Ideas & Insights

TAX ALERT: Latest on the Wayfair Impact on State Nexus Laws

TAX ALERT: Latest on the Wayfair Impact on State Nexus Laws

Following the US Supreme Court’s landmark decision in the South Dakota v. Wayfair case, states across the US are rolling out economic nexus laws requiring remote sellers to collect sales tax in states where they sell and deliver goods. The new nexus laws across the US will have a major impact on online retailers with intrastate business, state agencies tasked with enforcing and collecting new tax revenue, and consumers shopping from home.

The Fundamentals of South Dakota v. Wayfair

In 2016, South Dakota passed legislation that levies sales taxes on vendors that sell and deliver goods into the state. The state then sent notices to several internet companies they believed were well over the $100,000 threshold established in the new law. One of those companies receiving a notice was Wayfair, a Boston-based online retailer of home goods. Wayfair contested the legislation, bringing the fight to the South Dakota Supreme Court. The state court ruled that South Dakota was bound by the 1992 Quill Corp. v. North Dakota decision, indicating that state sales tax collection was not necessary for online retailers with no physical presence in the state.

South Dakota took their state’s decision to the US Supreme Court, where in June of 2018, the US Supreme court determined, by 5-4 majority, that internet retailers are subject to a state’s sales tax if selling and delivering goods to residents within that state, even if the retailer has no physical presence. As a result of this ruling, South Dakota placed a threshold, or nexus, of $100,000 gross retail sales or 200 individual transactions before sales tax would be collected.

Although it may have appeared that all internet purchases were exempt from sales tax, in reality, sales tax was historically only paid when purchases were made from an online retailer within a state where the retailer has a physical presence.  Before the Wayfair ruling sales tax was being collected on approximately half of all e-commerce purchases.

The Wave of Wayfair Laws

A growing list of states have begun implementing their own versions of e-commerce tax laws and establishing economic nexus rules, and those that haven’t are expected to do so by the end of the year.

Although incorporating sales tax requirements for individual states my sound complex – especially for smaller retailers, states are hoping to simplify the process by allowing online retailers that use compliance software some leniency. By incorporating this, along with simplified state rules, some states are offering audit immunity to sellers if errors are made by the sales tax software.

After the Supreme Court ruling, New York became one of the first states to begin enforcing what they viewed as existing tax provisions for out of state retailers. California signed into law their version of the tax law, effective April 1, 2019 while Pennsylvania’s law takes effect June 1st of this year. Texas, on the other hand, has been in no rush to implement their plan, specifically indicating they were leaving money on the table through the 2018 Christmas season. With that in mind, Texas now has an effective date of October 1, 2019.

States such as Ohio and Massachusetts are taking a different approach toward establishing nexus rules for their states. Their variation is based on cookies used for web tracking and mobile applications.  If a cookie has been placed on a buyer’s computer or mobile phone and a purchase has been made, then the online retailer is considered having established a presence in the state, although each cookie is roughly just a few kilobytes of data.

In all, 34 states have already established some form of nexus or are moving forward with their own versions.

The Implications for Retailers

Passing legislation and making official e-commerce tax laws is one thing. Effectively enforcing it might be another. MGO recommends that companies that exceed the nexus threshold properly register with each state and make provisions to comply with their respective tax laws.

Registering a business with each state should be generally straight forward, as each should have information easily accessible online.  Establishing a tax identification and tracking system, using either the state’s software or existing finance software, is essential to tracking sales and taxes due. Finally, companies must remit the appropriate payment to the respective state agencies in order to be in compliance.

Not complying with these steps could lead to an audit from each state in arrears, as well as back taxes owed to each municipality, including interest and fees.

Congress Could Take it out of the States’ Hands

While the states are moving to take advantage of the opportunity provided by South Dakota v. Wayfair, Congress has been considering two different approaches to resolving the issue. One, the Remote Transactions Parity Act (RTPA) or Marketplace Fairness Act (MFA), are similar bills that allow for sales tax to be collected by each state if they simplify their sales tax. The other, proposed by US Representative Bob Goodlatte (R-VA), suggests that sales tax be collected by the business in the state where the company is located but then remit the collected tax to the states where the buyer resides.

The RTPA and MFA appear to have more support and may likely pass, especially with the recent retirement of Representative Goodlatte prior to the 116th Congress.

As of now, states continue to move forward under the South Dakota v. Wayfair ruling and 2019 could see most states implementing their own sales tax collection requirements.


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