Sales Tax Compliance Issues that May Affect Your Business

History In Brief

  • For years, the US Supreme Court’s Quill decision has limited states’ ability to require out-of-state companies to collect and remit sales tax on sales made to customers in their state.
  • In 1992, the Supreme Court held that a company needed to have a physical presence (property, employees, or offices) before a state could require the company to collect sales tax (Quill Corp vs North Dakota)
  • As sales by internet-based companies have grown dramatically, revenues for states have declined over the years.
  • Over the past several years, states have enacted statutes to work around the “physical presence” nexus requirements set by Quill.
  • Many states have enacted “economic nexus” statutes which basically require an out-of-state company to collect/remit sales tax on sales made to in-state residents if sales and/or the number of transaction meet a certain threshold.
  • Large internet retailers challenged South Dakota’s economic nexus statute.  However in 2018, the Supreme Court upheld the statute in the Wayfair case.
  • Currently, 43 states have adopted an economic nexus law or rule.  All with different thresholds and effective dates.
  • There are 5 states (Alaska, Delaware, Montana, New Hampshire and Oregon) that do not have sales tax.  However, Oregon just enacted a new tax.
  • The other 2 states (Florida and Missouri) have introduced bills but have not yet adopted economic nexus legislation.

 

Recent Wayfair decision and impacts on your business

Sales tax (and possibly income tax) has turned into the “Wild West”.  Since so much business is now done across state lines, states are enacting laws and regulations in order to collect sales tax on sales to customers in their state in order to boost revenues that have been lost.  This not only affects internet retailers but also manufacturers, wholesalers and brick-and-mortar stores.  Any business selling across state lines will need to analyze compliance with state sales tax.

Nexus – Nexus describes the amount and degree of a taxpayer’s connection with a state before the taxpayer becomes subject to the state’s taxing jurisdiction. If a taxpayer has established sales and use tax nexus, the state will require the taxpayer to register, collect and remit sales and use taxes on sales made to purchasers in that state. States exercise their power to tax through statutes, case law, regulation or policy. Generally, state statutes are broadly written and include phrases such as “doing business in” or “deriving income from” to describe activity that will trigger nexus and thus a filing obligation. Statutes tend to vary from state to state.  In recent years, many states have become more aggressive in enacting various statutes that require out-of-state sellers to collect and remit sales tax. Many states that impose a general state-wide sales tax now have addressed a form of “economic” nexus; where nexus is generally established based on a certain threshold of economic activity in a state rather than just a physical presence

Quill – For decades, states attempted to collect sales tax from out-of-state retailers.  North Dakota passed a law requiring businesses engaging in “regular or systematic” solicitation to register and collect sales tax on transaction made to North Dakota businesses/residents. However, in 1992, the US Supreme Court made a decision on the landmark case Quill Corp v. North Dakota; the Court held that unless an out-of-state business had a “physical presence”, the state could not require the business to collect sales tax.  The physical presence standard depended on the state’s regulations such as having a location in the state, making deliveries into the state by the business (not using a common carrier) or having employees coming into the state.  Even though there has been some controversy about being “physically present”; basically, the Quill decision has made sales tax compliance fairly easy.

Wayfair – In 2016, South Dakota passed an economic presence statute that required out-of-state sellers to collect and remit sales tax if the seller had a specified level of activity in the state. The new standard applied if the business delivered more than $100,000 of goods or services in South Dakota or engaged in 200 or more separate transactions in South Dakota in the current calendar year or the prior calendar year. The case was ultimately heard by the US Supreme Court, which concluded that the physical presence rule of Quill is “unsound and incorrect.” By overturning Quill, the Court opened the possibility for states to impose sales tax collection obligations (and perhaps other taxes) based on economic presence.

So now, a physical presence is no longer needed.  If an out-of-state business has “substantial nexus” with a state, the state can require the business to register, collect and remit sales tax.  However, the Wayfair decision did not clarify the amount of threshold necessary to meet this standard.  The only thing that is clear is that the $100,000 in sales or 200 transactions does set a constitutional threshold to require business to collect sales tax.

Taxpayer considerations – Out-of-state businesses that deliver goods or provide services into a so-called “economic presence” state will need to determine if the business exceeds the state’s specific economic sales or activity thresholds. Currently, 43 states have enacted economic nexus models with varying enforcement dates. The remaining 2 states that have sales tax, Florida and Missouri, have been pursuing an economic nexus standard; however, currently no law has been passed.  There are 5 states that do not have sales and use tax; these are Alaska, Delaware, Montana, New Hampshire and Oregon.

Now is the time to review your sales and use tax compliance requirements – The landscape of sales and use tax compliance has been significantly altered with the Wayfair decision. It’s important to understand where your business has nexus and how the ruling may impact your state/local taxes and reporting requirements.  There are  over 10,000 sales tax jurisdictions in the US, each having their own set of rules regarding an economic threshold, the effective date, and what is or isn’t a taxable product and/or service.  Thus, if you are doing business in other states, we suggest that you have a game plan in place to meet the compliance challenges resulting from the Wayfair decision. Your plan should include the following:

  1. Determine what type of transactions are involved with other states.  Also, which states are involved.
  2. In order to determine economic nexus exposure, sales/transactions will need to be sourced by state.  This may require changes to your software or use of your current software.
  3. Determine which states you have a requirement to collect and remit sales tax and the applicable effective date(s)
  4. Determine your exposure for sales tax liability for each state
  5. Determine when, where and how to become compliant.

Any delays in performing an analysis of sales tax compliance, may result in the business absorbing a sales tax liability that could otherwise be collected from customers.

If you would like to discuss the impact of the Wayfair case on your business, please contact our office.  We would be happy to answer questions or assist you in conducting a multistate nexus review for your business.

Westbrook CPA