U.S. Supreme Court’s Wayfair Decision Will Have Tremendous Impact on Business’ State Tax Filing Obligations
On June 21, 2018, the United States Supreme Court changed the landscape of how states can collect sales and use tax with its decision in Wayfair v. South Dakota by upholding an economic nexus standard created by the state of South Dakota. With this decision, the Supreme Court overturned its own precedent, established in its 1992 decision, Quill v. North Dakota, which required a business to have a physical presence in a state for the state to be able to require collection of sales tax. As a result of the Wayfair decision, online sellers could be subject to sales tax compliance in many more states.
Wayfair, Inc. is an online retailer that sells home goods. The company sells goods across state lines without a physical presence in all of those states. The company was selling goods to consumers in South Dakota. South Dakota has an economic nexus standard by which the state collects sales tax from businesses so long as those businesses achieve certain economic thresholds in the state. To better understand the need for economic nexus standards, it is important to consider the evolution of the marketplace where e-commerce is replacing many brick and mortar stores.
With the expansion of e-commerce, states were losing significant sales tax revenue because they were not able to collect sales tax from online businesses that do not maintain a physical presence in that state. States were attempting to make laws that allowed them to collect taxes from these businesses while not violating the Commerce Clause of the U.S. Constitution, which requires “nexus” between the state and the taxpayer. The states tried to create new nexus standards, such as click-through or affiliate nexus, which would allow them to impose tax compliance on out-of-state businesses.
New York was the first state to institute a click-through nexus standard in an attempt to collect sales tax revenue through online businesses that avoided collection under the physical presence standard. The click-through or affiliate nexus rules create nexus for out-of-state businesses using an in-state business to refer sales to the out-of-state business. The term “click-through” comes from a link that would be on the website of the in-state business whereby the consumer would click through to the website of the out-of-state business to buy something. In 2008, the Supreme Court allowed the click-through standard that New York had established. Since that decision, other states have instituted click-through and affiliate nexus rules, and expanded into other nexus theories such as economic nexus.
Wayfair v. South Dakota: Economic Nexus
South Dakota’s economic nexus law requires out-of-state sellers to collect and remit sales tax if they are either delivering $100,000 of goods or services into the state during a year, or if they are participating in 200 or more individual transactions per year related to the delivery of goods or services into the state. With the Supreme Court’s decision in Wayfair v. South Dakota, states can institute economic nexus laws to collect sales tax revenue on sales by out-of-state businesses that do not have a physical presence in the state.
What does Wayfair mean for businesses?
Now that states have the enhanced ability to tax businesses that sell goods remotely, businesses could be required to comply with sales tax requirements in many more states. States will look at the decision of Wayfair v. South Dakota, and likely enact laws and issue new rules and regulations creating or revising economic nexus standards to mirror the $100,000 in sales or 200 transaction test approved in this case. Businesses should track all sales made in each state to identify the states where they have exposure under economic nexus standards, and determine the best course of action. In states where exposure is greatest, it may be prudent to register with that state and begin to collect and remit sales tax.
South Dakota’s economic nexus law has a provision that prevents the state from applying the statute retroactively. While the Wayfair decision does not expressly prohibit retroactive application by the states in their attempts to collect sales tax, many legal interpreters believe that the court would most likely disallow retroactive application if a case with that issue presented itself.
The unknown: income tax nexus
A secondary, but potentially more expensive impact of the Wayfair case is the likelihood that states which previously felt bound to the Quill physical presence nexus test for state income tax nexus purposes will take the position that physical presence was never required for income tax nexus. Those states could assess businesses that only have economic nexus for state income tax for all prior years still open for assessment. The Wayfair decision is silent on income tax nexus; thus leaving the door open to aggressive auditing and collection of income tax utilizing the new standard. Businesses should monitor developments in this area, particularly for offers of amnesty or opportunities to file under voluntary disclosure agreements in states where the potential unpaid income tax liabilities for past years are significant for the business.
Boyer & Ritter business clients operating in the eCommerce space are all wondering how this decision will affect their business, and how they can get ahead of it. Contact the advisors in the Boyer & Ritter Tax Department with questions specific to your business.
Brian J. Kutz, CPA, is a supervisor at Boyer & Ritter with experience providing tax and accounting services for individuals and closely held business clients. Reach Brian at 717-761-7210 or firstname.lastname@example.org.