It’s been just over a year since the U.S. Supreme Court handed down its landmark decision in South Dakota v. Wayfair Inc. on 6/21/18. This key ruling paved the way for states to enact economic nexus legislation and thereby more easily require companies to collect, remit and report sales tax. This decision quickly changed the sales tax world in a big way, particularly for on-line retailers, but also for many other companies.
The Supreme Court’s ruling in June 2018 overturned the Quill decision of 1992 which established physical presence for nexus standards. The Wayfair decision established the concept of economic nexus, but did not automatically make economic nexus the law of the land for all 50 states. The High Court’s decision was that South Dakota’s economic nexus law was constitutional. Since this ruling, most states have enacted some type of economic nexus legislation as it pertains to sales tax. As we describe in a previous blog, economic nexus is based upon the amount of sales or number of transactions in the state. If a certain threshold is met, nexus is deemed to be created. For instance, in South Dakota, economic nexus is created in if an out of state company makes sales of products or services into South Dakota in excess of $100,000 or has 200 or more transactions.
What have We Learned?
The Wayfair case has shaped the way that we collect sales tax today. This case opened the door for states to create new economic nexus legislation. Almost all states (with a few exceptions ) have enacted these types of laws. Most of the legislation is already effective, and for a few states, the effective date is fast approaching (i.e., July 1 for Arkansas and Virginia and Oct. 1 for Arizona, Tennessee, and Texas .
Most states have economic nexus thresholds modeled after South Dakota of $100,000 in sales or 200 transactions. However, some states with exceptions of higher thresholds include CA ($500,000 in sales), NY ($300,000 in sales) and TX ($500,000).
Retroactivity: Do we really have to go back?
While most state statutes dealing with economic nexus are written to not require companies to go back retroactively, there is still the likelihood of retroactive exposure in many different scenarios. As your company thinks about being compliant for economic nexus (i.e.; they meet one of the thresholds), and they consider registering in the state, here are some considerations:
- Retroactive physical presence can be a problem. Consider, in addition to economic nexus, whether the company has had employees in the state, inventory in the state, or offices in state in prior periods. If so, there is likely some retroactive exposure. What could have created this problem?
- Salespeople regularly visiting states
- Inventory stored there due to participation in Fulfillment by Amazon or similar programs
- Third party contractors working on the company’s behalf engaging in installation, training, or other services.
- If that’s the case, what should they do?
- Ignore any retroactive issues? (We don’t recommend that.)
- Fill out the registration form using the date nexus truly started (but then be prepared to pay penalties and interest for late filings) or
- Consider voluntarily coming forward in voluntary disclosure and likely getting penalties waived, a reduced lookback, and some control over the situation. (This is what most of our clients are doing.)
For more on this discussion, see our previous blog, where we discuss the concept of retroactivity in myth #1.
Have a Plan for Compliance
Having a compliance plan is key. Clients are hitting economic nexus thresholds in big ways and filing in 20+ states, when you’re used to filing in one or two, is cumbersome but no longer uncommon. Consider that compliance varies by state (some monthly, some quarterly, some annual), due dates vary, and the method of filing varies by state as well. Many companies are considering the following options as they decide how to handle the compliance burden.
- Continue to have a bookkeeper or internal person handle reporting. (Not a great option, particularly as the number of states increases.)
- Consider automated solutions which bolt on to existing systems and can deal with compliance at various levels (calculation, withholding, and even tax return preparation) – This is often a good option for companies selling simple items for which there is little question about taxability.
- Some degree of outsourced sales tax return preparation model, which employs technology and also a human touch. (This is the approach many of our clients are looking for. And we assist with that!)
The Addition of Marketplace Facilitator Rules
The interplay between selling from a company website direct to consumers versus selling from a marketplace facilitator (i.e., like Amazon or eBay), and the likely combination thereof adds to the confusion.
- If you sell direct to consumers, collecting is your responsibility;
- If you sell through Amazon, it currently is your responsibility to register in most states, but states are passing marketplace facilitator legislation which will ultimately push the responsibility to the marketplace facilitator.
- Interesting “gap periods” may occur for companies as a result
After passage of the Wayfair case, states began enacting additional legislation regarding marketplace facilitators. Please refer to a previous blog, where we talk about marketplace facilitators and online sales tax.
We’re here to help!
Due to the complexities surrounding the Wayfair decision, it is helpful to consult with tax professionals, like Miles Consulting Group, to assist you. When this case was decided, there was much confusion surrounding this landmark decision. Over this past year, we have learned a lot about sales tax collection set forth by the U.S. Supreme Court, like economic legislation, the concept of retroactivity, compliance and marketplace facilitation.
More than ever clients need help navigating these interesting issues and we can help with:
- Nexus reviews (including physical presence and Wayfair Analysis)
- Taxability of products and services review
- Mergers & Acquisitions Due Diligence
- Audit Support
Have questions? Contact Monika Miles.