According to the June 21, 2018 decision by the U.S. Supreme Court in South Dakota v. Wayfair, states no longer need to restrict their sales tax collection requirements to only sellers that have a physical presence in the state. 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.
Recent State Responses to Wayfair Decision:
Maryland is drafting legislation that would expand the definition of an out-of-state vendor who engages in business in Maryland. This vendor would include a person that sells tangible personal property or taxable services for delivery in Maryland if, during the previous or current calendar year, the vendor has Maryland destination sales of $100,000 or 200 sales transactions with Maryland customers. This change would be effective October 1, 2018.
DC and Virginia have not yet adopted economic nexus provisions. Pennsylvania already adopted economic nexus, but only as an alternative to detailed notice and reporting requirements. Pennsylvania requires remote sellers, marketplace facilitators, and referrers with aggregate retail sales of at least $10,000 of tangible personal property delivered in Pennsylvania in the prior calendar year to file an election, before March 1, 2018, either to collect and remit sales tax or to comply with detailed notice and reporting requirements.
California is drafting legislation that would establish a $500,000 California destination sales threshold. The draft doesn’t currently include an effective date.
Issues all businesses should consider after Wayfair:
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. Analysis must be done on a state-by-state basis since each state’s laws differ.
It is also important to note that while this case only impacts sales tax, it is likely that many states will also adopt an economic nexus standard instead of a physical presence nexus standard for income tax purposes. It is important to monitor this closely to make sure you are also in compliance with state income tax requirements. It is very likely that multi-state businesses will have filing requirements for income taxes in more states moving forward – especially those companies who are selling services or access to intangible property into states where economic nexus would trigger a filing requirement. There is no protection under P.L. 86-272 for the sales of services or intangibles.
If you have customers in states where you don’t have any physical presence, now is the time to confirm whether you have a filing requirement in any of these states. Our experienced tax professionals can assist you with this analysis to make sure you are compliant with the changing tax landscape.