Do you have a business that sells across State lines? Do you have a substantial number of transactions, or substantial gross receipts from such transactions, across State lines? Are you paying tax to the States and localities where your purchasers reside? These are among the questions businesses should be asking themselves after the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc.
Wayfair increases State and local power to tax remote sellers.
In Wayfair, the Court overturned prior holdings that prohibited States from collecting sales tax from sellers lacking a physical presence in the State. After Wayfair, the question is not whether the seller has a physical presence in the State but whether it has a “substantial nexus” with the State. A “substantial nexus” can exist when a remote seller has substantial numbers of transactions with purchasers in a State or substantial receipts from such transactions. After Wayfair, many States have set transaction and/or gross-receipts thresholds to determine which out-of-State sellers must collect and remit sales and use tax.
How does Wayfair affect interstate sellers?
It’s always best to consult with a tax or legal professional on the specifics, but here are five potential effects sellers should consider after Wayfair.
- New State sales tax requirements. The obvious takeaway from Wayfair is that remote sellers may have to register with their purchasers’ States and remit sales tax to those States. Many States have set thresholds for determining whether a remote seller must register and collect and remit tax, so the seller will have to evaluate its sales activity against the particular State law. The more States the seller has purchasers in, the more difficult this evaluation becomes for the seller. There is also an ongoing burden involved in monitoring whether and when State thresholds are met. There is additional complication in having to deal with the various State filing and registration requirements.
- New local sales tax requirements. Less obvious is how local sales tax requirements will affect the remote seller. States have different rules concerning localities’ authority to tax and how local taxes are collected. In evaluating compliance obligations, sellers must remember to consider these issues. Some States do not have local sales tax, and some have eased the administrative process in allowing for reporting and remission through the State department of revenue. However, some States have very complicated processes for ensuring the collection of local sales tax.
- Possible implications for wholesaling activities. With States imposing tax liability and registration requirements above certain “transaction” thresholds, there is an important question what qualifies as a “transaction.” Many of the State statutes focus on sales and use tax, so it seems clear that (at least) retail sales count. Some States have made clear that wholesale sales also count toward the threshold. However, in many States there is no clear guidance on whether wholesale sales count. Determinations must be made with respect to each State.
- Possible implications for other State and local taxes. Having endeavored to comply with applicable sales and use tax laws after Wayfair, some sellers have found themselves the targets of State demands for additional types of taxes – such as franchise, gross receipts, and excise taxes. Remote sellers confronted with State demands for franchise, gross receipts, and/or excise tax will have to either go ahead and pay or independently evaluate the lawfulness of such taxes under State law and judicial precedents other than Wayfair (which addressed only sales and use tax) and proceed accordingly.
- Congressional intervention? Businesses have been reporting difficulties in coming into compliance with the various State and a local tax regimes, after Wayfair. This has prompted legislation in Congress that would attempt to ease the process for smaller businesses and alleviate existing compliance burdens. The following bills are pending before Congress: the Protecting Businesses from Burdensome Compliance Cost Act, H.R. 379, 116th Cong. (2019), the Stop Taxing Our Potential Act of 2019, S. 128, 116th Cong. (2019), and the Online Sales Simplicity and Small Business Relief Act, H.R. 1933, 116th Cong. (2019).
After Wayfair, interstate sellers potentially find themselves newly opened to tax liability in various States and localities in which they have no physical presence. While there is a possibility of Congressional intervention, sellers face significant regulatory and compliance issues in the meantime. Not all sellers are caught up on their post-Wayfair compliance, and some may even be unaware of the issue. In any case, it is in the seller’s best interests to word toward compliance as soon as they can. Otherwise, they may have an increasing risk of collection and enforcement action by any number of States and localities.