The Wayfair case was decided by the Supreme Court in June of 2018 (South Dakota v. Wayfair). It has largely changed the landscape for sales and use tax, not only in South Dakota, but across the country. Wayfair has established a standard of what is called economic nexus.
Prior to the Wayfair case, the standard for being required to collect and remit sales tax came from the 1992 Supreme Court ruling in Quill Corp. v. North Dakota. In Quill, the Supreme Court ruled that in order to have sufficient nexus (connection) with a state, physical presence within the state was required. Wayfair has overturned the physical presence standard that we’ve relied upon for more than 25 years.
In this new landscape, states are now establishing economic thresholds for the amount of sales dollars and / or number of transactions taking place within the state to determine if a taxpayer has created economic nexus. Now, not only does having a physical presence in a state create nexus, but strictly an economic presence, meeting these thresholds, will legally require taxpayers to collect and remit sales tax to that state.
In the past year, virtually every state that imposes a sales tax has enacted legislation to conform to the new economic nexus standard. Each state has established their own thresholds for economic nexus, including sales thresholds ranging from $10,000 to $500,000. Additionally, some states do not impose a numerical threshold for the number of transactions taking place within the state. Furthermore, each state’s requirements for registration and filing vary, and many local jurisdictions impose a sales tax as well. For example, in California, there are over 2,500 different sales tax rates when considering the separate local jurisdictions!
What should businesses be doing in response to Wayfair?
Wayfair impacts any business, in any industry, that sells to or services out-of-state customers.
The first step that should be taken is to gather information. A business with out-of-state customers should look at the states where they file income tax returns, states that sales representatives visit, and customer lists to determine where sales are ultimately being made.
Once an organization has information about the states where they are transacting business, they can determine potential exposure for sales and use tax in those states. This can also serve as a monitoring tool going forward for states where economic thresholds may not currently be met. It will be important for businesses to continue this analysis on an ongoing basis as state laws and guidance are constantly being updated.
After gaining an understanding of potential exposure, every business will need to formulate their own plan for compliance. When deciding how to move forward, some important considerations will be: (1) whether the organization has the personnel capable to prepare these new filings; (2) whether current accounting records are generating the most accurate information necessary; and (3) determining if the business may need new exemption certificates from customers.
What can Hobe & Lucas do to help?
Our office can work with you to complete a nexus study in which we will evaluate the states in which your business may have nexus. This can be done from both a sales and use tax perspective as well as an income tax perspective. While the Wayfair case doesn’t impact nexus standards for income tax purposes, as states seek to capitalize on new revenue, it can be a good idea to revisit filing requirements that may not have been thought about in recent years.
Additionally, for businesses that prefer to take a more DIY approach, we can be involved to help with specific jurisdictional research as well as assistance with voluntary disclosure agreements. For states that have Wayfair effective dates that may have already passed, many states offer an opportunity to become compliant through a voluntary disclosure agreement. Our office can work with you to make sure that these applications are prepared completely and accurately for the best outcome in each scenario.
For many businesses, the cost and effort of compliance will prove to be quite burdensome. In that case, we can provide referrals to third party providers that can facilitate automated sales and use tax compliance.
This area of tax law is changing rapidly, and if you have questions or concerns about how this will impact your business, we invite you to contact our office for assistance.