August 15, 2018

By: Karen T. Syrylo, CPA

States no longer need to restrict their sales tax collection requirements to only sellers that have a physical presence in the state, according to the June 21, 2018 decision by the U.S. Supreme Court in South Dakota v. Wayfair. The result is that sellers that deal with their customers only through the Internet, phone and mail can be required to charge sales tax in many states where they have customers.

The Court’s decision overturned the long-standing rule outlined in two prior Supreme Court decisions that had said that a seller must have physical presence, such as an office or salesperson, in a state before the state could deem that there was “nexus” and require the seller to charge the sales tax on sales to in-state customers. The Court’s majority ruled that the physical presence test is an incorrect interpretation of the Commerce Clause of the U.S. Constitution. While the Court said that the prior decisions were incorrect, much attention was also paid to how technology has changed the ways of doing business in the modern economy since the time of those two rulings (Quill in 1992 and National Bellas Hess in 1967).

In the Wayfair decision the Court spoke favorably of the components of the South Dakota sales tax statute at issue in the case; this included that the tax responsibility applied to sellers with $100,000 of sales to, or 200 transactions with, in-state customers, thus allowing for a reasonable threshold and protections for very small businesses. But the Court gave no specific instruction on exactly what would or would not be acceptable in the states’ requirements in order to be Constitutional.

All states are in the process of reviewing and updating their laws to be in concert with this ruling so that the states can collect additional sales tax dollars from additional sellers. Some states already have laws in place that mostly or totally fall in line with the South Dakota standard that the Supreme Court addressed; but some states’ standards are significantly different, e.g. several apply a $10,000 sales threshold rather than the $100,000. We expect to see additional legislation and regulations in many states.

Issues all businesses should consider:

The Supreme Court’s ruling does not impact what products and services are subject to sales tax in any state or other rules regarding exemptions and taxability; it only changes who can now be required to charge and collect the tax. All businesses will need to review the rules of each state in which they have customers, to determine what the states’ nexus thresholds are and whether the states impose tax on or exempt the products and services that the businesses are selling. It is important to note that the new nexus rule applies to all sales into a state: the sale of tangible goods delivered to the customer, and digital goods that are delivered electronically, as well as to the sale of services that are taxable in some states.

This analysis must be done on a state-by-state basis due to the fact that the laws differ. Questions that need to be asked include:

  • In which states are our customers? To where do we ship our products? Where is the recipient of our services?
  • What is each state’s threshold for requiring sales tax to be charged, e.g. the sales dollar amount or number of transactions?
  • How much is our total annual sales volume in each state?
  • How many transactions do we conduct with customers in each state each year?
  • Do we sell items that are taxable, or do some or all of those states’ laws provide that our sold products/services are exempt?
  • In the states where we meet the state threshold, do we have exempt customers (e.g. nonprofit organizations, or resellers) from whom we will need to receive exemption certificates in order to legally avoid charging the sales tax?
  • What accounting and processing mechanisms do we need to have in place to identify taxable transactions, bill the tax on our invoices, collect the tax from our customers, and remit the tax to the states?
  • What processes do we need to have in place to monitor our operations and the state law changes, in order to stay compliant and avoid penalties?

GRF’s experienced tax professionals can assist you with this analysis to make sure you are compliant with the changing sales tax landscape and yet do only what is legally required. For more information, please contact Troy Turner, CPA, Partner and Director of Tax at 301-951-9090 or tturner@grfcpa.com.