economic nexus thresholds. Confusing? Maybe a little – give us a shout!
We’re Here To Help With Your Multi-State Sales Tax Needs!
When the Wayfair case was decided, there was much confusion surrounding this landmark decision. Since then, we have learned a lot about sales tax collection set forth by the U.S. Supreme Court, like economic legislation, the concept of retroactivity, compliance and marketplace facilitation.
Due to the complexities surrounding the decision, it is helpful to consult with tax professionals, like Miles Consulting Group, to make sure you’re filing correctly in all the right states.
More than ever, companies need help navigating these issues; we can help with:
- Nexus reviews (including physical presence and Wayfair analysis)
- Determining how the Marketplace Facilitator laws might impact your company
- Taxability of products and services review
- Mergers & acquisitions due diligence
- Sales tax compliance
- Audit support
We are here to help with all of your multi-state tax needs. Contact us today to get started!
