By Harriet A. Strothers, assisted by Kaela Ingram
Could you have sales tax exposure even if you never leave your office? Since the Wayfair decision, you certainly can, and not paying attention to it could lead to a very costly mistake!
The U.S. Supreme Court delivered “Just What They Need” to South Dakota in its recent and much-discussed South Dakota v. Wayfair, Inc., ruling. This Supreme Court ruling on sales tax overturned a principal tenet in determining nexus for state tax purposes. In short, all remote sellers, even those in states that do not impose a sales tax, may be required to collect and remit sales tax on sales delivered to other states.
The Wayfair case revolved around a law South Dakota had enacted requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence” in South Dakota if the seller met the stated thresholds of:
- $100,000 of goods or services delivered into the state or
- engaging in more than 200 separate transactions for delivery into the state.
Wayfair asked the court to declare the law unconstitutional. Rather than declare the law unconstitutional, SCOTUS instead overturned long-standing precedents and the requirement for a business to have a physical presence in order for the state to impose a requirement to collect and remit sales tax. South Dakota and other states now have the ability and the right to force not only internet sellers, but all sellers, to collect and remit sales tax across the country, even though the seller doesn’t leave the comfort of their own state or even their own home.
Before Wayfair, the precedential case law was set under National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corp. v. North Dakota, both of which required a physical presence in order to establish a taxpayer’s obligation to collect and remit sales tax in a state. The ruling in South Dakota v. Wayfair, Inc. has overturned this precedent and has opened the door for states to set different standards about who must collect and remit sales tax.
Expanded need to collect and remit sales tax
The real question is, what does this mean for a business selling over the internet and other businesses that ship goods and deliver services into other states? It means there will likely be an expanded need to collect and remit sales tax. The states have reacted very quickly to the ruling by passing new laws and imposing very short enforcement windows for these new laws. Some states had already passed laws to be effective at the date of the Wayfair decision. To date, almost all states have enacted some legislation, and many of those have established clear bright-line benchmarks for establishing nexus. There are a few states, such as California and Virginia, that have not identified a threshold and may consider even one sale into a state to establish nexus.
Steps to compliance with the new laws
What can businesses in the Pacific Northwest do to comply with these new laws?
The first step is to understand sales and use tax.
- Sales tax is a tax imposed on the sale of taxable property and services. Use tax is a complementary tax that is imposed on the end user or consumer in cases where the seller did not collect and remit the sales tax. These taxes are complementary taxes and in no case should the tax be due from both the seller and the buyer.
- The sales and use tax is only applicable on the sale to the end user, but only if the proper documentation for exemptions and resale are collected along the way.
The second step is to understand that when a taxpayer is compliant with the sales and use tax laws, they are merely acting as the agent of the state. They are collecting the sales tax from the customer and remitting it to the state. When a taxpayer does not comply with the rules, they are willingly accepting the liability for any sales tax that they should have collected along with penalties and interest on those amounts. This liability only grows over time when the taxpayer is not compliant.
The third step is to determine if and in how many states the company may have established nexus. Because so many states have established a clear bright-line standard like the one that South Dakota has enacted, the easiest and best way to do this is to collect your sales by state in both dollars and number of transactions. In general, you should include all sales. There are a very few states that only include retail sales in this benchmark, and it is not prudent to dive that deep in the first pass. These amounts should be compared to the benchmark set by each state. We have created a Sales Tax Nexus Tool (The Tool) that will allow you to enter your state-by-state activity, and it will return a preliminary nexus determination. The Tool can be accessed on the Delap LLP website at https://www.delapcpa.com/state-and-local-tax/do-i-have-sales-tax-nexus.htm. This tool is free to use and provides the option for you to print your results. You can and should use the Sales Tax Nexus Tool intermittently to confirm that you have not established nexus in additional states due to increased sales or changes in the state thresholds. Care should be taken to not let your results get stale in comparison to the quickly changing state laws.
The fourth step is not to panic! Even though you may have established nexus and a filing requirement, you may not be required to collect and remit sales tax. This will generally only occur if you are either:
- Selling a product or service that is not subject to sales and use tax,
- Selling to an exempt end user, such as the sale of manufacturing equipment to a manufacturer with a valid manufacturing exemption certificate in the destination state, or
- Selling to a reseller, such as a manufacturer that is incorporating the product into a new product that they are selling, or
- Selling a product to a retail store.
Excerpted from the article originally published in the December 2018 / January 2019 edition of The Accountant. Read the full story: Wayfair: Understanding the impact on Oregon business (PDF)
About the author
Harriet A. Strothers, CPA, is a partner with Delap LLP Lake Oswego, Oregon. She has over 30 years of experience in providing state and local tax advisory and compliance services to large multistate and multinational companies. Harriet also performs state and local due diligence related to mergers and acquisitions.