Wayfair Decision: How it Impacts Sales or Use Tax for Remote Sellers

By Sanika Gore, Chartered Accountant (Indian CPA)

The Supreme Court ruled recently in “South Dakota vs Wayfair Inc” that physical presence in a state is no longer required for collecting sales or use tax. This means that states may now require out of state sellers to collect these taxes from customers even if they do not have a physical presence nexus in the state.

Based on the above ruling of Supreme Court, the South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State.” However, not every remote seller is required to collect sales or use tax.

Remote sellers with no physical presence must collect sales or use tax if they meet one of the following conditions:

  • Sales of $100,000 or more in the state of South Dakota
  • Over 200 sales transactions in the state

Once the business meets either of these conditions in the previous calendar year, they are required to become licensed and remit South Dakota sales tax for the following year. If a business meets one of these thresholds during the current calendar year, they must become licensed and remit South Dakota sales tax from that point forward.

South Dakota cannot enforce retroactive tax collection on remote sellers.

Does Physical Presence Still Matter?

Many states are still considering adopting Wayfair-type rules, and it is likely that most will follow suit. But most online businesses are still making sales in states that have not yet adopted new tax laws. Physical presence nexus still matters in those places.

“Nexus” is used to determine if a business has enough of connection with a state to be required to collect sales or use taxes there. There are a few common nexus triggers for remote sellers in these states, including:

  1. Physical presence: Owning or leasing a building, or using a warehouse or distribution facility in the state
  2. In-state workers: Having employees or agents in the state
  3. Financial ties: Conducting financial activities   in the state, for example having in-state bank accounts
  4. Affiliate nexus: An affiliate or similar party has a presence in the state

Will Other States Enact “Wayfair” Rules?

States are eager increase their revenue. It is likely that many will update their laws to collect sales or use taxes on remote sellers, regardless of their physical ties.

Before the Wayfair ruling came through, many states had already acted:

  • Some states enacted legislation based on South Dakota thresholds
  • Over 40 states voiced their support in an amicus briefing

Since the ruling, multiple states have promised to enact these tax collection changes. Others have issued guidance on the decision’s impact, and some are still deciding how to proceed.

Recent Sales Tax Changes in US States

Multiple states have enacted Wayfair style laws, with similar thresholds.

State

Which remote sellers without a physical presence must levy taxes?

Which taxes must they collect?

Effective Date

Illinois

In the past 12 months, remote sellers who had:

  • At least $100,000 in Illinois sales

  • 200 or more sales transactions in Illinois

  • Use tax or Service Use tax

October 1, 2018

Minnesota

The state is analyzing the Wayfair decision. Its guidance in the news release includes the following:

  • Sellers already collecting and remitting (directly or through a third-party) should continue doing so

  • Sellers who want to start collecting and remitting can register for member states through the Streamlined Sales Tax Registration System (SSTRS)

Additional guidance will be issued soon.

Wisconsin

The time limit has not been decided, but Wisconsin will adhere to the same thresholds:

  • Local sales of more than $100,000

  • At least 200 sales transactions in Wisconsin

  • Sales tax, or

  • Use tax

October 1, 2018

California

Recently California Department of Tax and Fee Administration (CDTFA) accidentally posted a brief draft notice indicating its intention to adopt use tax collection thresholds for remote sellers like thresholds adopted under South Dakota’s Law. However, a CDTFA representative has said that the document was unofficial and should not have been on the CDTFA website. He also added the CDTFA is currently evaluating its next steps in the wake of the Wayfair decision.

Conclusion

Remote sellers should track the changes in the state legislatures where they do business. It will be important to implement or change internal systems to respond to new state statutes. Speak with an experienced tax professional to manage sales and use tax compliance for you.