Supreme Court Decision: The Dawn of a New Era
In the landmark 5-4 decision, South Dakota v. Wayfair, Inc. et al, the Supreme Court declared a new dawn for sales tax. Until now, a state could not impose sales tax unless a company had a substantial connection in that state, which was defined as a physical presence. This physical presence “nexus” standard had been in place for more than 25 years.
The concept of nexus was the thorn in the sides of many states. These states have attempted for years to get around nexus, but the bottom line was the requirement of physical presence. States have tried to expand the concept of physical presence to include offices, employees, independent sales agents, trade show attendance, inventory in third-party warehouses (FBA sellers take note), or affiliated companies, to name a few. States wanted that nexus bar lowered. Why not? The more companies that had established nexus, the more tax they could collect.
With the SCOTUS decision heard ‘round the country, physical presence is no longer a requirement for a state to be able to impose a sales tax. Simply having an economic presence is enough. In Wayfair, the law challenged and heard by the Supreme Court, imposed sales tax when a seller had in a calendar year, either $100,000 in sales or 200 transactions into the State of South Dakota. The state felt those levels were enough of an economic presence to warrant the obligation to collect sales tax.
Meanwhile, as South Dakota was rapidly trying to get their case heard by the Supreme Court, many other states were following suit and adopting similar economic nexus legislation. Other states were trying a different tactic and imposing reporting requirements, under which remote sellers with no physical presence were obligated to either collect sales tax or comply with requirements to notify buyers of use tax requirements and share buyer information with the Department of Revenue. A PR nightmare at best.
Who does this new economic legislation apply to?
While most media coverage has focused on eCommerce retailers, economic nexus does apply to every company selling goods and services into multi-states.
What should companies do now?
1. If you have physical presence in a state, make sure you are registered to collect tax and are doing so for all sales, on all platforms into that state. This is the old law and is still applicable.
2. If you don’t have physical presence in that state, start looking at your sales data to see if your volume is high enough to meet the economic nexus standards or the reporting requirements.
3. Don’t panic. This is just the beginning of the story. Many questions are still unanswered. Congress could still step in to regulate interstate commerce and impose limitations. States could offer amnesty programs or voluntary disclosure agreements.
While the biggest challenges are ahead, make sure your company is addressing sales tax today in an anticipatory manner. Cherry Bekaert’s sales & use tax team is available to your company to assist with these changing sales tax laws. From simple consultations to complete outsourcing of your sales tax function, we can help your company take control of sales tax in the dawn of a new era. Visit our website for more information.