“The Wayfair decision has emboldened states to become more aggressive with both their sales-tax laws and also their enforcement of those laws.”
Last year’s U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. has forced every business that operates across state lines to ask the question in the headline. That landmark holding overruled two prior U.S. Supreme Court cases, stripping away the physical-presence requirement that multi-state businesses have been hiding behind for decades.
Now, even small businesses can be significantly impacted by online and remote sales. With the physical-presence protection now gone, when then, is a business liable for collecting tax in a foreign state?
The technical answer is—when a business has substantial nexus with the state. However, that’s not terribly useful in real-world applications, so hopefully this article will shed some light on the topic.
Prior to Wayfair, state governments were becoming more and more crafty in how they were defining physical presence, attributing physical presence to in-state marketplace facilitators, agents, affiliates, and in some cases, cookies left behind on a customer’s computer while browsing the web. Now, however, with the blessing of the Court in Wayfair, the majority of states are adopting a test called “economic nexus.”
In the case of sales tax, nexus laws generally are a two-prong test—a gross-receipts benchmark and a number of transactions benchmark. Once an out-of-state business exceeds either benchmark, the business has established a substantial “nexus” with the state, and thus must follow the state’s laws relating to sales tax.
South Dakota’s law defining the thresholds has proven to be the most popular among the states. It established a gross- receipts limit of $100,000 and a transaction limit of 200 separate transactions delivered into the state. To date, 37 states and the District of Columbia have implemented an economic nexus law similar to South Dakota’s.
As a whole, this sector of law is developing on a daily basis. Many states issued early guidance and are now in the process of codifying the guidance into law. The effective dates of these new laws vary among the states, with some early-adopting states making their law effective prior to the Wayfair decision, while others are starting this year. Most states have indicated that they are not retroactively seeking taxes prior to the Wayfair decision.
Sales-tax compliance is a multi-step process, with the determination of substantial nexus being the first step toward a business being required to collect and remit sales tax to the state of origin. The ruling in Wayfair changed step one. However, the subsequent steps have remained unchanged.
After a business meets the nexus threshold, the business will have to determine which products or services it is selling in the state are taxable or exempt, and, if taxable, at what rate. Further, traditional exceptions to sales-tax liability, such as a sale for resale or unenumerated services, remain unchanged.
The Wayfair decision has emboldened states to become more aggressive with both their sales-tax laws and also their enforcement of those laws. As the economic nexus tests provide a clearer picture of the facts, states have become more willing to pursue those out-of-state businesses that are skirting their laws. Businesses that are selling across state lines, either through direct sales or an online presence, should be consulting with their tax advisor to ensure their business is in compliance.
Josh Terry is an experienced Senior Tax Accountant with the Bellingham office of VSH, PLLC, helping individuals and businesses navigate the complicated tax landscape. His practice focuses on estate and transition planning, as well as state and local taxes.