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Sales Tax Compliance after the Wayfair Decision

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Rödl & Partner Tax Matters Vol 2018 – 7, published in June 2018

 

​As communicated earlier this year, the Supreme Court’s decision in South Dakota vs. Wayfair, Inc. has been eagerly-awaited with the potential to affect millions of U.S. businesses. The decision was released last Thursday, June 21, 2018 and contains some surprises and some not-so-surprises.

 

As predicted in our earlier communication, the Court’s decision broadens the rights of the states to require businesses to collect and remit sales taxes. The surprising part of the decision was that the Court didn’t just move the line in the sand that was established by Quill; instead, the line was completely erased with the Court deciding the physical presence test is not a requirement under the Commerce Clause of the U.S. Constitution.

 

Despite eliminating the physical presence test, the Court did seem to establish some boundaries on when states can require businesses to collect and remit sales tax. Without specifying any bright-line rules that the Court would deem to be Constitutional, the Justices liked the fact that South Dakota’s law has a reasonable minimum sales ($100,000) or minimum number (200) of transactions threshold and is not retroactive from the date of enactment. The Justices also seemed to like that, because South Dakota participates in the Streamlined Sales Tax initiative, compliance with its laws would not put an undue burden on companies that meet the minimum threshold test. The Court remanded the case back to South Dakota’s courts for “further proceedings not inconsistent with this opinion”. In other words, because only the physical presence test was before the Supreme Court, any other determination under the Commerce Clause would have to be resolved by the South Dakota Supreme Court. The South Dakota Supreme Court is expected to formally receive the case mid-July. The case will return to the State Circuit Court with the possibility of a decision in August.

 

As expected, some states have already provided some guidance or activity in the wake of Wayfair:
  • Iowa has issued a statement noting that their state’s economic nexus laws are similar to the South Dakota law, including a $100,000 or more bright-line sales threshold or 200 more or separate transactions. Iowa will be applying their economic nexus rules prospectively, beginning with their law’s effective date of January 1, 2019. Any business with physical presence should participate in the state’s voluntary disclosure program.
  • Louisiana announced that because their economic nexus laws are very similar to South Dakota’s laws (also $100,000 sales threshold or 200 or more transactions), the state will wait until final details are determined from the remanded case before releasing additional guidance on how their laws will be implemented (http://www.rev.state.la.us/NewsAndPublications/NewsReleaseDetails/11466). Because the state’s original statute was effective to “all taxable periods beginning on or after the date of the final ruling of the United States Supreme Court in [South Dakota v. Wayfair] finding South Dakota 2016 Senate Bill No. 106 constitutional”, the state’s economic nexus provisions are still not deemed effective. However, to accelerate this effective date, the state has introduced, but not yet passed, legislation to apply the rules effective August 1, 2018.
  • Massachusetts stated that their position is that their physical presence definition has not been impacted by the Wayfair Online vendors should register, collect and remit tax in the state.
  • New Jersey has proposed legislation that would create economic nexus laws substantially similar to South Dakota’s. The effective date is the first day of a calendar quarter that is 90 days after enactment.
  • North Dakota announced that their state intends to implement their economic nexus laws passed in 2017. Under this provision, any business with sales of $100,000 or more or with more than 200 transactions in a twelve-month period will be required to register, collect sales tax, and remit the tax to the state. The Tax Commissioner established a new website (https://www.nd.gov/tax/remoteseller/) with additional information to be published on this page when it is available.
  • Rhode Island has issued an Advisory and a Tax Administrator’s Statement reminding businesses that their law requires a “non-collecting retailer” to either register with the Division of Taxation and collect and remit sales tax or provide a series of notices to Rhode Island customers with annual taxable purchases from the business of $100 or more for the prior calendar year.
  • Vermont has announced that due to the Wayfair decision, vendors are now required to register, collect and remit sales tax beginning July 1, 2018. Vermont’s economic nexus laws apply to businesses with advertising or solicitation in the state (including an internet presence) with Vermont sales of at least $100,000 or at least 200 sales transactions during any 12-month period preceding the monthly period.

 

Rödl & Partner Recommendations:

While it is looking more likely that the economic nexus provisions already passed in many states will stand, we are not recommending that businesses begin registering, collecting and remitting sales tax in every state in which they meet the economic nexus threshold. For the vast majority of these states, the Wayfair decision only clarifies that not having a physical presence in a state does not violate the Commerce Clause; the decision is not a de facto acceptance of all economic nexus rules. Until South Dakota’s Supreme Court has concluded on the validity of the law in context with the Commerce Clause, most states’ rules are still in limbo.

 

The states that broadened the physical presence test by defining physical presence as including apps and cookies deposited on consumers’ phones or computers when shopping or browsing a retailer’s site (Massachusetts and Ohio) may see the Court’s decision as acceptance of their definition of “physical presence”. These states will most likely move forward to enforce their laws, although we are closely monitoring these states for clarification.

 

In addition, any states with notification requirements (i.e., requirements to notify the state and/or customers of use tax requirements in the state) most likely will be emboldened to more aggressively enforce their rules.

 

After studying the Wayfair decision, we are recommending the following actions in certain states if a business is not already collecting and remitting sales tax:

 

StateCriteriaRecommendation
ColoradoBusinesses with sales of product delivered into Colorado of $100,000 or more in 2017 or 2018Prepare to implement Colorado's use tax notification laws in 2018
ConnecticutBusinesses that are "marketplace facilitators" are included in the definition of a "retailer" effective December 1, 2018. Additionally, "large, out-of-state online retailers" have been required to notify customer of use tax liabilities since 2017.Businesses that are "large, out-of-state online retailers" should weigh the business risks of implementing the use tax notification requirements versus voluntarily collecting and remitting sales tax in the state.
GeorgiaBusinesses with 2018 sales of $250,000 or more in the state or 200 or more transactions in the state, including softwarePrepare to implement the state's use tax notification laws.
IowaBusinesses with 2018 sales of $100,000 or more in the state or 200 or more transactions in the state, including softwareRegister, collect and remit effective January 1, 2019
KentuckyBusinesses with $100,000 or more of sales in the state in the current or prior yearPrepare to implement the state's use tax notification laws.
LouisianaAll businesses with sales to Louisiana customers not taxedPrepare to implement the state's use tax notification laws.
Massachusetts"Internet retailers" with sales of $500,000 or more in 100 or more transactions in the stateRegister, collect and remit sales tax.  If tax exposure after September 22, 2017 is material to the business, contact your Rödl & Partner advisor for potential penalty mitigation.
OhioA business that uses "in-state software" to sell or lease taxable tangible personal property or services in Ohio if sales in the current or preceding year (2017) are $500,000 or more. Includes providing services the benefit of which are used in Ohio.  "In-state software" is defined as software stored on property in Ohio or distributed in state for purposes of facilitating sales.Register, collect and remit sales tax.  If tax exposure since January 1, 2018 is material to the business, contact your Rödl & Partner advisor for potential penalty mitigation.
OklahomaRemote sellers, marketplace facilitators and referrers with sales of at least $10,000 of property delivered in the state in the prior year.Consider whether to file an election to collect and remit sales tax or comply with the state's use tax notification laws.
PennsylvaniaRemote sellers, marketplace facilitators and referrers with sales of at least $10,000 of property delivered in the state in the prior year.Consider whether to file an election to collect and remit sales tax or comply with the state's use tax notification laws.
Rhode IslandBusinesses with $100,000 or more of sales or 200 or more transactions of product to Rhode Island customers.Prepare to comply with the state's use tax notification requirements.
South DakotaBusinesses with $100,000 or more of sales or 200 or more transactions of product to South Dakota customers.Continue to monitor the final ruling from the state's Supreme Court in Wayfair; any business not currently collecting and remitting should implement the state's use tax notification requirements.
VermontBusinesses with $100,000 or more of sales into the state.Register with the state; collect and remit sales tax.
WashingtonRemote sellers and marketplace facilitators with sales of $10,000 or more in the state; referrers with sales of $267,000 or more in the statePrepare to implement the state's use tax notification requirements.

 

While Wayfair does provide a little more clarity by allowing broad discretion to states on requiring sales tax collection, the lack of any defining protections at the Federal level still create a myriad of confusing and complex rules across 50 states. We are closely monitoring each state for their guidance on how they will implement their rules in light of Wayfair and will update our clients as soon as actionable information becomes available.

 

If you feel your business needs a fresh look at your sales and use tax compliance, please contact your Rödl & Partner representative.

 

 

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