On June 21st, the U.S. Supreme Court, in South Dakota v. Wayfair, overturned 50 years of settled law that prohibited states from taxing companies without some type of physical connection to the state. The Supreme Court validated South Dakota’s economic nexus law requiring out-of-state companies with no physical presence in the state to collect sales tax once they reach $100,000 in sales or 200 transactions each year. What initially seems to be only sale tax compliance law is going to have far reaching impact on state income tax compliance as well.
Until now, nexus determined when a taxpayer had to file tax returns in a state based on the activities conducted in the state. In order to determine state nexus, physical presence was one of key factors i.e. do you have a physical location (office, warehouse), employees, sales representative etc. in particular state. This analysis was further confirmed in 1992 with Quill Corp. v. North Dakota case. Over the last decade the way we do business has totally changed, especially with online sales. States have been trying to enact new rules in order to collect sales tax on online sales and to counter the Quill case of physical presence.
South Dakota enacted the 2016 economic nexus legislation, requiring remote sellers to file sales tax returns upon making greater than $100,000 sales per year or 200 transactions. This legislation provided an expedited appeals process by delaying enforcement of the law until its constitutionality could be established by a binding judgment, such as by the Supreme Court. Wayfair appealed the law, and South Dakota’s Judicial and Supreme Courts ruled in 2017 that the legislation was unconstitutional under Quill. The state immediately appealed to the U.S. Supreme Court. On June 21st, the Supreme Court validated the law requiring out-of-state companies with no physical presence in the state to collect sales tax once they reach $100,000 in sales or 200 transactions each year.
Wayfair opens the door for states to apply economic nexus standards for state sales and use taxes and likely also for state income and business activity tax purposes. More than 18 states have currently enacted economic nexus provisions imposing sales and use tax collection obligations on remote sellers who make sales that exceed a certain threshold or a number of transactions in one year. Illinois jumped on the bandwagon earlier this month by including in its FY 2019 Budget an amendment to their nexus provisions (effective October 1, 2018) requiring remote sellers to collect sales tax if sales to Illinois’ purchasers exceed $100,000 or 200 separate transactions in a year. Many other states have remote seller nexus legislation pending, and the Wayfair decision makes their enactment almost certain.
The question that remains opens is about the threshold, what if another state enacts the rule with a lower dollar threshold amount or number of transactions. Also does the economic nexus create any state income tax obligations?
The Wayfair decision’s overruling of Quill’s “physical presence” requirement will affect millions of companies that sell goods or services out of state and do not currently collect sales or use taxes in states where they make sales but are not physically present. The laws are evolving and complying with the new laws in going to be burdensome especially on the sales and use side because if companies do not collect sales and use tax at the time of the sale and if there is an exposure in the future companies will be responsible for the paying the tax instead of the buyer.
Companies now need to undertake the daunting task of analyzing their business across state lines and communicating their sales tax collection requirement to customers. They need to understand how products and services are taxed throughout the different states, and manage the over 10,000 sales and use tax rates throughout the nation.
We have tools to identify states that you may have nexus is based on prior year information. We can also implement tools to monitor ongoing sales and use tax compliance requirements.
Pease contact us at (630) 505 – 1081 or firstname.lastname@example.org with any questions or to review how this will affect your company.
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