On June 21, 2018 the U.S. Supreme Court held that states can assert nexus for sales and use tax purposes without requiring a seller’s physical presence in the state. While you may have heard about this case in the news, have you thought about what this may mean for your business?
Before Wayfair There Was Quill
Prior to the Wayfair case, mail, phone, or internet retailers of tangible goods used the Quill case for protection from the burden of collecting sales tax. According to Quill, the protection from sales tax burdens was possible because these retailers did not have a physical presence in the form of an office, storefront, warehouse, or merely having an employee solicit the sale of goods in that state. Therefore, without stepping foot in a given state, sales in that state could be made without charging sales tax. That meant it was up to the purchaser to pay use tax on the sale.
Wayfair Case Changes Everything!
With the Wayfair case, everything changes. Here’s what happened:
- The state of South Dakota sued Wayfair, one of the largest online retailers of home goods.
- Because South Dakota doesn’t have an income tax, sales tax makes up about 60% of the state’s funds each year. Given that online buyers’ compliance with self-assessing use tax is low, the state was losing significant funds from the reduced sales tax collections from items sold online.
- To try to counteract the loss of revenue, South Dakota enacted a law in 2016 requiring out of state sellers that annually delivered more than $100,000 of goods or services or engaged in 200 or more separate transactions for the delivery of goods or services into the state to collect sales tax in South Dakota.
- The requirement applied whether the retailer had a physical presence or not. This new law was brought before the Supreme Court and South Dakota was victorious in having the new rules apply.
Justice Anthony Kennedy, who wrote the decision, reasoned that modern e-commerce no longer aligns with the Quill case. Essentially, the Quill case is outdated with the large amount of commerce that is conducted via the internet. The Wayfair decision essentially overturns the Quill case and physical presence is no longer a requirement for states to assert sales tax collection requirements.
What This Means For You
The Wayfair case will now allow all states to set their own laws in connection with interstate online sales. In fact, 31 states already have some form of laws in place. Effective October 1, 2018, retailers making sales of tangible personal property to Illinois purchasers will have to collect sales tax once Illinois sales reach $100,000 in outside sales or 200 transactions.
It is thought that the $100,000 in sales or over 200 transactions as determined in South Dakota may be the standard to determine economic sales tax nexus in other states. As noted above, this is the new standard for Illinois. If you are a retailer exceeding these numbers in states in which you don’t have physical presence, you may now have a sales tax collection and filing requirement moving forward. Congress may decide to move ahead with legislation on this issue to provide a national standard for online sales and use tax collection. We will keep you informed of future changes.
Cray Kaiser is here to help. Please contact us if you have any questions or would like guidance on a specific state’s current stance on sales tax nexus.