Earlier this morning, 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 involving Quill Corp. v. North Dakota. In that case, the U.S. Supreme Court ruled a state can only require a business to collect sales tax 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 on 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 to date that have enacted some type of economic nexus reporting requirements. The effective dates are different for a number of states and so are the thresholds to collect and remit sales tax.
One unanswered question that remains is whether some of the states that have already enacted economic nexus provisions will amend their statutes to closely follow the reasoning set forth by the majority in the decision. Throughout the decision, the majority focused on several features of South Dakota’s tax system that “appear designed to prevent discrimination against or undue burdens upon interstate commerce.” These are extremely important and are as follows:
- The South Dakota law applies a safe harbor to those who transact only limited business in South Dakota.
- The South Dakota law ensures that no obligation to remit the sales tax may be applied retroactively.
- South Dakota is one of more than 20 states that have adopted the Streamlined Sales and Use Tax Agreement.
The Court also did not indicate what “bright line,” or standard of activity, in a state will create economic nexus under the provisions of the Commerce Clause. That part of the case has been vacated and remanded back to the lower court for further action.
Despite the decision, certain things have not changed. To the extent 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 within a state and providing taxable services in a state.
In light of the decision, the temptation may be to register for sales tax collection without understanding if 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 prior return filing (eight to 10 years in certain states), while disqualifying 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 that they are not forced into registration and filing without fully understanding any prior sales tax exposure.
As the decision is analyzed, more information will be following and doubtless more questions will be raised. Wipfli is in the process of putting together a full webinar to address this landmark decision and help our clients navigate the new sales tax landscape.
In the meantime, let Wipfli help you analyze your situation so you can comply with your sales and use tax collection and reporting responsibilities in the most cost-effective manner. Wipfli will conduct a nexus study to determine where you have sales tax filing obligations for your top 10 states for $3,500 (per legal entity). If you would like additional states reviewed, Wipfli can do that for an additional fee.
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.