INTERNET SALES, THE WAYFAIR CASE

No. Physical presence does still matter.

There is another U.S. Supreme Court case, (Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)), which introduced the concept of ‘substantial presence’ as one of four prongs required in order for a state tax to be sustained as constitutional. Quill defined substantial presence to be a ‘significant physical presence.’ The Wayfair ruling means that in addition to physical presence, economic nexus (the concept that a specific number of sales or a dollar volume) can also be applied to determine if a company has created substantial presence.

So, companies with physical presence nexus in a state because of employees, inventory or offices in the state still have nexus because they’d meet the substantial presence test under the Complete Auto ruling. But now, companies who may not have had a physical presence must apply the test for economic nexus to see if their sales volume alone passes the state’s minimum. If it does, the company is subject to collection and remittance of sales taxes.

No, not immediately, but it is time to do some analysis.

Economic nexus laws are now applicable in all of the states which impose a sales tax.

States have enacted laws with varying thresholds, enactment dates and enforcement dates. Because the dates of enactment vary, even today companies need to consider when the state started its economic nexus policy and see how that intersects with the company’s activity in the state.

We are advising clients to review the past year’s volume of sales activity into any of these states (and even beyond) in order to get an accurate picture of their potential exposure and anticipated filing requirements.

Please note that the filing thresholds differ from state to state and a thorough analysis requires a review of each state separately.

Generally, no.

South Dakota’s law specifically indicated that it was not retroactive, and the concurring Supreme Court justices liked that aspect. Laws passed in other states are also nonretroactive.

However, it’s important to remember that if you previously had created physical presence in a state but didn’t address the issue, there is already exposure there. So, if you want to come forward and begin filing now as part of an economic nexus threshold, you MAY still have a retroactive issue, not because of Wayfair specifically, but because you didn’t deal with it when physical presence was the standard.

Also, a quick look at the calendar will let you know that if you’ve not yet begun to address the issue, you may have a retroactive issue back to the enforcement date. In many states, the enforcement date was in late 2018. So, depending upon when the threshold may have been met, retroactive exposure could go back a year or more.

The most important retroactive aspect we encounter is companies that simply haven’t been in compliance and now want to be compliant, but need to fix the past first. What does that mean? Companies can’t just start filing prospectively without determining their nexus start date (i.e., when they hit the sales threshold for economic nexus or had physical presence.) This information is required on a registration form. As such we recommend that companies examine their potential exposure via a nexus study. (We can help with that). If there’s significant retroactive exposure, we might recommend a VDA (see below).

This case touches even “traditional” sellers who do business across state lines. For some of them, reporting requirements may be just as onerous as internet retailers. While the case was aimed at the increasing revenue loss from internet sellers who did not collect sales tax from states in which they did not have physical presence nexus, there are similar scenarios in businesses such as those selling manufacturing equipment, large items of tangible property, software and even SaaS.

Absolutely!

Many of our clients are in the traditional software or software-as-a-service (SaaS) industry. When we talk about multi-state tax exposure, we always start the conversation by explaining that the first question is always, “Do you have nexus?” Then, the next question is, “Is your product or service taxable in the state?”

If answers to both are, “Yes,” (and SaaS is taxable in many states, including New York, Texas, Massachusetts, Washington and Ohio to name just a few bigger states) then the company should collect and remit sales tax on that revenue stream.

States have differing rules on which sales are included, but in most states the sales threshold includes all sales into the state. 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 have significant 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 number 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 South Dakota in excess of $100K, it must charge sales tax on the small number of internet sales to end users in the state.

Some states have dropped the transaction threshold recently as it can be more onerous to track and more difficult for small companies to navigate.