South Dakota v. Wayfair: How the Decision Impacted E-commerce
October 26, 2023
In the South Dakota v. Wayfair decision, the United States Supreme Court ruled 5-4 that states can require out-of-state sellers to collect and remit sales tax on sales to in-state customers despite the out-of-state seller's lack of a physical presence within the state.
While this decision was a hot topic for out-of-state sellers when first announced, there was some uncertainty about how states might respond at the time. Now that some time has passed, nearly all states have responded and have done so in a manner that potentially increases the sales tax compliance burden on out-of-state sellers.
Since it has been some time since the Wayfair decision was announced, it is important to understand the background surrounding the issues. Before the Wayfair decision, it was generally required that an out-of-state seller needed a substantial physical presence (i.e., employees or property) within a state before the out-of-state seller would be required to collect and remit sales tax. The physical presence standard was previously upheld by cases such as Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Ill.
As more and more of today's consumers began making purchases using internet-based retailers, the disconnect between the evolving marketplace and the historical physical presence standard became a concern for many state governments.
Before Wayfair v. South Dakota
Under prior law, where an out-of-state seller who had no physical presence within a state made a sale to an in-state customer, no sales tax was required to be charged and collected on the sale. Instead, the consumer was responsible for calculating and self-remitting the appropriate use tax to the state. It is easy to see how this fact pattern would lead to many otherwise taxable sales transactions being under-reported to the various state governments.
In order to try to capture the sales tax on these otherwise taxable transactions, many states enacted economic nexus legislation into their sales and use tax statutes and regulations before the Wayfair decision, to be enforced pending the outcome of Wayfair. The Wayfair decision also prompted states who did not previously enact such economic nexus legislation to proceed with doing so.
As a result of Wayfair and the increase in states enacting economic nexus provisions, companies can no longer look to the physical presence standard when evaluating whether they have established nexus for sales and use tax purposes.
More than 40 states have enacted economic nexus laws to tax out-of-state sellers for sales and use tax purposes. Many of these provisions provide that once an out-of-state seller meets a certain sales threshold and/or number of transactions within a state, the out-of-state seller creates an economic nexus and must charge and collect sales tax.
Questions About the Impact of Wayfair
If you have read this far (and why wouldn't you) and are making sales to customers in various states, you likely have some questions such as:
- You reference states utilizing thresholds to measure economic nexus. How are these determined? (i.e., prior calendar year, current calendar year, based on the state's fiscal year, etc.)
- How do the states measure the dollar thresholds? Will they look to taxable sales only, or will they include all sales, including re-sales?
- If I exceed a state's threshold but all my sales are non-taxable, will I still have to register and file zero-due tax returns?
- Am I properly collecting and tracking exemption certificates so that if I am now required to file in more states, I can support all of my non-taxable sales?
These are just a few of the many questions and issues that companies must now wrestle with when making out-of-state sales. Luckily for you and your business, Bowers' Sales & Use Tax group has extensive experience dealing with these issues for our clients. We have assisted our clients with navigating the world of sales & use tax by providing the following services:
A comprehensive review of a company's operations to ensure proper sales and use tax registration in states where a taxable presence exists.
Voluntary Disclosure Agreements
Negotiations and advance filing agreements with a state to satisfy prior sales and use tax liabilities with reduced penalty and interest charges.
Assistance with sales & use tax audits from the pre-audit conference through the appeals process to help minimize sales and use tax assessments.
A comprehensive review to determine the taxability of purchases or sales tailored to your company's specific operations, needs and requirements.
Exemption Form Review
Review of sales tax exemption forms to verify that all required exemption forms are on file, complete, and current.
Assistance with registration applications.
If your company is making sales out-of-state, please consider contacting one of our sales & use tax specialists for a consultation to determine how Bowers CPAs & Advisors can successfully help you navigate the ever-increasing complexities of sales & use taxes.
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Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.