On June 21, 2018, in a 5-4 ruling that overturned the 1992 decision of Quill v. North Dakota, the United States Supreme Court ruled in favor of South Dakota, proclaiming that states can legally mandate that businesses with more than 200 transactions or $100,000 of in-state sales—including those without a physical presence in a state— must collect and remit sales taxes on transactions in the state. The ruling overturned the physical presence rule for remote sales tax collection, setting a new precedent for the taxation of primarily online businesses.
The case has been remanded back to the South Dakota Supreme Court so that additional tests of constitutionality can take place, but in the meantime, a number of questions remain. Most notably, it is unclear how states will proceed with remote seller legislation or whether Congress will become involved or pass any federal legislation.
For both sellers and their accountants, these unanswered questions have given rise to a lot of uncertainty. As it stands now, the decision has impacted different states in different ways.
At the time of the South Dakota v. Wayfair decision, 18 states had already passed economic nexus legislation, most of which had an effective date prior to the time of the decision. Four other states passed similar legislation in the month leading up to the decision, and in the months since the decision, two more states have passed the legislation or argued that their current legislation authorized remote seller collection authority.
The existing legislation in Massachusetts and Ohio is notable for having cookie nexus provisions, which stipulate that digital cookies, apps, or software downloaded onto devices in the state comprise tangible personal property, thus meeting the prior physical presence rule. Massachusetts also announced that its October 2017 cookie nexus regulation would not be impacted by the Wayfair decision. Ohio, on the other hand, issued a statement stating that the decision would not have an immediate or direct impact on the state. However, litigation is currently pending in both states, neither of which has a stay of enforcement in place. Litigation is expected to be reviewed soon, but whether the litigation will be enforced retroactively remains to be seen, leaving some risk of non-collection in Massachusetts and Ohio that retailers in these states should be aware of.
For retailers, it is important to deal with each state case-by-case. Retailers should first begin with states with July effective dates and determine whether their sales exceed the threshold. For those that are close to the threshold, sales should be monitored closely so that preparatory measures can be taken. However, one should note that some states, like Kentucky, will be following a “soft” effective date, meaning that while retailers should start the registration process as soon as possible, retailers that aren’t ready on the exact effective date and that can provide a reasonable cause for missing it will not be assessed.
It is particularly important to remember that the threshold is a per state test, meaning that the threshold might be exceeded in some states but not others. In general, states’ laws apply to gross sales and have an “or” threshold, in line with the South Dakota legislation. If 100% of your sales are exempt, you likely do not need to register, but it is important to be sure you have all your exemption certificates on hand and won’t need to register in order to be able to issue a resale certificate.
For remote sellers, it’s critical to stay on top of your sales tax collection responsibilities. As the Wayfair decision has shown, the world of business is more technologically advanced than ever before. Luckily for retailers, automation solutions are available to help them comply with the newest legislation. However, this is not as simple as “clicking a button” in your company’s e-commerce software – there are many nuances and complexities that vary state-by-state. Just once simple example would be that each state has its own sales tax board/authority which requires separate registration in each state just to get the sales tax account established. Some states are also requesting that out-of-state internet retailers register as a “business” in addition to the sales tax registration – which presents its own set of legal issues. Also, your e-commerce software might be able to “automate” sales tax calculations and pass on the required sales tax to customers in each state by order, however, most software does not prepare and file sales tax returns in multiple states.
As you can see, the Wayfair Decision is a massive change in the business landscape for internet retailers with huge potential impact on sales, compliance and reporting. To say you’ll need to retain professional assistance in this area is an understatement. Don’t hesitate to reach out to us at Sousa & Weber – with more than 20 years of experience helping online retailers navigate the complex and ever-changing world of sales tax compliance, we would be happy to help you navigate the new sales tax landscape. Contact us to schedule a consultation.