You may have heard the discussion in the recent weeks about the case of South Dakota v. Wayfair. It is important that you consider what effect this has on your sales tax compliance requirements.

Background

The U.S. Supreme Court case of Wayfair was based on the issue of when is an out-of-state seller required to collect and remit sales tax on their sales. The prior standard was established in 1992 in Quill v. North Dakota, which concluded that a retailer must have physical presence in a state before it is required to collect sales tax in that state. Thus, where a retailer’s only connection with the state is the solicitation of business through catalogs, mailers, or telephone calls, and delivers all of its merchandise through common carrier or mail, the seller may not be required to collect sales tax on sales into that state.

Now the buyers of property in that state are still required to remit the tax when they didn’t pay sales tax, in the form of “use tax”, but in reality, compliance with the self-assessed use tax is quite poor and states push hard to force the seller to collect it instead.

New Case

On June 21, 2018, the U.S. Supreme Court in Wayfair ruled that the physical presence rule, which was established before the internet economy, is an “unsound and incorrect” interpretation of the Commerce Clause, and has created unfair and unjust marketplace distortions favoring remote sellers. Thus physical presence in a state is no longer required before a sales tax collection and remittance obligation can exist.

The South Dakota law, which Wayfair was contesting, was allowed to stand (for one of several reasons) because the requirements were considered quite reasonable. It did not impose the sales tax collection onus on the seller at the first sale or the first dollar of sales, but said that taxpayers were required to collect and remit South Dakota sales tax if the retailer (1) had annual gross revenue of more than $100,000 from sales in South Dakota, or (2) completed more than 200 sales transactions annually with South Dakota buyers.

While the Supreme Court did not tell us how rigid a requirement would be acceptable, the decision in Wayfair tells us that 200 transactions in one year or $100,000 of sales in that state is clearly acceptable. Thus, states are lining up to adjust their requirements to comply with the standards in Wayfair. NC is enforcing the Wayfair standard effective 11/1/2018 to out-of-state vendors who sell in NC. Note that some states impose a more rigid collection threshold than the Wayfair standard, and it is not known at this time whether those requirements would be upheld by the Courts.

Compliance Response by Your Company

If your company is making sales out of state, even without a physical presence in that state, please consider whether you have a sales tax collection and remittance requirement in those states. Also keep in mind that this requirement may be a significant administrative burden, knowing which transactions are taxable in which jurisdictions and what rate(s) apply. The Tax Foundation reports that with varying rates by city and county, not just by state, that there are about 10,000 sales tax jurisdictions in this country.

Many states are giving taxpayers a clean slate on sales tax compliance as they switch to rules that are compliant with Wayfair. Don’t miss this opportunity to be in compliance from the “new” beginning.

As of 8/9/2018, here are the states that have adjusted their sales tax collection rules after Wayfair, and are applying a standard similar to Wayfair – AL, CO, HI, IA, IL, IN, KY, LA, MA, MD, MI, MN, MS, MT, NC, NV, OH, OK, RI, SD, TX, VT, and WI. Note that some of these sales standards are as low as $10,000 so don’t assume that they all follow the Wayfair standard of 200 transactions and $100,000 in sales.

For these reasons, we recommend that you look into a sales tax compliance service, which will help you with determining when you are subject to tax, collection rules, and filing assistance. Some of these services are –

Let us know if you have any questions about these matters.

R. Milton Howell III, CPA, CSEP
R. Milton Howell III, CPA, CSEP

Milton is a tax partner experienced in taxation issues including, tax research for both open and closed transactions, structuring complex tax transactions, estate and income tax planning, and representing clients before tax authorities. Milton regularly writes and reviews articles in local, regional, and national publications on tax matters and spends significant time monitoring current tax issues and legislation.

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