Article written by:
Ryan Chesnut, JD, CPA
Manager, State and Local Tax Services
Anthony Ott, CPA
Director, State and Local Tax Services
On June 21, 2018, the United States Supreme Court ruled in South Dakota v. Wayfair that a taxpayer does not need to establish physical presence in a state in order for the state to subject the taxpayer to its sales tax laws. The decision reversed the Court’s 26-year-old precedent from the 1992 case Quill Corp. v. North Dakota.
In Quill, the U.S. Supreme Court ruled that the Commerce Clause of the United States Constitution prohibits states from requiring an out-of-state retailer to collect and remit sales tax if the retailer does not have a physical presence within the state. The Court reasoned that imposing such compliance obligations on retailers unconstitutionally burdens interstate commerce. The result of Quill’s physical presence rule was that retailers, especially online retailers and other remote sellers, did not have sales tax nexus in states where they were not physically present.
In 2016, South Dakota enacted an economic nexus standard, which directly contradicted Quill’s physical presence rule. The South Dakota statute requires that all retailers with either $100,000 in gross revenue or 200 or more transactions per year must collect and remit sales tax. After the state tried to enforce its expansive nexus standard, online retailers Wayfair, Overstock.com, and Newegg challenged the law in court. The South Dakota State Supreme Court sided with the retailers and found the economic nexus statute unconstitutional under Quill. South Dakota appealed to the U.S. Supreme Court, which agreed to hear the case.
In Wayfair, the U.S. Supreme Court reversed Quill’s physical presence rule for sales tax nexus. The Court ruled that the physical presence rule has arbitrarily created competitive advantages for out-of-state retailers since it was first set forth in 1992. Furthermore, the market distortions created by the rule have been exacerbated by recent technological advancements and the modern economic realities of internet retailing.
Since the ruling in June, we have seen a significant amount of activity as states reacted to the decision. In an effort to position themselves for a favorable ruling, many states had legislated economic nexus thresholds similar to South Dakota’s prior to the decision. After Wayfair was decided these states issued statements clarifying their economic nexus thresholds and providing effective dates for enforcement. In addition, several other states without pre-existing statues have followed South Dakota’s lead by instituting economic nexus statutes their own. Currently, thirty-four states employ some variation of economic nexus.
One of the key components of the Wayfair case relates to retroactivity. In its decision, the U.S. Supreme Court made it clear that South Dakota’s commitment not to enforce its nexus standards retroactively was a key reason for the decision in South Dakota’s favor. Since the decision, no states have publicly indicated they will enforce economic nexus retroactively beyond statutory effective dates. Therefore, it appears the statutes will be enforced prospectively with most effective dates ranging from July 1, 2018 through January 1, 2019.
It is important to note that several, key large states like California, Florida, New York, and Texas have not implemented economic nexus thresholds. While physical presence remains the nexus standard in these states, GBQ is currently monitoring further developments and expects additional economic nexus thresholds to be implemented in the near future.
As the states have reacted to Wayfair, the United States Congress has also gotten involved with the House of Representatives introducing the Online Sales Tax Simplicity and Small Business Relief Act of 2018 on September 13, 2018. The Act would have delayed imposition of collection requirements until January 1, 2019, created a $10 million dollar small business exclusion, and called for a multistate compact simplifying the sales tax collection and remittance process. The bill is currently referred to the House Committee on the Judiciary and has not moved forward. It is important to note that Congress has introduced bills addressing sales tax collection each year for the past several, none of which have been passed into law.
With the overall trend toward requirement for remote sellers to collect tax in all states regardless of physical presence, the Wayfair ruling is already significantly impacting remote sellers of tangible personal property and taxable services who have historically taken no-nexus positions pursuant to Quill. In light of the ruling and its changes to the multistate sales tax nexus landscape, there are some practical considerations and steps that retailers should take to prepare:
- Reassess current multistate filing and nexus positions;
- Perform systems readiness assessments for tax collection and filing obligations in additional states;
- Consider prior period exposures and mitigation opportunities in preparation for increased enforcement activity; and
- Proactively develop a strategy for mitigating exposure and audit risk through voluntary disclosures or amnesty programs where appropriate.
GBQ SALT professionals are available to assist taxpayers in understanding the impact of the Wayfair decision on their specific circumstances and business activities.