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.