Dispelling Myths About Sales Tax Obligations After the Wayfair Decision
It’s rare for a Supreme Court tax case to make headlines in the mainstream media, but that’s just what happened last year when the court announced its decision in the case of South Dakota v. Wayfair (Wayfair).
What most people “learned” from the coverage was actually full of half-truths and myths, the biggest one being that Internet retailers like Amazon would have to start “charging customers” state sales tax on their purchases. As with most news reports about taxes, reporters did their best to summarize a complex issue, but many taxpayers were left confused about how the change affects them. This confusion is now playing out in the day-to-day operations of businesses across the country, leaving many out of compliance when they otherwise thought they were.
Some common misconceptions about the impact of Wayfair, along with the facts:
- Myth: “Wayfair only applies to Internet sales.” The Wayfair decision allows a state to impose a requirement on all out-of-state sellers to collect sales tax on any taxable transactions within its borders. Internet sales are certainly covered, but so are many other interstate transactions. For instance, take a seller of restaurant equipment who has no Internet presence, conducts all of its sales over the phone, and ships all of its goods via common carrier. In the new Wayfair world, this seller might now incur a significant sales tax obligation if its sale of equipment exceeds the “economic nexus” standard approved in Wayfair and imposed by the state.
- Myth: “This will show Amazon and those other big retailers.” States have been interpreting their existing “physical presence nexus” standards very broadly in recent years. Most of the household names, like Amazon, were required to collect and remit sales taxes on their sales in many states based on laws in effect before this decision because they have had physical locations like distribution centers and warehouses in many states. The truth is that Wayfair will likely have a disproportionate effect on smaller businesses that ship their products into multiple states, despite not having established a physical footprint in those states.
- Myth: “I don’t need to worry until I sell $100,000 into a state.” It is true that the South Dakota law upheld by the Supreme Court applies to out-of-state sellers who annually deliver more than $100,000 of goods or services into the state. That safe harbor will protect some sellers delivering into South Dakota. But sellers should remember a few important caveats:
- South Dakota’s threshold also applies to sellers that engage in 200 or more separate transactions for delivery of goods or services into the state, even if this results in less than $100,000 of sales into the state.
- The court did not say that thresholds lower than South Dakota’s are automatically invalid. Other states could set lower economic nexus thresholds that may withstand legal challenges.
- Many sellers will need to track transactions in each state from the start in order to know when they cross a threshold and trigger a sales tax obligation via economic nexus.
- Each state’s rules are different, but some states require sellers to register and begin collecting and remitting tax on the transaction immediately after the transaction that crossed the threshold. It takes time to set up the systems needed to collect and remit tax, so sellers will need to monitor sales in these states to know when they cross the state’s threshold.
- Myth: “I don’t have to do anything; my sales are exempt anyway.” Some sellers, buyers, and products qualify for sales tax exemptions in some states. But most exemptions are applied on a product-by-product or customer-by-customer basis, and a product or a customer can be exempt from sales tax in one jurisdiction but not in another. Many businesses have only loosely tracked exemptions in states where they didn’t have a physical presence because they weren’t required to collect and remit sales taxes there anyway. However, because most states require sellers to document that their sales are exempt, economic nexus laws will force many interstate sellers to invest time, money, and energy into multistate taxability research and to alter customer relationships to ask for and maintain documentation on exempt products and customers in each jurisdiction.
In short, if you do business across state lines, there’s a good chance that Wayfair means sales tax obligations for your business in states that had none before. States are moving quickly to add economic nexus standards to their laws, and those that have such laws are already enforcing them aggressively.
As we’ve noted in previous articles on this topic, any business with sales outside its home state should carefully review its records to assemble a matrix of what it sells and where. In most cases, businesses operating in more than a handful of states should seriously consider automating the calculation and collection of sales tax as much as possible.
For questions on how these rules apply to you, please contact KSM’s State and Local Tax Group or your KSM advisor.
Keeping you updated on COVID-19 and its impact on businesses and individuals.