What Auditors Need to Understand about South Dakota vs Wayfair

Ned A. Lenhart, MBA CPA | https://www.salestaxstrategies.com

What is Nexus?

Nexus is the term commonly used to mean the legal connection a non-resident company (seller) has with another state (taxing state) that allows the taxing state to legally force seller to obey a variety of state taxing state laws concerning sales tax, income tax, or franchise tax.  Nexus has nothing to do with the actual taxation of the property or service being sold.  Nexus only refers to the ability a taxing state has over a non-resident seller to legally compel or force the seller to comply with the taxing state law.

Old Nexus Rule (Quill):

U.S. Supreme Court ruled in 1992 that non-resident sellers must have some minimum physical presence in the state before creating sales tax nexus in taxing state. Allowed many e-commerce companies to legally avoid collecting sales tax in customer state.  States took dramatic steps to change laws on what constituted physical nexus.

New Nexus Rule (Wayfair):

U.S. Supreme Court on June 21, 2018 overturned Quill.  Stated that rule was unfair and created an unintended benefit for e-commerce companies. Ruled that states no longer need to prove a physical connection before nexus is created.  Ruled that the South Dakota statute that created ‘economic nexus’ provided a balanced approach to a non-physical nexus rule. South Dakota rule stated that remote sellers with $100,000 of sales or 200 transactions in the state had nexus and were obligated to comply with sales tax law.  26 states have similar laws and it is expected that most states will adopt similar rules.  U.S. Congress may also develop uniformity rules and rules on retroactivity.  Allows states to use both the physical nexus rule and the economic nexus rule.

Who is impacted?

Wayfair rule applies to all companies with customers and revenue in multiple states, not just e-commerce remote sellers. Retailers, wholesalers, service providers, technology companies, etc.

What is the Significance of the South Dakota vs Wayfair Case for Auditors?

The South Dakota vs Wayfair case is crucial for auditors as it has significant implications for businesses. After this ruling, auditors must inform their clients about the new tax laws and regulations affecting their operations. A wayfair client letter must clearly outline the potential impact on their financial reporting and compliance requirements.

How Does Wayfair’s Drop Shipment Change Impact Auditors’ Understanding of South Dakota vs Wayfair?

Wayfair drop shipment changes have significant implications for auditors’ understanding of the South Dakota vs Wayfair case. These changes may require auditors to reevaluate how they assess sales tax nexus and compliance, as well as understand the impact of drop shipment arrangements on Wayfair’s tax obligations.

Questions to ask?

Client responsibitlies Risks Affected industries  

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