Determining your sales tax liability when you operate in more than one state is always complicated. Now it has gotten even trickier. Last week the US Supreme Court made, what I consider, a monumental decision in the case of South Dakota v. Wayfair, Inc. (Wayfair). This decision could turn small businesses, especially e-commerce businesses, upside down and have far reaching effects on how buy and sell products and services. At issue is whether a state can require an online retailer to collect and remit sales tax in a state where it does not have physical nexus. Prior to this decision, a company was only required to collect and remit sales tax in a state where it had either property or payroll, referred to as physical nexus. Now, solely having sales in a state could create nexus.
Let’s go back a bit in history, say a little over a week ago. Prior to Wayfair, a business only had to worry about those states where it had a physical presence in determining its tax nexus. Physical presence has long been the means for determining the taxability of sales in a state since the 1960s. This ruling was upheld and solidified in 1992 when the US Supreme Court ruled in the case of Quill Corp. v. North Dakota (Quill). In Quill, the US Supreme Court ruled that the catalogue retailer was not required to collect and remit sales taxes to the State of North Dakota because it lacked physical presence in that state. Wayfair has changed this in South Dakota and is expected to change this in a multitude of states.
In 2016, South Dakota passed a law requiring online retailers, with sales in the state of more than $100,000 or more than 200 transactions annually, to collect and remit sales taxes. In the wake of revenue shortfalls in many states, it is not a surprise that states will look for, and find, alternative revenue sources. This is the path that South Dakota took. As soon as they passed the law, the state sued four retailers, including Wayfair, Inc., for not complying with the law and won their case. This is huge!
Will other states follow suit? Most likely. Could this reach farther than just e-commerce? Maybe. We’ll have to keep a close eye on this issue as it unfolds. Whether you are an online retailer, SaaS based technology company, brick and mortar store selling occasionally online, or a company that just provides services to its customers, you need to keep a close eye on what other states will do in the wake of the outcome of Wayfair.
By Susan Nieland, CPA