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The reverberations of the Supreme Court ruling that overturned Quill is clear. States are accelerating sales tax collections and it’s time to form your plan now.

Tax strategies

South Dakota v. Wayfair Has Been Settled. Here’s What it Means

  • Steven Claflin
  • Dan Kidney
  • Alicia Miller Buchel
  • 11/20/2018

The U.S. Supreme Court’s June 21, 2018, ruling in South Dakota v. Wayfair has taken another twist: The case has been settled out of court.

Due to this confidential settlement, we now know for certain that the South Dakota court system will not be issuing any guidance about the constitutionality of the state’s sales tax nexus law in the near future, guidance that many businesses were hoping would shed light upon the constitutionality of other states’ sales tax economic nexus laws.

Because states have not waited for this guidance to begin enforcing their sales tax economic nexus laws, those laws are here to stay. For this reason, doing nothing in response to them is simply not a viable option. All companies that make remote sales should proactively review their sales tax collection responsibilities and take action, because sales taxes do not become an economic cost to a seller unless they are uncollected. States’ widespread adoption and rapid enforcement of these laws calls upon all remote sellers to develop a prompt response.

What happened after Quill v North Dakota was overturned?

In the Wayfair case, the Supreme Court was only asked to address one question — whether the physical presence nexus standard of 1992’s Quill case should be overturned — so the Court did not actually rule on whether South Dakota’s sales tax economic nexus law was constitutional.

While the high court spoke favorably about the law’s constitutionality, it sent the case back to the South Dakota court system to formally answer that question. As a result, many organizations had been waiting to see what the South Dakota courts decided before selecting their response to the state’s economic nexus law, and similar nexus laws enacted by other states.

However, on October 31, 2018, South Dakota announced that the parties to the case (Wayfair, Overstock, and Newegg) had settled the case out of court, and would begin collecting South Dakota sales tax on January 1, 2019 (enforcement for all other remote sellers began on November 1, 2018).

What is economic nexus?

Prior to the Wayfair decision, sellers only had to collect sales tax in states where they had a physical presence. A “remote seller” (one with no physical presence in a state) was not required to collect sales tax in states to which it made sales.

However, on June 21, 2018, this physical presence requirement for sales tax collection was overturned by South Dakota v. Wayfair, paving the way for states to require remote sellers to register for sales tax based purely on economic nexus (even though physical presence was still enough for sales tax nexus). At issue in Wayfair was South Dakota’s law, which asserted sales tax nexus over any remote seller with either:

  1. At least $100,000 of annual sales into the state; or
  2. At least 200 annual sales transactions to in-state purchasers.

While the Supreme Court did not rule on whether or not South Dakota’s law was enforceable, it spoke very favorably about its chances of being upheld as constitutional. For this reason, many states viewed South Dakota’s standard as the “blueprint” to follow for enacting their own sales tax nexus laws, and many states have now enacted them.

What companies are considered remote sellers?

The South Dakota v. Wayfair ruling impacts all remote sellers, not just e-commerce companies and online retailers. A remote seller is any company making sales that are delivered into a state without the company having a physical presence in that state.

This ruling is far reaching and affects many companies including:

  • Technology companies without an in-state physical presence that sell digital products that are utilized nationwide. These companies need to determine where their sales are sourced and compare them to the economic nexus thresholds established by the states.
  • Wholesalers that are selling across state lines. It is important to make sure that resale exemption certificates are gathered for all sales, even those in which you may not be registered.
  • Retailers selling across state lines. These companies may have real liabilities accruing and need to quickly assess their filing requirements and put a process in place to register, collect, and remit tax.
  • Any company selling products or services across state lines. Any business selling across state lines or providing services to out-of-state customers should assess its need to remit sales tax and put a process in place to continually review its filing requirement.

What actions should remote sellers take?

  1. Compare your sales revenue and transaction data with each state’s sales tax economic nexus thresholds. Each state sets its own thresholds and enforcement dates or lack thereof, which means you will have to get up to speed on many different thresholds at once.
  2. For states where the threshold is exceeded, make a business decision regarding registration and collection. If a company exceeds the transaction threshold but has minimal sales, the cost of compliance may exceed the amount of potential tax exposure.
  3. Review your company’s historical footprint to determine if you’ve had prior nexus before registering in a new state. Upon review of states’ new Wayfair nexus standards, many companies discover that they had physical presence nexus in one or more of those states in the past. Be aware of any past exposure to determine if you need to mitigate risk prior to registering. This is because once a company registers in a new state for sales tax purposes, prior period sales tax exposure mitigation tools, such as voluntary disclosure agreements (VDAs), may no longer be available.
  4. Analyze prior period nexus implications for other tax types (e.g., income, franchise, and/or gross receipts taxes), for past exposure. Even though economic nexus was not a valid concept for sales tax purposes until Wayfair, in some states economic nexus has been enforced for purposes of other state taxes for many years.
  5. Collect exemption certificates from customers who claim exemptions from sales tax. Because remote sellers may have an obligation to register for sales tax in many more states, there will be an increased emphasis on collecting exemption documentation as states begin auditing these remote sellers.
  6. Determine how you will collect the correct sales tax in each new state and local jurisdiction and develop a plan for filing timely sales and use tax returns. Sales tax automation solutions are available to help you with the compliance process.

What you should do next

All remote sellers must become familiar with the different states’ economic nexus thresholds and determine how their company is affected. Inaction can lead to substantial liabilities if you are audited.

States are already aggressively sending out nexus questionnaires to try and identify which companies are not complying, and they are actively engaged in data mining to identify which companies exceed their published nexus thresholds.

The sooner you are able to register and comply, the sooner you can ensure that any sales tax is paid by your customer rather than you having to pay it retroactively from your own pocket.

How we can help

Complying with a growing number of state tax filing obligations could be a full time job. CLA’s state and local tax professionals can help ease the burden. We offer sales tax compliance outsourcing and can give you a sales tax nexus assessment (“Wayfair checkup”) so you can understand your exposure under these new laws. We are actively monitoring sales tax economic nexus updates from each state, so you can be sure that you understand applicable requirements to collect and remit sales tax.