Key Takeaways
- The Wayfair ruling overturned the physical presence requirement for sales tax collection and allowed states to adopt economic nexus tests based on revenue or transactions.
- Most states have enacted marketplace facilitator laws, which require platforms facilitating sales to collect and remit sales tax, rather than the marketplace sellers.
- Businesses need to identify the relevant jurisdictions, assess nexus, analyze taxability, develop a compliance strategy, and consider other potential tax impacts.
The US Supreme Court’s ruling in Wayfair, Inc. et al. altered the sales and use 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 Impact of Wayfair on Sales and Use Tax
States now have broader authority to require online retailers to collect and remit sales tax on taxable sales. Businesses without a physical presence may now be subject to sales or use tax collection and remittance responsibilities in many jurisdictions. This is particularly notable for businesses with large retail or eCommerce sales, such as businesses selling SaaS, cloud and digital goods or digital services.
Since Wayfair, states have adopted an economic nexus test based on revenue and/or transactions thresholds. A common approach is to require the collection and remittance of sales tax when a seller reaches either $100,000 in revenue or 200 transactions in one calendar year.
In addition, almost all states have adopted marketplace facilitator laws, which require platforms that facilitate sales to collect and remit sales tax, rather than imposing this obligation on the marketplace seller. While states are beginning to provide more guidance on sourcing issues and clarifying the responsibilities between sellers and marketplaces, the implications for the filing responsibilities of these companies are profound.
The History of Wayfair
The State of South Dakota v. Wayfair, Inc., Overstock.com, Inc., and NewEgg, Inc. (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 physical 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.
Next Steps for Wayfair
In recent years, states with a sales tax have been revisiting their initial post-Wayfair laws on nexus thresholds. Fortunately, and perhaps in recognition of the burden a transactional threshold creates, many states are eliminating this measure of economic nexus.
For example, Wyoming, North Carolina, and Indiana have recently decided to eliminate their transaction threshold, leaving only a threshold based on revenue. However, the revenue threshold for some states can be scaled based on the calendar year, and states use different measures to determine whether the revenue threshold has been met. For example, some states look to gross revenue, gross receipts, or taxable sales.
How You Can Remain Compliant with Wayfair
Steps your company can take to ensure compliance include:
- Identify relevant jurisdictions
- Assess nexus
- Analyze taxability
- Develop a compliance strategy
- Consider other potential tax impacts
Wayfair’s impact is significant, and compliance can be complex. Our team of sales and use tax professionals can help you address your compliance needs and address your unique tax situation.
Frequently Asked Questions on Sales Tax Reform
There are many questions to consider when it comes to sales tax reform and its impact on your organization. Here are a few of the most common questions.
Which sales count towards the economic nexus thresholds?
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”, although a reasonable assumption could be that an invoice is 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.
I no longer meet the 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.
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