A Sales Tax Reform Game Changer: How Wayfair Changed the Sales Tax Reform Landscape

April 23, 2020 | Article

The Wayfair decision changed the sales tax landscape. Because of that ruling, it is now possible for states to collect sales tax from out-of-state sellers without a physical presence in their state.

The Supreme Court’s Ruling on Wayfair
The State of South Dakota v. Wayfair, Inc., Overstock.com, Inc., and NewEgg, Inc. case (SD v Wayfair, Inc.) challenged the physical presence requirement of Quill Corp. v. North Dakota, which prohibited requiring out-of-state retailers to collect sales taxes on behalf of a state without some minimum connection with that state.

In the U.S. Supreme Court’s 5-4 Wayfair decision, the Court ruled in favor of South Dakota’s law requiring certain internet sellers with no physical presence in the state to collect South Dakota sales tax.

About Quill
Quill Corporation, an out-of-state office supply company that sold products to North Dakota customers, was not collecting sales tax on such sales. North Dakota audited Quill and assessed sales tax. Quill appealed to the United States Supreme Court claiming they were not required to collect sales tax since they did not have a presence in North Dakota.

The U.S. Supreme Court agreed with Quill that North Dakota cannot impose a sales tax requirement on an out-of-state retailer who does not have a substantial presence in the state. Substantial presence is defined as physical presence.

The Wayfair ruling overturned the Court’s 1992 Quill decision that barred states from requiring sales tax collection from sellers with no physical presence in the state. With the rise of internet sales, states have pushed back against the Quill rule with some success. Now, the physical presence requirement is gone.

The Impact of the Wayfair Decision on Nexus
The Wayfair ruling indicates that physical presence is no longer required for a state to impose sales and use tax on a remote seller. This decision impacts nexus, and therefore impacts tax compliance for any organization operating across state borders. The decision will primarily affect remote sellers, including internet retailers, phone order retailers and inbound companies.

The Wayfair decision opened doors to collect sales tax from out-of-state sellers with no physical presence. Here’s how states are reacting.

The Impact of Wayfair on Businesses
No matter what you sell, if you reach a certain volume of sales or number of transactions, your compliance burden may change—without having a physical presence in the state. Below are a few examples of how sales tax reform is impacting businesses.

Service Across State Borders
States continue to take an aggressive approach to identifying businesses that are not following the new rules and identifying individuals that may not have paid sales or use tax.

Business are now required to:

  1. Provide customer a sales tax notice at time of sale
  2. Provide customers an annual information report of transactions
  3. Provide the state an annual report of qualifying transactions

For example, A company that makes road maintenance trucks sold more than 200 trucks and numerous truck parts online, with sales across the nation. Employees would drive the trucks to their new owners and provide training on how to operate them. The business was only collecting and remitting sales tax in the state where they were physically present. By delivering the trucks, the business had unexpectedly created nexus and therefore a sales tax connection.

Sales Volume Thresholds
A business that provides rental car companies with supplies to clean the rental car upon return sells most of their products online, and after a review of their situation, determined they meet the sales tax thresholds and will need to register in multiple states.

A company with a bulk of their business being resale also offers a “buy direct” option. Because of this “buy direct” option, their total gross sales were enough to trip them over the dollar threshold making them subject to collect and remit sales tax in five additional states.

Or, take the wholesale parts company that ships products all over the country. They don’t have a website, but people call them directly to order their product. A portion of the sales go to wholesales and another portion goes to end users. The total dollar amount got them over the threshold and now this business has a compliance burden of filing in 22 additional states every month.

Another business, traditionally a wholesaler of products to grocery stores, recently started selling direct to consumers through Amazon. Because of the new direct sales, they are subject to additional sales tax compliance.

Number of Transaction Thresholds
An online retailer makes sales more than $600K annually. Each transaction is roughly $50-$60. However, due to the number of invoices in various states, this company now needs to register in ten additional states.

Taxability of Software
Software is taxable in some states but not in others. Knowing the thresholds and whether you’re over them in particular states can help reduce compliance filing failures.

Amazon Fulfillment
Some business owners use Amazon to fulfill orders. This could mean inventory is being stored and shipped from warehouses across the United States, creating the potential for nexus in multiple states.

If you sell products online that are being fulfilled by Amazon, completing a Sales Tax Risk Assessment is a good way to determine your exposure. Where you’re storing inventory, and shipping from and to, could create nexus depending on state threshold laws for either volume of sales or number of transactions. It’s important to know where you currently have inventory being held or shipped to, especially when working with Amazon or similar outlets.

How you can remain compliant with sales tax reform
The Wayfair ruling doesn’t only affect internet sellers, it also makes it easier for states to collect sales tax on any business that has customers outside their home states.

If your business qualifies as a remote seller, here are a few simple steps you can take now to assure you remain in compliance moving forward.

  1. Review your sales by state to understand which states you’re doing business in and what your current thresholds are. If you don’t have this information easily available, consider how to start collecting it.
  2. Complete a nexus review so you know which jurisdictions you’re doing business in and what those filing requirements are.
  3. Talk with your tax advisor to discuss the next steps that make the most sense for your business.

Here are seven steps to consider when it comes to sales tax reform

Frequently Asked Questions on Sales Tax Reform
There are several questions to consider when it comes to sales tax reform and its impact on your organization. Here are a few of the most common ones.

Which sales count towards the economic nexus thresholds?
Most states have not specified if sales to resellers or specific items, such as freight, count towards the threshold standards. Most states simply use the term “sales” and do not specify if sales to resellers count towards the thresholds. A conservative approach is to assume that all sales would count towards the thresholds.

Do individual items count towards the number of transactions?
Most states have specified the number of transactions for their threshold. In addition, most states have not defined what is a “transaction.” We can only assume that they view an invoice as a transaction and not the individual items listed on the invoice.

Am I required to collect all local taxes in addition to state taxes?
Most states are requiring that remote sellers collect all applicable taxes including local taxes. This should be addressed by the state if you are required to register. Learn more about current state positions.

I no longer meet a threshold. How long until I can stop filing?
Based on state information available, once you have met a threshold, you are required to continue filing as long as you are in business or until you cease business in the state. Most states have a rolling nexus provision which requires you to file zero returns for a year or other time frame after you cease business in the state.

Once I meet a threshold are my previous sales subject to tax?
Typically, once a threshold is met, the tax liability is based on future sales, not historical sales.

The Impact of the Wayfair Ruling
The impact of the recent Wayfair decision will continue to have a ripple effect on businesses and state sales tax compliance.

There are considerations and steps to take before registering with a state and collecting and remitting sales tax. A nexus study, used to analyze your business activities and presence in a state to determine if sales or income tax should be filed, may need to be considered.

Address your state tax concerns head on

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