Sales Tax – South Dakota v. Wayfair

HOW WILL IT IMPACT YOU? HOW WILL IT IMPACT YOU?
On June 21, 2018; the United States Supreme Court issued its decision with respect to the South Dakota v. Wayfair case. In the decision the Court held that the South Dakota statute which created a sales tax collection/filing responsibility based solely on total sales/total transaction with in state customers is constitutional. 

WHAT IS NEXUS?
If a business is wondering if it should collect sales tax on a transaction with a customer in a state; the first question they should ask themselves is: Does my business have nexus with the state?

Nexus is the term used to indicate a business has established a connection with the state which allows it to impose a responsibility to collect/remit sales taxes on the business. In general, if a business has nexus with a state it may be required to collect/remit appropriate sales taxes. If a company does not have nexus with a state; the company does not a responsibility to collect/remit appropriate sales tax.

Historically; the Court has ruled states can impose nexus for sales tax purposes based on a business having a ‘physical presence’ test (i.e. property or employees working/traveling in a state). With the rise of the internet; the physical presence standard applicable to sales taxes has been viewed as archaic by most states. Through making sales over the internet a business can create a substantial market within a state without establishing any type of physical presence.

In seeking to address this problem; South Dakota enacted legislation which does away with the physical presence standard as a test to use to determine if a business has nexus with the state. Focusing on tests which consider items such as total amount of sales into the state or total transaction count with customers in a state to create nexus. The constitutionality of these new nexus thresholds is the main question addressed by the Court in the South Dakota v. Wayfair decision.

THE DECISION
The nexus standard at issue in South Dakota provided any business making over $100,000 of sales to customers located in South Dakota, or any business that has 200 or more separate transaction with customers in South Dakota will have nexus with the state.
The Supreme Court in this case upheld the use of this standard by South Dakota to create nexus for sales tax purposes. Specifically stating the previous physical presence requirement ‘does not align’ with modern eCommerce. Any business crossing either threshold (total gross receipts or total transaction count) will be required to collect/remit appropriate South Dakota sales tax.

WHAT’S NEXT
States can and will seek to update their own laws to utilize some version of the South Dakota nexus standard. As this occurs there are several items to need to keep in mind:

  1. Each state/locality can create new/distinct nexus thresholds based on total sales/total transactions in the state.
    • States will not uniformly do this at a set date/time; requiring businesses to track how/when states update the nexus standards.
    • States will not all utilize the same thresholds with respect to total sales/total transactions. When such standards are implemented retailers will need to ensure they are aware of various requirements/thresholds used by states.
  2. What is the definition of a ‘separate transaction’?
    • Does a statement of work with a total sum for goods/services which calls for quarterly payments count as 1 transaction or 4? Are sales of goods and associated services (i.e. warranty, repair, installation) covered under a single statement of work considered a single transaction?
  3. The use of these newer standards will broaden the state’s reach to require businesses to collect/remit sales tax. This will require businesses to:
    • Research revenue lines to determine if sales are subject to state/local sales tax;
    • Track/ensure use proper state/local sales tax rates;
    • Properly invoice tax on customer invoices;
    • Create internal accounting controls for taxes collected from customers;
    • File additional state/local sales tax returns; and
    • Ensure collection/retention of applicable resale/exemption certifications.
  4. Businesses will now experience increased sales tax audit risk due to:
    • Ability for states to pull in more retailers under inconsistent nexus standards.
    • Confusion/unclear sales tax treatment of revenue lines by states.

If you have any questions regarding how this recent decision may impact your organization, please reach out to our state tax leader, Adam DoVale (617-417-1796, adovale@cfgi.com), or any one of our tax and consulting team members.