The Supreme Court’s landmark decision in South Dakota v. Wayfair, et al. on June 21, 2018, spoke for the states when it overruled the “physical presence” standard long held in Quill Corp. v. North Dakota — changing the game for sales tax collection.
The decision stands to affect all types of businesses in various industries and locations throughout the world. Below are some key questions and answers that will help you understand the impact and potential risks to your business, and what you should do next.
The Wayfair decision is the culmination of years of eroding the standard set in Quill. The 1992 Supreme Court decision protected businesses selling in multiple states from having to collect sales tax in each state unless they had a physical presence — such as a brick-and-mortar building.
But in an increasingly online and “borderless” business culture, states felt they were missing out and began to get aggressive on the definition of “physical presence.” Activities such as click-through nexus, which is when someone clicks through another website to get to yours, having an affiliate in the state or using internet cookies to track customer activity became new targets for sales tax collection.
Many states began passing economic nexus statutes, which required sellers in their state that exceeded a dollar or transaction threshold to collect sales tax on the state’s behalf, regardless if they had a physical presence there. These statutes were in clear violation of Quill, but South Dakota challenged the ruling when it took Wayfair, a popular online retailer of home goods, to the Supreme Court. The decision was sweeping, overruling Quill with its judgment that a physical presence is no longer required for a remote seller to collect sales tax.
Now, if a company meets a state’s economic threshold, that’s enough to require the company to collect sales tax on the state’s behalf. However, it’s important to know that Wayfair does not replace the physical presence standard. If a business does not meet a state’s economic threshold but has a physical presence there, that business could still have sales tax collection requirements.
NO. Even though Wayfair is an online retailer, the decision impacts all businesses selling in other states. The economic nexus thresholds are applied broadly to remote sellers of any kind, not only those online, so states will be looking to identify sellers not based in their state. For example, a manufacturer in Ohio could sell its product to five other states through a more traditional sales process. Even though there is no online sales component, the seller will be required to collect sales tax on behalf of all five of those states if the company’s sales meet the economic threshold in those states.
There are over 30 states now that have enacted economic nexus thresholds requiring sales tax collection and remittance if either a dollar threshold or transaction threshold is exceeded. Most of the states have adopted $100,000 in transactions OR 200 or more transactions as their threshold. Of those 30, about 25 went into effect as of November 1, 2018. If your company has met the thresholds this year in any of these states and are not collecting, you are already out of compliance and creating a liability. Companies should develop a business plan around Wayfair that addresses both historical and current activities before the company registers with new states.
First, review and update your processes and procedures surrounding sales tax collection, both historically and going forward. Evaluate whether you have had prior physical presence in a state but did not collect sales. If so, you’ll need to determine your liability and the best way to remediate it.
Next, you will want to review your business’ current accounting system and staffing to determine if they can accurately and effectively collect and remit sales tax in multiple states. If you have not been collecting sales tax in every state in which you do business, your cost of doing business likely will go up. You may need to hire additional outside consultants for strategic advice, hire employees who can dedicate several days each month to sales tax compliance and potentially implement new third-party software to help with the additional sales tax compliance.
If you don’t come into compliance, the sales tax liability that belongs to your customers will become your liability. Unless you are able to document your customer already remitted the tax, states can come after your company as the seller and ultimate liable party for the tax. You then would have to make a business decision as to whether you want to, or are even able to, go back to your customers to collect sales tax. Collectively, that could be a large liability to try to recoup.
Uncertainty still exists regarding the future impact of Wayfair for sales taxes as well as other tax types. For sales tax purposes, questions remain about the decision’s applicability to local sales taxes, especially those that are self-administered; and compliance requirements in years when a company does not exceed the state’s economic nexus threshold. In the latter situation, companies will need to evaluate whether the administrative burdens associated with starting and stopping compliance exceed the cost of compliance provided a state allows for annual evaluations of compliance requirements. From a practical standpoint, companies likely will find that it will be less of an administrative burden to continue to collect and remit sales tax even if the company does not exceed a state’s economic threshold in a particular year.
Wayfair ultimately will have an impact on all state and local taxes. Just as the Quill physical presence standard was applied to non-sales tax, its reversal in Wayfair likely will be just as broadly applied in the future.
The decision in Wayfair is far-reaching for any business with sales in more than one state. Do not make your customers’ sales tax liability your liability. Start planning now with your internal and external teams to create a compliance plan before states come knocking.
Contact Hannah Prengler at hprengler@cohencpa.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.