New Nexus Rules To Result From Monumental South Dakota vs Wayfair Case
The U.S. Supreme Court issued its decision in South Dakota v. Wayfair. It’s been a highly anticipated and, at times, polarizing case and many business owners are rightfully concerned about what this might mean for their business. There is quite a lot to do and consider now that their decision is the law of the land. Keep reading for a couple of thoughts on what this decision means and what you should do now to begin your own response to this historic case.
First of all, the Wayfair case has a relatively simple message: “if you really make use of the marketplace in a state, you should comply with their sales tax laws.” This replaces the basic message of the case it overturned, Quill, which was “if you don’t have physical presence in a state, then you shouldn’t have to comply with that state’s sales tax laws.”
“But we never go there, we have no employees, inventory, or property there” is no longer a defense. This way of thinking was potentially valid pre-Wayfair, but it is not now. This is a big change and it means that most companies with substantial out of state sales will need to start filing in a number of new states.
But isn’t the physical presence test from Quill easier to understand than the Wayfair use of the marketplace test? Many years ago it was, perhaps, but not anymore. States have started to go so far as to say if you have website, then you have nexus in our state (cookie nexus) or if someone you pay for internet ad click referrals has physical presence in the state then you do (Amazon laws/click through nexus). They have even said that if you do business through Amazon and Amazon might store your inventory in a state, then you have nexus there because Amazon has nexus there.
In Wayfair the Court reconnected the rule to a bright line – did you make money in the state ($100,000+)? Did you have a lot of transactions in the state (200+)? Those are quite a bit easier to get a handle on than the various weird ways that he states have tried to apply the physical presence test.
So, What Does Wayfair v. South Dakota Mean For Me?
- The court removed physical presence as a floor to have nexus in a state. Having physical presence can still give you nexus, but you can also acquire nexus in other ways.
- If you sell more than $100,000 worth of goods or services into a state in a year or have 200 or more transactions into that state; then that state can require you to register with them and hold you liable for their state sales tax on your sales there.
- “But we never go there, we have no employees, inventory, or property there” is no longer a defense. This way of thinking was potentially valid pre-Wayfair, but it is not now. This is a big change and it means that most companies with substantial out of state sales will need to start filing in a number of new states.
- Just because a state can constitutionally do this, they still have to have a law on their books to do so. Most states have some language asserting that you have nexus “to the extent permitted by the US Constitution” or similar language. Even without a specific Wayfair law, most states could argue that their law as it is today permits this treatment.
o There are 12 states with a Wayfair-style law, which means that those are presumably constitutional and valid today.
o There are a number of other states with a variety of economic nexus requirements not specifically modeled after Wayfair. These may also be valid.
- While this case was about sales tax nexus, since you will need to register with the state tax department you will likely also be liable for some of the income type taxes as well.
- Now that we have a more bright line rule, companies that obviously have nexus but that choose not to register or collect sales tax in other states may need to have financial statement disclosures in their audited financial statements.
What Should Business Owners Do Now?
You should consider your risk in each state in which you do business. Ask yourself, if you were to register or be caught by the state, what would be the result?
- If you primarily sell to wholesalers, and you keep good exemption certificate records, registering might just be an administrative issue – you just have to do some informational reporting to the state. If you get caught, you will have to go through the process of defending the audit, but so long as your documentation is good, that might be it.
- If you sell to end users, is your product or service taxable in that state? Do you know how your product or service is taxed in other states?
- Have you broken out your invoice price sufficiently to contain the risk to things that are actually taxable (many states fully tax mixed transactions)?
- Do your customers have an exemption for their use of your product or service in that state? If so, have you been keeping record of those exemption certificates for that particular state?
- If you were to be audited by a state, is your software in a position to accurately give you sales by state, county, etc? Are you sourcing your sales in accordance with state rules on sourcing (which may vary by state)? Can your software handle taxable and nontaxable sales?
- In states where the risk is high, do you register going forward? Pursue a voluntary disclosure? Simply wait and see what happens?
- Have you talked to your internal or external accounting advisors? Most of them do not have a strong concentration in transactional tax (sales and use tax) – are they giving you the best advice to help you decide what to do next? If you choose not to take action on states where you have nexus under Wayfair, will your auditing team be required to add a disclosure to your financial statement or will you need to consider an accrual for sales tax?
If that seems like a lot – it is. The states that have been reached for comment after Wayfair are considering their responses as well. They know that all of this is going to take taxpayers a little while to figure out and to change their systems and processes to become compliant. Therefore, it is especially important to take this time to assess your business’ specific situation and tailor a plan with your tax advisors to minimize risk and put you in the best position for continued success post Wayfair!
Wondering where to start? You can contact Rea’s team of state and local tax professionals for assistance. Or, visit our state and local tax services page to learn more about our team and the services we can provide to help keep your business safe.