On June 21, 2018, the Supreme Court issued its decision on South Dakota v. Wayfair, bringing sweeping changes in the world of state taxation. The ruling brings about one of the most significant transformations in the state and local tax realm over the past 50 years.
What Does the Decision Change About Sales and Use Tax?
Before this recent Supreme Court ruling, sales and use tax nexus was based on the entity having physical presence in the state. Nexus is the minimum connection a business needs to have with the state for it to impose a tax on the entity, requiring the company to register, collect and remit sales tax. For example, physical presence may take the form of property, employees, or some type of completed work in the defined state. This physical presence requirement was issued under Quill and made sense at a time when brick and mortar stores were prominent, and before internet sales and technology came into play. In January 2017, we published “Beware! This State Tax Standard will Cost You,” which outlined how many states were moving towards economic and factor-based nexus standards.
In Wayfair, the Supreme Court held that the South Dakota economic nexus statute satisfies the substantial nexus standard under the Commerce Clause. Economic nexus exists if a company exceeds a certain threshold of sales or transactions in the state. In South Dakota, the law imposes tax obligations on sellers that have sales to South Dakota exceeding $100,000; or 200 or more in-state transactions per year. This law applies not only to sales of tangible personal property, but also products transferred electronically or services for delivery into South Dakota.
States may now begin to require all remote sellers to register, collect and remit sales and use taxes on transactions with in-state customers, regardless of the seller’s physical presence, and would include online sales. Each state’s economic nexus laws and thresholds are different and have different legal effective dates. Some states have not yet reacted and are still likely to enact further sales tax nexus legislation throughout the year, bringing a great deal of complexity to tax planning.
How Should My Business Prepare?
It’s time to begin assessing where your business may not be compliant. Once you meet a state’s definition of having nexus in that state, there is a legal requirement to register, collect and remit tax in that state. It is important for businesses to begin looking at states where sales and use tax nexus may not have been met in the past because of lack of physical presence, but where economic nexus requirements may now be fulfilled. Sales by state should be analyzed alongside each state’s economic nexus thresholds, to determine if there are new obligations. Remember, states can charge penalties and interest if an entity is not tax compliant. Companies should consider registering where required and applying for voluntary disclosure or amnesty programs where it may be to their benefit. Stambaugh Ness has the expertise to assist you with analyzing tax exposure and the registration process.
The Stambaugh Ness tax team will offer a free webinar where we’ll explore in more detail the impact of the Wayfair decision, additional recent changes in state and local taxation, and how we can assist your business as you are faced with the many new complexities. Please join us – click here to register!