The recent Wayfair decision has drastically altered the landscape for states that want to collect sales and use taxes. In short, this ruling undid decades of precedent and stated that a business does not have to have any physical presence in a state in order for that state to be able to require sales tax collection from the business on any sales into the state. Thus, under Wayfair, even those businesses operating solely online (“remote sellers”) may face sales and use tax obligations in various states. This means that your business could now have sales tax collection requirements in a much larger number of states than it did previously, as each state gets to set its own sales tax filing requirements now for remote sellers that have no physical presence in a state.  (South Dakota v. Wayfair, S. Ct. No. 17-494, June 21, 2018)

History Lesson

shopping cartThe controversy over taxing remote sellers goes back to an interpretation of the “commerce clause” in the U.S. Constitution. Essentially, the clause allows states to require collection of sales and use taxes if the following four requirements are met:

  1. The seller has a substantial nexus in the taxing state.
  2. Taxes are fairly apportioned.
  3. Taxes don’t discriminate against interstate commerce.
  4. Taxes fairly relate to the services provided by the taxing state.

The physical presence requirement was solidified more than 25 years ago by the Supreme Court’s decision in Quill. (Quill v. North Dakota, 504 U.S. 298, May 26, 1992)

The Court ruled in Quill that North Dakota couldn’t require sellers to collect and remit use tax when the seller didn’t have a physical presence in the state, such as a sales office or a warehouse. It was often cited in cases involving mail order sales. In the ensuing years, states have aggressively pursued nexus policies constituting a physical presence.

New State Tax Environment

The constitutional conflict crested in the Wayfair case. Under a South Dakota law, a remote seller (i.e., a seller with no physical presence in South Dakota) was required to collect and remit sales tax if:

  1. The seller had gross revenue from goods and services exceeding $100,000 in the current or previous tax year, or
  2. Taxable goods and services were sold for delivery within the state in 200 or more separate transactions in the current or previous tax year.

Note that the 2nd arm of this threshold requirement suddenly made many businesses with substantially less than $100,000 in South Dakota sales subject to sales tax collection requirements. For example, if a company’s average sale is $200, sales tax collection may require no more than $40,000 of sales into South Dakota before the state law says the business has nexus and must collect sales taxes.

As a result, South Dakota assessed sales tax jurisdiction over a handful of remote sellers, including the retailer Wayfair. And the matter went to court.

The lower courts in South Dakota affirmed the Quill precedent, but then the Supreme Court agreed to review the outcome. Ultimately, the Court overturned the long-standing physical presence standard required by Quill and remanded the case back to the district court.

Impact of the Wayfair Decision

Wayfair is having a tax impact around the country. States have been very actively and quickly putting into place new laws to start collecting from these remote sellers. While many states have followed South Dakota’s lead on the dollars or number of transactions to determine whether a business must collect taxes, some states have aggressively put into place much smaller limits (Oklahoma and Pennsylvania, as examples, are using a threshold of just $10,000 in sales before they require collections from a remote seller).

Many states passing these laws have set “start compliance” deadlines for remote sellers that have started or are starting now. Many states have used 10/1/18, 11/1/18, 12/1/18, or 1/1/19 as their final cut-off date at which time remote sellers must start immediately collecting and remitting sales taxes and filing sales tax returns with the various states where they meet the thresholds the state has set.  A number of these states reference their thresholds to the prior 12 months or prior calendar year – meaning, for many states, if your business had $100,000 of sales or 200 transactions in a particular state in 2017, it would be considered immediately subject to collection and reporting requirements for that state.

Sellers of all shapes and sizes should examine their policies in light of this ruling. In certain cases, some businesses may need to consider adding additional software supplements or a new software package altogether to help with reporting if the business will now have nexus in several new states.

Stay Tuned

Undoubtedly, we haven’t heard the end of this matter. Following is a link to a website (Sales Tax Institute) that has been trying to keep an up-to-date chart of all the states and their active legislation in this area. Under the chart, the column labeled “Economic Nexus” is the principle described above that covers remote sellers and their potential sales tax collection obligation:   https://www.salestaxinstitute.com/resources/remote-seller-nexus-chart

Note that there are still states, such as California and New York, that are working towards legislation in this area but have not passed anything yet. Accordingly, this will be an ongoing issue that needs to be continuously monitored moving forward as the remaining states decide what to do (and when).

Please contact your Pugh CPAs tax advisor for the latest developments regarding how your business is affected by state rules for economic nexus related to sales and use tax collections.




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