The breaking news headlines about the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. have slowed, but the work for advisors when it comes to advising clients on sales tax collection is ramping up. The Wayfair decision overruled the physical presence rule for sales tax nexus for remote sellers – meaning states now have the right to require tax collection from online retailers and other remote sellers with no physical presence in their states.
Many states are still analyzing what the decision means for retailers selling into their respective states. How should you advise your clients in this uncertain legislative environment? Let’s take a look at the decision and explore potential action steps for you and your clients.
The Supreme Court ruled in favor of South Dakota in a 5-4 decision. The last time we had a Supreme Court case on nexus was in 1992 with Quill Corp. v. North Dakota. Twenty-six years later, the Court demonstrated the ability to change its mind, deeming Quill’s physical presence rule “unsound and incorrect.”
In the opinion, Justice Kennedy addressed how the business landscape has change. “Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill,” he wrote. “And the Court should not maintain a rule that ignores substantial virtual connections to the state.”
Although the decision found in favor of South Dakota, it was also remanded back to the South Dakota Supreme Court to evaluate whether South Dakota’s economic nexus legislation meets other tests for constitutionality. Until the South Dakota Court address the remand, South Dakota will not enforce its economic nexus provisions and the stay of enforcement remains in place.
For more information about the case and the decision, check out our prior blog post.
The law in question, and South Dakota’s tax laws in general, minimize the burden on interstate commerce – a major reason the Supreme Court ruled the way it did. South Dakota is a full member of the Streamlined Sales and Use Tax (SST) Agreement, which standardizes taxes to reduce administrative and compliance costs, has a limited rates structure, and simplistic taxability rules (everything is taxable).
South Dakota’s legislation limits the application of economic nexus to prospective periods once the case is finalized. In terms of what constitutes substantial nexus, the legislation provides a safe harbor for small sellers. The economic nexus threshold is set at $100,000 or 200 separate sales transactions into the state the previous or current calendar year before sales tax collection is required. The Wayfair decision upheld South Dakota’s threshold as meeting the “substantial nexus” test.
Retroactivity, thresholds, and cost/burden will continue to be central issues to other states’ implementation of economic nexus legislation since the Supreme Court’s decision left a lot of questions unanswered. For example: Does the decision solely allow prospective application? Is $100,000/200 transactions the minimum threshold? Does a state have to be an SST member to have similar legislation?
Impact on the States
After the decision, a few states were quick to issue notices on how the state plans to proceed in light of the decision. Many states had already enacted economic nexus legislation, many of them with similar provisions to South Dakota, and indicated in their notices that they are reviewing the decision and will provide additional guidance regarding their legislation at a later date.
Massachusetts, which enacted “cookie” physical presence nexus rather than a straight economic nexus provision, announced that their existing regulation that took effect October 1, 2017 continues to apply and is not impacted by the Wayfair decision.
Hawaii, Kentucky, and Oklahoma have July 1, 2018 effective dates. Hawaii initially announced that the legislation applied to taxable years beginning after December 31, 2017. However, after about 2 weeks, they rescinded that position and announced it would only be enforced beginning July 1, 2018. It’s also important to note that Hawaii’s tax is a gross receipts tax with virtually no exemptions. Kentucky announced that they believe their statute meets the requirements under the Wayfair decision. Oklahoma has yet to release a notice about any changes to their effective date. Post-Wayfair, Vermont announced that their legislation set the effective date as the 1st day of the quarter after a controlling court decision or federal legislation abrogates the physical presence requirement of Quil , which is July 1, 2018.
Alabama and North Dakota announced an October 1, 2018 effective date for their legislation, applied prospectively. Wisconsin does not have economic nexus legislation. However, the state interpreted that the decision now authorizes them to impose collection requirements on remote sellers subject to standards found acceptable in the case, and announced an October 1, 2018 effective date. Wisconsin will issue a regulation with the specific provisions but has agreed that it will follow the South Dakota threshold of $100,000 or 200 transactions and it will be enforced prospectively from October 1, 2018. New Jersey’s legislature passed a similar bill and this is pending signature by the governor.
In quite a different approach, the New Hampshire governor announced that the state plans to fight the Wayfair decision by creating legislative hurdles at both the state and federal level to prevent other states from forcing New Hampshire businesses to collect sales and use tax.
To check the most current status of states as they announce effective dates for economic legislation they have already enacted, new legislation, as well as states that have determined they can enforce economic nexus without any new legislation, check out our Remote Seller Resource page and our Remote Seller Nexus Chart.
Several states tied the effective dates of their economic nexus provisions to a Supreme Court decision overturning Quill. In our opinion, most of these states cannot enforce the legislation until South Dakota disposes of the remand on the Wayfair case. We also believe that any state that has its own litigation pending must resolve their case through summary judgment or settlement. An appeals process may also need to be concluded. In our opinion, states in any of these situations are not in a position to begin enforcing their legislation.
There’s a lot in flux between pending litigation and states’ analysis of the decision, so it’s critical to continually track the status the states’ economic nexus legislation. States without legislation may start proposing.
It is important to remember that these provisions apply to all businesses — not just traditional e-commerce sellers. Therefore, we recommend you take these steps with all your clients to determine if they have any obligation to collect tax in new states. There are a number of questions to consider:
- Does your client have traditional physical presence in the state? Even though physical presence is no longer a requirement, if your client has it, the sales/transaction thresholds may not apply.
- Does your client surpass the state’s economic thresholds? Your client will need to evaluate their sales volume by dollar and transaction (invoice) count. This test is based on GROSS sales, not TAXABLE sales.
- Does your client have any liability? You must determine whether the goods or services your client sells are taxable in the state. If your client has nexus, but their goods/services are exempt, registration may not be necessary.
- Does your client need a new automated tax solution? If your client sells directly to customers and not through a marketplace, they will need to start evaluating what kind of sales tax functionality or system they need for compliance purposes. How will they handle increased sales tax filings? How will they monitor for dates when they’re below an economic nexus threshold?
- Has the state your client does business in released any updates for remote sellers? Monitoring for state notices and guidance will be key. We keep an ongoing list of updates for remote sellers.
It’s both an exciting and a nerve wracking time to work with sales tax. Everyone from sellers to tax pros to business advisors will need to understand the implications of the Wayfair decision – it is changing the business landscape as we know it.
What issues have your clients worried following the Wayfair decision? What do you think will be your biggest challenge going forward? Let us know in the comments.