The Far-Reaching Impact of the Wayfair Decision
On June 21, 2018, the Supreme Court made a ruling in South Dakota v. Wayfair, the result of which has been a massive expansion of the states’ ability to levy sales tax on remote sellers who make sales into states. This decision has had far-reaching impacts, and the manufacturing industry is no exception. Manufacturers have always had an eye on state tax issues because success in the industry often means having a large geographic footprint. But the results from the Wayfair legislation may catch some manufacturers off guard and it is important that leaders in the industry are fully aware of how this decision impacts the way they conduct business.
How did the Wayfair case make it to the Supreme Court?
To understand where we are now with the law, it is important to understand where we’ve come from. The last major legislation to impact the states’ ability to levy tax was Quill Corp v. North Dakota in 1992. In this case, the Supreme Court affirmed that a company must be physically present in a state for a state to have the ability to collect sales tax. The decision also declared that the use of a common carrier to deliver products did not constitute physical presence. However, that decision allowed companies like Amazon to make sales into states and obtain a competitive advantage due to the fact that they were not required to collect and remit sales tax. In 2012, Amazon did begin to collect sales tax under pressure from some states; however, other online retailers did not follow suit, which led to the Wayfair case making it all the way to the Supreme Court. The Supreme Court found Quill Corp v. North Dakota to be “unsound and incorrect” and opened the doors for states to begin to require remote sellers to collect sales tax.
How does this ruling specifically affect remote sellers?
Many hear the term “remote sellers” and immediately think this court case relates only to companies like Amazon who use the internet to sell products remotely. However, “remote seller” has a much broader definition. A remote seller includes the following types of companies:
1. Companies that create and sell digital products that are utilized throughout the country
2. Wholesalers that are selling into multiple states
3. Retailers that are selling into multiple states
4. Any business that sells products and/or services to multiple states
Clearly, this comprehensive definition will have impacts on all manufacturers who sell their products across state lines. There are several different implications that manufacturers should keep in mind as the impacts of Wayfair continue to develop:
Exemption Certificates: For many manufacturers who do not make sales to end users, sales tax is usually an afterthought as their sales are exempt from sales tax. However, more states may be engaging in sales tax audits as their power has been expanded, so it is very important that if sales are exempt, companies have valid exemption certificates within the various states in the event a state conducts an audit.
State Registration & Filing Obligations: Every state has different rules. Some states require that a company register with the state and file sales tax returns even if the company only reports exempt sales. It is important for you to be aware of each state’s requirements. It is also important to understand that states will often change their rules—and not being aware of a filing requirement is often not good enough to constitute a reasonable cause for non-compliance.
Drop Shipments: Some states have a rule that allows a drop shipper to accept exemption certificates from another state for companies that don’t have a sales tax obligation within the state where their customer is located. However, with Wayfair greatly expanding where companies now have a sales tax obligation, there is a much higher likelihood that a company would not be able to use this rule and would be required to obtain its own exemption certificate. Companies using drop shippers may now have to reassess their obligations depending upon where their customers are located.
Accounts Payable: With this change, there may be an increase in the number of vendors who begin charging sales tax without fully analyzing if it is the correct thing to do. It is important that manufacturers are providing their vendors with the proper exemption certificates, and it is also important that the individuals who are processing invoices from vendors have been educated about these changes and are on the lookout for any invoices that may improperly assess sales tax.
So what should manufacturers do in light of the decision?
While the Wayfair decision has been enforced for over a year now, the impacts are still evolving. More than 43 states have implemented rules that create sales tax obligations based on economic thresholds (either number of transactions or total sales). When states create these rules, they often give very short timelines for companies to become compliant. Additionally, the Wayfair decision has also caused states to implement rules that go beyond sales tax requirements, and can also now create economic thresholds for income or franchise tax filing obligations. In this evolving landscape it is very important that manufacturers are aware of their activities within various states and how those activities could impact their compliance requirements.
Have more questions about how the South Dakota v. Wayfair decision might impact your business? We’re here to help. Get in touch to speak with the CLA team today.