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South Dakota v. Wayfair, Inc.

After almost 30 years, the sales tax game has changed

Based on the June 21, 2018 Supreme Court decision that ruled in favor of South Dakota’s authority to impose sales tax obligations on out-of-state transactions, out of state sellers without physical presence in a state must collect and remit sales & use taxes on taxable sales into that state.

What has changed?

South Dakota has a remote seller (out of state seller that sells online and off-line) law in place.  Since South Dakota has no income tax, it relies heavily on sales taxes for its General Fund so their law requires out-of-state retailers to collect South Dakota sales tax if the retailer:

  • had annual gross revenue of more than $100,000 from sales in South Dakota; or
  • completed more than 200 sales annually in South Dakota.

Based on several previous court decisions, retailers had to have physical presence (employees or other agents, property owned or leased in the state, or other factors) in a state to be required to register and collect that state sales tax.  This decision reverses the time-honored standard.  States are now free to levy taxes on sales of goods and services regardless of whether the seller has physical presence in the state.  This is known as economic nexus.

This impacts every remote seller including retailers, manufacturers, distributors, and service providers.

FAQs

My business is a manufacturer who sells only to distributors for resale and a few phone orders to end users. Does the Wayfair decision effect my business?

Yes. Regardless of the type of sales (taxable or exempt), the economic nexus test includes gross receipts and the number of transactions. It is going to be more important than before to have properly executed exemption certificates managed and register to collect sales tax on the taxable sales to end users.

If I sell services, am I affected by the Wayfair decision?

Yes.  Many states consider services (consulting, training, computer programming, etc.) taxable services.  Assuming the specific state’s thresholds ($100,000 or 200 transactions) are met, the seller would be responsible for sales tax collection on the taxable services.  Each state may determine how those sales are sourced whether to the state where the service is performed or where the benefit of the service is received.  A point to note is that many services are taxable when associated with the sales of taxable tangible personal property.

I’ve been selling online for years. Should I participate in voluntary disclosure programs to settle any back taxes?

It depends.  The recommendation is to determine through a nexus study if your business activities have created sales tax nexus.  If so, any exposure should be quantified to determine how and when nexus began (and sometimes ended).  A point to note is that many states are requiring prospective filing.

My competitors aren’t currently charging sales tax. Why should I?

Although possible but unlikely that the US Congress will intervene or the Supreme Court would reverse their decision in this case, each of the 45 states plus District of Columbia that administer a sales & use tax are considering rules or legislation adopting economic nexus.  To date, 27 states have economic nexus rules.  Additional states are expected to follow.

Are there free sales tax calculators out there that I can use as opposed to purchasing expensive technology to provide me the jurisdictional tax rates?

Yes, some vendors offer free databases on their websites for state rates.  The local jurisdictions are not usually provided and the state rates are not updated timely.