In days before the world was fully explored, map makers often placed the words “here be dragons” in uncharted waters as a warning to sailors. On June 21, 2018, the Supreme Court handed down its ruling on South Dakota v Wayfair, requiring “out-of-state sellers to collect and remit sales tax ‘as if the seller had a physical presence in the state’.” This ruling overturns prior rulings in National Bellas Hess, Inc. v. Department of Revenue of IL, and Quill Corp v. North Dakota, and creates uncharted tax waters for businesses that sell goods and/or services in states where they do not have a significant physical presence.
South Dakota v Wayfair changes the entire landscape for remote sellers, potentially exposing them to numerous sales tax filing requirements across the country. Prior to this ruling, a remote retailer did not have to collect and remit sales tax if they did not maintain a significant presence of personnel or property, including inventory and office space, in a state they were selling into. South Dakota v. Wayfair completely changes that, creating the potential for states to institute more aggressive sales tax collection and remittance requirements.
In its syllabus on the ruling, the Supreme Court explains its reason for overturning Bellas Hess, Inc. v. Department of Revenue of IL, and Quill Corp v. North Dakota, citing potential erosion of a state’s sales tax base and corresponding loss of state revenue. The Supreme Court’s rationale for repealing the physical presence rule is that factors of physical presence are moving further and further away from the reality of the modern economy. While this may be true, the Court only acknowledged South Dakota’s use of economic nexus and threshold of $100K of goods/services and/or 200 or more separate transactions was sufficient. It did not specifically define significant nexus. This leaves determining what constitutes both nexus and how much is significant in the hands of the states, barring Congress choosing to do so. The implication is that any state sales tax law based on a reasonable interpretation of significant nexus will be upheld.
Previously, states have been trying to circumvent physical nexus rules and collect sales tax on online purchases since the late 2000’s. Some states have enacted “Click Through Nexus” rules, where an out of state seller is defined as having nexus if they are referred business from a business with physical presence in that state. Others have enacted “Affiliate Nexus” rules, where an out-of-state seller is considered to have nexus if they are referred business from an affiliate with a presence in that state.
Over the last couple of years, economic nexus, a specific level of sales within in a state, has been the primary trend. Most states already have some form of economic nexus rule in place, recently passed, or scheduled to take effect in the future. Since South Dakota announced its intention to take Wayfair, Newegg, and Overstock.com, the three defendants in the Wayfair case, to the US Supreme Court in 2016, at least 20 states have passed legislation enacting economic nexus rules with similar thresholds to South Dakota. Many more are considering such legislation.
South Dakota v Wayfair exposes any business selling goods or services into another state to potential sales tax collection and remittance, and state income tax filings. This includes businesses selling goods and services on eBay, Amazon Marketplace, and Etsy. Such retailers may not only have to collect and remit sales tax, but also file tax returns in every state they ship goods to or provide services in. The good news? Most states have not moved to enact effective economic nexus legislation until at least 2018. It also does not appear from the South Dakota v. Wayfair ruling that any filing requirements will be retroactive. Still, you might want to consult the Sales Tax Institute’s Remote Seller Nexus Chart.
If you would like to discuss how South Dakota v Wayfair could affect your sales tax filing requirements, and/or your collection, remittance, and filing responsibilities in a specific state, please feel free to reach out to us for a consultation.
Written by Damien Falato, CPA, MST, CGMA, Tax Director