Have you heard? The Supreme Court ruled on South Dakota v. Wayfair and Quill v. North Dakota has been overturned.
What does this mean? Online retailers are going to face new challenges in the months to come and will need to decide whether to start collecting tax, what software they may need, and how to report the tax.
Since 1967, if you have a link or connection to a state, called nexus, you’ve always been required as a seller to collect sales tax. One of the most defining court decisions impacting this law was Quill versus North Dakota. Up until now, there had to have been a minimum level of physical presence in a state to create nexus. But on June 21, 2018, the Quill decision was overturned, and this sets the stage for states to win big with sales tax.
For sellers, this decision wreaks havoc. The defining moment came from South Dakota versus Wayfair. In a 5-4 split decision by the United States Supreme Court, the prevailing judges ruled against the physical presence requirements taxpayers have relied on for over 50 years. As stated in the decision, sellers can have nexus in a state without a physical presence depending on the sales volume or number of transactions in the state. Not only did this decision create a different type of nexus, it also creates that nexus can only be created by an economic nexus, the old rules no longer apply. Depending on the sales volume or number of transactions, retailers may be required to collect sales tax in every state they conduct business!
The court defined substantial economic nexus as $100,000 in sales or 200 transactions per year. That is pretty specific, what about companies who don’t conduct 200 transactions or $100,000 in sales? Could, for example, just $10,000 in sales and 20 transactions constitute substantial business? Now it is up to the individual states to determine if they want to use lower thresholds.
More than 20 states have already passed economic nexus rules anticipating this decision in Wayfair. Those that have are ready to start implementing them soon. Many more than that (including 40 states and DC) petitioned the court to repeal Quill. Now that they’ve gotten what they wanted, they’ll be implementing their own regulations and requirements.
As if this weren’t bad enough, the decision is worse. Not only does this open the door for new requirements going forward, SCOTUS also seemed to indicate that prior courts were wrong about their interpretation about the physical presence test. This means states can potentially go back as far as 1992 (the date of the Quill decision) to collect back taxes, penalties and interest!
To get ready for the change, sellers need to look at their sales volume by state and start counting transactions. Once the states finalize their protocols, which will likely include different amounts as thresholds, sellers will be required to collect, report, and remit sales tax based upon the local rates of the buyer or receiver.
Although SCOTUS seemed to indicate the elimination of other nexus tests, it will ultimately be up to individual states as to which standards they will use to determine a seller’s liability for sales tax. Again, it is a wait and see measure on whether or how inventory, employees and sales reps effect nexus.
It is rumored that Amazon may offer a service to collect sales tax for third-party sellers. This, as well as other sales tax software and service providers will no doubt see a jump in revenues as companies’ needs for compliance will explode in the coming months and years.
Once sales and transactions are determined by the states, sellers should review the different requirements. If nexus is established, sales are taxable and sales are material, it is better to register at this point, collect, report and remit sales tax.
For members of the AICTP you’ll find a client alert prepared for you in the Toolbox. Even if unaffected, this can still be a great opportunity to connect with your clients and add value, reminding them you have their back and provide higher order solutions.
So now that sales tax nexus thresholds are up to the states, how long before we see states changing the nexus laws for income tax related to multi state sales?
