South Dakota v. Wayfair – What Does It Mean for Sales Tax Going Forward?
Last month, the Supreme Court ruled in favor of South Dakota in the case of South Dakota v. Wayfair, Inc. With this ruling, the Supreme Court upheld South Dakota’s “economic nexus” standard for sales tax, allowing it to require Wayfair to collect and remit sales tax on sales to the state. This reverses a previous Supreme Court ruling from 1992 stating that states do not have the authority to impose sales tax unless there is “physical presence” within the state.
This is likely to have a major impact on internet retailers and even small businesses that sell online and ship to other states. With this ruling, states can now impose economic nexus and require businesses that ship or sell to their state to have to collect and remit sales tax.
Nexus standards can be a bit confusing, so let’s have a quick overview of the main nexus standards and how they work. Nexus, in a nutshell, is how much “activity” a business has in the state before it is subject to that state’s sales tax laws. Physical presence nexus involves a business’s “actual presence” within the state. Items that can trigger physical presence nexus include having a physical storefront in the state, holding inventory within the state, having an employee, or an independent contractor in the state, or attending multiple trade shows within the state. Economic nexus, on the other hand, is triggered by “economic” activity within the state, even if your business never has a “physical” presence in the state. South Dakota, for example, considers a business to have economic nexus once a business ships over $100,000 in gross sales product to the state, or has over 200 separate sales transactions within the state in a year (which could be a calendar year or a 12-month period). This also includes electronically delivered product and services, as both are subject to sales tax in South Dakota. So, a business that has over $100,000 online gross sales made to South Dakota, even without ever setting foot in the state, would be considered to have nexus and need to register for South Dakota sales tax and collect and remit sales tax on South Dakota sales.
It is expected that more states will implement economic nexus laws modeled after South Dakota’s. This has far reaching consequences for any business that makes sales out of state or online. However, consideration does still need to be given to a state’s sales tax laws in whether the activity is subject to sales tax. For example, a company that performs $150,000 in consulting services in Oklahoma may hit the sales threshold, however, consulting services aren’t taxable in Oklahoma.
Before the Wayfair ruling, 45 of the 50 states had sales tax laws. Thirty-one of these states had nexus laws that went beyond just “physical presence,” sometimes resulting in online internet sales being subject to sales tax. Nineteen states have laws or are about to pass laws that are very similar to South Dakota’s economic nexus law. It is projected that if more states switch away from physical to economic nexus, it will generate $10-$25 billion more in sales tax revenue for the states.
In response to the Wayfair ruling, Indiana announced that as of October 1, 2018, out of state merchants with Indiana gross sales over $100,000 or over 200 Indiana transactions will need to collect and remit Indiana sales tax. This is pending the resolution of a 2017 lawsuit prohibiting Indiana from collecting sales tax from remote sellers.
Hawaii, Maine, Oklahoma, Vermont, and Tennessee (pending a court injunction) implemented economic nexus standards on 7/1/2018. Mississippi has set a date of 9/1/2018. Alabama, Illinois, Kentucky, Michigan, Minnesota, New Jersey, North Dakota, Washington, and Wisconsin all plan to implement their economic nexus standards as of 10/1/2018. North Carolina has a 11/1/2018 implementation date set, and Connecticut has a 12/1/2018 start date for its economic nexus standard. Georgia, Iowa, Louisiana, Nebraska and Utah all have a 1/1/2019 economic nexus standard. Even though South Dakota was involved in the Supreme Court case, similar to Indiana, South Dakota’s economic nexus standard implementation date is pending a court injunction.
The above are just the states with implementation goals currently set. Many other states have already announced that they will be re-evaluating their current nexus standards and may modify them to better match the Wayfair ruling.
The Supreme Court ruling in this case only relates to sales tax nexus standards, however, this could eventually trigger economic nexus laws expanding to include corporate income taxes. Small businesses with internet sales to other states may not only have to worry about sales tax in a foreign state, but also income tax. Again, this is likely some ways down the road, but with change on the horizon, it is important businesses stay up to date on the ever-changing tax nexus landscape.
With these changes, you may be asking, what do I do now? Do I need to register now for all these states? An initial recommendation is to make sure your software can track your gross sales and invoice transactions by ship to address by month. If so, think about those states you ship to the most and run a report to examine the sales and transactions in the state over a 12-month period. If those reports show activity over the average $100,000 in gross sales or 200 invoice transactions, we can help walk you through any next potential steps. Now, while most states listed above seem to be using the threshold of $100,000 in sales and 200 transactions, not every state is using that threshold. If there is a state where you think you might have some economic nexus, please contact us and we can help you walk through that specific state’s economic nexus requirement.
We want clients to be aware of the ruling and what these changes could mean for you. Feel free to reach out to us if you have any questions or concerns. We are more than happy to help assist you in determining if you have sales tax nexus in other states, need a nexus study, and keeping you up to date as states implement economic nexus standards.