On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc., the most recent and direct challenge by a state to the physical presence nexus standard, adopted/continued in Quill v. North Dakota over 25 years ago.
Their decision eliminated the physical presence requirement for sales tax nexus purposes. Specifically, the South Dakota law states that remote sellers (those without any physical presence in the state) who have either more than $100,000 of in-state taxable sales of products/services annually or have consummated 200 or more separate transactions annually are required to register with the state and collect and remit sales taxes to South Dakota on those transactions.
It is important to note that the Court did not formally hold that the thresholds in South Dakota’s law are the new standard, or even that there is any standard. The ruling, simply, was that physical presence in a given state is no longer required for a state to require sellers of property and services within that state to collect and remit sales taxes.
Several states, in anticipation of the Wayfair case, had previously adopted economic nexus provisions for sales and use taxes and there are others whose laws are contingent on the decision in the Wayfair case. Some states also had cases pending in their respective courts waiting for the Supreme Court’s ruling to come down.
It is important to remember that the Supreme Court remanded the case back to the lower court for a decision as to the impact of the Commerce Clause (for “undue burden”, etc.) of the Constitution. It is therefore possible that the S.D. law will be modified pending the outcome of that case. If the lower Court finds in favor of S.D., then its statute will likely become the standard for other states to follow. A similar result will occur (although without the protection of a court decision ratifying the Commerce Clause provisions thereby subjecting them to future litigation if another taxpayer decides to challenge them) if the parties settle prior to litigation.
So, what’s next? Good question. It appears that states with laws requiring some threshold level of economic (but not physical) contact before they assert sales tax nexus for a remote seller would not be in violation of the Wayfair decision. That said, there were other provisions in the South Dakota law, namely no retroactive liability and compliance with the Streamlined Sales and Use Tax Agreement which will need to be evaluated on a state-by-state basis.
Accordingly, each state (and locality for that matter) MAY decide to come up with their own economic nexus thresholds, which may or may not comport with the S.D. law. If different, this would potentially open the state to future challenges on the Commerce Clause issue.
As a result of the Wayfair decision, many states are re-evaluating their nexus statutes and Congress has been discussing responses as well.
For businesses no longer protected from sales tax nexus due to this decision, the following are some questions that will need to ultimately be addressed in all the states they sell into, according to the statutes passed (or to be passed) in those states:
Do we meet any of the threshold tests?
Are our services or products taxable?
Are we required to register in each state we sell into?
What are the correct tax rates?
Are there local taxes in addition to state level taxes?
How often must a return be filed and what are the available methods for filing?
When will the first sales taxes be due?
How complete is our system for tracking exemption certificates?
Do we need to purchase a software solution to handle this and, if so, how much will that cost?
Do we need to hire more staff to accommodate this increase in our compliance obligation?
Might we have to collect and remit sales taxes in a state that does not have economic nexus standards currently in place?
Can states make sales tax collection retroactive? Likely not, but one never knows.
As you can see, this issue is very much unsettled at the moment. Following are some actions that businesses should take sooner rather than later:
- Understand the states and localities that you currently sell into. Make sure that you have some reliable method of capturing the amount of sales and the number of transactions into each state and locality. Shortly, ignorance will not be an excuse for non-compliance in states where you may not have previously been required to file.
- If your products are for re-sale, be sure that you have updated your Resale Certificates, and that you have a process for doing so periodically.
- If you have physical nexus in a state and have not been filing there, immediately evaluate the costs of compliance versus continued no compliance. Voluntary Disclosure Agreements may prevent penalties in some cases, and prevent unlimited look back, but you have to go to the state. Once they find you, it’s too late. And states are all on high alert for non-compliance.
- Monitor the states into which you sell for changes to their nexus legislation.
- For states where you are currently filing, be sure you actually ARE collecting the correct amount of tax when and where you should, and remitting it on a timely basis.
As always, if you would like to discuss this further, please contact us.