Sales Tax Liability in the Aftermath of South Dakota v. Wayfair
By Mary Jo Dolson, Partner, Tax & Business Services
Since the U.S. Supreme Court ruled on South Dakota v. Wayfair in 2018, businesses across industry sectors have been grappling with changing state and local sales and use taxes. Already, of the 45 states that collect sales tax at the state level, all except Missouri and Florida have enacted laws requiring online marketers to collect and remit sales tax on behalf of third-party sellers, and both of those states have similar legislation pending.
In ruling in favor of South Dakota, the Supreme Court cleared the path for states to impose sales and use tax requirements, including those applicable to out-of-state businesses, such as online retailers, even if they have no physical presence in the state. The case overturned physical nexus standards that had been in place for over five decades (National Bellas Hess v. Dept. of Revenue, 1967, and Quill Corp. v. North Dakota, 1992). These standards prevented states from requiring out-of-state businesses to collect sales tax on goods shipped to in-state customers unless the seller had a physical presence in the state.
South Dakota requires a business with 200 transactions or more, or $100,000 in sales, to collect South Dakota sales tax. No physical connection with the state is required to meet this threshold. Other states moved quickly to enact economic nexus sales tax laws, many of which are based on similar dollar thresholds and/ or numbers of transactions. Three states – Louisiana, California and South Carolina – are currently pursuing retroactive collections from marketplace facilitators such as Amazon, based on collection dates in their respective states pre-Wayfair. Consequently, the time period covered by the assessment can vary by state.
Who Is Impacted
While online retailers were the focal point in Wayfair, other types of businesses are also affected given the low dollar thresholds and transaction volume triggers enacted in most states seeking to capitalize on the ruling. For example, in states adopting South Dakota’s law, manufacturers that generate more than $100,000 in sales in South Dakota must comply. Before undertaking sales tax registration, a manufacturer must determine if the product it sells is taxable and if the customer purchasing the product incurs the tax burden. For example, the manufacturer’s customer may be a reseller who must collect the tax as part of a retail sale.
States That Have Enacted Nexus Laws
Currently, only five states – Alaska, Delaware, Montana, New Hampshire, and Oregon – do not collect state-level sales tax and have not enacted economic nexus laws. Alaska allows its cities to determine their own sales tax laws including nexus legislation. For example, the city of Nome, Alaska, has enacted its own economic nexus law for gross sales above $100,000 and 100 transactions conducted within a calendar year.
Although Wayfair opened the door for states to collect sales tax from remote sellers, the sales tax codes in a number of states are viewed as vulnerable to legal challenge in state courts. In other states, the constitutionality of nexus laws to apply fairly to all taxpayers in accordance with the commerce clause is stronger because compliance costs are low, tax regimes for state and local taxes are uniform and unified, there is no retroactive compliance, and out-of-state companies are not disadvantaged by the tax compared to in-state companies.
Keeping Track of It All
Economic nexus laws can change quickly—some states have already amended their initial laws to eliminate the transaction volume threshold because it was too cumbersome to enforce. The ongoing evolution of nexus laws that is unique for each state and jurisdiction makes compliance much more complex. Software can help businesses track customer location and sales data and the application thresholds in each state and locale, but it is important to make sure that sales tax collection and remittance programs are current and accurate.
For more information about remote sales tax questions, please contact Mary Jo Dolson, CPA, at (813) 397-4850 or email Mary Jo.