Wayfair's Impact: Five Years Later

Written By:

Marc Sporn

Wayfair's Impact - Five years later

It's hard to believe five years have passed since one of the most influential decisions in tax history was handed down by the United States Supreme Court. Before we take a look at the impacts the decisions has had on the entire sales and use tax landscape, we must first look at a brief history of the past.

Physical Presence is "Unsound and Incorrect"

In 1992, the Supreme Court's decision in Quill Corp v. North Dakota effectively prohibited states from requiring a business to charge sales taxes on its sales into a state in which the business did not have a physical presence. Out-of-state retailers, including those selling online, followed Quill and avoided collecting and remitting sales tax, arguably giving them an advantage over in-state retailers that were required to charge sales tax. While consumers had always been required to pay taxes directly on their purchases when retailers didn't charge sales tax, enforcement had been nearly impossible, and many consumers simply did not pay such taxes.

In 2016, South Dakota enacted a new law to challenge the "online retailer loophole" and require out-of-state retailers to collect and remit sales tax on sales into South Dakota. The law applied to any out-of-state business that exceeded certain sales thresholds in South Dakota, regardless of physical presence. Wayfair, the popular online home store, challenged South Dakota and the case made its way to the United States Supreme Court.

In 2018, the Court sided with South Dakota and reversed the Quill precedent, essentially stating the principal of physical presence was "unsound and incorrect" based on the technological advances of the Internet and the way it has transformed the national economy. It created new responsibilities for businesses that sell goods through remote sales channels, including online marketplaces like Wayfair and Amazon.

Economic Nexus: A New Era of Sales Tax

The Wayfair case ushered in a new era of sales tax. In the years since, all but four states have adopted new laws that define the idea of economic nexus. Economic nexus is a connection between a business and a state when annual sales revenue and/or number of transactions reach a threshold which requires the business to register for, collect and remit sales tax. Each state has its own set of thresholds. As many business owners already know, no two states have enacted the same laws and each state has its own idea of activities that are exempt from the collection and remittance of sales tax.

It is important for businesses to understand their sales tax obligations in each state in which they have nexus, including whether they have a direct obligation to collect and remit sales tax or if that obligation falls to the marketplace facilitator. In some cases, businesses may have a direct obligation to register for a sales tax permit and collect sales tax, even if they sell through a marketplace facilitator.

The COVID-19 pandemic also affected how business owners and tax professionals approach these new challenges. In response to the public health emergency, the retail and service world pushed most of their activity online. Remote sales in the US and world-wide grew exponentially, rendering nearly every business an out-of-state business for at least some of their customers and making the effects of the landmark Wayfair case even more prevalent in tax planning.

Post-Wayfair: What Businesses Need to Know

Business owners and their accountants must be aware of their sales tax obligations and ensure that they are complying with sales tax laws in each state in which they do business. Some steps they can take to ensure compliance and avoid potential penalties or fines include:

Discover sales tax nexus:
Determine if there is a substantial connection (also known as "sales tax nexus") to any states in which they do business. This includes states in which they have a physical presence, as well as states in which they may have economic nexus (e.g. a certain level of sales in a state).

Check state laws:
Review the laws of each state in which they have sales tax nexus to determine if the state has passed a marketplace facilitator law.

Determine your responsibilities:
Figure out whether you, the business owner, is responsible for collecting and remitting sales tax, or if it is the responsibility of the marketplace facilitator.

Register for a sales tax permit:
If a business owner has a direct obligation to collect and remit sales tax, they will need to register for a sales tax permit in each state in which they have nexus.

Consider using sales tax software:
To simplify the process of calculating, collecting, and remitting sales tax, business owners may consider using sales tax software.

Review and update processes regularly:
Keep abreast of changes in state laws and regulations, and update processes accordingly.

As we look ahead to the future, taxpayers and tax professionals alike will continue to approach the everchanging landscape of sales tax with caution. States will continue to look for ways to generate revenue, the economic climate will continue to evolve, and businesses will continue to adapt to changes in their industries.

You can count on WBL CPAs + Advisors to stay ahead of changes in the world of sales tax.
Contact a member of our State and Local Tax (SALT) team with any tax strategy questions you may have.