The June 21, 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair established that a state can require an out-of-state seller to collect sales or use tax on sales to customers in that state, even though the seller lacks an in-state physical presence. Now, when an economic or virtual presence exists without a physical presence, that will likely be enough to create nexus under the new Wayfair standard. In order for a state to impose this new economic nexus standard for sales tax, the state must have enacted legislation that establishes their own requirements in regard to economic nexus. The thresholds and requirements to establish economic nexus will likely be different for each state. Keep in mind that some states may enact statutes that are more aggressive than others. South Dakota’s economic nexus laws at issue in Wayfair established nexus with South Dakota if the business in the current or previous calendar year: 1) had gross revenue from sales of taxable goods and services delivered into the state exceeding $100,000; or 2) sold taxable goods and services for delivery into the state in 200 or more separate transactions. It is likely that South Dakota’s threshold requirements are constitutional. Any threshold requirements enacted by a state that are more aggressive than South Dakota’s will likely face strong scrutiny.
We encourage remote sellers and online retailers to discuss the immediate implications of this case with their tax professionals, especially if they sell to consumers in states that have enacted economic nexus statutes with respect to sales and use tax collection or reporting requirements.
Potential Impact and Next Steps
- The 20 or so states that have enacted or have pending legislation for similar sales/use tax nexus standards will likely enact and impose the standards immediately. Businesses should review their current and projected sales footprint to determine if they have sales in states that have pending or enacted legislation following the South Dakota standard.
- All other states will be encouraged to enact similar sales/use tax economic nexus legislation following the South Dakota model. Businesses should stay abreast of the latest legislation in all states where they have sales.
- Many businesses will be liable for sales tax collection and/or reporting in a substantial number of new states. This decision likely will affect all out of state sellers, not just online retailers. In Wayfair, the court does not differentiate between types of out of state sellers. Likely, states will impose sales and use tax collection burdens on all out of state sellers.
- It is important to keep in mind that goods and services may be exempt from sales and use tax in one state and be taxable in another. A determination of the taxability of all products and services a business offers on a state-by-state basis should be considered.
- Businesses should complete a thorough review of their nexus footprint prior to the Wayfair decision. Voluntary disclosure programs should be utilized for noncompliance and remittance as state statutes of limitation may apply to past periods.
We Can Help
The State and Local Tax (SALT) professionals at Elliott Davis will be providing further coverage and analysis of this landmark decision in the days, weeks and months to come. If you have questions about your particular tax situation or need help in evaluating the impact for sales and use tax collection on out-of-state vendors, please contact your Elliott Davis tax advisor. Elliott Davis has a team of experienced SALT professionals who can assist you with your sales and use tax guidance needs.