On June 21, 2018, the U.S. Supreme Court released its highly anticipated decision in South Dakota v. Wayfair, Inc., a case that has been referred to as the “Tax Case of the Millennium.” In a five-to-four decision, the Supreme Court overturned the physical presence standard set forth in its own decision in Quill Corp. v. North Dakota. In that case, the U.S. Supreme Court ruled that a state can require a business to collect sales tax only if that business has a physical presence in that state.
Wipfli SALT Alert From June 15, 2018
On June 15, Wipfli released a tax alert discussing the impending Wayfair case and alerting businesses to the importance of reviewing their sales tax reporting and collection duties in various states. The Wayfair decision now gives states a blueprint to follow for implementing an economic nexus standard.
States Enacting Economic Nexus Provisions to Date
States have been setting the stage for the state-favorable outcome they just received by legislating economic nexus standards. This chart summarizes the states that, to date, have enacted some type of economic nexus reporting requirements. Since the Court’s decision, 21 additional states have implemented, or are in the process of implementing, economic nexus rules. The effective dates are different for a number of states, and so are the thresholds to collect and remit sales tax.
The Court stopped short of indicating what “bright line,” or standard of activity, in a state will create economic nexus under the provisions of the Commerce Clause. The majority in the decision did indicate that several features of the South Dakota law “appear designed to prevent discrimination against or undue burdens upon interstate commerce.” South Dakota adopted a $100,000-sales-and-200-transactions test in determining when a remote seller is required to collect and remit sales tax in the state. That part of the case has been vacated and remanded back to the lower court for further action. It remains to be seen whether the parties will settle the case or wait for the circuit court to rule on this issue. Many tax professionals believe this standard will be approved by the court.
Despite the decision, certain things have not changed. To the extent that businesses sell to end-user customers and are not currently registered to collect and remit sales tax, the following in-state activities have always created a sales tax filing requirement: ownership of property including inventory, employees and representatives working in a state, and provision of taxable services in a state.
In addition, many states have enacted Colorado-type notice reporting rules over the last several years. Given this historic Supreme Court decision that allows states to enact economic nexus filing requirements for sales tax collection, we will likely see notice reporting requirements fall by the wayside, with less emphasis on notice reporting and more emphasis on states finding non-filers through data mining and other techniques. States will likely add resources in this area to identify non-filers.
What You Should Do Now
In light of the decision, the temptation may be to register for sales tax collection without understanding whether your business has tax risk for time periods prior to the Wayfair decision. Registering to collect and remit sales tax prospectively in a state, without reviewing prior periods, could prompt a state-initiated review of prior periods and potentially expose your business to filing prior returns (8 to 10 years in certain states). Filing in a state prospectively would also disqualify your business from participating in any voluntary disclosure programs to mitigate your risk for prior periods.
The Wayfair decision makes it critical that taxpayers understand both their prior and future sales tax filing obligations so they are not jumping into registering and filing prospectively without fully understanding their sales tax exposure for prior years.
As the decision is analyzed, more information will follow, and doubtless more questions will be raised. Wipfli is committed to proactive communication that addresses this landmark decision and helps our clients navigate the new sales tax landscape.
Understand your unique situation as a result of the Wayfair decision by getting a SALT Assessment Review, which includes a nexus study of the top 10 states where you do business. Wipfli can also expand this initial review to all states, depending on your situation. We will help you understand in what various states you may have not only sales tax filing requirements, but also income tax and economic nexus for non-income taxes such as B&O, CAT, net worth, and minimum taxes.
About Wipfli’s State and Local Tax Practice
Navigate the complicated sales tax rules with a proactive team that brings real-world experience to the table. Wipfli’s seasoned tax professionals deliver a comprehensive approach, grounded by years of industry experience and tax law knowledge. To speak with one of Wipfli’s State and Local Tax professionals, please contact Craig Cookle, Daryl Ohland, Jessica Macklin, Tara Johnson, Austin DeMoss, Sean Woods, Linda Feirn, or your Wipfli relationship executive.