A business located in Central Massachusetts may find that they now have tax filing requirements in other states than under previous law.
It’s been over ten months since the U.S. Supreme Court’s Wayfair decision, a landmark sales and use tax nexus case out of South Dakota with implications for Central Massachusetts businesses of all sizes and industries that sell products or services remotely across state lines. A business located in Central Massachusetts may find that they now have tax filing requirements in other states than under previous law.
In short, Wayfair, the popular e-commerce home goods company, lacked a physical presence in South Dakota, but its sales and transactions satisfied the statutory threshold amounts to collect and remit South Dakota sales and use taxes. The issue rose up the ranks to the U.S. Supreme Court, which last year issued the opinion that an economic presence can satisfy the Commerce Clause of the U.S. Constitution’s requirement that a remote seller must have “substantial nexus” (a connection or situation in which a business has a tax presence) with a state before the state can require a seller to collect and remit sales and use taxes. Prior to the South Dakota vs. Wayfair decision, the Court, in 1992, held “nexus” constituted that a business have a physical presence in a state; without substantial physical nexus, a state could not legally compel a remote seller to register and collect its sales tax.
Fast forward to June of 2018 with the Court’s new ruling that in today’s e-commerce landscape, the physical presence rule no longer applies, and states have the right to enforce sales tax laws on any seller above a “reasonable” economic minimum, regardless of whether the seller has any physical presence in that state. In other words, the seller doesn’t have to have a traditional brick and mortar presence—online transactions will do.
So, by way of example, a business with one location in Worcester that is shipping products to South Dakota may now be required to collect and remit South Dakota sales taxes.
Presently, nearly 40 states of the 45 states that impose sales tax have enacted legislation similar to South Dakota. This rapid influx of economic nexus legislation has created a heavy struggle for Central Massachusetts businesses that previously only needed to worry about collecting and remitting sales and use taxes if they had a physical presence in the state where they were conducting business. This is a real hardship, especially for small and middle market Central Massachusetts companies grappling for compliance with the law.
The crux of the compliance obligation is twofold: 1. taxability determinations, and 2. the tax filing burden. A Worcester business that previously just had to worry about whether its products or services were taxable and filed in Massachusetts could now be responsible for determining taxability and filing returns in every state it has sales. This is a burdensome load to carry as every state taxes products and services differently and has different filing requirements—some annual, others quarterly or monthly—adding layers of compliance that some Worcester businesses may not be equipped to handle. In addition to having a dedicated individual responsible for multiple filings, some small businesses might have to purchase special software to integrate with their accounting system and track transactions.
Several federal legislative bills have been introduced since the Wayfair decision that provides a de minimis exception; for instance, if a company’s sales are less than $1 million. Under these federal bills, compliance with Wayfair would be mitigated or even excluded for a smaller business. At this time, however, these measures that would provide some relief to small businesses are not on the books.
Another can of worms opened by the Wayfair decision is the impact on international companies—a U.K. company that sells to the U.S. through Amazon, for example. The U.K. business may not have to file U.S. income tax returns but could very well be obligated to collect numerous states’ sales tax on their product or service transactions into the U.S. Much discussion is needed on how foreign companies should comply.
The Wayfair decision largely applied to a stand-alone remote seller. States have now taken the decision one step further. After enacting their remote seller economic nexus laws, the next wave of economic nexus laws go after those companies that facilitate a remote seller’s sales using their e-commerce platform. Such “marketplace facilitator” laws are intended to go after the Amazons of the world, requiring that the facilitator be the responsible party to charge and collect tax for all of their remote sellers that use their online sales platform. More than a dozen states, so far, have enacted such legislation—which is anticipated to grow throughout the year.
A good number of Worcester businesses, seeking nexus consulting and tax liability analysis in the wake of the Wayfair decision, have contacted their tax advisors looking for guidance as they navigate these new tax collection waters.