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The Wayfair Decision…Ten Months Later

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 businesses of all sizes and industries that sell products/services remotely across state lines.

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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 businesses of all sizes and industries that sell products/services remotely across state lines.

Wayfair Re-introduction

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 businesses of all sizes and industries that sell products/services remotely across state lines.

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.

State Economic Nexus Legislation

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 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 companies grappling for compliance with the law.

Sales Tax Compliance Challenges for Small Businesses

The crux of the compliance obligation is two-fold:  (1) taxability determinations, and (2) the tax filing burden. A business that previously just had to worry about whether its products or services were taxable and filed in its single home state, or a few states, 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 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.

Federal Legislation

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 smaller businesses. At this time, however, these measures that would provide some relief to small businesses are not on the books.

Impact on International Companies

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.

Marketplace Facilitators

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 businesses, seeking nexus consulting and tax liability analysis in the wake of the Wayfair decision, have contacted blumshapiro, looking for guidance as they navigate these new tax collection waters. We’re here and at the ready to help businesses, no matter the size, tread these waters and avoid going under.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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