Re-examining the Wayfair U.S. Supreme Court Decision Two Years Later
The U.S. Supreme Court’s June 2018 landmark ruling in South Dakota v. Wayfair, Inc. has greatly increased exposure to sales tax for businesses with interstate sales by overturning the physical presence requirement for sales and use tax nexus. Although the Court did not create a new bright-line test the statute at issue in the case required out-of-state retailers who lacked physical presence in South Dakota to collect and remit the state’s sales tax if the retailer has $100,000 in sales or 200 transactions delivered into South Dakota in the preceding year.
Companies with interstate sales should evaluate their exposure to sales-and-use-tax liability. If the company satisfies the South Dakota thresholds (at least 200 sales or sales totaling at least $100,000 in the state, on an annual basis) in multiple states, it probably is subject to multi-jurisdictional registration and collection requirements for sales and use taxes.
A more thorough prospective and historical nexus review is advisable for every company that conducts interstate sales. Not only sellers of tangible property but also marketplace facilitators, sellers of services and digital products including cloud computing, information services, data processing, audio and video content, and various online subscriptions can be subject to economic presence nexus.
MINIMIZING THE RISKS
In the wake of Wayfair, almost every state is imposing nexus on remote sellers based on a business’s economic presence in the state, rather than its physical presence. Increased state audits are more likely in the future because of the economic downturn and states are scrambling for additional tax revenue.
If material prior-year tax exposure exists, companies should be aware that state officials generally treat favorably companies that take advantage of voluntary disclosure programs.
Companies without historical sales-and-use-tax reporting obligations are not in the clear. They need to understand the various economic nexus standards being adopted by states, along with applicable registration requirements. And, if registration is required, processes for collecting and reporting tax and evaluating the different sales-and-use-tax rules must be established.
The collision of Wayfair‘s greatly expanded boundaries for imposing sales-and-use-tax collection and reporting obligations has the potential to burden unsuspecting businesses with hefty tax bills as well as civil and, in some cases, criminal penalties. Companies should act now to evaluate their sales-and-use-tax nexus profile, assure compliance going forward, and, if confronted with material historical liabilities, consider pursuing voluntary disclosure agreements to mitigate tax audit and assessment risks.
If you are concerned that you may have created sales and use tax nexus, please contact us. We can help you determine if you have a sales and use tax collection requirement and, in the event that you do have a requirement, limit any potential penalties and interest.