South Dakota vs Wayfair | Summary Bulletin

From Ned Lenhart, CPA, Interstate Tax Strategies, P.C.

Overview

On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota vs. Wayfair, Inc. In this opinion, the Supreme Court stated that the physical nexus requirement established in 1992 in the case of North Dakota vs Quill was not valid. The Quill decision prevented states from requiring remote sellers from collecting sales tax in their states unless the seller had some physical connection with the state.  In most cases, this meant that the seller needed to have salesmen or other employees working in the state, own inventory in the state, or perform services in the state. Some states even adopted statutes that the presence of in electronic ‘cookie’ that resides on the customer’s computer would be enough to create nexus.  In the Wayfairdecision, the Court said that the physical nexus requirement in Quill was no longer a valid basis for preventing a state from legally forcing a remote seller from collecting sales tax in that state on taxable sales made to customers located in that state. The Court endorsed the South Dakota economic nexus rule (but did not necessarily mandate this rule be used) that requires sellers with $100,000 of annual sales or 200 separate transactions be held responsible for collecting and remitting sales tax on taxable sales sent into South Dakota. The Court indicated that states must have a statute in place that balances the cost of compliance against the valid interest the state is attempting to regulate.  As such, the Court indicated that the South Dakota rule, on its face, appears to meet this balancing test.

What Became of the Physical Presence Test?

Over the past 26 years, states have adopted a variety of rules on what constitutes a physical presence in their state for purposes of meeting the Quilltest.  Most of these have been found to be constitutional and have been used by the states to require remote sellers to collect tax. From my reading of the Wayfairopinion, these rules are still valid.  As such, states may require remote sellers with any type of physical nexus to register to collect tax and, for sellers without a physical connection, the states may also adopt various economic nexus rules such as the one adopted by South Dakota.  Even though the Court held that the physical requirement under Quillwas not valid, it did not say that physical presence in the state would   prevent a state from requiring compliance. States now have two options for requiring compliance; the physical standard and the economic standard.

States with Economic nexus rules

The following states have rules like the South Dakota rule; there are state specific nuances, however.   Alabama, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, New Jersey, Ohio, Pennsylvania, Rhode Island, Tennessee, Vermont, Washington, and Wyoming.  More states will be added in the coming months as they adopt legislation.

What Are the Key Points in the Summary Bulletin of South Dakota vs Wayfair?

The summary bulletin of South Dakota vs Wayfair highlights the key points that auditors understanding South Dakota Wayfair need to know. These include the impact of the decision on economic nexus, the threshold for sales tax collection, and the need for businesses to comply with state tax laws.

What to do now?

The actions to take now are unique to each company.   I recommend companies reexamine where they have a physical presence of any kind.  If physical presence does not exist, then examine states where revenue is at least $100,000 per-year.  If sales exceed $100,000, determine if the customers you sell to are taxable and if the products and services you sell are taxable in the state. For exempt customers, begin collecting exemption certificates for all exempt sales. If your company has over $100,000 of taxable sales in any of the 21 states listed above, you should consider any historical exposure you may have since the economic nexus standards were adopted and the possibility of registering for prospective registration.

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