Article

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

April 23, 2020
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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 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.

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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State
Revenue Threshold
Transaction Threshold
Effective Date
Notes
Alabama $250,000 10/1/2018 Alabama's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Alaska     While the state does not impose a sales or use tax, several municipalities do. 
Arizona $100,000 10/1/2019 Arizona has a scaled revenue threshold during a three year period. In 2019, the revenue threshold was $200,000. In 2020, the revenue threshold is $150,000. In 2021, the revenue threshold will lower to $100,000. Taxpayers will be considered to have nexus if the taxpayer has surpassed the revenue threshold in that year and going forward.  
Arkansas $100,000 200 7/1/2019 Arkansas's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
California $500,000   4/1/2019  
Colorado $100,000 6/1/2019
Connecticut $100,000 200 12/1/2018 Connecticut's economic nexus standard is met when both the revenue threshold and the transactional thresholds are met. 
Delaware       Delaware does not impose a sales or use tax. 
District of Columbia $100,000 200  4/1/2019 The District of Columbia's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Florida  $100,000    7/1/2021
Georgia $100,000 200 1/1/2019 Previously $250,000 effective 1/1/2019 through 12/31/2019. Georgia's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Hawaii $100,000 200 7/1/2018 Hawaii's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Idaho $100,000   6/1/2019  
Illinois $100,000 200 10/1/2018 Illinois's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Indiana $100,000 200 10/1/2018 Indiana's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Iowa $100,000   1/1/2019  
Kansas $100,000 - 10/1/2019
Kentucky $100,000 200 10/1/2018 Kentucky's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Louisiana $100,000 200 7/1/2020 Louisiana's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Maine $100,000
7/1/2018 Maine's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Maryland $100,000 200 10/1/2018 Maryland's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Massachusetts $100,000   10/1/2017 Prior to 10/1/2019, the economic threshold was $500,000 and 100 or more separate transactions. On and after 10/1/2019, the economic threshold decreased to $100,000 and dropped its transactional threshold. 
Michigan $100,000 200 10/1/2018 Michigan's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Minnesota $100,000 200 10/1/2018 Minnesota's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Mississippi $250,000 9/1/2018  
Missouri $100,000 1/1/2023  
Montana     Montana does not impose a sales or use tax. 
Nebraska $100,000 200 1/1/2019 Nebraska's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Nevada $100,000 200 10/1/2018 Nevada's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
New Hampshire       New Hampshire does not impose a sales or use tax. 
New Jersey $100,000 200 11/1/2018 New Jersey's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
New Mexico $100,000    7/1/2019  
New York $500,000 100 6/21/2018 New York's economic nexus standard is met when both the revenue threshold and the transactional thresholds are met. 
North Carolina $100,000 200 11/1/2018 North Carolina's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
North Dakota $100,000
10/1/2018  
Ohio $100,000 200 1/1/2018 Ohio's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. Prior to 8/1/2019, the economic threshold was $500,000. However, it decreased to $100,000 on and after 8/1/2019.
Oklahoma $100,000 6/1/2018  
Oregon     Oregon does not impose a sales or use tax. 
Pennsylvania $100,000 7/1/2018  
Rhode Island $100,000 200  7/1/2019 Rhode Island's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
South Carolina $100,000 11/1/2018  
South Dakota $100,000 200 11/1/2018 South Dakota's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met.  
Tennessee $100,000 10/1/2020 Previously $500,000 effective 10/1/2019 through 9/30/2020.
Texas $500,000   10/1/2019  
Utah $100,000 200 1/1/2019 Utah's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Vermont $100,000 200 7/1/2018 Vermont's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Virginia $100,000 200 7/1/2019 Virginia's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Washington $100,000 1/1/2018  
West Virginia $100,000 200  1/1/2019 West Virginia's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met. 
Wisconsin $100,000
10/1/2018
Wyoming $100,000 200 2/1/2019 Wyoming's economic nexus standard is met when either the revenue threshold or the transactional thresholds are met.