The Wayfair Decision May Seem Unfair to Small Businesses: Are You Prepared?
The U.S. Supreme Court issued its decision in South Dakota v. Wayfair on June 21, 2018. This case overturned Quill Corp v. North Dakota, the 1992 Supreme Court decision in which the physical presence sales tax nexus standard was established.
States have tried to expand the physical presence standard over the years. The most recent attempts include: 1) economic nexus and 2) notice or reporting requirements. Economic nexus is based on the seller’s volume of sales to customers in such states and challenges the legal precedent that states can require a sales tax collection responsibility only if a company has a physical presence in the state. This was the law under litigation in Wayfair. Notice or reporting requirement laws notify purchasers to self-remit applicable use taxes and require retailers to compile information regarding such purchasers on behalf of the states. Karen Stern, Partner in Charge, Entrepreneurial Services Group, discusses the implications of this ruling for small businesses, in this month’s “Financial Fitness” column, as featured in Small Business Monthly.
What you need to know
Out-of-state retailers will have to start collecting sales and use tax for transactions to South Dakota customers, assuming sellers’ volume of sales exceeds the threshold in the statute. It is unclear how this case will impact the interpretation of other states’ economic nexus provisions. Presumably, states with economic nexus provisions will evaluate whether their provisions are similar to South Dakota’s provision, and therefore are enforceable. We do not believe that these states will impose such laws retroactively. However, we do anticipate other states will rush to implement economic nexus statutes. It is unclear if this case will impact notice or reporting requirement laws.
It is important to understand where your company currently has nexus and how this case may impact your business and reporting requirements. If you are required to start collecting in additional states, do you have the ability to calculate the correct sales tax rates, based on destination address, for each customer?
To discuss conducting a multistate nexus review or other questions related to state and local taxes, contact Bernie Ottenlips, Principal, Tax Services at Brown Smith Wallace, at firstname.lastname@example.org; Amy Jackson, Manager, Tax Services, at email@example.com; or Karen Stern, Partner in Charge, Entrepreneurial Services Group, at firstname.lastname@example.org.