If you’re a frequent reader of this blog (or you’ve just been scanning headlines), you know that the hot news in the sales tax world is the recent U.S. Supreme Court’s June 2018 ruling in South Dakota v. Wayfair, Inc. This ruling overturned the high court’s 1992 decision in Quill (Quill Corp v. North Dakota, 504 U.S. 298 (1992)), which established a physical presence standard before a state could enforce sales tax collection responsibilities on a seller. With the Wayfair decision, the Supreme Court effectively ruled that another indicator of sufficient presence in a state is “economic nexus”. Essentially that means that a certain dollar volume or number of transactions in a state can create nexus and therefore a responsibility on the seller to collect and remit sales tax. In the South Dakota statute, those amounts are SD sales in excess of $100,000 or 200 transactions in the state within a year.
In the last month, we’ve received many questions from our clients and referral partners about what this really means for them and what they should be doing next. We addressed a few of those questions in a previous blog and here, we tackle a few more.
Q: In the month since the decision, have other states already jumped on the South Dakota economic nexus bandwagon?
A: Yes, they have. Several states either already had economic nexus statutes in place before Wayfair (i.e.; Alabama) or had legislation in the works in anticipation of a Supreme Court ruling (or act of Congress) that would allow the economic nexus determination to create substantial presence and a filing requirement. These states have effective measurement dates as noted: Hawaii (7/1/18); Alabama, Illinois, North Dakota and Wisconsin (10/1/18); Georgia and Iowa (1/1/19). We anticipate additional states will join the fray within the next few months.
Q: Do all sales (even sales for resale and sales to exempt entities) count as “sales” in the economic nexus threshold.
A: Yes, most likely. While it may not be specified in all the statutes and further guidance may be forthcoming, it does appear that the sales threshold does include all sales into the states which have enacted the statutes. This could add a filing burden to companies which ordinarily would not have had a filing requirement prior to Wayfair and even now may not really have any taxable sales. An example would be a company that sells products mostly for resale (assume greater than $100K) in a given state, like South Dakota. Assume that company also sells a very small amount of products (less than $100K or 200 transactions) via its online store to end users in South Dakota. In that example, because the company has overall sales to SD in excess of $100K, it must charge sales tax on even the small number of internet sales to end users in the state.
Q: How do you count a “transaction” for purposes of the 200 transaction threshold?
A: Likely by invoice. It’s not necessarily clear yet, and additional guidance is likely to be provided, but most observers agree that a “transaction” is probably counted by invoice. So, if an invoice consists of 5 different products on one invoice, it’s still just one transaction. But, likely, if a customer purchases, say, a subscription service for a year, but pays monthly, that would equal 12 transactions per year.
Q: What’s likely to happen next at the state and at the federal levels?
A: At the state level, more states will likely be enacting economic nexus legislation. The states listed above, plus at least 11 others (who have commented publicly so far) are contemplating economic nexus legislation. If even just 18 states enact these statutes at the $100K in sales and 200 transaction threshold, that will become a significant additional filing burden for many middle-market companies and small businesses.
A: At the federal level, it may be getting interesting! Several members of Congress, including Bob Goodlatte (R-VA) the House Judiciary Chairman who has been intimately involved in various forms of suggested sales tax reform legislation over the past few years, are concerned that the Supreme Court case may be unduly burdensome for smaller businesses. The House Judiciary Committee convened a hearing for today (Tuesday, July 24th) to examine the Wayfair decision and its ramifications for consumers and small businesses. Will this lead to federal legislation? Reconsideration of codifying Quill or dusting off the Marketplace Fairness Acts? We’re not sure. But if Congress does plan to act on something, they are likely to do it soon – hopefully before all of the economic nexus statutes come to fruition.
Q: What do we recommend as next steps for our clients?
A: Awareness! We are reaching out to clients and recommending the following steps as they consider navigating these interesting waters:
- Review your nexus situation. This is a good time to review both physical presence (current and prior) as well as potential economic nexus thresholds. It will help identify potential retroactive areas needing remediation and a game plan to move forward with compliance efforts.
- Track upcoming economic nexus legislation. We’ll be doing this as well, but communication with your service providers will be key over the upcoming months.
- Be prepared to develop a compliance system. Get ahead of it so that your accounting systems are ready to take on additional tax collection and filing responsibilities. If you’ve not already considered assistance with the new compliance areas, reach out. There are many options out there. We can help with this!
Again, these are just a few of the questions we’ve been working through with our clients and partners. Stay tuned to this blog for more information. And, as always, please don’t hesitate to contact us for more specific questions!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
