In South Dakota v. Wayfair, Inc., the U.S. Supreme Court (Supreme Court) struck down the physical presence nexus standard established in Quill Corp. v. North Dakota and Natl. Bellas Hess, Inc. v. Department of Revenue of Illinois, and vacated the judgment of Supreme Court of South Dakota’s holding that the state’s economic nexus standard imposing tax collection and remittance obligations on remote sellers was unconstitutional. The Supreme Court remanded the case to determine if, when following the four-part framework established in Complete Auto Transit, Inc. v. Brady, other Commerce Clause principles would invalidate South Dakota’s standards.
The Supreme Court held in favor of South Dakota’s nexus standard to impose sales tax collection responsibilities on out-of-state sellers with $100,000 in sales or 200 separate transactions into the state. Although the Supreme Court provided clarity around South Dakota’s remote sellers’ collection responsibilities, there are many things that haven’t been addressed. For example:
- What metric will be used when comparing other similar remote seller laws to South Dakota’s, particularly states with lower thresholds?
- What’s the retroactivity of the decision in states with similar economic presence statutes prior to this decision?
- Does a remote seller with 100 percent exempt sales have a reporting requirement or does the term “revenue” encompass only taxable revenue?
- Will states continue to enforce notice and reporting requirements?
- The potential for legislative action by Congress – On June 28, 2018, Senate Bill 3180: Stop Taxing Our Potential Act of 2018 was introduced. It’s unlikely these concerns or any other points raised in the Wayfair hearings will be addressed any time soon.
- Will states with “traditional” sales tax nexus laws call for special sessions to enact similar legislation?
- How will Wayfair affect other state and local taxes?
States’ Post-Wayfair Reaction
Since physical presence is no longer required for sales tax collection, this court ruling affects remote sellers engaged in online commerce as well as domestic and international companies with multistate sales in traditional business environments. Even before the Wayfair case was decided, many states have proactively passed economic nexus legislation in anticipation of a favorable decision for South Dakota.
Connecticut, the most recent state to enact an economic nexus law, targets out-of-state sellers making $250,000 in gross receipts and engaging in 200 or more retail sales into Connecticut during a 12-month period, for example. The new nexus standard, which goes into effect on December 1, 2018, also redefines retailers to include marketplace facilitators. Some states, such as Iowa, Ohio and Massachusetts (through regulations adopted by its taxing agency), only recently began asserting the kind of cookie or app nexus discussed by the Supreme Court in Wayfair. Nebraska has interpreted its existing statutes and regulations as consistent with Wayfair and has stated nexus will be asserted on out-of-state vendors without a physical presence. Each of these states will need to apply the Wayfair test in determining whether its standard is constitutional, however.
A minority of states that don’t impose a sales and use tax, such as Montana and Oregon, have actually opposed the Wayfair outcome because of the nonreciprocal burden placed on their in-state businesses. A small business in Oregon may be subject to sales and use tax in Washington, while a small business in Washington isn’t subject to a sales and use tax in Oregon.
Since the Wayfair decision, 17 of the 23 Streamlined Sales Tax (SST) full-member states have issued guidance summarizing how they’ll implement the Supreme Court’s decision, with four confirming they’ll apply the collection responsibility prospectively. Eleven non-SST states have issued press releases summarizing their responses to the decision.
Post-Wayfair Compliance Challenges
The challenges taxpayers face include that many of these states have different economic nexus thresholds, as well as the effective dates vary from current enforcement through effective dates into early 2019. While the South Dakota standard of $100,000 in sales or 200 separate transactions is a prevalent threshold among many of the states, some states like Alabama will impose a threshold of $250,000 in sales without a transaction count. Some states apply the threshold on a calendar-year basis while others apply it on a preceding 12-month period.
Because many states apply transaction count thresholds, many remote sellers will likely cross these thresholds before they reach the $100,000 revenue mark. According to economic market data statistics, the average online order in the U.S. in 2017 was $82, which could mean about $16,400 in sales into a state may trigger economic nexus in that state purely based on transaction count.
Moreover, the Wayfair decision affects exemption/resale certificate management processes and imposes increased multistate compliance for distributors and drop-shippers. Distributors and remote sellers drop-shipping goods into various states could now be required to collect exemption/resale certificates in more states than their pre-Wayfair, traditional footprint as well as register and file sales and use tax returns. This domino effect could create resource and software system challenges for many taxpayers. Currently, nine states don’t accept out-of-state exemption certificates in drop-shipment situations.
Remote sellers in all industries should review not only the locations of their property and employees, but also their sales for determining sales and use tax filing obligations and registrations. The sales analysis by state should include a number of separate transactions, as well as overall sales volume, to fully evaluate if economic nexus has been created.
States currently without an economic nexus threshold may soon enact one or begin asserting nexus based on their current law, e.g., Nebraska. As such, remote sellers should be prepared as the guidance from states becomes clearer. Remote sellers also should discuss the effects of Wayfair on other state and local taxes with a tax professional.
Contact Jana, Ken, Rick or your trusted BKD tax advisor if you have questions.