Sales taxes are inherently complicated because every state sets its own rules. In addition, many states allow counties or municipalities to impose sales tax. Twenty-six years ago, the U.S. Supreme Court decided in Quill v. North Dakota that a state can require a business to collect sales tax only if that business has a physical presence in that state. This is often referred to as the “nexus” standard.
On April 17, 2018, the U.S. Supreme Court heard oral arguments in the case South Dakota v. Wayfair, Inc., which challenges the physical presence standard. The Court is expected to issue its ruling over the next two weeks. While there is no clear consensus about how the Court will rule, now is the time to focus on building a solid understanding of your business activities in the various states. A solid understanding of your company’s facts now will better prepare you for any potential changes that could result from the Court’s decision and the states’ reaction to it.
You might be aware that many states have been aggressive in trying to expand the definition of nexus by broadening what constitutes doing business in the state. Physical presence is still the law of the land, but many states have enacted notice reporting requirements, economic nexus, cookie nexus, affiliated nexus and click-through nexus, to name a few. Mind-boggling to say the least! There are many potential outcomes of this case, but two likely scenarios include the following:
- Quill remains law of the land. Should this happen, we will likely see states enact notice reporting requirements similar to those found in Colorado, Pennsylvania and Washington (to name a few) to force companies to share customer sales data. This may have the ultimate effect of causing companies to register and comply with sales tax filing requirements due to the complexity of notice reporting requirements.
- Quill is overturned. States will enact economic nexus reporting rules similar to those enacted by South Dakota.
It remains to be seen whether the federal government will step in and enact separate legislation that will change the sales tax landscape.
Regardless of how the Court decides South Dakota v. Wayfair, Inc., you need to consider the sales tax statutes of the states in which you provide services or to which you send product.
What facts do you need to better gauge your sales tax reporting and collection duties?
- Where do you currently collect sales tax?
- Where is your inventory maintained?
- Do you sell through any third-party marketplaces such as Amazon or eBay?
- Do you use Fulfillment by Amazon? If so, in which states is Amazon storing inventory?
- Do you have any “click through” agreements with parties to generate sales in other states?
- What states do your employees or sales representatives visit, and what activities do they do there?
- Do you know what your sales of products and services are by state for the last three or four years in the event of a state audit?
- Have you ever performed a nexus study?
- Do you maintain exemption certificates in all states or just the states in which you are currently registered?
- Could you benefit from a sales tax technology system that would help charge the correct sales tax rate to your customers and ease the filing of returns?
- Are you a remote seller selling property into states that have enacted notice reporting requirements?
That is a lot to think about. Let Wipfli help you analyze your situation so you can comply with your sales tax collection and reporting responsibilities in the most cost-effective manner.
About Wipfli’s 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 Daryl Ohland, Tara Johnson, Austin DeMoss, Sean Woods, or your Wipfli relationship executive.